Chapter 2
Framework for the Request for Proposals
Introduction
2.1
Throughout this inquiry, the committee has heard concerns expressed by
stakeholders and prospective bidders alike relating to potential differences in
the interpretation of a number of key concepts and terms of phrase within the
National Broadband Network (NBN) Request for Proposals (RFP) document. There
have also been issues raised about the perceived transparency of the process
due to the lack of face-to-face discussion opportunities with the sector and
the tight timeframes specified for the assessment of proposals after the
closing date.
2.2
This chapter explores the varying definitions of broadband technology,
examines a number of key terms and concepts within the Request for Proposals and
also provides comment on the overall tender process.
What is broadband?
2.3
Broadband is rapidly becoming a critical element of Australia’s national
infrastructure, being an enabling technology that fulfils a key role in
connecting consumers and businesses to the online economy. It allows
organisations and government departments alike to adopt more flexible service
delivery and more productive ways of operating.
2.4
The term broadband is a contraction of the term ‘broadband width’,
generally used to describe fast, ‘always-on’ internet access. The intrinsic
value of broadband is not just the technology, but in what it enables people
and businesses to do. Most people are not concerned about what type of
technology might deliver their broadband access, but rather their ability to
access services and perform tasks where, when and how they want. Different
users will have different needs; the diversity of consumer demand underscores
the fact that there is unlikely to be a ‘one-size-fits-all’ broadband solution
for Australia.
High speed broadband
2.5
A definition of 'high speed' broadband provided in the government's RFP is
'a minimum dedicated downlink speed of 12 Mbps (Megabits per second)'[1]
that is capable of supporting 'symmetric applications such as high-definition
video-conferencing.'[2]
However the government also recognises that this speed will most likely be
quickly outdated, requesting that proponents should outline how their solution
would support future upgrades 'in line with international trends'[3],
while demonstrating a 'clear upgrade path ... to at least 2020 and preferably
beyond.'[4]
2.6
In relation to what is 'high speed', the committee received evidence at
the public hearing in Sydney that many Australian households and businesses are
already able to access broadband speeds much higher than 12 Mbps. Mr Gregory
Hicks, Chairman of Adam Internet Pty Ltd, made the following remarks in his
opening statement:
We have our own networks in South Australia that currently are
providing more than 50 per cent of our customers with speeds greater than what the
national broadband network is proposing anyway.[5]
2.7
Mr Hicks later reinforced this point by saying, 'In fact, I do not class
the 12 megs as the next step.'[6]
2.8
The Organisation for Economic Cooperation and Development (OECD) Broadband
Statistics report published in June 2008 clearly shows that available broadband
speeds in Australia in October 2007 were well below other OECD countries,
including New Zealand; they also illustrate that our incumbent
telecommunications operator does not provide the fastest connection rate within
Australia.[7]
Although Australia rated in the top ten OECD countries when rating the fastest
advertised connection speeds, the top five countries were at least three times
faster, with the highest rating country, Japan, rating thirty times faster than
Australia's fastest connection speed.
2.9
At the Canberra public hearing, Mr Lyon from Infrastructure Partnerships
Australia, noted that:
The speeds in both Japan and South Korea are around 100 megabits
per second. We are talking about a minimum speed in Australia of around 12
[Mbps], so we still have some way to go if we are to reach them.[8]
2.10
Conversely, the committee has heard that many Australian homes and
businesses will not require speeds much higher than 12 Mbps to access online
services, contending that the majority of benefit gained from speeds higher
than that is purely social in nature, being utilised by consumers wanting to
download movies or participate in interactive online games. Mr Paul Budde
commented that:
There are still a million people in Australia for whom the only
thing they do is to occasionally check emails.[9]
2.11
In his submission, Professor Joshua Gans made a similar observation,
noting that:
Indeed, evidence from Japan and South Korea where even fast internet
connections are available suggests that where there is demand it is mainly for
video downloads and gaming.[10]
2.12
However, the committee received evidence that businesses will definitely
benefit, as was noted by Dr Walter Green from the Communications Expert Group (CEG),
whose submission included a summary of case studies looking at the impact of
broadband on small and medium enterprises (SMEs) in the United Kingdom.
2.13
This summary highlighted the productivity gains that could be achieved
by SMEs, the lack of which could lead to 'loss of opportunity and reduced
efficiencies.'[11]
It is well acknowledged that for any business, 'time is money'; this was
reflected in a comment made in Dr Green's submission that, in general:
...SMEs were dependent on multi megabit ... [and] the main driver
for bandwidth was response times ... They all reported improved profits and
efficiencies because they could spend more time delivering the services they
were good at ...[12]
2.14
The committee acknowledges that broadband benefits will facilitate the government's
social inclusion agenda, particularly for those Australians living in isolation.
However, the committee also acknowledges that the extent to which these
benefits are felt will be highly dependent on the extent to which the NBN will
be accessible by those in regional and remote Australia.
Specified coverage of the NBN
2.15
The RFP follows the government's election commitment by requiring that
98 per cent of Australian homes and businesses will be covered by the
successful NBN fibre-based solution, with the remaining two per cent to have 'an
improved broadband service'[13]
through funding under the Australian Broadband Guarantee (ABG) program.
2.16
The Australian Government has injected $270.7 million to continue the ABG
over the next four years. Answering questions at Senate Estimates in relation
to how this funding will be utilised, the Secretary of the Department of
Broadband, Communications and the Digital Economy, Ms Patricia Scott, said:
The Australian Broadband Guarantee will provide access to metro
comparable broadband services to underserved areas while the network is being
rolled out and for the remaining two per cent of Australians in rural and
regional areas.[14]
2.17
Ms Scott explained that the demand for the broadband guarantee is
expected to decline as a consequence of 'the continuing provision of commercial
metro-comparable services'[15]
via the NBN rollout.
