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Address to the Adelaide Press Club.



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Senator the Hon Helen Coonan

Minister for Communications,

Information Technology

and the Arts

Address to the Adelaide Press Club

12.30PM THURSDAY 7 JULY

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7 July 2005

Adelaide

Thank you and good afternoon. We are now one week into the brave new world - a Government with a majority in both Houses of Parliament and a clear mandate to get on with legacy policy initiatives that have been languishing in the too hard basket of Senate opposition.

And while I don’t agree with the dire predictions of some about what this mandate means for Australia, today I would like to discuss one major reform, long stymied by Labor and the minor parties - the tricky mix that surrounds the full sale of Telstra.

A common myth

There are people in Australia - the Labor Party included - who continue to maintain that the only way to ensure adequate telecommunications in Australia is to keep the Government’s majority ownership in Telstra.

However, majority Government ownership of an independently run and publicly listed company does not and cannot guarantee service levels - this is done by regulation. Nor is majority Government ownership a prudent investment strategy for the Government, on behalf of the taxpayer. No investment adviser would recommend that the Government keep all of our eggs in the one investment basket - especially when

the eggs are worth more $30 billion!

The Government has a firm view that the interests of all Australians will best be served by freeing up Telstra and this policy has now survived three elections. But clearly, whether or not Telstra is sold, the Government must ensure that telecommunications services are adequate for all Australians, regardless of where they live.

The Government is committed to achieving more than parity of price and service to the bush. We are striving to deliver the best possible telecommunications services to rural and regional Australia.

To achieve this we will continue to combine a sound, competitive telecommunications regulatory regime, with a robust consumer protection framework and targeted Government investment where the market will not go.

Today I will outline some of the issues under consideration as the Government looks to ensure that the regulatory regime is fit for the 21st century and will deliver the telecommunications services Australians need and expect.

Over the coming weeks and months the Government will be providing a settled regulatory framework that will include a decision on price controls, adjustments to the Customer Service Guarantee, legislation that will future proof telecommunications services, a response to the telecommunications regulatory and competition review and, of course, an Australian version of operational separation that will apply to Telstra.

It is a comprehensive and complex body of work. While the debate about telecommunications tends to be seen through the prism of the Telstra sale, a timely examination of the competition regime is necessary irrespective of whether the sale proceeds.

Preconditions

The Government has consistently stated that there are three preconditions for the further sale of Telstra -

• that services in rural and regional Australia are adequate, • that there is value for taxpayers and • that we have the authority to sell from the Parliament.

Getting value for taxpayers from the sale of Telstra has always been a prerequisite of going ahead with full privatisation - that is just a matter of common sense.

But I am acutely aware, as are my colleagues, that at the end of the day the Government will not just be judged on whether Telstra shares sell for ten cents more or five cents less.

What the Australian people expect of the Government, and what history will also judge us on, is whether we deliver a strong competitive telco market and whether that market delivers the services Australians need to make their communities strong and their businesses competitive now and into the future.

There is, of course, an inherent tension between the competing objectives of the Government in having responsibility for ensuring a level playing field for over 100 telecommunications providers and, at the same time, protecting the taxpayer’s investment in a dominant provider - Telstra.

Resolving this tension is possibly the most powerful argument for selling the Government’s shareholding. For my part, regulation of the telecommunications industry is a delicate balancing act. On the one hand the Government must ensure that competition continues to thrive.

But, while encouraging competition, we will also ensure the important consumer safeguards built by this Government will remain. Price controls, the Customer Service

Guarantee, the Universal Service Obligation, subsidies for low income earners and targeted assistance for rural and regional Australia all interplay with the broader telecommunications framework designed to encourage competition and investment in

new infrastructure.

These consumer protections are akin to the human face of regulation and the Government is committed to maintaining them.

But the regulatory regime must have a body - one that encourages investment, promotes competition and makes Telstra’s operations more transparent for the benefit of the industry and consumers more broadly.

