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NBN Futures: The Option of Merging NBN Co with InfraCo, as a Benefit to the Digital Economy

No national goal has been set for how the National Broadband Network should provide competitive advantage for Australian small or medium enterprises (SMEs) participating in the global digital economy. This paper proposes robust national goals for how the NBN should serve both our digital society and our digital economy. From this perspective it considers the merits of merging NBN Co with InfraCo, and the pros and cons of public versus private ownership of the merged entity, “NetCo”.


Introduction
The author was invited to discuss the merger of NBN Co with Telstra's InfraCo as one of four options proposed at TelSoc's NBN Futures Forum held in Melbourne on 31 July 2019.
A reason for this mission was evidently my authorship of the paper 'Revisiting the Structural Separation of Telstra' (Gerrand, 2004), which had some impact on policy discussions in the industry. In this paper I had advocated, ahead of the full privatization of Telstra in 2005, the structural separation of Telstra and the retention in government ownership of its fixed network wholesale business. The motivation was to create a self-funding entity which could roll out a high speed national broadband network without the need for additional government investment -as well as providing a level playing field for all retail service providers of fixed access broadband.
Graeme Samuel in his presentation at this same NBN Futures Forum suggested that "the privatisation of Telstra had breached competition policy by not including either strong regulation or structural separation of Telstra. This historical example highlighted the market problem of vertical integration, something that must be avoided in the future ownership model the plural: because in the ten-year time frame of this policy discussion, several other networks will emerge, in my view as early as 2020, that will satisfy most definitions of a 'national broadband network'.
My answer to that question is simple: we need NBNs to support national policy goals for both our Digital Economy and our Digital Society. I illustrate that point with Figure 1.

Figure 1. Why do we need the NBN?
A reasonable policy goal for our Digital Society is: All residents should have affordable broadband access to essential online services, irrespective of the location of their residence (to the maximum extent possible).
This goal is more focussed explicitly on consumer needs than the Universal Service Guarantee announced by the federal government on 5 December 2018(Fifield, 2018, intended to replace the former Universal Service Obligation legislation after the NBN has been fully rolled out (Reichert, 2017). The Universal Service Guarantee will commit the government to providing affordable broadband (peak speeds unspecified) and telephone services in rural and remote areas. However, if essential e-health services for remote residences require, for example, 25/25 bandwidth in order to provide a high-quality video signal upstream for diagnostic purposes, the current rural NBN and hence the USG itself will not be fit for purpose.

What We've Got: the Current NBN
At the time of this forum, on 31 July 2019, the most recent public information we have on the status of the NBN is regrettably more than a year old, as it appears in the company's FY 2018 Annual Report (NBN Co, 2018), issued in October last year. Table 1 shows the progress by NBN Co in achieving "ready for service" status in designated service areas using seven alternative access technologies. Unfortunately for external analysts, the FTTN technology, widely found to be unfit for purpose, is mixed with the more versatile FTTB and FTTC access technologies. If we set a national goal of providing competitive advantage to our SMEs operating in the global digital economy, one concludes that only the FTTP, FTTC and FTTB access technologies will provide the necessary symmetric and ultra-highspeed services they need. By this criterion, more than half of the current NBN is not fit for purpose.
To be fair to NBN Co, they are working on upgrade paths for their HFC and FTTN technologies, for when their RSP customers start demanding higher speeds. (The upgrade path for FTTN is basically FTTC or FTTB.) But upgrading the NBN to provide the broadband services at a par with those being offered in New Zealand, as just one competitive example, will require significant additional investment by the current or future owner of the NBN (Gregory, 2019).
What is the sale (or purchase) value of the NBN likely to be, on completion of its rollout? NBN There are some significant synergies that would add $ value to the merged entity, NetCo: • Reduced costs with a single Operations Support System and single wholesale billing system; • No need for profit between the backhaul network (InfraCo) and the access network (NBN Co), thus ensuring that either output prices to customers can be reduced or profits to the owner increased -or a balance between these two aims, to make the merger acceptable to the key stakeholders.
• NetCo can achieve this will be explained with the help of Figure 2 below. 5G networks will provide picocells with very high data transfers taking place in small radio footprints, often requiring the 5G radio stations to be attached to buildings or other existing structures, e.g. along streetscapes. They are expected to be well suited to managing communications for moving vehicles, such as driverless cars and other vehicles. NetCo can use its NBN-derived FTTP and FTTN service areas to provide fibre connections to 5G radio stations, as well as using its InfraCo-derived transit network as the most cost-effective backhaul in the country, to provide a 'single shop' wholesale fixed network service to new entrants into 5G and later networks. This should be much more economical for new 5G players than investing in their own transit networks.

Figure 2. How NetCo can support new entrants to the 5G market
Telstra has chosen to publicly underplay the potential of 5G networks to substitute for NBN connections except in the context of warning of the likely consequences of NBN Co sustaining its current high wholesale prices (e.g. Kruger (2019)). However, a recent study of fixed-mobile substitution by Pugh (2019) with 1,446 participating households reveals that in 2017 "30% of existing fixed broadband households would consider switching to a wireless broadband service", in the context of existing retail prices for the NBN and for 3G/4G mobile services.
The key reasons given by these respondents were "concerns over the NBN", "wireless faster than their fixed connection", "wireless is cheaper" and "portability" (Pugh, 2019). I take the view that 5G will be a considerable substitutional threat to the NBN in its poorer performing service areas -as well as providing opportunities to NBN Co as a 5G infrastructure provider.