Qualifying the 98 per cent coverage
2.18
The committee repeatedly drew attention to the objective stated within
the RFP that 98 per cent of Australian homes and businesses would be covered by
the NBN, attempting to clarify on what basis this percentage was decided upon,
and how the Department of Broadband, Communications and the Digital Economy (the
department) would assess whether prospective proponents would achieve that
level of coverage. At the Senate Estimates hearing on 20 October 2008, the Minister for Broadband, Communications and the Digital Economy, Senator the Hon. Stephen
Conroy explained that:
After extensive consultation with the sector, we believed that
98 per cent was achievable and so we decided to set that as our benchmark ... it
is our stated policy and election commitment to reach 98 per cent.[16]
2.19
The minister also suggested that the specified coverage rate was very
achievable when he continued that:
... I have not heard one single potential bidder suggest that they
cannot reach 98 per cent ...[17]
2.20
It was further explained that the RFP was specifically not prescriptive
in what geographic areas the 98 per cent of covered homes and businesses existed.
This was to ensure that the RFP:
... maintains as much flexibility as it can for the Commonwealth.
... We have left it up to the bidders as part of the competitive process to
suggest what the best architecture is.[18]
2.21
As an alternative view, Mr Paul Budde suggested to the committee that
the requirement for fibre to reach 98 per cent of Australian homes and
businesses was unnecessary. At the public hearing in Sydney, Mr Budde stated
his view that:
I am totally in favour of looking at fibre to the node to approximately
91 to 93 per cent of the population. It is silly to go for 97 [sic] per cent.
For that last two, three or four per cent [coverage], you are spending all your
$4 billion, and it does not make sense. It is not necessary.[19]
2.22
Most other witnesses and submissions did not agree with Mr Budde on this
point. For example, in his submission Dr Green from CEG stated that, in order
to achieve the government's broadband objectives, it was essential for all
Australians to have access to broadband services. Dr Green then recommended
that the 98 per cent needs to be further clarified or defined by the government:
The Commonwealth Objective of achieving 98% coverage is critical
to the future wellbeing of all Australians, however the definition needs to be
clarified or strengthened by including a definition such [that] "all
communities of more than 100 persons should have access to the NBN Broadband
network."[20]
2.23
Discussion at the Canberra public hearing turned to how the government
would measure whether each proponent would actually reach 98 per cent coverage,
in particular what modelling the department would be using to make their
assessment. The department explained that proponents have been asked to
provide a wide range of detailed information within their proposal, much of
which relates to coverage:
...proponents are asked not only to indicate what extent their
coverage will be but also the methodology by which they have come to that
number themselves.[21]
2.24
When the department was subsequently questioned whether the modelling that
the department was using to evaluate the ability to achieve the required
98 per cent coverage would be provided to bidders, the department
responded by saying that:
... there are a number of approaches to modelling and in the
interests of a very comprehensive and thorough assessment of proposals we
envisage using all those ... there is no single set that we could give to
proponents.[22]
2.25
This response does not provide the level of confidence that proponents
are seeking and seems to imply that there may be several models used, or the department
is as yet undecided as to the model they might use. This raises doubts in
relation to the transparency of the process, given that proponents do not have access
to this critical piece of information that would assist their solution design.
This is borne out by the fact that the previous OPEL contract was cancelled
subsequent to the department applying its own modelling to measure the coverage
promised by OPEL, which provided different results to OPEL's assessment.
2.26
The committee is of the opinion that, in order to prevent a difference
of measurement modelling, similar to that which occurred with the assessment of
the OPEL bid, possibly resulting in a consequential delay to the NBN
implementation, it would be beneficial for all stakeholders to know which
modelling the department will use to assess the coverage footprint. The committee
heard from Terria, (one of the bidders) at the Canberra public hearing, that
they had sought clarification of how the 98 per cent would be calculated by the
department. Dr Wagg from Terria told the committee that:
...we have written at least twice to the department specifying
what we believe 98 per cent to be, what the basis is of what we are going to
submit and the logic behind why we believe that will achieve 98 per cent. ... As
far as I am aware, we have yet to receive any response from the department
formally identifying that our position is incorrect.[23]
2.27
Dr Wagg's consortium colleague, Mr Michael Simmons, later stipulated
that bidders needed to be confident on what the modelling would be and also
that the department would apply that model consistently across all proposals:
... I must also stress that there is no dispute ... on coverage
measurement. It is just seeking clarity and agreement between both parties on
how it would be measured and that that methodology would apply to all bidders.[24]
The remaining two per cent
2.28
A substantial number of stakeholders and members of the general public have
expressed their concern to the committee that the two per cent of Australian
homes and businesses that will not be covered by the NBN would be those in
remote and rural Australia, or other 'black spot' areas, which are already
underserviced or unserviced.[25]
2.29
This concern was predictably expressed quite clearly in submissions from
state governments responsible for a large number of remote communities, which
have the potential of being bypassed by the NBN due to their location and low
population densities.
