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  1. 1. 26 August 2002 Dear There are a number of significant flaws in the current approach taken by Government to telecommunications industry regulation and assistance to regional infrastructure investment. Our view is that these flaws have hampered innovative competitive outcomes. The current regime has actually entrenched Telstra’s dominant market position. This has occurred due to two main factors: • The compounding complexity resulting from the frequent tweaks to the regime has ensured that Telstra, the telecommunications player with the greatest scale and scope, is best placed to absorb and manipulate these continuous changes to its greatest advantage; and • This is exacerbated by the subsidies that Telstra has ‘won’ from Government to assist the expansion of its network in regional areas. We do not question the Government’s social objectives in this regard – however, we do question the social outcomes that have been delivered. Through its funding choices in the mobile space, the Government has allowed and encouraged Telstra to build what is effectively a Telstra proprietary network1 – which cannot be accessed by its competitors. The ensuing situation cannot be rectified by further ad hoc amendments to the regulatory framework or by simply increasing subsidy levels for regional and rural infrastructure investment. What is required is a fresh look at the regulation of the telecommunications industry. The dynamic nature of the market means that regulatory intervention will always be a second-best approach to market outcomes. This is a position that was recently advocated by the Productivity Commission (PC) in its Telecommunications Competition Regulation report: 1 Telstra’s use of Government funding to extend its CDMA network has resulted in all GSM users, about 10 million, being unable to take advantage of the subsidised network. This contrasts with the Government’s Mobile Phones on Highways tender, won by Vodafone – the deployed network is GSM and national roaming on the subsidised network has been offered to Telstra and Optus for use by their customers. Vodafone Pty Ltd Vodafone Network Pty Ltd ABN 76 062 954 554 ABN 31 081 918 461 Citadel Towers, 799 Pacific Hwy Locked Bag 1581, Chatswood NSW 2067, Australia Chatswood NSW 2067, Australia Telephone +61 (0) 2 9415 7000
  2. 2. A more pragmatic and modest policy goal is to devise a set of arrangements that are workable, that improve efficiency over the medium term, that reduce some of the bigger risks of making regulatory errors and that promote the contribution of telecommunications to Australia’s future economic growth2. Efforts must be made to remove regulations that constrain the parts of the industry that are already competitive, or where new investments are taking place or are planned. Regulation should be refocussed to address the distortions created by the elements arising from the Government ownership of Telstra and the transition from a state-owned monopoly to a competitive market. A broader view of regional funding is also required to ensure that a key criteria of any future funding decisions is the ability for all Australians to be able to access the subsidised infrastructure, and the services provided by the deployment of that infrastructure. Vodafone looks forward to assisting the Committee in its endeavours and we welcome future involvement with the Committee. Regulation Regulatory overreach - impact on investment and innovation Vodafone believes that elements of the current regulatory regime adversely impact the development of products and services, and the incentives for industry participants to innovate and invest. Decisions to commit to new infrastructure or service investment crucially depend on an assessment of regulatory risks. We note that the Government response to the Productivity Commission (PC) report stated that it would facilitate investment in new telecommunications infrastructure by extending the existing provisions under Part XIC of the Trade Practices Act relating to exemptions and undertakings to include services that are not yet declared or supplied3. The Government’s intention is stated as enhancing the operation of the current telecommunications-specific competition regime. However, taking account of this response, we remain concerned about the inherent risk of regulatory overreach – an unsettling trend of regulation extending to competitive parts of the market in anticipation that anti-competitive behaviour may arise at some time in the future. 2 Productivity Commission, Telecommunications Competition Regulation, Inquiry Report, Report No. 16, 21 September 2001, xxii 3 Senator the Hon Richard Alston, Telecommunications regime to be made more competitive, media release, 24 April 2002 Page 2 of 7