Operational Separation

For years now there has been a debate over whether or not to carve up Telstra into separate companies. The Government has consistently ruled out forced structural separation of Telstra or any of its business arms for a range of reasons.

Foremost, there is no way of guaranteeing the resulting market structure would be any better than the status-quo, not to mention the high cost and complexity of unscrambling the Telstra egg.

At the same time, it is fair to say that the telecommunications industry, the ACCC and Telstra are of the view that the current accounting separation framework, which was designed to ensure transparency of Telstra’s dealings with its wholesale competitors, has not yet delivered its anticipated benefits.

Clearly something needs to be done to improve transparency and equivalence for wholesale customers in the services they get from Telstra. This is why I have taken the lead in proposing that we should consider a form of operational separation of Telstra.

Operational separation can go well beyond the scope and impact of accounting separation without taking the heavy-handed and costly step of structural separation or forcing radical re-structuring of Telstra.

The aims for operational separation are that:

• it should provide wholesale customers of Telstra with greater certainty and clarity of Telstra’s operations. • It should also give them confidence that they will receive treatment from Telstra Wholesale equivalent to that provided to Telstra’s own retail arms; • It should allow the regulator to more quickly and effectively scrutinise

Telstra’s activity and compliance with its regulatory obligations; and • It should provide Telstra itself with greater regulatory certainty.

I believe that Telstra can only benefit from more transparent operations, and from wholesale customers gaining a clear understanding of, and confidence in, their right to equivalent service.

But the model needs to be workable, cost-effective and not completely re-engineer Telstra’s existing structure. A workable and effective model for operational separation

is obviously an issue I will be discussing with the new Telstra CEO Sol Trujillo shortly, as well as with the regulator and industry more broadly.

Many commentators are speculating about just what operational separation means. This has been heightened by the announcement in the UK that its regulator, Ofcom, and British Telecom have reached an agreement to give effect to a form of operational separation.

BT and Ofcom

While the UK experience will provide valuable lessons, it will not serve as a blueprint for operational separation in Australia. But one of the most important lessons is that a company like BT can see commercial benefit in reaching an agreement of this nature with the regulator.

Let me make a few observations about what has transpired in the UK. BT is not proposing separate boards. In fact, separate boards are meaningless and confusing if they are both responding to common shareholders.

What BT has proposed is a board of equivalence - this is part of the governance and audit mechanisms that BT is building into its operation.

A similar outcome might be achieved through the Director of Equivalence concept that has been mentioned by Telstra in Australia. But this is but one possibility under consideration.

The model of operational separation agreed between BT and Ofcom is focused on making the access arrangements to core bottleneck assets work better.

While the Government and Telstra have been working hard on a formula that is relevant to the Australian conditions, I have avoided getting into a public ‘ruling in and ruling out’ debate about how an Australian version of operational separation will work.

For example, I have never advocated separate boards as an essential feature of what would work. I have advocated that rather than take a heavy hand to Telstra we will work constructively to look at what would deliver equivalence, transparency and

certainty in the Australian market.

Telstra and operational separation

To that end we are not trying to copy what BT and Ofcom have done in the UK. The UK situation is very different to Australia. Telstra is an integrated full service telecommunications company, whereas BT, for example, does not have a mobile phone arm.

Second, our focus is not just on the unbundled local loop, or even just on regulated services. Other, non-regulated wholesale services, and future services, may also require specific attention.

These are the instances where the regulator has no role in determining prices or non-price terms and conditions.

And, these are the instances where there is the greatest concern that Telstra might or could behave anti-competitively. We have seen this recently with the dispute over Telstra’s wholesale ADSL service.

Thirdly, we are not concerned about every service that Telstra sells. What we want to do is achieve organisational separation of the wholesale and key support functions from the retail functions.

Once established inside the company, we would expect operational separation to become self executing. That there would be sufficient incentive and appropriate sanctions to ensure that providing equivalence to wholesale customers would follow as a matter of course.

There are many things to get right to give effect to operational separation. The central feature is the organisational structure of the company. Telstra already has separate wholesale and retail divisions all of which deal with a separate infrastructure services part of the company. But separate units internally are not enough - it is just the kernel around which we need to add the framework of operational separation.

