Can the Telco Reform Act be win-win?

In the second of our two programs looking at the Senate Inquiry into the Telecommunications Legislation Amendment Bill, we hear from shareholders, bureaucrats and industry groups.

If you take out some of the repetitive elements (which we have), there are a lot of interesting questions raised by these inquiries: will the new law do anything to Telstra's share price? Will the government's behaviour create sovereign risk and scare off foreign investment in other sectors? Should more time be given to negotiations between Telstra and the government?

On this week's program you'll hear from witnesses at the Inquiry in Melbourne (13 October) and Canberra (14 October):

• Ross Barker, managing director of the Australian Foundation Investment Company
• Anton Tagliaferro, investment director, Investors Mutual Ltd
• David Forman, executive director, Competitive Carriers' Coalition
• Rosemary Sinclair, managing director, Australian Telecommunications Users Group
• Peter Harris, secretary, Department of Broadband, Communications & the Digital Economy
• Pip Spence, first assistant secretary, Department of Broadband, Communications & the Digital Economy

Read the inquiry report, submissions and transcripts from the public hearing here.

A transcript of this week's edition of Twisted Wire can be found on page two.

Dobbie: Hello, I'm Phil Dobbie. Today on Twisted Wire, our final senate select committee, this week again looking at the Telecommunications Legislation Amendment Bill. We hear from shareholders whinging that it's going to reduce the value of their investments.

Ross Barker: As far as I am aware, it is unprecedented that a particular company has been targeted in this particular way...

Dobbie: As well as cut back on industry investment.

Anton Tagliaferro: The Bill is heavily focused on increasing competition in the short term, but it will stifle investment in the industry over the long term.

Dobbie: We'll hear from others who say it has to happen because we're so far behind the rest of the developed world.

Allan Asher: OECD surveys time after time show that we are towards the top end of the price charts — appalling levels of customer service that are getting worse.

Dobbie: So we should just get on with it shouldn't we?

David Forman: Arguments to delay this Bill, in the view of the CCC, simply do not wash.

Dobbie: After all that's what everyone wants isn't it — even Telstra.

Peter Harris: "Should this go on over a long period, with the continuation of uncertainty?" They would say: "No we want certainty". That would be my guess.

Dobbie: But what about the universal services obligation?

Senator Ian MacDonald: Who is going to be obligated? Is it going to be NBN Co?

Dobbie: On today's Twisted Wire we try and simplify the arguments.

Rosemary Sinclair: On my desk I have one squidgy toy up here which I call the NBN world.

Dobbie: And ask, is the government right to push ahead with this legislation, or are there other options? That's today on Twisted Wire.

And I promise you this is the last time we wade through a senate hearing on Twisted Wire — at least for this year. But for today, more on that Senate Inquiry into the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009. They've already reported, of course, and said generally they think it's a jolly good idea and the government should get on with it — and that's even with Nick Minchin sitting on the committee — I suspect it might not have been a unanimous decision.

Last week for half an hour we heard from the folks at Telstra and Optus, who strangely had differing opinions about whether the idea of splitting up Telstra was a good thing or a bad thing — who'd have thought it — the industry is clearly not united on the idea.

So what about the shareholders? Well there's Ross Baker — he is the managing director of the Australian Foundation Investment Company — a listed entity with significant investments in Telstra shares.

Ross Barker: As far as the proposed legislation is concerned, we feel troubled, as a shareholder, that it is being crafted to deliver a particular outcome — namely, that Telstra chooses to deliver its traffic into the proposed NBN and if it does not do that then penalties apply.

Dobbie: He's not convinced it will add to competition, but it will, he says, add to cost for Telstra in money and management time.

Barker: As far as some of the penalties — the divestiture of the hybrid fibre-coaxial cable and the Foxtel holdings are concerned, the shareholders have borne the risks of the development of these activities and are now being asked to give them up just at the time that they are starting to reap rewards from that investment.

Dobbie: And he says the approach of forcing Telstra to split raises the question of sovereign risk.

Barker: As far as I am aware, it is unprecedented that a particular company has been targeted in this particular way, and we think that will raise questions in the minds of investors both domestic and international: if the government can do this for one company, what other things can they do?

Dobbie: It could scare off future foreign investment in Australia in other sectors in other words. So he's not a big fan of the changes it's fair to say.

Barker: We probably did not expect that the changes would be as draconian as they appear.

Dobbie: Although having not read any of the submissions to the inquiry, perhaps he hasn't really waded into the debate about the competitive regime.

