Chapter 6 - The Future
Technical developments and convergence
6.1
Telecommunications is an area characterised by rapid
technical development and convergence.
During the short period that has elapsed since the Committees final
hearing and the preparation of its report there have been several developments
which will significantly change the telecommunications environment in Australia. In particular:
-
Telstra has announced that new testing showed
that transmission limits for ADSL can be increased. Telstra estimated that this will extend ADSL
availability to an additional 400,000 telephone services by the end of March
2004.
-
Telstra announced that it will upgrade its CDMA
mobile network to allow access to data services, including the Internet, at
speeds of up to 144 kbps.
-
Telstra signed an agreement which will allow it
to develop a nationwide broadband service using two way satellite technology
through a Thai owned ipstar satellite.
Telstra claims that the new service will be cheaper than its current
ADSL network.
-
Foxtel will upgrade its pay TV service to
digital in the first half of 2004 allowing it to offer a greatly expanded range
of services.
6.2
The pace of development in telecommunications in the
current regulatory environment raises issues about the availability and
accessibility of new services. Earlier
chapters of this report outline the concerns of people in rural and regional
areas that they were being left behind the standard of service enjoyed by urban
residents. Similar concerns were
expressed by organisations representing people with disabilities. For many people in remote, rural and regional
Australia the
improvements in ADSL, CDMA and the Foxtel cable service outlined above are
meaningless because they do not have access to these services anyway.
6.3
There are two avenues through which these concerns
could be addressed. By retaining control
of the Telstra network, or by taking a leadership role in the development of
infrastructure, the Government could ensure that new services were made
available to all Australians on an equitable basis. An alternative approach would be to recognise
the importance on new technology in the regulatory regime by fully recognising
the importance of data services.
Unfortunately neither of these approaches is being pursued by the
Government.
6.4
The proposed full privatisation of Telstra will remove
it from Government control and expose it to even more pressure from the
financial markets to put profits ahead of services to its customers. In this environment there will be strong pressure
on Telstra not to invest capital in providing services in remote, rural and
regional areas where there will be a low return on investment.
6.5
Similarly the current regulatory regime fails to ensure
that new services will reach all Australians.
While it ensures that all Australians have reasonable access to voice
services through the USO, it does little to ensure that people in remote, rural
and regional areas have reasonable access to data services such as the Internet. It is not surprising that people in these
areas are apprehensive about whether they will again be left behind as other
new technologies and services become available.
Investment in the network
6.6
A key question relating to the future of the Australian
telecommunications network is whether the current and projected levels of
capital expenditure (capex) will be sufficient to maintain adequate levels of
service. Throughout the Committees
inquiry concerns were raised about Telstras falling levels of capital
expenditure.
What we are aware of however, is the fact that some two years
ago, on a national scale, Telstras CAPEX budget was some $5 Billion. In the
current 2002/2003 Financial year, the national CAPEX budget is some $3.5
Billion and the CEO is on the public record as suggesting CAPEX in 2003/2004 to
fall below $3 Billion. (See Attachment 1)[393]
6.7
In response to a request from the Committee Telstra
provided the table below which outlines its capital expenditure from 1998 to
2004. The table shows a decline in capex
from $3,754 million in 1998 to an estimated $2,900 million in 2004. This represents a fall from 21.7% of revenue
in 1998 to 15.5% in 2003.