2.30
The submission provided by the Queensland Government incorporated their
previous submissions provided to the department in response to a call for
suggestions on recommendations for regulatory change and on how to supply
broadband services to the two per cent. In the latter submission, it was
highlighted that defining the NBN broadband footprint for their state was a key
issue for Queensland. Of particular concern was that to date no detail has
been provided by the Australian Government:
... on how [the 2 per cent] will be determined or where the 2 per
cent will be located.[26]
2.31
The Queensland Government submission illustrated its concerns with a map
created using population densities of Census Districts obtained from the 2004
Census. This clearly highlighted that, by using populations densities, the 98
per cent footprint would include all highly populated areas along the coast of Queensland,
with the vast majority of inland regional, rural and remote Queensland
comprising the remaining two per cent. The Queensland Government submission
strongly states that:
The Queensland Government does not wish the NBN 98 per cent
threshold to be allocated in Queensland purely on a population density basis.[27]
2.32
A subsequent map illustrated a comparative 98 per cent footprint that
would be created if the Australian Government was to ensure that the NBN
provided services to:
-
Population centres in Western Queensland (not just those within a
few hundred kilometres of the coast);
-
All bounded localities and hub towns;[28]
-
Every school and tertiary campus in Queensland;
-
Every health and public safety facility (i.e. police, ambulance, SES
and fire service); and
-
All state and local government libraries.[29]
2.33
This footprint covered a far greater geographical area of Queensland, with
the submission consequently calling on the Australian Government to:
...collaborate with the states to agree on the location of homes
and businesses that will benefit from the NBN.[30]
2.34
The Queensland Government has demonstrated that it will continue to strive
to meet the broadband needs of its citizens, stating that it will:
...consider using its telecommunications expenditure to support
the extension of the NBN bidder proposals should they not meet all the
Queensland Government's requirements [described above in 2.32].[31]
2.35
The South Australian Government expressed similar concerns in their
submission to the Regional Telecommunications Independent Review Committee
(RTIRC) in June 2008. The submission states that almost three-quarters of South
Australia's population reside in metropolitan Adelaide. However, South
Australia (SA) differs from other states in that it has only two regional
centres with more than 20,000 people. The submission highlights this, stating
that:
The sparseness of the population is indicated by the fact that
only 30 towns have a population greater than 2,000 and 50 per cent of the
state's regional population reside in towns of less than 200 people or in rural
areas. Over 30 per cent of the regional population is in towns with less than
200 people or in rural areas outside of towns.[32]
2.36
In the attachment to their RTIRC submission, the existing level of
broadband access in regional, rural and remote South Australia is described,
noting that:
... a significant proportion (estimated at 27 per cent) of South
Australia's regional, rural and remote population remains unserved.[33]
[emphasis added]
In some regional areas the proportion of population that
cannot access broadband at all is as high as 33 per cent.[34]
2.37
Like the Queensland submission, the situation is clearly illustrated
with a map indicating the 98 per cent NBN footprint that would be covered if it
was based on population densities. This footprint would represent only four
per cent of the state's land mass. The state acknowledges however that the actual
NBN coverage may in fact be significantly less that 98 per cent, 'due to the
economics and practicalities of an FTTN architecture solution'.[35]
If the footprint was dropped even by a small percentage, to 95 per cent of the
population, coverage would reach only 0.7 per cent of the state's land mass.
2.38
It is the committee's view that it would be an extremely unsatisfactory
result for the NBN, such a significant government investment, which has been contributed
to by all Australian taxpayers, to reach only a small percentage of a state's
geographical area while leaving a very high proportion of rural and remote
citizens without access to the NBN.
2.39
South Australia recommends against allowing the NBN operator to adopt a 'cherry-picking'
market-driven approach to select the larger towns 'with the most easily
deployed broadband solutions.' It closes with the following statement:
... the submission urges the adoption of region-wide projects as
the most effective means to reduce the effect of being outside the NBN coverage
and recognises a collaborative model as the best approach to achieve
widespread, sustainable outcomes.[36]
2.40
The Western Australia Department of Industry and Resources (WA DOIR)
also noted concerns with where that state would fit into the 98 per cent
footprint. When asked whether they have been able to determine with any
certainty where the 98 per cent may be, WA DOIR answered in the
negative.
We tried to ask that question of people in Canberra and no-one
could give an exact answer. ... WA as a whole could become the two per cent. ... I
think we risk becoming the two per cent casualty of NBN.[37]
2.41
Mr Anson Cheng from WA DOIR drew attention to the fact that the majority
of Western Australia's (WA) population of approximately 1.8 million lives in Perth,
with around 400,000 living in rural and remote areas. Of this number, around
200,000 to 300,000 live in the state's far north-west region. Mr Cheng
highlighted the importance of this small section of Australia's population,
noting that:
... the bulk of the wealth of this nation is generated by these
200,000 to 300,000 people in the north-west, and they are not getting the
infrastructure.[38]
Conclusion
2.42
At the time of this report going to print, neither the department nor
the Australian Government had provided any guidance or further clarification of
the composition of the 98 per cent NBN coverage footprint. The committee
believes that the government needs to provide this clarification to proponents
and stakeholders alike to ensure a level of confidence that the significant
$4.7 billion funding will benefit in particular those Australians that are
already underserved or unserved. Particular attention is required to address
the needs of those remote areas that are currently generating a large
percentage of Australia's wealth yet are in the most underserviced areas.
2.43
Chapter 4 will highlight this issue again to examine suggestions for the
rollout schedule for the NBN.
Definition of open access
2.44
One of the critical Commonwealth objectives within the RFP is that the
National Broadband Network:
...facilitates competition [in the telecommunications sector]
through open access arrangements that ensure equivalence of price and non-price
terms and conditions, and provide scope for access seekers to differentiate
their product offerings.[39]
2.45
Given that this objective is central to ensuring that the current level
of anti-competitive behaviour is addressed, there has been strong criticism
that the government did not clearly define the term 'open access' within the
RFP. 'Open access arrangements' is a term used within the RFP, which does
leave room for interpretation. However, the government has repeatedly stated
that it has deliberately avoided being prescriptive to allow proponents the
greatest degree of flexibility.
The approach taken in the request for proposals is an approach
that tries not to be prescriptive. It is outcomes focused with 98 per cent
coverage and open access competition ... and it wants to have the most
competitive process possible to achieve those outcomes.[40]
2.46
In the RFP the government expands on open access by stating that:
...the long-term interests of end-users should continue to be
promoted. The Government is therefore determined to ensure that appropriate
open access arrangements are in place to promote competition and ensure
efficient investment. In this context it will be important to ensure that
access is provided on equivalent price and non-price terms and conditions. ...