Barker: I didn't read the submissions no.

Dobbie: Perhaps instead he was listening to Sol Trujillo — he's a big fan of Sol — even though the share price slid noticeably under his reign.

Barker: We actually welcomed the approach that he had, but we were very troubled when it developed into open warfare between the government and the company. That did unsettle us, as it unsettled our shareholders.

Dobbie: It's open to debate, of course, what impact the proposed changes have had on Telstra's share price. Some argue that it was all factored in and that the removal of uncertainty might actually improve things — but that is akin to saying that dying from a fatal disease is actually preferable to wondering whether you will die and face eternal damnation. I'll take life, thank you. Second door on the left.

Next came Investors Mutual Limited — an Aussie equities specialist that manage funds totalling more than $3 billion. Their investment director, Anton Tagliaferro, says the Bill is not good for Australia in the long term.

Anton Tagliaferro: The Bill is heavily focused on increasing competition in the short term, but it will stifle investment in the industry over the long term.

Dobbie: He says the Bill is only to enable the government to build its NBN, something which shouldn't be left to the government.

Tagliaferro: The Australian telecommunications sector is acknowledged as being one of the world's most technologically advanced and competitive in the world. As a result, consumers have a great number of choices and price points to choose from. There is no need to dramatically change the telecommunications landscape in this country.

Dobbie: The Australian telecommunications sector is acknowledged as one of the most competitive in the world. I wonder who acknowledged that? On another point he argues that a vertically integrated company can respond to consumer demand and invest accordingly.

Tagliaferro: Vertically integrated companies are the ones that invest heavily in their respective industries. This inevitably results in relatively high market share versus competitors. Merely using Telstra's market share as a guide to dominance is totally misleading, as this totally ignores the fact that Telstra has invested multiples of what other players in the industry have invested.

Dobbie: Although who is going to invest if they can be trounced on by a dominant player.

Tagliaferro: The new Bill will lead to over-regulation and it will distort free market forces.

Dobbie: Which is fine, but I wonder if Telstra would have been able to grow to its size if telecommunications had started as a free market. The market was distorted from the start, I reckon.

By the way, this company advocating a free market, has shares in Telstra but not in any other telecommunications company. Curious if they believe there's free and open competition. Wouldn't they be hedging their bets just a little bit?

Tagliaferro: We have looked at SingTel before, but it is also going into emerging markets and setting up mobile networks in places like Indonesia, India etc. It is, in our view, a pretty high risk.

Dobbie: But they bought a lot of Telstra shares obviously seeing them as less risky — till the new government came along!

Finally in day one of this two-day public inquiry came Allan Asher, chief executive of the Australian Communications Consumer Action Network. The what? It's a new body, apparently, formed in July. He says until now, when it comes to communications, consumers have had a pretty lousy deal.

Allan Asher: OECD surveys time after time show that we are towards the top end of the price charts — appalling levels of customer service that are getting worse, slow access and old technology that predominates much longer than it ought to. Indeed, we have seen sleepy regulators who too often hear the views of industry and too rarely hear the views of consumers.

Dobbie: Perhaps because they were asleep, or the consumer couldn't get through! Mr Asher's new organisation, funded largely via the government right now, wants to see the new legislation passed, but not rushed through. And he'd like more consumer protection included in it because right now, the free market just isn't doing it for the poor telecommunications user.

Asher: Sadly, we have got a rather sleepy market where we do not see the level of rivalry and competition that has driven customer service up and prices down. If you look at the data, there just is no other explanation for the continuing decline in customer service and customer satisfaction.

Dobbie: And regulation is needed he says, and will probably always will be.

Asher: The sober reality is that, in the absolute economics of these networks, it seems as though that sort of backbone competition at an infrastructure level is just unattainable in a sustained way. That is also proving to be the case, even in much denser economies than Australia's. The model we have of a wholesale-only provider makes me nervous because it raises all sorts of issues about risk of regulatory failure. But I am also, sadly, satisfied that the economics is such that you do need to have a backbone carrier of that sort who is not also operating at a lower vertical level.

Dobbie: So he's supporting the legislation for that reason — because, even though many believed past regulation would make the industry competitive, it just hasn't worked. Something else that Mr Asher would like to see is a universal services obligation that is suited for the digital age. Now that sounds like a big job in itself. More of that later.

So what about the competitive carriers coalition, whose membership rules are very simple — you're not Telstra. I'm going to go out on a limb here and say that they believe splitting Telstra into two is a good thing.

David Forman: This is a problem of market power and is a problem that cannot continue to go unaddressed.