There needs to be a formalised relationship between the units through which the infrastructure part of the company provides equivalent products and services to both wholesale and retail. And there must be transparency to allow this equivalence to be

audited. There needs to be a tough internal governance structure.

One of the best ways of driving internal behavioural change will be if the Board of the company expect the provision of equivalence in the same way it expects compliance with accounting rules.

Finally, there needs to be a mechanism to provide confidence and transparency of Telstra’s retail pricing behaviour. This is difficult.

We must avoid damaging Telstra’s legitimate commercial interests. We do not want to remove flexibility for the wholesale business, and it needs to work consistently with the existing regulated pricing decisions made by the ACCC.

Expectations of operational separation

There are, understandably, high hopes for whatever model gets introduced in Australia. But the reality is that any agreed operational separation model will not likely satisfy all the requirements of Telstra’s competitors - there will always be competing views about how it could be done.

And it will not likely be a panacea that will deliver the full extent of regulatory relief that might be hoped for. This will be because I do not believe operational separation itself justifies extensive stripping back of existing telecommunications competition rules.

However, I do believe that if an effective operational separation model is settled, there should be scope to remove some regulatory burdens and provide greater clarity about the use of others.

Competition and regulation

What we are trying to achieve with regulatory reform is greater competition and more benefits for consumers. But greater competition in the telecommunications market is not an end in itself. It just happens to be the best tool to drive consumer benefits - it leads to lower prices, greater innovation, and more choice.

We do have an effective telecommunications regulatory regime in Australia. Despite the criticism it receives from time to time, it has served us well. But there are improvements that can be made.

While my natural inclination is to reduce regulation as quickly possible, I am firmly of the view that the Australian telecommunications market is not yet ready for removal of the fundamental regulatory levers.

The vast majority of the 32 submissions responding to the Issues Paper I released in April support retaining the telecommunications specific elements of the Trade Practices Act.

And, with the surge in interest for access to Telstra’s unbundled local loop, there is more than ever a need for an access regime that delivers timely outcomes at cost based prices - albeit prices that allow for reasonable ongoing network investment.

I must add that there is nothing in the current regime that actually prevents the rollout of new networks. The point is we might be able to improve the way the access regime operates and it is a key objective of the review.

For example, I think it is appropriate for investors get certainty about regulatory treatment of entire infrastructure investments rather than just the services that will be delivered over the infrastructure.

The regime that operates at the moment has delivered good results - for example the ACCC estimates that more than $2.5 billion was invested in telecommunications infrastructure in 2003-04. So it is likely that what is required are targeted improvements rather than fundamental change or an overhaul of the existing framework.

Services

Another central part of the telecommunications mosaic, especially in the current environment, is adequacy of services. No-one could reasonably argue that the Howard Government has failed to respond to the urgent need to upgrade telecommunications services in rural and regional Australia.

We Networked the Nation and then had two, major independent inquiries - Besley and Estens - and backed that up with funding of $163 million and $181 million respectively.

After Labor switched off the analogue mobile phone service in Australia it was this Government that required Telstra to replace it. Since then, we have built on the network by investing over $140 million to expand mobile phone coverage to 98 per cent of the population.

When Labor dominated Senate committees were calling for billions to be spent on yesterday’s technology - dial-up Internet services - it was the Howard Government

that responded with a National Broadband Strategy and $107.8 million to deliver broadband to the bush through our Higher Bandwidth Incentive Scheme (HiBIS).

Estens has long been considered the bench-mark for adequacy of services in the bush and the Government has accepted all 39 Estens recommendations. With Estens implementation almost complete our thoughts now turn to what Estens called ‘future-proofing’ - a term that captures the overriding concern in the current debate.

In fact 7 of the 39 recommendations made by Estens relate to ‘future-proofing’. This need to future proof would exist irrespective of the full privatisation of Telstra - this is about providing affordable telecommunications services for all Australians now and into the future.