Proponents should keep in mind the Government's objective of providing scope
for access seekers to differentiate their product offerings.[41]
2.47
Although the government's intensions may have been to encourage
innovation by proponents, the capacity for individual interpretation of the
open access terminology has led to uncertainty within the industry.
2.48
Many submissions have consequently sought to provide the government with
what they believe should be considered as 'open access' to the network, with
some calling for this to be defined within legislation. The submission
provided by Google was a prime example, stating that:
Google submits that the Government should consider regulatory
conditions that will preserve the fundamental open architecture of the Internet
in designing the regulations to apply to the NBN. ...
...the Government should also consider crafting narrowly tailored
non-discrimination rules that appropriately limit potential access provider
misconduct, as competition may not be a panacea.[42]
2.49
Comments relating to open access are often interwoven with requests for
regulatory change that would engender sustainable competition in the
telecommunications market; however, this relationship will be more fully
explored in chapter 3.
Why is open access so critical?
2.50
The requirement for open access stems from the commonly held assumption
that, due to Australia's high infrastructure costs, large land masses and
relative low population densities (compared with other developed countries such
as the United Kingdom), it is most likely that the NBN will be characterised as
a natural monopoly. Clearly there are issues with the current incumbent having
a strong monopoly position in most local markets, but particularly in
non-commercially viable remote and regional areas, which has subsequently lead
to lack of choice and higher costs in those areas. There is a need to avoid
re-creating similar issues when designing the NBN.
2.51
In order to achieve open access, it can be deduced that the new
owner/operator of the NBN, which will most likely be a monopoly provider, must
share with other access seekers, without discrimination, the infrastructure
they build, in order to enable competition. The Western Australian Government
states that:
... it is in the national interest to encourage (if not compel)
the local monopoly bottleneck facilities' owner to share its facilities with
its competitors.[43]
2.52
iiNet attributes the existing lack of customer access to fixed line
broadband to not only the lack of infrastructure, but also to a 'lack of
genuine open access to existing infrastructure'.[44]
2.53
In their submission, iiNet offers their own definition of open access
requirements as being:
...the broad requirements for improvements in the relationships
between the rights and obligations of the network owner/operator (Access
provider) and those organisations purchasing access (Access Seekers) ... to
services and facilities for the creation and eventual sale of retail products
and services to end users.[45]
2.54
Of particular importance is their qualification that open access
requirements:
...do not relate to the sale of retail products and
services to end users.[46]
[emphasis added]
This strong comment captures the concern that the capacity
for individual interpretation may allow a prospective proponent to claim they
enable open access, when what they actually will allow is open access to their
own pre-packaged services.
2.55
Google draws attention to the exponential growth of the internet in the
last decade, highlighting that this has been due to the open access on which
the internet was founded:
This open, non-discriminatory architecture [of the Internet] has
given rise to fierce competition, constant innovation and unparalleled social
benefits ... [and] was deliberately designed to empower end-users...[47]
Telstra's differing definition
2.56
It is a fact that although urban areas can support competition in the
provision of backhaul, once the metropolitan or major regional areas are exited,
Telstra is the frequently the monopoly provider of backhaul between major
centres. Due to the immense distances and subsequent extremely high infrastructure
costs involved, it is unlikely that facilities-based competition would ever be
sustainable in rural and remote areas of Australia.
2.57
In their submission Vodafone notes that once the NBN is operational, the
use of Telstra's backhaul will significantly increase. However, for the
reasons mentioned, there is unlikely to be a competing infrastructure provider:
Accordingly, the vast majority of transmission routes display
strong natural monopoly characteristics, meaning entry [as a competitor] is
neither desirable from a social welfare perspective nor commercially viable...[48]
2.58
Vodafone draws the conclusion that because of the strong likelihood that
there will be a monopoly owner/operator of backhaul in rural and remote areas,
open access requirements for the NBN become even more critical:
The importance of open and non-discriminatory access to backhaul
transmission is therefore likely to significantly increase with the roll out of
the NBN ... The regulatory regime for the NBN must recognise the importance of
backhaul infrastructure, and maintain the status of such transmission as a
declared service under the existing regime.[49]
2.59
Vodafone believes that it will be essential that large-scale wholesale customers
like themselves:
...are able to purchase unbundled wholesale access services which
allow them to develop a suite of tailored products for their customers.[50]
2.60
This comment concurs with that made earlier by iiNet that open access
must allow access seekers to differentiate their products. The current RFP
only asks that prospective bidders 'should keep in mind' this objective;
however the committee suggests that there is a strong requirement for the government
to ensure that proponents achieve this objective.
2.61
A number of submissions have stated that they believe that the only
feasible service provider that could fulfil the government objectives for the
delivery of the NBN is Telstra. Electronic Frontiers Australia is of this
opinion, noting that, for a number of reasons:
...as a matter of commercial and legal practicality, nobody other
than Telstra would be able to build the FTTN network.[51]
2.62
Telstra has publicly stated that it supports open access, but the cause
for concern within the industry is the fact that the current incumbent has a
very different understanding of the term open access.