Dobbie: That's David Forman, executive director of the Competitive Carriers Coalition.

Forman: Arguments to delay this Bill, in the view of the CCC, simply do not wash.

Dobbie: He's the husband of senator Kate Lundy by the way — one of the members of the standing committee.

Forman: Delaying the passage to see if Telstra chooses to negotiate some voluntary separation agreement with the government needs to be weighed against the certainty that every day that action is delayed is another day that Australian consumers suffer high prices and poorer services compared to the rest of the developed world.

Dobbie: That was his basic argument — the legislation should happen and it should happen now. No delays. But by the time it's finished, with all these new systems in place — won't the NBN already be in place — I mean, let's look at the BT experience in the UK.

Forman: The BT example would suggest that it should be fully operational within three years, and elements of it could be operational within a very short time, within months.

Dobbie: That, he says, is for a functional separation — which is the road Telstra will be forced down if the legislation is passed. They can avoid that by volunteering the more rigorous structural separation, which will surely take longer.

Forman: If you were to seek to structurally separate by creating a separate company and simply transferring assets into it, disposing of the assets that way, or if you were to dispose of the assets in a trade sale, then it could be done very much more quickly. We have examples of that too. I point to what has happened in Singapore, where SingTel was voluntarily structurally separated because of the creation by that government of an NBN.

Dobbie: So, sell the assets to the NBN and have done with it all — that's basically what they're saying. Big risk for a company though isn't it — to run a network then sell it to someone else to run and to be wholly dependent on them. It's not an approach you'll take lightly.

Then there's the question of universal service obligation — how will that work...

Forman: I cannot pretend to have read that part of the Bill in detail but if you are asking how it will apply in terms of...

Senator Ian MacDonald: Who is going to be obligated? Is it going to be NBN Co?

Forman: NBN Co is not referred to in this Bill and the universal service obligation as to the post- NBN world is something that we cannot speculate on in relation to this Bill. This Bill, as we read it, stands alone and apart from NBN. Universal service obligation is clearly something that needs to be reformed under any event as you move to different technologies. However, this Bill speaks to some aspects of the USO and my understanding is that it strengthens some aspects of the USO. Under this Bill a functionally separated Telstra remains a single entity and it continues to be the universal service provider. So there is effectively no change to the obligation.

Dobbie: This area's a bit messy isn't it. Presumably if Telstra sells all its assets to the NBN, tomorrow, then they have to pass the universal services obligation over with them. It's difficult to maintain the USO if you don't own and operate the network.

Forman: Again, this is not related to this Bill. I am happy to speculate on our views on the future of the USO and the questions that need to be asked around the future of the USO, but they stand apart from this Bill. Our view on the future of the USO is that if you have a new universal network — that is, 100 per cent of Australians have a right of access to a network — then that changes the underlying dynamic of the USO.

Dobbie: But surely Telstra's obligation to meet the USO means it can't sell its assets, unless its USO obligations are lifted — which is not covered in this legislation.

Forman: The circumstances under which Telstra voluntarily structurally separates will presumably be required to describe how they intend to deal with the USO, and then the government separately will need to make its decisions about the future of the USO. There is a process that is described in the Bill as to how Telstra may achieve a voluntary structural separation. In relation to what is in the Bill, though, Telstra is not structurally separated. It is functionally separated and that has no bearing on their obligations to provide the USO.

Dobbie: So if I'm putting this all together in the right way — Telstra can choose to structurally separate, and if they do, then a new piece of legislation will need to be passed to remove their USO obligations. In the meantime this new legislation will keep the USO obligations with Telstra, whilst encouraging them to split up and ideally sell off their assets, although this other new legislation would be required before they can do that.

I've said before that this could be bad times for telecommunications lawyers — now I'm beginning to think this is the dawning of a new age for them.

Moving on, perhaps off at a tangent to the main discussion, David Forman also had a few words to say about competition in the bush — as we know there isn't any in many places, it's Telstra or nothing. Not ideal perhaps.

Forman: Telstra was given about $120 million of public funds to build the CDMA network in regional areas because they said it was not profitable or commercial to build it. Those funds came with requirements that wholesale services were provided. Telstra switched off that network, took the towers and the other investment in infrastructure that had been paid for by the public, put their own equipment on it and they then had no obligation. Telstra said, "This is now the Next G network not the CDMA network. We now have no obligation to provide a wholesale service" and so an entire network, the Orange network, which had been built by competitors was shut down because a service that is called roaming was no longer available. Telstra said, "Bad luck. We're just not providing it anymore".

