In the Midas myth, Dionysus rewarded King Midas’s hospitality by granting him his dearest wish — to be able to turn everything he touched into gold. However, poor Midas found that his dearest wish was also a curse — a diet of golden food was counter-indicative to ongoing survival. Midas blamed Dionysus for his plight and begged him to retract the gift. Dionysus, however, was implacable — he told Midas to bathe in the river Pactolus, which immediately turned to gold, killing the king. Dionysus’ message: be very careful what you wish for because you may just get it, and when you do, it may not be at all what you imagined.
If the experience currently playing out in the Antipodes (Australia and New Zealand) is anything to go by, the sobering mythical message is particularly pertinent for policy-makers and industry advocates calling for governments — both local and national — to spend large amounts of taxpayer funds bringing forward the time at which nationwide ultra-fast broadband infrastructure (notably fiber-to-the-home (FTTH) connections) is deployed. The golden fiber future promised in the heady days of 2007 and 2008 — when then-opposition political parties swept into power on the back of nation-building ultra-fast broadband investment policies — is rapidly turning into a leaden morass that has already contributed to the downfall of one government and is threatening the credibility and tenure of the other (for details, see here (0) and here (1)). The government-owned Australian NBN is in tatters (2), running nearly 50 percent behind schedule and with its initial A$43 billion budget (which made it the biggest infrastructure project in Australia’s history) blown out to A$72.6 billion. Meanwhile, New Zealand’s privately-owned copper network operator Chorus, the major partner in the government’s flagship Public-Private Fiber Partnership, is veritably fighting for its financial life (3), facing a share price collapse, foreign capital flight and a NZ$1 billion deficit on a NZ$4 to $6 billion project following a series of government and regulatory decisions regarding pricing and access to the legacy copper network. The tragedy is that ultimately taxpayers, consumers and the firms contracted to deliver the new networks are bearing the costs of policies whose consequences were not fully thought through before being enacted.
A series of blogs over the next few weeks will explore what has occurred in Australia and New Zealand, so that other jurisdictions can learn from the Antipodean experience. These findings are instructive in the context of the aftermath of the Global Financial Crisis, as governments are desperately looking for economic growth-enhancing projects on which to spend fiscal stimulus monies. They are also insightful, as they provide some of the first ‘live case studies’ of the return of governments as owners, funders and strategic leaders in an industry which, for the past three decades, has been focused on the pursuit of privatization, liberalization and increased competition.
It is apposite, therefore to begin with a summary of the government investment strategies in the two countries. It is noted that Australia and New Zealand, like the United States and Canada, share a strong sense of shared history and strategic objectives, but at the same time are embroiled in a fierce, almost familial, rivalry as the smaller ‘sibling’ seeks to keep up with the larger, and the larger does not wish to be outshone. This rivalry has persisted throughout the “digital decades,” where for the most part, New Zealand has outperformed its Trans-Tasman neighbor in the metrics typically used to measure telecommunications market performance.
The Australian government was first to gain headlines with its promise to spend A$43 billion on the National Broadband Network (NBN), a government-owned and operated, structurally separate wholesale G-PON fiber network ultimately supplying services (via independent retailers) to 93 percent of the Australian population. Nearly a quarter of the budget was devoted to compensating existing copper and cable network operators for decommissioning their infrastructures and transitioning customers onto the fiber network. The plan was to create a new government-owned fiber fixed-line access monopoly to replace the privately-owned copper network. Structural separation was seen as a more cost-effective means than existing access regulation of avoiding competitive tensions arising from a vertically-integrated incumbent leveraging off its network assets to foreclose retail competition.
New Zealand responded with a more modest NZ$1.35 billion government subsidy towards a NZ$4 to NZ$6 billion G-PON network in 33 geographic regions representing the most densely-populated 75 percent of the country. Unlike Australia, the resulting access networks would be built by way of public-private partnerships, ultimately owned by the private partner, and with the potential for different operators to own networks in different parts of the country. Once again, structural separation of network and retail operations was a non-negotiable condition for prospective partners, including the incumbent Telecom across the entire country, should it be the successful tenderer in any of the 33 areas.
On first blush, if fiber access networks are inevitably going to replace copper, then preemptive government investment will accelerate the rate at which the transition will take place. Surely this will bring forward the time at which the benefits of the more capable technology will become available, thereby creating a competitive advantage for the selected economy over its non-fiber rivals? Such thinking certainly sat at the center of the New Zealand government’s strategy.
Furthermore, government funding injections can break investment deadlocks (4) that have emerged in countries where aggressive access regulation has chilled private sector incentives to build new networks. Incumbent Telstra’s long-standing intransigence regarding investment in ‘cabinetization’ (fiber to the node — FTTN) in non-metropolitan areas so long as the regulator) refused to increase regulated access tariffs was certainly a motivator for the Australian government’s intervention. Electors in both countries were sufficiently convinced to give the governments a mandate to proceed.
Probing the Pactolean practicalities
In practice, however, governments’ reclaiming of center stage in industry strategy has served to emphasize some of the well-established reasons why politics and the telecommunications industry have historically made such uneasy bedfellows. Regardless of well-meaning intentions, given superior legislative powers, it is inevitable that political objectives will ultimately trump economic considerations. The short-term horizons of governments also sit uncomfortably alongside the need for long-term investments in telecommunications networks. And finally, government subsidization of networks inevitably leads to a tension between distributional and competitive objectives. All three are evident in the ‘Antipodean case’, and will be explored in the next blog.