2.63
In their submission, Optus went to great lengths to draw similarities
between the current 'open access' practices of Telstra and what Telstra has
proposed in their response to the suggestions for regulatory changes required
for the NBN. The submission quotes a number of pre-conditions that Telstra has
stated that it would require to roll-out the NBN, which include:
-
A
specific guarantee that services on the NBN will be excluded from the current
regulations;
-
That it
would only be obligated to provide access to a limited set of "anchor
products". These are the legacy services it provides today – it would
have no obligation to provide new services;
-
That it
should have freedom to set wholesale prices based on "value" not "cost";
and
-
There
would be no restrictions on Telstra discriminating between the prices and
delivery of both wholesale and retail services.[52]
2.64
Optus states that although Telstra is claiming that this equates to open
access, in reality this is far from the case:
[Telstra's] regulatory model is actually a form of discretionary
access not open access – that is Telstra will provide access on its discretion
and on its terms.[53]
2.65
The Optus submission supports their claim with a quote from the General Manager
of Telstra's wholesale division, which indicates that Telstra does not intend
to treat its retail and wholesale customers on equal terms:
Whether we would sell exactly the same products in the wholesale
division as the sorts of things that retail would be seeking for their end
customers, not necessarily. Just like it is now, we sell a lot of things in
wholesale that retail don't directly buy an equivalent of and I expect that
would continue to be the case.[54]
2.66
In the submission from the Competitive Carriers Coalition, Telstra's
definition of open access was strongly criticised. The submission quoted a
media statement by Telstra that seems to confirm the concerns of many that
Telstra indeed has a completely different concept of open access. Mr Donald McGauchie
from Telstra is quoted from a media briefing held on 23 June 2008, where Mr McGauchie stated his belief that Australia should move:
...away from "open access" type requirements, in which
competitors can free ride or cheap ride on incumbent's networks...to one based on
competition between fully vertically and horizontally integrated rivals...[55]
2.67
Mr Maha Krishnapillai from Optus criticised the stance taken by Telstra
that they would define the meaning of open access, warning that Telstra's
definition would not facilitate a level playing field for competitors. Telstra
responded to the criticism by stating that:
It's a purely open access proposal ... you will be able to take
the [wholesale] service from the network that we build and do with it whatever
you like. And copy what we do if you are prepared to invest...[56]
2.68
Digital Tasmania provided a submission to the committee that called for access
regulation that would protect and encourage competition, so that:
...access seekers are free to seek commercial arrangements with
both NBN and other non-NBN operators ... [so that] a level playing field can be
created for all access seekers [which] offers ISPs the ability to differentiate
themselves ... through competitive commercial arrangements.[57]
Open access as defined in the RFP
2.69
Returning then to the definition provided within the Request for
Proposals, a key objective for the NBN is to establish a national broadband
network that:
...facilitates competition through open access arrangements that
ensure equivalence of price and non-price terms and conditions, and provide
scope for access seekers to differentiate their product offerings;[58]
[italicisation added]
2.70
Despite Telstra's assurance that it will meet that objective, it is
clear that the majority of stakeholders' lack confidence in this undertaking,
most likely due to Telstra's prior record of anti-competitive behaviour. Indeed,
in their evidence at the Canberra public hearing, Mr David Quilty from Telstra
provided their definition of open access, which seems to confirm the concerns
of many.
What we mean by an open access network is that Telstra ... would
make available to wholesale customers a range of wholesale products on
an equivalent basis. ... I cannot go into detail of what those products
might be.[59]
[italicisation added]
2.71
As previously mentioned, stakeholders have highlighted that open access
must be supported by appropriate changes to regulation, with many also advocating
structural changes to the industry itself to prevent anti-competitive behaviour
by a powerful monopoly provider. Although the definition of open access may
appear to be reasonably clear within the RFP, a cause for concern is the fact
that the advocated restructure of the industry is not assured as a component of
the NBN, especially when Telstra has openly stated that it will not be a part
of the NBN process if structural separation is a prerequisite:
Telstra's position is that if further separation is part of the
NBN then we are not in a position either to build or to bid for the NBN. We
have sought clarity from the government that further separation will not be
required of Telstra as part of the NBN ... and that clarity is very important in
terms of Telstra being able to do this project.[60]
2.72
The relationship between open access, structural separation and
regulatory changes will be more fully examined in chapter 3.
Conclusion
2.73
The committee believes that submissions received and evidence taken to
date strongly support the need for the term 'open access arrangements' to be
more clearly defined. The committee calls on the government to provide a clarification
of this term, which is critical to encouraging ongoing competition in the
industry. This would ensure that there is no potential for a successful bidder
to interpret the term to its own competitive advantage.
Funding estimates and allocation
2.74
In the government's announcement of the National Broadband Network, it
committed up to $4.7 billion to facilitate the roll-out. One of the terms of
reference for this inquiry requests the committee to investigate:
(k) the cost estimates on which the Government has based its
policy settings for a NBN, how those cost estimates were derived and whether
they are robust and comprehensive.[61]
2.75
Through the course of this inquiry, there have been comments relating to
the adequacy of this funding, how it relates to predicted costs of implementing
the NBN, and whether the funding should have been targeted to ensure benefits to
those Australians that are already underserviced or unserviced by broadband.
2.76
The Department of Broadband, Communications and the Digital Economy was
questioned extensively by the committee on the funding, in acknowledgement of
the significant proportion of the budget that the $4.7 billion represented.
The requirement for clarity from the department was heightened following the global
financial crisis that evoked a strong monetary response from the government,
which included the spending, if necessary, of the entire surplus to ensure Australia
survived the crisis.
2.77
At the Canberra public hearing, the department was asked whether it had
made any calculation or estimation of the overall cost of rolling out a National
Broadband Network, with Senator Nash commenting that:
We seem to be at bit of loss of even a close to ball park figure
of what the total figure might end up being?[62]
2.78
Responding to this, Mr Colin Lyons, from the department answered:
I would not wish to speculate on the cost. The government has
indicated it will offer up to $4.7 billion ... [and] expects proponents to make a
significant contribution ... it is a matter for the competitive process to bring
forward the best possible proposals ... within the cap of the contribution that
the Commonwealth has said it will provide.[63]
2.79
The Coalition Government had established a $2 billion Communications
Fund that was to ensure that funding is available 'in perpetuity' to enable the
telecommunications industry to provide metro-comparable services in regional
and remote Australia. Questions were asked of several departments by the committee
as to the fate of the $2 billion and whether it had been rolled into the
$4.7 billion made available for the NBN. Several departments provided similar
responses to this question. The response from the Department of the Treasury
perhaps captures the essence of these answers:
In the 2008-09 Budget, the Australian Government announced that
it will close the Communications Fund and transfer the balance to the Building
Australia Fund (BAF), with up to $4.7 billion from the BAF to be made available
for the NBN initiative. This reflects the Government's election commitment to
use the $2 billion from the Communications Fund to finance, in part, its
contribution to the roll-out of the NBN.[64]
2.80
This answer confirmed Senator Nash's concerns that where there had
previously been $2 billion set aside purely for the provision of
metro-comparable services for those in regional and remote areas,[65]
this funding would now be used to provide broadband for the majority of
Australians who already had access to broadband services.