The central features of future proofing as envisaged by Estens are that:

• Telstra maintain a local presence in regional, rural and remote Australia along the lines of Telstra’s Country Wide; and • That Government be required to conduct and respond to independent public reviews of the adequacy of regional telecommunications every five years.

Legislation to give effect to these future-proofing mechanisms was defeated by Labor in the dying moments of the Opposition dominated Senate. We will revisit the legislation in the August sittings.

Telstra should be congratulated for responding to customers in regional Australia through its Telstra Country Wide arm. Country Wide is such a success story that Estens recommended it as a model that needed to be locked in for future generations.

I expect to be imposing a Licence Condition on Telstra by the end of the month, requiring it to maintain a rural presence. This is not negotiable - T3 or no T3 - Telstra will be required to maintain their level of service to the bush. Country Wide is expected to be at the core of Telstra’s Rural Presence Plan and Telstra will be working over the coming weeks to present me with a workable and responsive rural presence plan.

As well as imposing the Licence Condition, I will be providing Telstra with written guidance on the Government’s expectations of the Rural Presence Plan itself. The upshot is that we are committed to ensuring that Australia’s competition regulatory regime provides incentives to encourage future investment in telecommunications services.

But I also want to make sure that where the market will not go, we can readily identify where targeted Government investment is needed.

HiBIS

A living example of this is the Government’s HiBIS program to make broadband affordable and available in rural and regional Australia.

At the time of Estens, broadband take-up in Australia was still in its infancy and largely limited to urban areas with the rollout of ADSL services. But Estens identified broadband for regional areas as the first step in future-proofing telecommunications

and the mechanism for delivering it was the Higher Bandwidth Incentive Scheme - or HiBIS.

HiBIS is one of this Government’s true success stories. It is the archetypal example of how targeted Government investment can encourage the market to deliver affordable telecommunications services where they are needed.

Australia ’s love affair with broadband is starting to mirror the way we embraced mobile phone technology over the past decade. There are now almost two million broadband subscriptions in Australia - almost half of these in regional areas.

More than a million households were connected to broadband in the past 12 months alone. And take-up continues to rise. The latest figures place Australia in the top ten OECD countries in terms of growth of broadband take-up.

There are now 33 registered HiBIS providers driving competition in the regional market and providing regional Australians with greater service, choice and value as broadband becomes available over competing platforms. In the past 12 months more than 600 regional and rural communities have been connected to terrestrial broadband services, such as ADSL and wireless, as a direct result of HiBIS and there are now more than 9000 HiBIS satellite services in operation.

Only yesterday I was in Streaky Bay to launch the provision of ADSL broadband to the community as a direct result of HiBIS. Streaky Bay is the 43 rd rural community I have visited to see firsthand the status of services in the bush.

So successful is HiBIS that it has provided the blueprint for a further $50 million program, announced during the election, that will provide broadband services to outer metropolitan areas - the Metropolitan Broadband Blackspots Program.

Announcement

And today I have the very great pleasure of announcing a further $50 million of new money for the Government’s extremely successful HiBIS program bringing total funding for broadband in regional Australia under HiBIS to almost $160 million.

Broadband take-up is now at 19 per cent in regional Australia compared to 21 per cent in metropolitan areas - so quite clearly the digital divide between the country and its city cousins is closing. $50 million, on top of the $107.8 million already committed by the Government, aims to close that gap even further.

My announcement today brings Howard Government investment in telecommunications services in rural and regional Australia - excluding metro areas - to more than $1 billion since 1997.

The Howard Government has a clear track record in taking the need for telecommunications services seriously and hitting the $1 billion mark for rural and regional investment is proof that this Government has heeded the cries for investment in rural and regional services.

Funding Future Telecommunications

There are challenges facing the Coalition with a Senate majority for the first time in two decades. Coupled with disparate and divergent views - some that border on demands - on the best way forward, quite clearly we have an interesting time ahead of us in the coming months.