Arguments Against Such a Merger
Infrastructure competition. The first counter argument arises from the traditional regulatory culture in this country, in which infrastructure competition is raised as being the highest policy goal iii -far higher than the goals of greatest interest to consumers or citizens, such as reduced retail prices, or more reliable performance, neither of which is necessarily guaranteed by infrastructure competition, but are simply expected to flow from it. Because NetCo, whether publicly or privately owned, will be a monopoly, this will be considered to be an extremely undesirable outcome. The traditionalists would rather InfraCo and NBN Co continued as separate entities, encouraged to invest competitively in each other's monopoly area.
But infrastructure competition does not necessarily lead to better outcomes for end users.
Some of us remember the frantic competition between Optus and Telstra in the 1990s, to gain an early advantage in what was then called the cable TV market. The result was both carriers

Conclusions
It is vital to clarify our national policy goals for our digital society and our digital economy before deciding the future of the NBN. Otherwise, its future will largely be left to the market -and we have seen how well that has worked over the past twenty years! In particular, we note how "leaving it to the market", in the absence of national policy goals for how the NBN should support the digital economy, has created a national network which is largely optimised for passive Netflix watchers, given the government's weak statement of expectations for the NBN. Only the approximately 21% of premises who receive FTTP, as a legacy from the original NBN implementation, provide highly competitive advantage to SMEs operating in the global digital economy -and most of the FTTP service areas are located in the capital cities.
This paper suggests two worthy policy goals, one for the digital society and one for the digital economy: 1. All residents should have affordable broadband access to essential online services, irrespective of the location of their residence (to the maximum extent possible).
2. All Australian businesses should have access to broadband infrastructure at internationally competitive bandwidths and prices, irrespective of their location (to the maximum extent feasible).
If one supports those broad policy goals, one can assess and compare each "NBN Future" option in the light of how well it will achieve them.
In considering the option of merging Telstra's InfraCo business with NBN Co, the following observations have been made.
Firstly, it would not be acceptable (under either competition law or good policy) to allow InfraCo to buy NBN Co until InfraCo ceases to be controlled by Telstra or by any other vertically integrated carrier. But this independence can in fact be achieved by a process which Telstra's CEO seems to be favouring: InfraCo's divestment from Telstra, either by an IPO or by sale to an independent investor.
Secondly, NBN Co and InfraCo have entirely complementary networks. Their merger (as "NetCo") would serve the national interest better than NBN Co alone, creating an end-to-end fibre network that can support new entrants to the 5G (and later generation) mobile markets.
Without this cost-effective assistance, new market entrants are likely to struggle to compete effectively with the market dominance which Telstra's 5G network is expected to achieve by Thirdly, NBN Co and InfraCo have synergies which can be crystallised via their merger to provide a balance between additional financial dividends to the new owner and reduced pricing to its wholesale customers. Or the owner can use the captured value of the merger to invest in the technology upgrades necessary for the network to become or remain fit for purpose, and hence more profitable.
Whether NetCo becomes a public or private monopoly, its pricing and performance will need to be strongly regulated. This is important because of NetCo's crucial role in supporting the national digital economy as a whole.
Lastly, the pros and cons of public versus private ownership have been considered. An economic rationalist (as distinct from a free-market religionist) would see that cost and governance advantages flow from public ownership. However, the aversion of governments these days to electoral risk and budget deficits may triumph over the need to achieve more practical policy goals for the country. The timing of the sale of NBN Co will therefore be quite crucial. The sale would seem to be an unattractive option until the fully rolled out NBN has time to pay off about half of the government's current $51b investment in it, in order that the net value of the transaction can have a negligible impact on the bottom line of that year's federal budget.
So, due to the perverse impact of federal accounting rules, it may be in the interests of both sides of politics for the NBN to remain in public ownership for an extended period of time.

Disclosure
The author has held shares in Telstra since "T1". This has not deterred him from authoring articles which favour the long-term interests of end users over the interests of shareholders. • achieve an appropriate financial return from the sale; • promote orderly market trading of Telstra shares; • secure a timely sale process, conducted to the highest standards of probity and accountability; • support Australia's reputation as a sound international investment location; • continue to build investor support for the Government's asset sale programme and broaden share ownership; and • remove the Government's conflict of interest as owner and regulator of Telstra.
ii The federal government's Strategy for Australia's Tech Future, published in December 2018, aims to deliver "a strong, safe and inclusive economy, boosted by digital technology". It admirably proposes that "Australians have access to world-class digital infrastructure in their personal and working lives" (Department of Industry, Science and Technology, 2018). Yet there is a major disconnect between the aim of "world-class digital infrastructure" and what the NBN is actually delivering for the majority of premises in Australia, as evidenced by Table 1 above. This new government strategy appears to have emerged too late to influence the design of the current NBN; and it is perhaps significant that it was not issued jointly by the Minister for Communications, Cyber Safety and the Arts.