Skip to content

Richard Dammery

Richard Dammery

I have spent the last 9 weeks managing production of AAPT's response to the Victorian Government's TCS tender, which turned out to be in all around 3,500 pages.  So I apologise that I could not bring myself to do another 10 slides for today.  I am just going to talk about the topic instead.  Please take some of my comments as Richard Dammery's perspective rather than AAPTs, if we can draw that distinction.

Mark Armstrong made this really easy because he said in 15 minutes you can only make 3 points so I will tell you what my 3 points are and then I will elaborate on them. 

The first point that I want to talk about is government's role as a purchaser, versus its role as a policy maker.   James O'Farrell and Colin Griffith pointed out that the Commonwealth obviously is the body that has legislative power over communications, but as a buyer State governments spend $1 billion a year.  Right now they are the biggest game in town from a supplier's point of view. That value has been locked up largely with Telstra for quite long periods. AAPT itself has been the happy recipient of the $40 million or so spent by the Victorian Government on data services for the last 5-6 years.  For the first time in that period, the Government's business is coming out of contract.  Clearly there is a lot of value on the table.  More in fact than you will find anywhere else in the Australian telecommunications market right now. So State governments will wield enormous power in terms of shaping market outcomes.  If you read their tender documents, as I am sure many of you have, you can be under no misapprehension whatsoever that these guys know exactly what they are going to do in terms of exploiting their significant buying power. So I will talk about that government as purchaser versus policy maker.

Secondly, I want to talk about whether government can pull off their ambitious plans to get better deals as consumers while also impacting market structure.  I think the answer is yes.  However, when you look at the tenders they cover a very wide spectrum of options. Without giving the game away, AAPT in its response to the Victorian Government has tried to cover this very wide spectrum of options, ranging from, on the one hand, relatively incremental upgrades to the VicOne data network (and adding a voice offering), through to a major infrastructure build to every government location in the State with a new, innovative fibre-based IP network. Since the plan would be to project finance any major infrastructure build, this adopts the same approach to telecommunications networks as we have used in this country with other infrastructure.  Government has got a hard job to choose where on the wide spectrum of options it is going to go. 

My third point is why do we need broadband at all?  Is it because the Government sees it as a desirable social objective to have broadband everywhere? James O'Farrell alluded to the fact that the Commonwealth Government through its legislative powers sets the universal service obligation, and at the moment that is a narrowband service obligation. Presumably, someone at sometime is going to give really serious consideration to a broadband USO.  This has profound implications for how operators invest.  It also forces the question "why do we need this" to be asked and answered.

Returning to the first point: government as a purchaser versus a policy maker. Government as a purchaser is different from corporates. They buy differently, they make their decisions differently; that should be hardly surprising to anyone. Their objectives are concerned with more than just their own economic advantage.  They want, for example, effective competition. Most corporate customers, by comparison, like to know that they are not being held to ransom by their supplier but they are not exactly that interested in the economically pure competition objective. Governments also talk about connectivity and convergence, they talk about regional development; generally, they take a wider perspective as a purchaser and, dare I say, traverse policy ground.  The State governments are quite clearly looking to use their purchasing might as a backdoor way to achieve policy outcomes, which are constitutionally the domain of the Commonwealth. 

I have already mentioned how large the spend is:  $1 billion a year is a large amount of new revenue coming onto the market. It also creates the possibility to do innovative things such as project financing. But contract term is essential. If you are going to build infrastructure you have to get a payback.  Generally, and especially so in more remote locations, those paybacks are going to come in years not months and, in some cases, many years.

AAPT built quite a substantial amount of regional infrastructure in Victoria as part of VicOne, including LMDS infrastructure which Stephe Wilks gave "a bit of a pasting" to this morning.  In regional locations, such infrastructure was created to serve the Victorian Government.  In some cases the demand did not eventuate. Nobody is going to make that mistake this time around and certainly not us.  People are going to want to see committed demand in order to justify new investment, either geographically in terms of each area paying for itself or across the network as a whole. 

It is instructive to contrast what is happening right now in telecommunications with the extraordinarily detailed work that went on with national electricity market reform, national competition policy reform or corporations law reform.  In telecommunications, the amount of inter-governmental activity is actually quite light by comparison. I would suggest, although it is obviously a political issue, that there is considerably greater scope for governments to coordinate their approaches here.  In terms of purchasing strategy, every government is doing the same thing at about the same time. When you read the tender documents, you see that the approach being adopted by each Government is different in significant respects.  The policy objectives may be the same, but the approaches are different.