Telstra Capital Expenditure[394]
|
|
|
|
Year Ended 30 June
|
|
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
|
|
(in $A millions)
|
Switching
|
|
376
|
661
|
735
|
647
|
626
|
756
|
Transmission
|
|
378
|
416
|
429
|
693
|
602
|
584
|
Customer
access
|
|
959
|
929
|
1,004
|
1,315
|
898
|
778
|
Mobile
telecommunications networks
|
|
449
|
255
|
390
|
628
|
616
|
340
|
International
telecommunications infrastructure
|
|
193
|
233
|
172
|
125
|
138
|
143
|
Capitalised
software
|
|
555
|
559
|
737
|
599
|
502
|
237
|
Other
|
|
454
|
553
|
677
|
722
|
926
|
986
|
Operating
capital expenditure
|
|
3,364
|
3,606
|
4,144
|
4,729
|
4,308
|
3,824
|
|
Less
Non Domestic Capex spend
|
|
187
|
172
|
93
|
70
|
70
|
70
|
|
Core Domestic Operating
Capex (incl Cap Interest)
|
Around 2,900
|
3,177
|
3,434
|
4,051
|
4,659
|
4,238
|
3,754
|
6.8
The Australian Telecommunications Users Group submitted
that this decline in capex was the result of pressure from the financial markets
since the partial privatisation of Telstra:
The interest of the financial sector in the industry since 1997,
when T1 was issued, has had significant influence on industry directions. It
has also created unforeseen tensions between the interests of the shareholders
and the interests of the end users. In 2001/02 the capital market is saying:
reduce capex, improve earnings and cut costs. The impacts on users will be
higher prices, reduced levels of service and possibly delayed innovation.[395]
6.9
Telstra advised the Committee that the falls in capex
have had some specific causes, such as the decline in the construction of new
mobile networks:[396]
Prior to 2000-01, our capex expenditure on the access network
was approximately $942 million. That was
actual capex expenditure in the narrowband component of our access network. If you recall, that was the year that Sydney
hosted the Olympics That was a
substantial increase in our investment that year and for all the right reasons:
diversity, security et cetera of approximately 10 per cent from the year
before, which was the 1999-2000 year. The
year after that, which was 2001-02, we did have a reduction of 11 per cent, to
$838 million, and in 2002-03, this current year, we have a one per cent
reduction in access narrowband. Obviously, we have also had a major increase
in that time in the broadband network. To do that we have gone from $30 million in
year 2000-01 to $130 million this year. So it has been a quite significant investment
in our growth. How have we done that I
think that is one of the questions you were alluding to and why has there been
a reduction in one? That is the balance
of trying to get growth and maintenance programs aligned. At the end of it we
are certainly looking at an outcome for the customer, and that outcome needs to
be driven by the investment but also the overall customer service.[397]
For example, in the last five years Telstra has committed close
to $5 billion in upgrading and developing its network what we describe as the CAN.
As I said, our capex over that period
has been around $5 billion. To put that
into context, that is pretty well more than the New South
Wales government spent in six years on staging the
Olympics. This expenditure on upgrading
the technology used in our network and on the delivery of a more robust network
has allowed Telstra to deliver significant consumer benefits in the form of
substantially lower telephone call charges and I think that has been well
recognised and is on the record as well as reduced maintenance requirements and
lower costs in general.[398]
6.10
Notwithstanding these reassurances from Telstra the
Committee remains concerned that Telstra has little incentive to invest in
infrastructure in light of its dominance of the network and the pressure on it
from the financial markets to minimize capex.
The reduced investment in infrastructure is likely to impact on
innovation, the development of new services and the maintenance of existing
infrastructure. This is likely to have
its biggest impact in regional and rural Australia
where the returns on capex are likely to be lowest and would be further exacerbated
by the full privatisation of Telstra.
One submission to the Committee expressed the concerns of rural Australia
in this way:
Privately owned telecommunications systems are unlikely to
invest in low return areas such as rural Australia,
where, arguably, the need for excellent telecommunications is greater than that
in cities.[399]
6.11
There is clearly a need for long term government involvement
and leadership in telecommunications infrastructure, particularly in relation
to rural and regional Australia. The future development of Australias
telecommunications network is too important to be left solely to the decisions
of profit driven private businesses.
Demand aggregation
6.12
Demand aggregation is a general term to describe the
process under which the users of telecommunications services combine to offer a
single contract for the supply of all of their telecommunication needs. By combining their demand they gain greater
bargaining power with telecommunications providers and may be able to offer a
large enough customer base to a carrier to justify the provision of new
infrastructure. The principle of demand
aggregation, and its advantages for remote communities, were outlined in the
submission from Optus:
There are some policies that governments can use which minimise
distortions in private sector investment.
One such policy is through the aggregation of public sector demand,
which creates a market sufficiently large to provide an incentive for private
investment in regions where normally it may not be profitable. While this demand aggregation policy has a
national as well as regional basis, initiatives at the regional level are the
most common in most countries. In such
an initiative, the government enters into a partnership and shares the cost
with the private sector to build the network supported by public sector
demand. Yet, the government has to be
careful when it asks private companies to provide regional network in order
not to reinforce the dominant position of incumbents.[400]
However, overall, achieving scale is promoted by encouraging
partnerships between carriers, industry and communities, rather than making
funding available to individuals or small groups. Such a strategy will:
deliver better outcomes for remote
communities, lower prices and greater choice;
put alternative providers in a
stronger competitive position to compete against the incumbent and expand their
service offerings; and
drive broadband services further into
remote communities. As service costs reduce
through scale and scope, the potential for these services to be delivered to
even more remote, less economic communities increases.[401]
6.13
Some examples of successful aggregation projects were
brought to the attention of the Committee.