2.81
In their response to this same question, the department also explained
the purpose of the newly created BAF:
The BAF will provide a financing source for future investment in
critical economic infrastructure in transport and communications such as
broadband.[66]
2.82
At the Senate Estimates hearing on 20 October 2008, members from the Select Committee also questioned the minister as to whether the recently
announced criteria for prioritising the projects that could access funds from
BAF would be applied retrospectively when allocating the NBN funding. In
response, the minister stated quite categorically that:
This [expenditure for the NBN] will not be subject to Building
Australia Fund processes. This is a separate election commitment.[67]
2.83
The minister eventually provided details of where the $4.7 billion
would be sourced, as follows:
...a provision for the national broadband network is to be
included in the contingency reserve, pending the determination of the
successful proponent. ... Budget Paper No. 1 identifies where the funds will be
sourced. I refer you to page 7-6 ... which states that government will close the
Communications Fund and transfer its assets to the BAF, the Building Australia
Fund. The BAF will also receive $2.7 billion from the Telstra 3 sale process.[68]
2.84
Since this inquiry was established in June 2008, the global financial
situation has worsened considerably to the point where it is commonly termed
the 'global financial crisis'. The Australian Government has put in place a
number of financial measures designed to steel the nation's economy from the
full impact of this crisis. Despite this, the value of the Australian dollar
has fallen by a third since the May Budget was brought down. This will have
the obvious consequence of making it more difficult for prospective proponents
to source financial backing for their NBN costs, while also increasing their
costs to build.
2.85
This fact was conceded even by Telstra, which, having now placed a bid,
will undoubtedly be positioned as one of the strongest contenders financially.
At the public hearing in Canberra, Telstra stated that:
...obviously times have changed ... [T]he cost of capital has
increased. Of late we have seen a significant devaluation or reduction in the
value of the Australian dollar, and virtually all of the equipment for this
would be sourced from overseas. The economics of building this are not getting
easier.[69]
2.86
At the Senate Estimates hearings in October 2008, discussion ensued around
the recent government announcement of its intention to spend half of this
financial year's surplus to minimise any impact from the current global financial
crisis. It was proposed by Senator Minchin that, due to the surplus being
halved, the $4.7 billion committed by the government for the NBN would now
represent close to half the BAF, with potentially less funding being available
for other essential services such as education and health.[70]
2.87
Despite repeated questioning, the minister would not speculate on the
size of the BAF, noting that:
Because a whole range of factors could impact on the final size
of the BAF ... I am just not in a position to give you any commentary on it. ... That
will depend on the final size of the surplus. It will depend on a whole range
of factors to do with growth, tax receipts and [other financial] issues.[71]
2.88
At both the Senate Estimates hearing and also the Select Committee's Canberra
public hearing, questions were asked of the department as to how the figure of
$4.7 billion was determined to be an appropriate figure for government
funding of the NBN. The minister was able to explain that this was based on a
range of discussions that his department had held with the industry:
There have been a range of estimates and I have drawn on ... such
expert policy analysis as the Page research centre. ... We took some soundings,
and no-one in the sector at the time believed that the proposition that we were
putting forward was unreasonable.[72]
2.89
Mr Lyons from the department also reiterated that the $4.7 billion is
the maximum commitment from the government, and that the RFP document made it
clear to proponents that they would be required to make a significant
contribution to the cost of implementation.[73]
2.90
The manner in which the $4.7 billion will be allocated was also a
concern for the industry and stakeholders alike. Throughout the inquiry the committee
heard calls for the $4.7 billion to be targeted to areas that are currently
underserviced, rather than fund a fibre upgrade to urban and other areas that
are already able to access broadband. This issue will be examined in detail in
chapter 4 of this report.
2.91
The WA Department of Industry and Resources touched on targeted
approaches to funding when describing an initiative they have placed before the
government for future funding:
...instead of putting a blanket broadband coverage throughout the
state, or this whole country, we should apply a targeted approach where it is
required, not duplicating the infrastructure. It is just a waste of money.[74]
2.92
The committee attempted to determine whether the $4.7 billion would be targeted
to specific areas or groups of homes and businesses. At the Canberra public
hearing, Mr Lyons from the department explained that:
It is not targeted to any specific areas. ... [The government] has
asked proponents to indicate in their proposals what would be the uneconomic
areas that would be part of its coverage rollout ... to determine the extent to
which there is any subsidy component in their bid.[75]
2.93
The minister verified this during Senate Estimates, commenting that this
would ensure that the successful solution would not create a second class of
broadband receivers in rural and remote areas:
We have explicitly stated that we support the cross-subsidy
[from the successful proponent to the underserved areas]. So there will be one
uniform price reaching 98 per cent of Australians – not a two-tier system ... It
is a national build ...[76]
2.94
When further questioned as to whether the government could assure those
in regional and remote Australia that this cross-subsidy would be ongoing,
beyond the five year scheduled roll-out, the department could only verify that
this was, once again, just one of the factors that proponents would have to
provide, which would be considered together with the stated objectives and
evaluation criteria.[77]
To confirm otherwise would be speculating on the outcome of the RFP.
2.95
Also questioned was the requirement within the RFP that the proponents
demonstrate the capacity to provide the government with a return on investment.
