NBN: we would have been better off without privatisation

I have (over the fold) a piece in The Guardian, making the fairly obvious point that both the need for a publicly-owned NBN and much of the cost are the result of the decision to privatise Telstra, and to rely on “facility-based competition” to drive new investment.

Add in the failure of electricity reform, PPP toll roads and airport privatisation, and there’s not much in the way of success from the infrastructure reforms of the 1990s. Then, of course, there’s the collapse of the much-feted productivity boom.

And yet Australia is exceptionally prosperous. A little bit of that, particularly in Queensland and WA, is due to the mining boom. But most of it is the simple fact that, by a combination of good luck and good management, we’ve gone 20 years without a recession.

At the coming federal election, voters will be asked to choose between two plans for a publicly owned broadband network. There have been plenty of claims and counterclaims, many of which do not stand up to scrutiny.

Labor’s National Broadband Network, already under way, offers optical fibre connections to most households. The Coalition’s alternative offers ‘fibre to the node’, that is, to a Telstra box in the street, from which the existing copper wire connection will carry signals to our home.

The differences between the schemes are less important than the two great similarities: Both proposals will cost tens of billions of dollars, and both are greatly complicated by the need to work with Telstra’s existing network. These similarities point to one crucial, and largely overlooked fact – the construction of a national broadband network would be much simpler and cheaper, if Telstra had never been privatised.

If Telstra had remained in public ownership, there would have been no need to create a separate entity to make the transition from copper wire to optical fibre, nor to engage in protracted and expensive bargaining about how to connect the two.

As a privatised firm, but still a near-monopoly, Telstra had no incentive to upset the applecart in fixed-line communications. Despite some intense pressure from the Howard government, Telstra steadfastly refused to provide a 21st century network unless it was guaranteed rate of return far above the true social cost of capital.

Telstra’s dominant position was enhanced by the fact that its privatisation occurred at the same time as the rise of the Internet, which converted the company from a carrier of other people’s phone calls to a dominant supplier of internet content through its half-share in Foxtel. The fact that the other half of Foxtel is owned by News corporation has provided the Telstra monopoly with a powerful media arm, which has shown itself to have no scruples about using its dominance to promote its corporate interests.

The hope of those who designed telecommunications reform was that Telstra’s monopoly of the physical telecommunications network would be replaced by ‘facilities-based competition’ in which a range of competitors constructed their own networks. This approach has been reasonably successful for mobile phones, for which competing networks with common geographical coverage make technological sense.

But fixed-line telecommunications is a natural monopoly, like electricity distribution. It makes sense to have just one network in any given area. As a result, our only experience with facilities based competition was the cable fiasco of the late 1990s. Given a period of grace in which they were the only suppliers, Telstra and Optus raced to roll out parallel networks of hybrid fibre coaxial cable, which gave duplicate coverage to about half the country. The rest got nothing. The cable race stopped abruptly once the Telstra-Optus duopoly faced competition from new entrants, most of whom had no option but to resell services using the duopoly network. Even 15 years later much of the country has to rely mainly on DSL technology using the old copper network.

By the time the Rudd government came to office, it was clear that, as with the original public telephone network, the only way we would get a modern broadband system was for the government to build it. The LNP opposition has railed against the alleged wastefulness of the NBN but they have been unable to come up with a private-sector alternative. Rather, their alternative proposal is a cut-down, but still publicly owned broadband network, heavily reliant on the goodwill of the Telstra monopoly.

The failure, and partial reversal, of telecommunications privatisation is part of a broader pattern, observed across the entire infrastructure sector. Privatised firms have often, though not always, done a good job of operating existing assets. However, investment in privatised infrastructure industries, badly misallocated and often totally inadequate.

Private investment can only be secured at rates of return far higher than those that were required when investment was funded by public debt. From the failure to upgrade Brisbane airport, to the collapse of the PPP model for new toll roads, to the huge increases in the cost of electricity, the story has been the same. The privatised infrastructure model presents us with a choice between inadequate investment and high prices. The only solution is a return to public investment.

42 thoughts on “NBN: we would have been better off without privatisation

  1. why do you assume that the government is any more or less competent in a selling an asset, that running it. both are run with the same political interference and soft budget constraints.

  2. Economic rents, if there must be any, should belong to the people in general rather than a small number of ruthless individuals.

    Also, I get the impression that some individuals are far more ruthless at extracting economic rents than governments are.

  3. Would giving telecom its monopoly back solve anything.

    The NBN is a classic outcome of politics and soft budget constraints.

  4. Re: electricity prices, recently we had our voltage supply from the transformer reduced. This was not at our request so I don’t know how the action was instigated but the exercise was worthwhile, for the same period last year a drop in power consumption of ~30%.

  5. Privatisation of Telstra has led to taxpayers having to pay twice for a telco and consumers being overcharged to pay dividends to shareholders.

  6. Rog, are you sure that was intentional. A 30% power drop would require a mains voltage drop from 240 down to about 200. That seems very low.

  7. The voltage was over 240, they are dropping it to less than 240 (I don’t remember the voltage could be 220).

    If it was well above 240 then that makes more sense.

  8. Hi John, forgive me if I’ve missed something, but could you explain how a fibre to the home plan involves Telstra? I though half the reason for it was to finally cut Telstra out of the loop and level the playing field for good. Such a plan ought to completely bypass Telstra’s ageing existing infrastructure, and finally give us a real 21st century network, and remove Telstra’s ability to manipulate the broadband market.

  9. Ben D :
    Hi John, forgive me if I’ve missed something, but could you explain how a fibre to the home plan involves Telstra? I

    Ben D, NBNCo made a deal with Telstra to use Telstra’s pits and conduits (which contain the current copper lines). This cost $11 billion I think. Telstra’s responsible for re-mediating these pits/conduits to allow NBNCo to pull fibre through them. i.e. removing tree roots, blockages, broken pits, etc. Telstra still retains ownership of pits and copper wires. (Turnbull has assumed that Telstra will give him the 215,000 km of copper wires for free)

    So, yes, Telstra is out of the loop.

    Please see “http://stevej-on-nbn.blogspot.com.au/” for lots of details.

  10. The purpose of privatization was to steal public assets in order to make a small number of professional looters (or as you economists call them, “rent-seekers”) very rich.

    Privatization has been highly successful at enriching those professional looters.

    Of course it has made things worse for everyone else. But it was known in advance that it would do so — this is basic economics, the study of monopolies. It is foolishness to imagine that anyone actually thought that privatization would improve things for the general public; people who claimed that were lying through their teeth.

  11. @derrida derider
    “Bluntly, I’ve come to believe microeconomic questions – such as Telstra vs the NBN – are simply not as big a deal as trying to keep the economy on a stable growth path with near-full employment.”

    While I mostly agree, I disagree on one key point:

    I believe that certain microeconomic questions are crucial to macroeconomic policy — specifically, any combination of microeconomic policies which allows rent-seekers to acquire *vast political power* will stymie efforts to have good macroeconomic policy. We’ve seen this in both Europe and the US, and even in New Zealand.

    Microeconomic mistakes which translate into accumulation of political power by a small group of rent-seekers are *very dangerous*.

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