One example is the Reefnet established in Queensland
with the support of the Queensland Government.
This development has increased infrastructure competition on the main
telecommunications backbone on the Queensland
coast as well as lowering prices on that route:
The Queensland
government has pursued a very strong policy of demand aggregation, not just to
get cheapest costs in telecommunications but to achieve better infrastructure
outcomes. . By marshalling your purchasing power you can actually achieve some
good infrastructure outcomes. One example thus far is the Reefnet. There is now competitive fibre up the coast of
Queensland between Brisbane
and Cairns. There was not a business case to do it, I
might add, in the absence of government support. Optus and Leightons
with AAPT have built the Reefnet. To support that, $23 million a year over
five years is being spent. How much does
that cost taxpayers? Zilch. No money has
to be used to build that infrastructure; it is money that we would have already
spent. We spend $172 million year on
telecommunications in Queensland.
All we did was marshal some of that
spend and after five years we will go and spend the money somewhere else.[402]
. the primary reason we
did the Reef Network was for competition. As the minister pointed out, there was no
competition; there was only one carrier, Telstra, when we put that in place. There are now five carriers on there. As to
the specific question of the two-thirds reduction, that is a real figure. In some cases it is actually more than that. That is an average. I know that two or three
years ago a two-megabit link from Cairns
to Brisbane cost
about $125,000 a year. It is now $25,000
a year for the raw bandwidth. Sure, you
have to add the extra costs for the tails onto that, which maybe takes it up to
$40,000 or $50,000, depending on where you are, but that is where that figure
comes from. It is actually even better
than that in some cases. I realise that
not everybody wants to buy two-megabit links, so that cost saving is primarily
concerned with the larger bandwidths, which are really what we are trying to
get into the state anyway. It will take
some time for those cheaper bandwidths to flow through into individual
telephone calls and data services, but the primary point of having the
competition there was so that they would eventually flow through.[403]
6.14
The Queensland Government has also used a similar
approach to promote improved mobile phone infrastructure:
Mobile telephony is another issue that is important in a state
like Queensland. We used to have
100 mobile telephone plans operating for public servants. I imagine taxpayers in Queensland
would not have been too keen to know that in other words, when anyone wanted a
phone they just got whatever the plan was. We have now been able to go to the carriers to
ask them what they will do in terms of pricing, and we will end up with four
pricing plans. Four carriers have
submitted their proposals, and a number of them will involve some
infrastructure outcomes. So, again, by
marshalling our spend and the process is not finalised yet the question was
what additional mobile telephone towers can we get in places. Putting aside the question of the $30 billion
that they got from the sale of Telstra, there is no question in principle why
the federal government cannot use its spend to do that as well. Frankly, I do not care how they pay to give
fair coverage to people between Mount
Isa and Townsville; it is just the
fact that they do it.[404]
6.15
The Queensland Government is also looking at a similar
proposal to aggregate demand in rural and remote communities:
Our SmartNet proposal is about aggregating demand for bandwidth
in rural and remote communities. If you
like, instead of having a small pipe for the hospital, a small pipe for the
police and a small pipe for the school, you get a big fat pipe that benefits of
all of them, including the local community.[405]
6.16
The importance of aggregation as a means of promoting
infrastructure development was emphasised in the submission from Optus. It cited both the Queensland Governments Reefnet
project mentioned above and demand aggregation by the Northern Territory
Government as being examples of where it was able to invest in infrastructure
because of demand aggregation by governments:
The Northern Territory Government, for example, in its awarding
of most of its business to Optus has embraced both the demand aggregation
approach, and the approach of supporting new players to improve the competitive
environment. The Northern
Territory aggregated all of its IT&T spend into a
whole of government arrangement for telecommunications and Internet through a
five year contract worth over $110 million.
Optus has committed to major infrastructure improvements in the NT and a
range of value added services and industry development initiatives.[406]
6.17
Optus also cited the Commonwealth National
Communications Fund program, which provided funds for the development of new
infrastructure where aggregation could play a role:
There is one recent Government funding initiative that has adopted
this approach - the National Communications Fund (NCF). The NCF was developed as part of the
Governments implementation of the Besley Inquiry recommendations. It provided for $50 million for
telecommunications health and education services. Successful proposals needed to have matching
funding from alternative sources, eg. state or territory governments and
industry. The funds were available on a
competitive basis, but allocated to the proposals that demonstrated they would
be viable and deliver community benefit.