The RFP document states that:
The Government has indicated it will make a funding contribution
of up to $4.7 billion to establish the NBN. This contribution may take the
form of debt or equity which would be required to earn a return. While the Government
has previously indicated its preference for an equity investment, other forms
of funding will also be considered.[78]
2.96
Telstra again pointed to the economics of fulfilling the government's
objectives in the current financial climate:
...commercially we could not, even with regulatory certainty, roll
out a fibre-to-the-node network to 98 per cent. The economics would not stack
up ... without government money, it is simply not feasible to roll out to that
footprint, but that is not what the government is asking in the RFP.[79]
2.97
In their evidence at the public hearing, the government's preference for
an equity-based investment was also raised with Telstra, who verified that if
this was required by the government, Telstra would not participate in the NBN.[80]
Other financial considerations
within the RFP
2.98
During Senate Estimates in October 2008 and also during the committee's
public hearings, there was much discussion on whether a cost-benefit analysis
had been, or would be, undertaken by the government on the investment of $4.7
billion of taxpayers money, and whether that study would be made available to
the public. When asked by the committee whether he was conducting a
cost-benefit analysis, the minister answered:
This is an election commitment and we will deliver on our
election commitment. ... No ifs, no buts: it will be delivered.[81]
2.99
The committee considered that this was an 'amazing' admission by the government
adding the comment that:
I am just fascinated that you propose to do it without any
cost-benefit analysis of how you will spend $4.7 billion of tax payers' money.[82]
2.100
The same question was raised quite independently by Professor Joshua Gans
in his submission during his discussion of how Telstra had 'dramatically
revised' its own estimates of the value of broadband to the economy. Professor
Gans states that:
...as an economist, I am concerned as to whether a proper
cost-benefit study as been conducted (either within government or industry).
Those benefits ... have not been appropriately quantified in a rigorous manner.[83]
2.101
If there has not been a government cost-benefit analysis, this runs contradictory
to the government's policy in relation to the $20 billion Building
Australia Fund, under which all initiatives and projects seeking funding under
undergo the scrutiny of what the government has stated will be a rigorous
cost-benefit analysis.
2.102
Another concern raised regarding how the fund might be spent was in
relation to whether there would be any allocation towards researching the types
of online services that would drive take-up levels of the NBN once it was
implemented.
2.103
This issue can be likened to the 'chicken and the egg' debate, as it
could be said that, without the infrastructure being present, services cannot
be provided, so infrastructure needs to be established prior to services being
developed and delivered. Conversely, it could be said that appropriate
services must be made available as soon as the NBN is available; otherwise
there will be no incentive for people to adopt the new broadband, which would
make it less commercially viable for an owner/operator, who might in turn limit
their future investment. This issue was highlighted in two separate submissions;
both advocated for research into the provision of services, but from a slightly
different perspective.
2.104
Professor Joshua Gans acknowledges the importance of providing the
infrastructure for high speed broadband, but continues that infrastructure
itself does not create demand for such connections. Professor Gans suggests
that the government should be investing 'on two fronts':
First, it needs to encourage applications that leverage the
network ... e health, e-education or video-conferencing. ... Second, the
government needs to investigate the price of computing equipment that
households need to access the new network.[84]
2.105
Professor Gans highlights that for many households the purchase of
appropriate computer equipment would be a constraint on their ability to
utilise the network, with the consequence that they would be paying for a
network through their taxes but unable to gain any benefit from it.[85]
2.106
In Professor Trevor Barr's submission, he strongly recommended that the government
should utilise a proportion of the $4.7 billion to research the types of
services that consumers would utilise once they had access to the NBN:
The present ongoing National Broadband Network (NBN) tender
process gives almost no attention to the complexities of services on the demand
side of the broadband equation. ... It is surely incongruous for a government to
offer such huge capital expenditure to ensure that the new fibre network passes
98% of Australian homes but to ignore the issues of what services will be
offered to whom and how?[86]
2.107
The affordability issue was also taken up by Ms Teresa Corbin from the Consumers
Telecommunication Network. Ms Corbin stated the need to ensure that broadband
is affordable for all Australians, and suggested that this could be achieved by
the government also using the $4.7 billion to assist people of lower income
levels:
It is in our submission that there has to be some kind of
communications allowance, particularly for people who are recipients of a
government benefit and require higher downloads. For instance, if they are a
user of any health service ... they are going to require some assistance to
ensure that they are not running up ridiculous bills, and we end up with a
two-tiered health system. We will have to be very cognisant of how, in
reality, its affordability plays out on customers.[87]
2.108
Evidence taken at the Perth public hearing also raised the issue of affordability
when discussing the ability of remote Indigenous communities to access
broadband services. Commenting on the impact that the Australian Broadband
Guarantee has had in remote communities, Mr Anson Cheng stated that:
There is a bit of impact, but ... [t]hese are people who are very
poor and cannot even afford to pay for their basic living. How can they afford
broadband in this case?[88]
2.109
The committee acknowledges concerns of affordability and service
provision, which have the potential to impact on the long-term sustainability
of the NBN operator in providing a viable return of investment.
The RFP process itself
2.110
On 11 April 2008 the government released the Request for Proposals
document outlining the objectives of the government's broadband initiative and
a number of criteria against which each bid will be evaluated.
2.111
In addition to the issues already raised regarding the lack of clarity
provided in relation to critical terminology used in the RFP, the committee has
had a number of other concerns highlighted in evidence and written submissions.
Transparency
2.112
A common criticism has been that, despite the government's claims, the
RFP process is not as 'open and transparent' as the government has stated it
would be, particularly when considering the significant government funding
outlay of $4.7 billion of taxpayers' money.
2.113
This criticism was heard repeatedly by the committee when prospective
bidders were unable to elaborate on critical issues due to what has effectively
become a gag order within the RFP. A clause within the RFP states that:
Proponents should not communicate with or solicit information in
relation to the RFP process from any government employee (or contractor), Minister
or Minister's adviser other than the Contact Officer.
