Discussion: (0 comments)
There are no comments available.
A public policy blog from AEI
The bold policies of the Australian and New Zealand governments to fund nationwide national fiber-to-the-home (FTTH) broadband networks have drawn attention of late for all the wrong reasons. So far, Australia has spent around $28,000 for each of its 260,000 residential connections, whilst New Zealand’s uptake rate after two years stands at just a little over 5% of premises passed. The inability of such ‘grand policies’ to deliver upon the aspirations held for them is in large part due to some of the well-established reasons why politics and the telecommunications industry have historically made such uneasy bedfellows.
First, private sector investors have to account to shareholders for the application of their funds, but governments’ accountability is to electors, whose tax liability often bears little resemblance to their voting power. Thus, government-owned firms tend to operate less efficiently than their private sector counterparts, whilst political priorities often result in deployment schedules following political, rather than economic, priorities.
The recent Strategic Review of Australia’s National Broadband Network (NBN) reveals a budget blowout from A$43 billion to A$72.6 billion in just four years, for a project running around 50% behind the schedule and downscaled significantly over time in order to constrain political damage. Meanwhile, building is ahead of schedule in New Zealand’s privately-constructed Ultra-Fast Broadband (UFB), as the key performance metrics and access to government funds are linked to meeting pre-agreed build targets. However, uptake has been extremely modest. In part, this arises from the political priority to connect (predominantly government-owned) schools and hospitals first, rather than building to meet the needs of the (private) consumers based on willingness to pay.
However, the peculiar structural separation arrangements governing New Zealand’s UFB do not help. Taxpayer funds have underwritten network deployment for three of the government’s four network ‘partners’ (copper incumbent Chorus receives interest-free loans). However, these operators assume no financial risks until consumers start buying services over fiber, so they face few incentives to prioritize marketing over building activities. At the same time, structurally separate retailers receive very similar margins for selling fiber and copper connections but face none of the risks of ownership that would otherwise see them aggressively marketing the new network to maximize scale effects. Taxpayers bear the financial risks, but it is far from clear that these arrangements safeguard their significant investments.
Second, telecommunications networks require long term investment for both the network itself and complementary products sold over it.
To induce the optimal level of complementary investments, commitment to and stability of a network investment plan is essential. It is given that private investors can take a long-term view about the ways in which the returns to that investment will accrue. But government investments are inherently unstable, as no government can commit its successors to continue to implement its investment strategy. Instead, network investments can be held hostage to political positioning, especially when they had their origins in populist politics rather than underlying economic imperatives.
In the 2013 Australian election, the (ultimately successful) opposition campaigned on a promise to substantially downscale the NBN to a predominantly fiber-to-the-node network. Unsurprisingly, investment and competitive intensity in the entire Australian telecommunications market stalled in the lead-up to the election as the political horizon became more uncertain. Even with private sector investment, politicking can have marked effects on both the subsidized network and any others that compete with it for customers.
The structurally-separate, incumbent New Zealand copper network operator, Chorus, has the contract to build 70% of the UFB. In December 2012, a statutory review of regulated copper access pricing proposed new prices that were 30% lower than the prices used to benchmark the subsidized UFB tender prices. A lower copper price is very attractive in the short run for copper broadband consumers (90% of NZ broadband consumers), making any government move to overrule the proposed price reduction a prime target for opposition politicians (there is an election in September 2014). But it also reduces the copper revenues available to Chorus to fund the fiber network. The reduced revenues will delay deployment, slowing the rate of uptake on already-deployed fiber infrastructure, and extending the time taken for the firm to repay the interest-free loans enabling the fiber network to be built in the first place. Not surprisingly, Chorus’ share price went into free-fall, as (predominantly foreign) investors quit the stock in favor of less risky investments.
The core of the ‘problem’ is a flawed regulatory regime that separates regulation of the copper network (statutory regulation by an independent regulator) from regulation of the fiber network (by contract, overseen by a separate Crown agency). This could have been resolved relatively quickly by giving one regulator the power to govern both network technologies. Prices on both networks could then be calibrated to maximize achievement of the government’s fiber uptake policy. However, the government prevaricated for a full twelve months before taking any action, at which point it did not revise the regulatory arrangements but undertook a review of Chorus’ financial affairs instead. The subsequent changes to the agreement between Chorus and the government paper over the immediate cracks (Chorus’s finances are secured until after the election, at least) but fail to deal with the bigger structural and regulatory problems.
Third, government subsidies are inimical to the use of traditional competitive forces to govern industry interaction and can lead to surprising competitive responses.
Subsidies distort the cost-based signals conveyed in competitors’ actions. As government investment is not subject to the same forces that govern private sector funding, an action that conveys certain information when the actor is a private investor will not necessarily convey the same message when taken by the government – or by a government-subsidized actor. Additionally, governments have the power to act in ways that are impossible for private sector firms. Nonetheless, governments are not all-powerful, and have no special powers of predicting technological futures. Arguably, they are less well-placed than the industry to do so, as they are less well informed of research and development trajectories.
The Australian government foreclosed all competition from copper and cable networks for the NBN. This increased the cost and hence the political risk associated with the fiber network but restricted threats to the network from commercial competitors. But constraining competition in the Australian fixed line markets has been impotent to deflect the competitive threat to the NBN arising from increasingly more capable wireless networks. Indeed, the compensation paid by government to the copper and cable operators for decommissioning their networks is fuelling even earlier investment than would have otherwise occurred in rapidly-developing LTE and more sophisticated 3G networks. These networks are particularly appealing for households with low or no internet demands, who are opting to go ‘wireless-only’ in much larger numbers than anticipated in the initial planning for the NBN.
The New Zealand policy debacle has arisen because it does not recognize that the two separate sets of regulatory arrangements governing retailer access to wholesale products (services competition ‘on the network’) do not address the separate matter of how competition ‘between the networks’ (infrastructure competition) takes place. When the fiber network was commissioned, regulation of the copper network remained essentially unchanged. The regulator was required to set copper prices as if there was no fiber network. Yet the fiber ‘regulator’ had agreed to contractual terms with the fiber firms in the presence of a subsidy intended to bring forward the time at which substitution from the copper to fiber network would occur. Fiber prices were not ‘cost-based’, as occurs in typical regulatory processes or in competitive markets where each network competes on the basis of its own costs, but used artificial price points established using the prevailing price of copper connections as a benchmark. The fiber price was irrevocably dependent upon the (regulated) copper price. There could never be true ‘competition’ between ‘independent’ fiber and copper networks (as might occur in the United States or the Netherlands, where neither network is subsidized). Any change in the regulated copper price would undermine the precariously-balanced incentives set up to achieve the government’s fiber policy objectives. Subsidies truly are the enemy of competition.
The bold, Antipodean government-funded fiber policies began as grand dreams of Midas-like proportions, but both appear to have become increasingly illusory when subjected to the realities of a technologically vibrant industry. Unlike the good/bad old days of government-owned and operated monopolies, infrastructure competition is an ever-present reality and it is far from clear that access networks are the bottlenecks they were once believed to be. There is a role for government funding in areas where there truly are missing markets for investment. However, the Australian and New Zealand experiences indicate that much more caution is required than was exercised in the Antipodes before governments re-enter the market as owners and/or funders of networks that inevitably will compete at some level with other networks and technologies.
Be very careful when you wish for government-subsidized fiber – what you get may be vastly different from what you imagined.This post was originally published on TechPolicyDaily.
There are no comments available.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2018 American Enterprise Institute