NBN scandal

By mid-2015 the NBN will have cost taxpayers more than $12 billion, while only 12 percent of premises will be connected. It will burn $100 million a week this financial year and by mid-2015 will have consumed 46 percent of the $29.5 billion in equity the Commonwealth has pledged to it.

To call this a scandal would be an understatement. To say it demands urgent attention should be to state the bleeding obvious.

Communications Minister Malcolm Turnbull inherited an unenviable situation. Contracts entered into by Labor, if valued like other Commonwealth contracts, lock taxpayers into $35 billion worth of spending until 2021. As for NBN Co, which has responsibility for deploying the network, it has been highly politicised from the outset, with its deployment strategy used to provide photo opportunities rather than efficiently build and operate the NBN.

Moreover, as things stand, Australia is the only OECD country to have gone back on the process of deregulation that began 20 years ago, renationalising telecommunications infrastructure and vesting it with a de facto monopoly. The NBN is now our largest piece of applied socialism.

Long experience shows just how inefficient public monopolies are and, once entrenched, how difficult they are to reform. Those old enough to remember Telecom will know what I mean. If the current NBN structure remains in place, consumers will pay too much, taxpayers will suffer huge losses, and governments will have enormous scope to misuse their ownership of NBN Co to serve narrow political ends, including monitoring and censorship of the internet.

The question is how to get out of this mess. The Vertigan panel, which identified the risks inherent in this kind of monopoly, proposes splitting NBN Co into a number of distinct and competing entities. There would be a 'HFC Co', to operate the hybrid fibre coax (ie pay TV cable) networks, a 'Fibre Co', to deploy fibre to the node and to the home, and a 'Wireless Co', to take over the fixed wireless network and possibly the satellite service. Each entity would have Government-imposed service obligations relating to their core assets, but would be free to compete outside that area as well.

The result would be more focussed management and, by spinning off the HFC and wireless networks, responsibility for funding those structures and the risks they involve would be transferred to the private sector. This would partially reverse Labor's nationalisation of the network.

Additionally, plenty of international experience shows HFC and Fibre-to-the-node/Fibre-to-the-premises can be viable and effective competitors, reducing the risk of monopoly pricing. And by keeping all of these platforms in play, this approach would prevent huge quantities of existing infrastructure from being scrapped prematurely, integral to Labor's approach and still intended to occur under NBN Co's current strategy.

Regrettably, Turnbull has put the panel's recommendation on hold, suggesting it would disrupt deployment and impose fiscal losses. These objections are hardly compelling.

The greatest risk to timely, cost-effective deployment arises from a dysfunctional and heavily politicised NBN Co. This is a business that has struggled to deploy even a single technology. It is unrealistic to expect it to manage platforms where it has very little expertise, such as the HFC. NBN Co's incentive is to preserve its monopoly, not to meet consumer needs. Putting all taxpayer and consumer eggs in this one basket is reckless.

As for the losses, they are already there. As Vertigan shows, the costs of the wireless and satellite services are about five times what consumers are willing to pay. It is only because the public sector is not compelled to disclose likely losses (unlike private companies) that this destruction of wealth goes unreported.

Of course, selling the assets would crystallise the losses. But that honesty – putting in place transparent ways of funding any universal service obligations – is a benefit of Vertigan's proposal, not a cost. So too is the fact that competition between a future HFC Co, operating HFC that already provides speeds of over 100 megabits per second and is capable of gigabit per second speeds, and a Fibre-to-the-node/Fibre-to-the-premises operator, would drive down prices to consumers, promoting the 'digital revolution' both Labor and the Coalition claim they want.

The greatest risks to both taxpayers and consumers come from not acting promptly to introduce competition when the prior government legislated every single competitor out of the market. If we still haven't learnt just how high the costs of government monopolies are, the prospects for Australia are poor indeed.