The Commonwealth may preclude a Proposal from further
consideration if the Proponent does not comply with any requirement of this
clause 10.7, or based on any investigation carried out under this clause 10.7.[89]
2.114
Additionally, the document states in a later clause that an additional
right of the Commonwealth is that it may:
...at any time, in its absolute discretion and without providing
reasons ... decline to answer queries from any Proponent;[90]
This goes some way towards explaining why some proponents
have mentioned to the committee that they have sought clarification on issues,
such as footprint of the 98 per cent and the modelling of how this
might be measured, as already highlighted in this chapter, but that these
clarifications have not been forthcoming.
2.115
Although the government clearly provided several opportunities for the
industry and the general public to provide comment in the form of written
submissions, it was noted that this did not allow for two-way dialogue. Dr Ross
Kelso noted this in his submission:
It is difficult to appreciate how this process can be
transparent and accountable ... Neither the Panel of Experts nor the specialist
advisors are required or are likely to publish their deliberations. ... Whilst
the tabling of submissions from industry and public interest groups does
constitute a public process of consultation, such consultation is only one way
communication. There is no process for official feedback nor further public
scrutiny.[91]
2.116
When outlining his suggestions for public policy goals for the NBN, Dr Kelso
again highlighted the lack of accountability, stating that:
A prime goal in selecting the NBN provider and managing ongoing
deliverables should be to ensure full transparency of process and public
accountability for outcomes.
It is totally unacceptable for agreements with the NBN provider
to hide behind the cloak of 'commercial-in-confidence' secrecy. ... [t]ransparency
and accountability are crucial factors.[92]
2.117
Dr Kelso also criticised the government's launch of the RFP without
establishing the desired regulatory framework and went on to highlight the
subsequent importance of this Select Committee inquiry process:
This Senate Committee offers the only opportunity for the
consideration of public submissions by a body independent of the Department or
its Minister.[93]
2.118
The lack of opportunity for either industry or public scrutiny was
particularly a concern in relation to the regulatory regime. The government
has invited suggestions for regulatory change, but has not provided an
opportunity for industry comment on the regulations under which they will be
required to operate their businesses.
2.119
When questioned in Senate Estimates in October 2008, the minister would
neither confirm nor deny that this opportunity would be provided. Rather, he
indicated that he did not want the legislative process to be impeded by any
additional consultation with either the industry or the customers who will be
accessing broadband services under this new regime. The minister claimed that:
We will go through the process of the NBN, we will then put
forward a package of legislation, and if [the] opposition choose to block it,
slow it or frustrate it, then it will be on your head.[94]
2.120
The minister was non-committal when asked at the same Senate Estimates hearing
whether there would be an announcement of the successful proponent at the end
of the eight week assessment period, which according to the government's
revised timeline, should be towards the end of January 2009. In response
to the committee's questioning, the minister responded:
We are not intending to announce a winner and then try to
negotiate an outcome.[95]
2.121
This sparked a lively discussion on whether it would be feasible for a
contract to be signed with the successful bidder prior to the passing of
legislation that would create the regulatory framework necessary to implement
and administer the operation of the NBN. The minister continued to evade the
issue, but did state that:
...we will reach an agreement [with the successful bidder] and we
will put forward – depending on the outcome of that [agreement] – any
regulatory changes. ...
We are not going to be negotiating with your good selves about
this issue once we have reached an agreement with the successful bidder.[96]
How the proposals will be assessed
2.122
The RFP states that the proposals will be assessed on:
...the extent to which the Proposal meets the Commonwealth's [18]
objectives for the NBN project. ...
Within the framework of an overarching value-for-money
assessment [against] the [six] evaluation criteria...[97]
There are eighteen Commonwealth objectives for the NBN
initiative and six evaluation criteria, which are listed at appendix 2.
2.123
Criticism has been levelled at the timeframe for evaluating the bids
that are submitted by proponents. The RFP states that the assessment process
will be undertaken during an eight week period immediately following the
closure of the RFP. The committee notes that, given the closure date is 26 November 2008, the assessment period will occur over the Christmas / New Year break,
when most of the industry and government bodies will have closed down.
2.124
When the department was asked to clarify the timeframe for assessment,
it became apparent that the Australian Competition and Consumer Commission (ACCC)
would actually only have six weeks to examine all proposals and write its
critical report on each for the government to consider during the last two
weeks of the eight week process. Their assessment and report would be conducted
in parallel with the assessment process conducted by the Expert Panel, who will
the have an additional two weeks to consider the ACCC's report. Ms Patricia Scott,
the Secretary of the department, explained the timeline:
We are expecting the ACCC to provide written advice to the panel
at the end of the six weeks of them examining the proposals. ...
It is expectation that the panel will commence its work on the
receipt of the proposals on 26 November and that it will conclude its work at
the end of eight weeks.[98]
2.125
At the Canberra hearing, the ACCC seemed very much aware that they would
have a very limited time to provide a report that would be critical to the government's
final decision. Although their responses were constrained by their role in
this process, the comment was made that:
I can assure you that Christmas has been cancelled for the
relevant officers that will be working on this...our staff are expecting some
long hours over this period...[99]
2.126
Through this discussion, the committee noted that the RFP states merely
that the ACCC will have access to the final proposals 'as soon as is
practicable'.[100]
This may well lead to the ACCC having less that the six weeks already
mentioned. The committee believes that a more appropriate time for the thorough
assessment of proposals and the subsequent report should be allowed by the government.
Conclusion
2.127
The committee questions the appropriateness of the timeline for the evaluation
of the RFP, believing it will not permit the necessary level of scrutiny by
either the Expert Panel or the ACCC to select the successful proponent for the
NBN.
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