  3. 3. The risk of regulatory overreach impairs the incentives to invest in new networks, products and services such as 3G mobile technology and various wireless broadband technologies. This leads to poorer outcomes for consumers. To encourage and foster the development of future products and services it is essential that new markets should be given opportunities to work by themselves rather than applying a regulatory framework as a ‘just-in-case’ measure. Vodafone has outlined its position regarding the need for fundamental regulatory reform – especially as related to the development of new investment and innovation – in submissions and responses to various inquiries, discussion papers and reports4, including the Productivity Commission report. Vodafone welcomes further interest of the Committee in these documents and is willing to provide copies of documents as requested. The advantages of aligning sector-specific with general competition law Vodafone encourages reforms to more closely align sector-specific regulation and general competition law. This will assist to ensure that regulatory intervention is targeted to actual market failure – and not regulating ‘just-in-case’ problems arise in the future. We have consistently maintained that sector specific regulation should be replaced with generic competition law. The primary benefit is that telecommunications competition would be treated in the same manner as competition issues in other industries – under Part 3 of the Trade Practices Act. In an era when convergent technologies are likely to introduce new competitive pressure from outside of the telecommunications industry, we consider it imperative that a consistent regulatory approach is applied across industries. Again, Vodafone has included this position in many forums, and is happy to expand this view if necessary. Industry specific taxes – barriers to entry and investment Vodafone is concerned that the Government has played a significant part in creating barriers to entry and investment in the market through a range of industry specific taxes and levies, such as licence, spectrum and numbering fees, and service obligations. 4 Response to the final report of the Productivity Commission into Telecommunications Competition Regulation, Vodafone submission to the Department of Communications, Information technology and the Arts, February 2002; Inquiry into Wireless Broadband Technologies, Vodafone submission to House of Representatives Communications, Information Technology and the Arts Standing Committee, May 2002, http://www.aph.gov.au/house/committee/cita/Wbt/subs/sub017.pdf and associated public hearing, http://www.aph.gov.au/house/committee/cita/Wbt/transcripts/proof14june.pdf; Broadband Issues; Vodafone submission to the National Office for the Information Economy Broadband Advisory Group, August 2002. Page 3 of 7
  4. 4. Up-front regulatory costs are high and continue to rise. Vodafone has invested $2.7 billion in Australia in almost 10 years – the Government has received almost a quarter of that in up-front taxes, fees and levies. An example of the growing burden faced by Vodafone is that in 2001 the Government increased spectrum license fees significantly, from $7 million per year to $17.5 million per year. These regulatory levies and taxes harm consumers by leaving firms with less funds for infrastructure network investment and therefore slowing the development and delivery of services. In addition it puts new and smaller players at a significant competitive disadvantage – Telstra is much better placed to absorb industry-specific levies because of its scale and scope. We believe that to promote and encourage industry development, the Government should not tax players up-front. We are not asking for the Government to give us a free ride – it is our view that taxes on individual firms should be broadly related to profits earned. Universal Service Obligation Social outcomes – why is the industry subsidising Telstra? While Vodafone is not questioning the social objectives of the USO, Vodafone considers that the current USO regime gives Telstra, as the provider of the USO, significant competitive advantages, including direct revenues from products and services purchased by USO customers, and the enhancement of Telstra’s brand. If the Government deems that USO costs are greater than the benefits that accrue to Telstra, then the question that needs to be addressed is how that cost should be funded. Currently the industry funds the USO. This represents a transfer of wealth from industry participants, including Vodafone, to Telstra. The industry has subsidised Telstra with USO payments to the value of at least $1,353 million over five years5 - creating additional regulatory barriers to entry for prospective industry participants, and impeding the progress of new services to the marketplace. Most nations of the European Community (EC) have recognised and concluded that no payments from industry or Government are necessary for incumbents to meet their respective USOs. These decisions were made on the basis that the intangible benefits to the USO provider outweighed the costs; and in the case where net costs were acknowledged, because the cost of the USO did not constitute an "unfair burden" on the incumbent. We believe it is inappropriate for the Government to impose a specific up-front tax on industry – to fund Telstra – to deliver a social policy outcome. In the instance whereby the Government 5 Rural telecommunications Policy Reform, Part III – Research Paper, by Chris Dalton, Sydney 2002, p42 Page 4 of 7
