National broadband network: Australia's GDP to take a hit if Telstra gets its ROI

An expert has warned Australia will pay if Telstra gets its ROI way with the national broadband network

Australians will pay more than four times the original cost of the national broadband network (NBN) in lost gross domestic product (GDP) over the next two decades if Telstra wins the tender and gets its 18 per cent ROI, a leading economic expert has warned. Speaking at the Broadband World Australia conference in Sydney last week, Centre for International Economics (CIE) director, Kerry Barwise, said a key dynamic for ensuring competition is the rate of return sought by the National Broadband Network (NBN) builder.

Telstra has said it is seeking a return on investment (ROI) “north of 18 per cent” and a guarantee of protection from regulation by the government.

Results of an analysis into the NBN undertaken by the CIE showed a market and regulatory structure that permitted the exercise of market power through vertical integration and allowed the operator to obtain a relatively high rate of return on equity (18 per cent or more) would lead to a loss of GDP of around 0.35 per cent per annum.

Relative to the size of GDP this year, this equals about $4-5 billion and is about a quarter of the benefits expected from the use of genuine broadband, Barwise said.

“So with 0.35 what happens is, every five years the community will pay again for this asset," he said. "The community would pay the first time and then every five years they would have paid again through high prices.” The losses in GDP would be larger in proportion to the actual cost of the NBN which is still being discovered through a government tender. With less competition the community would pay for the network many times over, Barwise said.

“Through the distortion that the exercise of a monopoly power has resulted in, basically the price of everything will be higher than it otherwise should be and Australia will be less competitive. So that’s the case for having competition and efficient regulators, whoever provides this if we don’t do it that way we will pay and pay for those benefits,” he said.

Barwise argued the vertically integrated monopoly Telstra enjoys today – what Macquarie Bank calls a “privileged asset” – is expensive for service providers accessing the incumbent’s infrastructure which in turn raises prices, hinders innovation for consumers, and leads to strategic behaviour.

Facilities-based competition through multiple networks is not an ideal alternative either, he said, as multiple networks would compete against each other. This resulted in double investment, which Barwise said wasn’t affordable given Australia’s small market.

The ideal structure is an open access regime where the owner and operator of the NBN is a completely separate entity to all access providers on the network.

“Reflecting on what other analysts and one in particular from the OECD which is heavily relied upon by many governments, is that separation in many industries generates significant benefits, but it’s a question of case by case and evaluating the particular circumstances of a market,” Barwise said.

According to the OECD 2008 Broadband and the Economy report, structural separation limits the need for certain regulations that are difficult, costly and only partially effective. The OECD also notes that separation may stimulate innovation and efficiency in competitive service and helps eliminate cross subsidisation.

Telstra has waged a public campaign against any form of separation should it win the bid for the NBN, arguing that it will be detrimental to its shareholders and that government regulation hinders investment. Barwise disagrees.

“Despite the fact that the regulated people in those industries complain like hell that they are being regulated, they have also invested," he said. "It’s not a barrier to investment as a general rule, so if people say ‘we’ll end up being regulated and it will cost us dearly’ it seems to fly in the face of practical experience in other industries.”

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