Dial M for monopoly and send the bill to consumers

IT'S done, though not fully disclosed. And Telstra has done very well out of it. But the "dial M for monopoly" deal between the government, NBN Co and Telstra gives consumers and taxpayers nothing to cheer about.

Start with consumers. If the National Broadband Network is to be built, it should share Telstra's ducts and pipes. That reduces costs, making consumers better off. But eliminating competition is a different proposition altogether.

This is not merely a question of the retirement of Telstra's copper network. Ultimately, that would happen anyway, though scrapping it now is not especially sensible. But paying Telstra, and it appears, Optus, to cease providing high-speed data services over their hybrid fibre coax networks is nothing more than the NBN buying itself a monopoly.

As NBN Co CEO Mike Quigley recognised in Senate estimates, those networks provide effective competition to fibre optic networks in many advanced economies. Indeed, careful studies find that network competition reduces prices by 10 to 20 per cent while significantly enhancing the quality of service consumers receive.

The government's argument is that Australia is too small to accommodate multiple providers. But these networks exist already and their running and expansion costs are very low. Moreover, the agreement explicitly envisages their continued use to provide pay-TV services, so those costs will be borne in any event. Far from avoiding needless duplication, the deal merely prevents the fullest use of scarce capital.

Even more appalling is the prohibition on Telstra "promoting wireless services as a substitute for fibre-based services for 20 years". With few fixed networks in the world's most rapidly growing telco markets, investment is pouring into developing ever higher speed wireless services. This clause, along with others aimed at preventing those services from competing with the NBN, will therefore not only cement NBN Co's market power but also impede our access to cutting-edge technologies. None of this is to deny that NBN may be able to achieve scale economies by expanding its customer base. But let it do so by winning consumers over, not through sweetheart deals that pay rivals to shut down. The first is competitive rivalry, with all the gains it brings; the second is no better than price-fixing.

The government claims any resulting harms are offset by wider benefits. The greatest of these, it says, is that the NBN will be structurally separated, giving Telstra's rivals a competitively neutral platform from which to compete.

But this claim too makes little sense. After all, the government has repeatedly emphasised that regardless of any deal with Telstra, the NBN will proceed. The structurally separated platform will therefore be put in place quite independently of the restrictions on competition the deal mandates. Removing those restrictions would only make the consumer benefits all the greater. Indeed, the government fully knows its claim is bunk. That is why it has exempted the deal from the trade practices provisions of the competition law. Those provisions would allow the deal even if it created a monopoly, so long as NBN Co could convince the competition regulator, and the competition tribunal in the event of appeal, that the deal's competitive detriments really were outweighed by public benefits. It is the fact that such a claim has no prospect of success that has forced the government to grant NBN Co the unparalleled exemption it has now obtained.

But it is not only consumers who lose; taxpayers too will suffer.

The government has negotiated policy changes valued by Telstra at $2 billion, without any pretence of adequate prior public disclosure or consultation. There also seem to be tax concessions, though these are undisclosed. But the damage to taxpayers goes even further.

NBN Co will be a government-owned monopoly. Freeing it from competitive disciplines means allowing inefficiency and cronyism to flourish. That the initial sites chosen for the NBN's deployment are largely marginal electorates is merely a sign of things to come. As such waste becomes the order of the day, it is taxpayers who will bear the losses.

Bad as all that is, the greatest victim is the quality of public policy. Exactly 20 years ago, the Telecommunications Act, 1991 marked a new era, opening telecommunications markets to competition, reducing cross-subsidies and setting clear bounds on political interference. Certainly, serious mistakes were made; but those broad policy directions have more than proven their value.

A sensible government would have used a Productivity Commission inquiry to identify options for addressing the mistakes while preserving the achievements. Instead, the Rudd government's grand promises degenerated into a stunt it announced before it had even been costed. The Gillard government then used backroom deals, lubricated by taxpayer-financed largesse, to bring a poor idea to poorer implementation.

That is this government's style. So too is trashing every principle of good governance along the way. Billions of dollars have been committed without even the semblance of a cost-benefit analysis, legitimating wasteful public spending decisions more widely. Inefficient cross-subsidies, painfully reduced over a long period, have not only been restored but are being locked in. As for consumers, they will be faced with a monopoly that the government, now back as both owner and rule-maker, has powers to manipulate at will. And future generations will bear losses that every study concludes could well be substantial.

Even worse, the deal includes break clauses forcing any government that reversed those decisions to make huge payments to Telstra. There is nothing wrong with ordinary commercial penalties, which only compensate for costs, legitimately incurred, that otherwise could not be recouped. But these clauses seem to go beyond that in shackling future policy.

As well as being constitutionally abhorrent, such clauses undermine fiscal honesty by creating liabilities that do not show up as government outlays. And to aggravate matters, they make rent-seeking more profitable by obliging future governments to honour their predecessors' tainted promises. So that is what we have come to: white elephant projects that squander the income from depleting our mining wealth; backroom deals that bribe firms to go along with bad policy; and penalty clauses to protect shabby bargains from the democratic process.

Yet this, the government tells us, is economic reform. With reforms such as these, can it be long before we are undone?