  5. 5. considers that the market is unable to deliver specified social policy outcomes, then the most appropriate approach would be to contract with the industry to provide the service, and fund the identified social policy outcome through consolidated revenue. Unfortunately there seems to be a commonly held view that all telecommunications network operators have ‘cash to burn’ and should therefore contribute more to Government and its social objectives than other industry sectors. This view ignores reality, and that investors in mobile telecommunications must achieve a reasonable return that reflects the capital intensive and high- risk nature of the industry – now and in the future if they continue to invest. Government subsidies Solidifying Telstra’s dominant market position The Government has recently provided significant subsidies to encourage the deployment of network facilities in otherwise uneconomic areas. A significant amount of this money has gone directly to Telstra to fund expansion of its CDMA network. To illustrate this further, ‘of a total of $819 million in rural telecommunications federal grants, little more than $25 million has been allocated to carriers other than Telstra.’6 This mechanism for funding Telstra has included: - $150 million extended zones project; - $20.4 million to provide improved spot CDMA mobile phone coverage on 34 regional highways7; - $20.4 million to provide CDMA coverage to 55 towns of 500 or less8; - $24 million for towns over 500 initiative – under the program, 132 towns will receive CDMA coverage and 40 of the towns will also receive additional GSM base stations to supplement existing coverage9 - extensive funding for infrastructure projects, including CDMA mobile coverage, under Networking the Nation; and - $7 million for the WirelesSWest project in Western Australia. We also note that the state government of Western Australia contributed an additional $7 million to Telstra for the WirelesSWest project. This copious amount of funding has provided Telstra with additional funds to increase its CDMA network – to which only about 10 per cent of Australian mobile users are connected. GSM mobile 6 Rural telecommunications Policy Reform, Part III – Research Paper, by Chris Dalton, Sydney 2002, p42 7 Senator the Hon Richard Alston, Mobiles initiative a TSI milestone, media release, 15 August 2002 8 Senator the Hon Richard Alston, More rural communities to receive mobile phone coverage, Media release, 12 July 2002 9 Senator the Hon Richard Alston, Towns get better mobile coverage, media release, 21 June 2002 Page 5 of 7
  6. 6. customers, who comprise the overwhelming majority of mobile customers in Australia, are unable to benefit from the enhanced CDMA coverage because CDMA is not compatible with GSM handsets. Vodafone believes that this is not the optimal outcome for funding social outcomes. The most advantageous outcome for the Australian people is for the maximum number of Australians to be able to access the subsidised infrastructure and services. What is the answer? All regional and rural funding made available for infrastructure in the future should take account of the accessibility for all Australians to benefit. Therefore the Government should aim to maximise its social objectives through funding which will provide the greatest number of Australians with access to the technology. Vodafone does not believe that providing funding to Telstra to expand CDMA, what is effectively a proprietary network – and which provides services to only 10 per cent of Australian mobile phone users – is an effective outcome of the allocated funding. We hold that the key criteria for future funding decisions should be the ability for the maximum number of Australians to access the services carried by the infrastructure deployed. We believe that the outcome achieved through the Mobile Phones on Highways project, successfully tendered by Vodafone, is a model for future subsidies offered by the Government. The roaming conditions applied to the contract denote that the offer of GSM roaming for other GSM operators will potentially maximise the benefits of the Government subsidy to the maximum number of Australians. Conclusion Vodafone strongly supports a light-touch regulatory environment, with regulatory intervention resolutely focused on durable market failures. However, Vodafone is concerned that regulation is extending competitive parts of the market justified by the belief that anti-competitive behaviour may arise. Consequently, we consider that there is a real risk that industry specific regulation will be extended into new areas such as 3G services and wireless broadband – risks which will be detrimental to the incentives to invest in new networks, products and services. Regulatory intervention amalgamated with industry specific taxes creates additional barriers to entry as Telstra can more easily meet with costs compared to other players. This has also been compounded by the Government’s approach to providing subsidies for infrastructure investment, with the vast majority of monies being ‘won’ by Telstra – in most instances to expand its proprietary CDMA network. Page 6 of 7
  7. 7. Again, we maintain that the key criteria for future Government funding decisions should be the ability for the services carried by the subsidised infrastructure to be accessed by the maximum number of Australians. The current approach of subsidising Telstra’s CDMA network requires reassessment under these criteria. Vodafone welcomes further opportunities to expand our position and thoughts with the Committee, and looks forward to further opportunities to ensure that future Government subsidies are efficiently allocated, ensuring that the maximum number of Australians has the occasion to access Government subsidised infrastructure and resultant services. Yours sincerely Page 7 of 7

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