The PC on the failure of infrastructure reform
My Fin article last week (over the fold) was about telecommunications, and included the statement
It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of â€˜rebalancingâ€™, which typically benefitted business at the expense of households.
This point is neatly confirmed by the PC report on National Competition Policy, which shows that households are paying higher prices for nearly all infrastructure prices as a result of reform, mainly because of shifts in costs from households to business.
The PC report notes declining average prices for most infrastructure services. However, as with telecommunications, there was, in most of these cases, a long-standing trend of declining prices before reform began. There’s no evidence to suggest that average prices have fallen faster (or in cases like urban transport, risen less) than would have been the case without reform.
The absence of any net change in average prices, relative to trend means that the effects of infrastructure reform have been almost entirely distributional. The losers have been household consumers of infrastructure services and workers in infrastructure industries. The winners have been senior managers and capital owners in the infrastructure sector and business consumers of infrastructure services. Presumably, businesses have passed on some of the savings to their consumers. And, in the case of publicly owned infrastructure services, households benefit in their capacity as members of the public.
Overall, though, it’s not surprising that there has been little enthusiasm from Australian households for another round of reform. The last round produced plenty of pain, and not much in the way of gain.
The debate surrounding the privatisation of Telstra points up the near-complete failure of telecommunications policy in Australia over more than a decade. The first proposals for privatisation were made in the early 1990s, within the Hawke Labor Cabinet by Paul Keating and in the Fightback! election manifesto by John Hewson. The atmosphere was one of naÃ¯ve optimism, with the assumption that a privatised Telstra would take its place as first among equals in a competitive market, delivering lower prices and better services for all.
The reality under partial privatisation has been very different. It is true that prices have fallen, but they are still driven by regulatory constraints, and the rate of decline is no more than would have been expected from technological change. The ACCC is currently proposing a price cap for Telstra that would require real average price reductions of 4 per cent per year, and is meeting considerable resistance.
This is exactly the rate of progress achieved by the old Postmaster-Generalâ€™s Department when it provided telecommunications services in the period before 1975. It is rather poorer than was achieved by Telecom Australia as a statutory authority. Yet unlike its predecessors, Telstra has the freedom to retrench workers in large numbers, rebalance prices and close off, contract out or sell off unprofitable services. And the underlying rate of technical progress has, if anything, accelerated.
The situation with new technologies is even worse. Australians are famously avid adopters of new technology, and we clearly love the Internet. Yet we now rank 20th in the OECD for the takeup of broadband Internet services, and our rank is falling.
The same lag is evident in relation to Voice over Internet (VOIP). Telstra announced in 1999 that it was moving to implement this service across the network. Six years later, weâ€™re still waiting.
Then thereâ€™s the much-ventilated problem of services in the bush. While some complaints may be put down to rural grumbling, not all can be. Itâ€™s clear, for example, that if mobile telephony had arrived in the days of public monopoly, much more would have been done to extend network coverage. The policy regime we actually got achieved the startling feat of reducing coverage, by scrapping the (still perfectly functional) analog system, which was then expensively, and only partially, replaced by Telstraâ€™s CDMA network.
What explains these poor outcomes? Some of the problems are common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of â€˜rebalancingâ€™, which typically benefitted business at the expense of households.
Other problems seem more specific to telecommunications. Policy has been driven by a series of fads. While the overriding theme has been a naÃ¯ve faith in competition, the outcome has often been to produce competition in areas where it is not needed, but not where it is.
Our poor performance in broadband is easily explained. The service of physical connection to broadband is a classic example of natural monopoly. We only need one connection, and one service is pretty much as good as another. But thanks to the nonsensical application of notions of facility-based competition, some of us have multiple physical services on offer, while others have no adequate option at all. During the great cable race of the 1990s, Telstra and Optus laid parallel networks of optical fibre reaching about half the population. Then, with the advent of full competition in 1997, they suddenly stopped. The rest of the country has had to make do with a patchwork of more or less unsatisfactory alternatives.
On the other hand, the provision of content to be transmitted over the networks is naturally competitive, but Telstra has been allowed to act as a vertically-integrated monopolist. The result has been that Telstra not only dominates the telecommunications sector but also pay-TV and ISP services.
The government shows no desire to clean up this mess before proceeding to full privatisation, since any sensible reform would almost certainly reduce Telstraâ€™s market value, heavily dependent on monopoly power as it is. But a privatised Telstra will be a political power to make the Murdochs and Packers look small (especially since, in most cases, it will be allied with them). If the mess isnâ€™t fixed now, it never will be.