NBN flirting with competition breach: report

An investigation by an office of the Productivity Commission has found that while it's not anti-competitive for the National Broadband Network Company (NBN Co) to become the fibre provider of last resort for new housing estates, its rate of return for the network could be in breach of competitive neutrality rules.

The investigation was launched in May by the Productivity Commission's Australian Government Competitive Neutrality Complaints Office, following complaints from fibre providers such as Openetworks and TransACT that when NBN Co announced it would be the fibre provider of last resort for housing developments of over 100 premises, it was effectively killing competition in that sector. This was due to the fact that NBN Co would install the fibre at no cost to developers, outside of the cost of digging the trenches to NBN standards.

In its report handed down yesterday, the Productivity Commission found that NBN Co's decision to act as a fibre provider did not constitute a breach of competitive neutrality policy.

"NBN Co's decision to be an alternative provider of fibre in greenfield developments (rather than only the provider of last resort) is not dependent on a competitive advantage by virtue of its government ownership, and is not a breach of competitive neutrality policy," the commission said.

Comverge Networks had also argued to the commission that NBN Co's profile gave it an advantage over its competitors in being able to market to property developers, but again the commission ruled this was not a breach.

"NBN Co's use of its profile to promote itself to the development industry as a provider of fibre to the home in greenfield developments is an operational decision, and is not a breach of competitive neutrality policy."

It had been alleged that NBN Co had gained from the information provided by unsuccessful applicants to the panel of providers tender, and this again was a breach of the competitive neutrality policy. The office also dismissed these complaints.

Additionally, arrangements made with Telstra over installation at greenfields sites were not a breach, according to the commission, because engaging with such a large corporation was necessary to meet the government's objectives in the roll-out of the NBN.

But it wasn't a clean scorecard for NBN Co, with the report finding that NBN Co's proposed rate of return on the network of 7 per cent does not take into account the fact that NBN Co sees itself operating in a medium risk environment over the course of the roll-out and, for this reason, the commission does not view this as achievable.

"On this basis, the targeted 7 per cent return after tax does not represent a commercial rate of return," the commission said.

The commercial rate of return was also a sticking point for a breach of the competitive neutrality policy because NBN Co has not made its non-commercial benefits clear. With other government-owned businesses, it is usual for them to undertake community service obligations that a commercial company would not undertake, and if they do charge, it must not be at a higher price for the service or product. The Productivity Commission said that as these had not been outlined, NBN Co could be in breach of competitive neutrality policy, which is designed to ensure that the government-owned business is competing fairly with commercial businesses.

"In the absence of a quantification of the non-commercial benefits to be delivered by NBN Co, the targeted rate of return of NBN Co represents a potential ex ante breach of competitive neutrality policy," the commission stated.

In order to address this, the report recommends the government conduct an analysis of the nature and magnitude of non-commercial benefits required of NBN Co and the company should adjust its pricing model to take into account funding for community service obligations. The government would also need to demonstrate that this new pricing model will achieve a commercial rate of return.

In a statement, Communications Minister Stephen Conroy rejected the findings of the report, saying that NBN Co was established to build the NBN because the private sector was unable to do so, and as such was not expected to earn a private sector rate of return.

"In order to earn the commercial rates of return that the report is recommending, higher prices or lesser services would be necessary in rural and regional Australia," he said. "The alternative of funding of rural subsidies from the budget would create permanent uncertainty. These are not acceptable outcomes."

He said that the non-commercial benefits were "so self-evident and pervasive" that it was doubtful whether there would be merit in meaningfully quantifying them as the office suggested.

"To spend time trying to do so would just delay our top priority — the roll-out of the NBN. The government considers that regional Australians want and deserve certainty that essential, affordable broadband services will be available to them. That is what the NBN is achieving."