Moving to my second area, how likely is the government to succeed in its approach and can it pull it off?  I think it mainly depends on what the government is trying to achieve.  Certainly they can get more bang for their buck, which was one of the catch phrases in Victoria. I can confidently assert that the industry will bid very aggressively for this business.  There is no doubt that price reductions will be achieved by government and that obviously has wider implications for the rest of the market.  Colin Griffith in New South Wales has taken a very bold approach in the way in which he has constructed the NSW tender.  It is structured to separate the provision of access services from the core services from the value added services (like internet provision); that is, if you like, a virtual structural separation of the industry.  It remains to be seen how the industry will respond to that. 

In Victoria a different approach was taken.  If you want you can bid for the whole project, all available services, but first you must address the governments specific requirements for tranche 1 sites for voice, data and/or mobile.  If you only bid mobile in tranche 1, you can only bid mobile for the rest.  My guess is most people will bid for all the individual groupings of services (ie. voice, data, mobile) as well as for the whole business.  That is what AAPT did. So how to bid is really down to the tenderer. The government did not give a lot of direction other than to say; we want more bang for buck, we want competition, we want convergence, we want regional infrastructure development; so you guys go work it out. I would expect a very wide range of responses.

Making successful investments in regional areas of low population density is very challenging.  Every telco in the world for the last five years at least, and in some cases for a lot longer, has been adopting a market segmentation approach.   This means not only how it addresses the market from a sales and marketing point of view, but also in terms of how it invests.  Every telco in the world, in particular incumbent telcos, have what are called 'market planning areas'.  Areas of high value and low value if you like. None of us like to be thought of that way as individuals, but that is how telcos plan their investment in the network.  In determining whether regional areas are high value areas or low value areas, it is almost entirely a function of the economics of density which is just another form of economies of scale.  That is why in Korea you can broadband a lot of territory with a relatively small amount of money because the population densities are so high. That is not true of Central South Otago in NZ or the South Australian Cooper Basin, it is not even true of North Western Victoria. 

The Victorian government has structured its tender in such a way that some cross-subsidies will be exposed because they require pricing that basically unpacks the cross-subsidy.  Those decisions will at least be transparent to government, but they are tricky.  From an investment point of view, operators will only invest when they have some kind of certainty of return.  That becomes quite challenging in terms of predicting sensible outcomes and managing capital market expectations. Just by way of illustration of the point about market planning, that is exactly what Telstra's ADSL demand register sets out to achieve. It is saying that "we understand the break-points needed to assure a profitable investment in ADSL, and when the community aggregates its demand to reach that point then it will have ADSL.  But until then, forget it!"

The third point I guess is why do we need broadband? This is a really interesting question and an area where I think nationally we need to do a lot more work. Colin Griffith alluded to some of the really good initiatives in New South Wales.  Around the country there are pockets of neat little initiatives in health care and education, provision of social services and so on, but they are very much driven by the individual user base rather than by a systematic and structured government policy around, for example,  moving education at a primary, secondary, and tertiary level from where it is today to where government wants it to be.  The same applies for health.

This takes us back to that question about co-ordination between governments. For example, if we want to put in place a national system of electronic patient record access, as I understand Korea has done, that will almost certainly require legislative change and probably across multiple jurisdictions. There would be a number of Privacy Act issues involved. Korea has, as I understand it, articulated a fairly detailed strategy for implementing this and they have started to undertake legislative changes to support it.  Of course they do not have the Federation, so they do not have to deal with the difficult issues that we deal with in Australia as a legacy of Federation, namely Commonwealth-State relations, tied grants, parallel legislative processes, and so on,

And therefore, whatever the market says in terms of driving uptake of broadband services, we are going to face our own particular challenges as we have in every other area of activity where inter-governmental coordination is required to get a good result. So it is pretty important for us to have a clear idea about what we are trying to do here before we go and invest significant amounts of money in building separate broadband networks all over the country.  As an example, I have worked closely now with the Department of Education in Victoria for 18 months and have had conversations where we agonised over how to get best use of new network infrastructure and whether the needs of each school are the same.  Clearly they are not, but such issues have a political dimension.  It is really challenging to work out how to improve the education system, whether on a state or a national basis.  Until there exists a clear view of what governments want to achieve exactly, you can build the best damn broadband network that any government has ever seen, but it will end up as just more network carriage.  The desired outcomes in terms of user experience and specific policy objectives need to be sorted out first.

«  Back

^  Top of page

Network Insight sponsors include:

Click here for full sponsors list.