Dobbie: There clearly needs to be more accountable ways of managing public money — but a separation of some form, which encourages Telstra to work with competitors, would certainly benefit regional Australia.

And if the competitive carriers coalition was to choose one or the other — the split up of Telstra or the government build of the NBN, which would they choose?

Yep, you guessed right.

Forman: I will take this legislation and let the NBN sort itself out over the course of the next eight years.

Dobbie: Which is what's happening in the UK, for example. Some might say not as quickly as it might — but they'd be wrong — at least they've started over there. We've still got more talking, more legislation — there's a lot to be said for an incremental approach to these things I reckon.

Forman: I think that the experience in the UK suggests that that functional separation leads to greater competitive investment and greater investment in response by the incumbent. Would that ever lead to a fibre-to- the-premises network? I think that is a pretty big bet. Commercial telcos on their own cannot capture all of the externalities that governments look at when they think about that kind of investment.

Dobbie: Although the government has said they expect the NBN to provide a commercial return — if that is the case, surely it would be a sound investment for a separated Telstra wholesale division.

Rosemary Sinclair presented next to the inquiry. Rosemary is the managing director of the Australian Telecommunications Users Group.

Rosemary Sinclair: Central to the way we think services are best delivered is our commitment to competition having a core role wherever possible. We think competition delivers choice, price, service, quality and innovation.

Dobbie: And they want that competition to come from a voluntary separation made by Telstra itself. Good luck!

Sinclair: We think a win-win for the government and Telstra will also be a win for end users. But we do not see any reason for those discussions to be the cause of any delay to this legislation. We would like to see this legislation passed as quickly as possible. We think that it in fact contains the incentives that have caused the discussions that have happened so far to get underway, and that without those incentives there is no likelihood of a good outcome on that issue of structural separation. Should those discussions not get to the point of effective, sustainable structural separation then we would support the functional separation model outlined in the Bill.

Dobbie: In other words, I think, she's saying Telstra won't reach a voluntary outcome without a noose hanging over its neck.

And on the question of whether we need both, a separated Telstra and a government funded NBN — it's all to do with which squidgy toy you're looking at...

Sinclair: On my desk I have one squidgy toy up here which I call the NBN world and I have another squidgy toy down here which I call the current world, and I am always very careful to work out which world I am in when I am answering questions and writing submissions. Occasionally I go over here and I say, "OK, we have finally, finally decided that the fixed network, whether it is a copper network or a fibre network, is an enduring bottleneck and it needs to be treated in the same way." So, having got that philosophical point, I then go back here, and say, "How close can we get in the current legislation and now the new legislation relating to the existing network and take the principles and philosophies from that and try to embed them here so that we actually start to create an industry with a culture and a way of working that is preparing it for this world and, as well — importantly, from my point of view — get much better outcomes for end users from the fixed network world that we have got?"

Dobbie: And she gets all that from a couple of squidgy toys, wow! Now back to Britain we haven't looked at the UK experience for minutes now. Is a functionally separated BT investing and would a separated Telstra do the same?

Sinclair: BT did quite a bit of thinking about their own level of investment. Once they had worked through their own business case for extending fibre out to nodes then they made very significant investments in the last couple of years. So I think it has been good for investment. I think it has also been good for innovation. When you are in that market, you get a sense of a whole range of different products and services, pricing packages and innovations that are really important to customers. They are further ahead than we are on IPTV, for example, and those sorts of new services because they are not all worrying about the regulatory environment. That is set. It is well understood. It is clear. People can get on with investing and innovating.

Dobbie: Investment here, of course, is being slowed, not just by Telstra but by anyone, because of the uncertainty around the future.

Finally, the men from the Department. The bureaucrats from the Department of Broadband, Communications and the Digital Economy, who, just in case we hadn't figured it out yet explained that this new Bill was to...

Peter Harris: ..transform Australia's telecommunications industry in the interests of all Australians.

Dobbie: That's Peter Harris, secretary from the Department of Broadband, Communications and the Digital Economy who, as a bureaucrat cannot, of course, offer any opinions of his own.

Harris: It is the government's view that Telstra's high level of integration has hindered the development of effective competition in the sector and has contributed to Australia continually lagging behind other developed countries on the availability, price and quality of telecommunications services. This view is shared by as diverse a set of committees as the World Economic Forum, commentating in the last week on economic performance around the world, and the OECD, with the latter stating in its 2008 economic survey that Telstra's dominance of all platforms makes it difficult to establish effective competition between the various types of infrastructure.