The NCF has been offered in a way that provides greater
opportunity for alternative providers to compete against Telstra. The reason for this is that:
Unlike NTN, carriers were able to take the lead with proposals
(in partnership with other agencies such as government departments) and by
doing so develop proposals that deliver economies of scale and scope for
competing against the incumbent;
Selection was based on wider benefits to communities, rather
than the lowest cost. This created opportunities
for new technologies that are more designed for delivering a range of services
to a wide range of users. (Indeed existing technologies face greater hurdles
cost effectively meeting broader community benefits.)
A good example of a proposal that has been successful under the
NCF was Optus proposal to deliver education services to New
South Wales and Northern
Territory School
of the Air (SOTA), TAFE and indigenous communities explained earlier.[407]
6.18
Another interesting example of demand aggregation is
the Coorong project. The Coorong
Communications Project saw the development of new end-to-end infrastructure for
broadband data and voice services delivery into the Murray
Bridge and Coorong regions of rural
South Australia. Networking the Nation funding was used as a
catalyst for the project which aggregated voice and data demand from the local
municipal council, small businesses and consumers with the purpose of achieving
lower charges and enhanced access to broadband.
New broadband microwave infrastructure was built by Agile Communications
between Murray Bridge
and Adelaide, and by the Coorong
District Council with the region encompassing Meningie, Tailem Bend and
Tintinara.[408] Agile submitted that:
The Coorong Communications Project is a nationally significant
example of the successful creation of a new, sustainable, alternative to
Telstra for Telecommunications service delivery in the bush. Sadly it is one of the few such examples that
exist, despite the financial magnitude of the NTN grants process.[409]
6.19
Although the Coorong network was originally built
around the provision of voice services and data services for local government, the
new infrastructure has enabled Agile Communications to provide wireless and
fixed line broadband services in areas where they were previously unavailable:
There is a township called Murray
Bridge in the Coorong area; we are
delivering broadband services to a school in that area today, on trial, that
exceed the speed of an ADSL service, using wireless systems. It all works fine and we are going to build
more of it. Similarly, we are about to
become the first company to deploy the Telstra style of ADSL on copper lines in
a rural community that has no Telstra
ADSL today. The township
of Meningie, another community in
the Coorong area, will have that going by about the end of June.
That means that Meningie will be the
first place in Australia
to have faster broadband than that which Telstra provides, on the same copper
lines that Telstra uses. That, for us,
is a very positive example that the Coorong network is working.
The reason we have been able to afford to broadband enable that
town is that the Coorong network connects that town back to Adelaide.
So, having built a backbone that is
sustainable, we can use it to deliver broadband services at the edges of that
network[410]
6.20
Agile Communications' Managing Director, Mr
Simon Hackett,
told the Committee:
We have put in nodes of that network simply by leasing capacity
from other carriers in Sydney, Melbourne
and Brisbane. In these places the business model is able to
work. Ballarat and Bendigo are big
enough to make a broadband model work, but Berri and Renmark are marginal. The townships in the Murray-Mallee area are so
small that, really, they always get left out of this sort of situation. It is still the case that, once you manage to
bootstrap them, you can keep them running.In our experience, for the sort of
model we deploy, the limit of viability below which you cannot make it work
without subsidy is around 25,000 to 30,000 people in a township.[411]
6.21
A further example of demand aggregation is the Norlink
e-town process. Norlink is a community
based company involving eight community partners based in the northern rivers
region of NSW. It intends to provide
broadband, voice and virtual private network services using wireless local loop
technology.[412] Its CEO, Mr
Keith Davidson,
advised the Committee that:
In 2001, Norlink received federal funding to establish an
alternative local loop trial in the Northern Rivers using wireless and taking
it to full commercialisation. This trial
is being conducted in four communities in the Northern RiversMullumbimby,
Maclean, Kyogle and Lismore, which was added with the support of the New
South Wales state government. To do this, we have developed what we call a
prototype regional telco model that incorporates local ownership, partnerships,
complementary use of existing infrastructure and community developmentwhat we
are calling the Norlink e-town process.
We believe that local community ownership is the
keyparticularly to identify real infrastructure needs, to reinvest locally and
to build communities through the ownership and development of community
development initiatives. We also
recognise that communities cannot do this alone and the development of
extensive partner relationships is important to success. These partnerships can include relationships
with vendors, backbone providers, building partners and other carriers for
other service offerings. Income from
existing and new infrastructure will not deliver sufficient returns to the
entity in the short term to ensure sustainability; therefore, the need to offer
services over existing infrastructure is important, providing a strong base
from which to grow. Most importantly,
reinvesting in the community is key. Identifying
areas of social and economic development can be enhanced by better
telecommunications and by investing in these areasfor example, investing in IT
skills and in the deployment of infrastructure to remote or more difficult
access sites.[413]
6.22
Canada,
a country with similarly vast distances and isolated communities, has shown the
way with its Broadband for Rural and Northern Development Pilot Program
(BRAND). It is essentially a program
aimed at helping communities without broadband access to develop a
community-based strategy for acquiring the technology.