But, what is a robust debate, should not be interpreted as the Liberal and National parties being at loggerheads over T3. We all have the end-game in sight - we all want broadband for the bush, competitive businesses, stronger communities and a world-class telecommunications industry delivering cheaper and more innovative services no matter where you live.

Whether this is characterised as equity or parity of services and price seems to me to be more a matter of semantics than real and appreciable points of difference.

I acknowledge that there are different views as to how to achieve these objectives. There is also an emerging view that future proofing as envisaged by Estens may require some more developed thinking about to how to deliver as yet unheard of technology and services.

Ultimately we need to give people confidence that investments will be made, service levels will be guaranteed and the bush will not be left behind in this process.

While the Coalition has a proud and unprecedented record of delivering targeted funding to regional Australia, the same cannot be said of the Labor Party.

It’s fair to say that much of the angst and concern rural and regional Australia as articulated to me, is based on distrust that the Labor Party, should they ever get into Government, would have the same level of commitment to the bush.

This is at the heart of concerns of people living in regional Australia and the driving force behind what is seemingly a wild array of suggestions including earmarking large chunks of the proceeds of the sale of Telstra for services or committing to major, risky infrastructure builds such as fibre to the home for all Australians. Suggestions such as these are what some commentators have called the ‘price tag’ for T3 and that price tag varies from $2 billion to $7 billion.

One commentator referred to it as the National Party’s new bike and a pony. This is not entirely fair as the concerns of rural and regional Australia and the National Party are genuine and their views are being expressed by their elected representatives.

As you might appreciate I do receive a lot of gratuitous advice in this portfolio. If it can be forgiven, I am going to offer a bit of gratuitous advice on my own part to those shooting in the air in the Telstra debate.

The ideas currently being floated from a number of sources including by some financial institutions and infrastructure organisations, to my mind, often lack credibility or coherence. The amounts of money being proposed appear to be drawn from thin air, and the argument for entirely new networks shows a tenuous grasp of the infrastructure that already exists in Australia and little comprehension of the mix of technologies needed to meet the particular demographics of metropolitan and rural and regional Australia.

Without meaning to be disparaging of these ideas, there are, in my view, a few core propositions that must underpin any consideration of how to fund future telecommunications networks and services whether this is by way of recurrent expenditure from the Budget or from any purpose built Fund.

• I do not think Governments should be picking technologies. Experience shows that technology quickly becomes obsolete and a Government mandated technology would stifle competition and investment at taxpayer’s expense.

• I do not think Governments should be investing in technologies for which there is no demonstrated demand; • I think there needs to be reasonable access for competitors to any major new network; • I think unnecessary duplication of networks such as what occurred with pay

TV cable networks should be avoided; • I think we should not presume as to who might make major new investments in telecommunications infrastructure; • I think setting aside funds for unknown purposes denies these funds being

spent on other urgent Government priorities such as health and education and the community needs to understand this consequence; • And finally when assistance is required, it is impossible to predict now how much will be enough.

Clearly if a telecoms fund were to be seriously contemplated there would be many other considerations and criteria - such as having the fund and its investment mandate at arms length from Government, having an independent source of advice on how Government should spend the income, and making clear it could not be spent on paying Telstra to carry out repair and maintenance of its networks.

We already know what a credible Government response to the needs of regional Australia looks like - in the case of Networking the Nation it was almost $250 million, for the Besley Inquiry it was $160 million, in the case of Estens it was $180 million.

These are useful and quantifiable benchmarks that point the way to possible future targeted spending. An obvious possibility would be to align spending with the response to regular reviews that the Government must conduct as part of the Estens recommendations.

The purpose of these comments however is not to endorse the need for a telecommunications fund. I am usually asked for my views about various proposals as they emerge. So my view is that if, at some stage, the Government is going to be asked to consider a fund, it must be based at the very least on identified need, encourage investment in a range of technologies and utilise market forces to its best advantage.

If a more targeted and realistic discussion results in better and more sustainable services for the future, the debate about Telstra will have served us well. This is essential for taxpayers, consumers, the telecommunications industry and broader Australian economy.

Thank you.