Dobbie: And the timing for the separation, here's the department's Pip Spence.

Pip Spence: Within three months of the Bill coming into effect, the minister would have to issue the determination on the requirements for functional separation. There is then a three-month period in which Telstra could lodge a functional separation undertaking. The minister can give an extension to that time frame if either a structural separation undertaking has been lodged or he is satisfied that work is underway in preparing a structural separation undertaking.

Dobbie: But there's no date as to when the separation, in whichever form, must be implemented. Plenty of opportunity for stalling and obfuscation then, although the absolute end date for completion is 2018 — when the NBN is expected to be completed. Hardly a transitional measure then is it?

Harris: The undertaking may take quite a few years to roll out, as it were, as the NBN will take quite a few years to roll out, but the idea is to have some form, to the extent it can be created through a diverse set of processes such as these, of alignment. But alignment will depend entirely on what is brought forward now by Telstra in response to the legislation.

Dobbie: Right. I love bureaucrat-speak. I find it substantially reduces the innate requirement to state things in a simplified manner when a more elongated device exists to portray the same communication message in a way that will ensure most people have, by the time you've finished speaking, notwithstanding the variation in people's attention span, by and large, stopped listening or indeed caring about anything you have to say, or convey. Now what was the question again?

So let's try for some quick answers. Has the department done any modelling to figure out how much the separation will cost Telstra?

Harris: No, I do not think that is the case.

Spence: No, we have not.

Dobbie: Phew, that was easy wasn't it? So, given that Telstra are now talking to the government, wouldn't it be wise to hold back the legislative process until those discussions are finished — which Telstra has said would be the end of this year.

Harris: No, I do not in the sense that traditionally with the negotiation both parties set out their high ground positions. That is what we are doing and Telstra is doing it, too. We are doing it quite transparently really, more transparently than you often see in a negotiation like this. We each have our high ground positions but we are attempting to come to a meeting and that is why passage of legislation, I think, is quite important.

Dobbie: Isn't he saying the legislation is the threat? Or am I putting words in his mouth. And if the threat exists, is the actual passage of the Bill absolutely necessary?

Harris: I think I did mention earlier that I think all parties would agree that, this now being out, it needs to be resolved and should not hang for a long period...

MacDonald: Well, all parties do not agree. Telstra obviously do not.

Harris: I think if you put the explicit question to them, "Should this go on over a long period, with the continuation of uncertainty?" They would say: "No. We want certainty." That would be my guess. I do not want to verbal them, but the idea is that is what is behind timing. In terms of answering your question, that is what is behind timing.

Dobbie: And so the legislation is being pushed through with haste. Those opposed to the legislation have argued three points. That it will discourage investment, cost Telstra a lot of money and reduce their shareholder value. On the latter point the committee concluded there was no evidence to suggest that shareholders will be hit unduly and, in any case, it is not the government's responsibility to protect the interests of the shareholders of one company over the shareholders of another.

We'll see. In my mind, this is the biggest legislation for the industry, possibly of a lifetime. And it does seem rushed? From the initial announcement to the anticipated passing of the legislation is just a few months — it sounds like a world record for something with such far reaching consequences.

If it's got Telstra talking, that's a good thing. I did a piece on negotiation for my BTalk podcast this week with Helena Cornelius from the Conflict resolution centre and she says, on any conflict, you need to find a win-win outcome.

Helena Cornelius: What you're actually seeking to do is have a cooperative relationship. It isn't always easy. Particularly if you're dealing with someone who is giving you a hard time, but your intent is, where it is possible to be cooperative and to find a solution that will work for both of you, that's where you're heading.

Dobbie: So that's what's needed in this debate — and what a great bit of cross promotion that is, by the way. You can hear the rest of that interview over on BNET.com. But this proposed new legislation doesn't sound totally like a win-win outcome as far as Telstra is concerned. And I'm by no means a Telstra supporter. But to my mind, it does seem like they're being roughed up a bit more than might be necessary. It seems just one step short of negotiating by sending David Thodey off to one of those countries where they use those interrogation processes are not strictly legal in the west.

Why the rush to pass the legislation before Christmas?

And that's our coverage of the senate inquiry into telecommunications reform. It seems likely it will pass through parliament — but you never know in politics do you. It'll make for a big year of change in the telco arena.

Next week, no senate hearings — you might be pleased to hear. But I will be back for another episode of Twisted Wire. I'll see you then. For ZDNet I'm Phil Dobbie.