6.23
The Committee was also advised of some practical
difficulties and limitations on demand aggregation.
The most difficult part of this whole process to achieve
aggregation is: what is the process? Nobody has come up with a model on how to work
it out. Who do you talk to local government, local businesses? Who is the driver of this process? Basically this comes back to one of the
recommendations from the Broadband Advisory Groups report to encourage a
brokerage system where people are specifically targeted to bring together all
these community needs. But at what level
you can do this government or individual business I really do not know.[414]
6.24
In advertisements in the national media in January
2004, the then National Office for the Information Economy called for
applications from eligible regional, rural and remote organisations for funding
for Community Based Broadband Demand Aggregation Brokers. The advertisement stated that funding for
Demand Aggregation Brokers is a key element of the National Broadband Strategy,
developed in response to the Regional Telecommunications Inquiry.
6.25
Witnesses also gave evidence about the practical
limitations on demand aggregation. For
example, Professor Eric
Wainright, stated:
There are some real barriers to university, government and
business aggregation. The Queensland
government, for example, is presumably going ahead with its SmartNet
arrangements to allow Queensland
government departments access to a better deal, no doubt, than they can get at
the moment. But they cannot collaborate
with us, because we are across the border. We cannot go into their deal; they cannot come
into our deal. When you look at it on a
city-by-city, town-by-town basis Innisfail, Ingham, Mareeba, Atherton;
all the places around with a capacity of 10,000 to 20, 000 none of those
communities can gain at the moment. And
none of us can guarantee that in all of those smaller places we have sufficient
demand to persuade Telstra, an energy company, Optus or anybody else to invest.
At the end of the day, prices stay very
high, even though a lot of the capacity is in the ground already. From an individual carrier point of view, they
say, Show me five years of growth in demand and income coming in.[415]
6.26
In evidence to the Committee Optus was critical of the
approach taken by the Commonwealth to filling its own telecommunications
needs. Optus criticised both the failure
of Commonwealth departments and agencies to aggregate their demand, and the
failure to take into account the wider public benefit in allocating government
telecommunications contracts.
The Commonwealth, on the other hand, has a silo approach to
telecommunications purchasing that prevents creative leveraging. Agencies and departments make their own
purchasing decisions albeit within a
centralised framework managed by the National Office of the Information Economy
(NOIE). The goal of the department or
agency is to obtain the best commercial deal that it is able.
The limitation of this approach is that it can make the
aggregation of demand by multiple agencies and departments difficult. Indeed, there has been a recent rejection of
a whole of Government approach to IT&T outsourcing. While this may have a valid rationale, it
means that demand aggregation is not feasible where it is most needed in regional areas. Although NOIE has
examined mechanisms to aggregate demand for departments and agencies in
regional towns Project Golden this initiative has not progressed. In Optus view, it would be desirable for
further resources to be provided to pursue this initiative.[416]
The other problem with the current approach is the potential
missed opportunities that can arise from purchasing decisions being made purely
on the basis of commercial interests and without regard to broader government
objectives or the wider public benefit.
For example, assume a Commonwealth agency is tendering for the
provision of bandwidth between central Australia,
and the East Coast. One of the proposals of a bidding carrier is to build a new
intercity fibre network to provide the service (such as to provide dual
infrastructure with the incumbent).
Under the current arrangements there would be no consideration by the
agency (or the Government) of the benefits that would flow to consumers from
the building of a new competitive network, as opposed to simply using an
existing monopoly network.[417]
6.27
The importance of government demand aggregation was
also recognized by the Small Enterprise
Telecommunications Centre (SETEL) whose E-Commerce Forum Taskforce recommended
that governments:
Establish a program to promote Government (covers all tiers of
government) demand aggregation and infrastructure development initiatives in
regional and rural areas and to encourage greater participation by industry and
regional action groups in support of e-commerce.[418]
6.28
In the Committee's view the Commonwealth could, and should,
do much more to promote the development of alternative infrastructure by
participating in demand aggregation arrangements. This is particularly important in remote,
rural and regional areas where there is no effective infrastructure
competition.