Monday, 20 June 2011

Community Ownership of the Telecommunications Network

The recent interest in the government’s broad band initiative articulates a fundamental problem with the supply of comprehensive modern telecommunications network across New Zealand under the current market structure.  It is a problem that government appears to be grappling with through the Broadband Initiative however this initiative is not the answer and is likely to only exacerbate the problems of fragmented ownership of the network.
I would propose that the right answer is for the telecommunications network to return to some form of community agency ownership.  The agency could be regional councils or some form of regional infrastructure trust.  This would not require radical change to the existing service structures, little other than the network element being owned and managed by the community agency.  The existing service suppliers would remain as network services companies.
There are very sound reasons to return the network to community ownership.  Private ownership cannot efficiently provide public utility services such as telecommunications in the longer term.   These failures are apparent in telecommunications and in electricity; they have been clearly evident over the past two decades in rail and in airlines and in coastal and international shipping.  It is not possible to effectively run a national economy when the key foundation services are driven by the profit motives of a private owner rather than for viability and growth in the national economy.  I am not advocating a return to the old days of government departments running everything but propose a hybrid that achieves the benefits of community ownership with the advantages of private enterprise.
The key issue at present is that the community being serviced by the network has no power to determine the level of service.  The community receives the level of service that the network owner can afford to deliver profitably, not the network that enables the community to most effectively meets its present and future needs.  Indeed the consumer is likely to only receive the minimum level of service that the supplier can sustain without undue political consequences.
Telecommunications, like all public utility networks, are governed by a different economic logic than most other goods and services that can be supplied competitively.  Networks underpin the entire economy.  They enable society to function and to progress.  Utility networks function best as monopolies as any fragmentation detracts from the performance and integration of the whole or leads to needless duplication, this being the issue discussed in recent news items.   Network services also tend to be uneconomic at the margins, yet that is where they are most important because it tends to be at the margins - in rural New Zealand - where our export income is earned.  And the margins sustain the core.  The whole network loses functional value if the uneconomic services are not provided.
The optimum level of capacity for the whole network needs to be determined by the consumer, not the supplier.  This does not mean that there is no role for private enterprise in the supply of these services, just that the power relationship needs to change to one dominated by the consumer as a collective.   There are much better mechanisms for blending the efficiency of competitive private investment and the benefits of public ownership than that currently in place. 

The ownership, management and use of the roading network provides the best model of this “blended” alternative presently operating in New Zealand.  Councils and the Crown “own” the roads but in most cases those roads are established and maintained by private enterprise through contractual arrangements with the owner.  The owner sets the service levels and raises the cost of developing and maintaining the network in part through user charges and part a levy on the land serviced by the network.  All of the services provided on the roads are undertaken by private business except where the community requires services such as public transport (again a utility within utility as completeness of network is essential).  In the same way, this service may be best provided by contracting out its delivery with the community determining the level of service. 
The simple core concept is that network services have to be purchased as a whole.  That is one of the reasons why local government was established.  Local government generally runs far more infrastructure than private enterprise and does so with less fuss and bother, lower salary structures, and with less unnecessary complexity in the manner services are supplied, and funded more cheaply than the market can achieve.  Local government also specialises in investing for the future and developing infrastructure strategically, though Auckland does fail us there.  However, that is a political failure not a philosophical one.
I first raised this idea of local government taking over the Telecom Network at a TUANZ (Telecom Users Assn) conference some five years ago and senior executives from Telecom and Vodafone present supported the idea with them remaining as service providers.  The need for this initiative is now more urgent as the issues around urgently required investment in leading new technologies starts to severely undermine the economic viability of the existing private providers, while also holding back the national economy.
There are a raft of other reasons why the market is not able to provide these services effectively.   The arguments against the status quo would fill a book, however I hope I have done sufficient to justify the concept in somewhat less than that.
The logic of a community-owned telecommunications network for each region across the rest of New Zealand is compelling.  It is also going to become essential as the internet develops as a core tool for delivering social services and undertaking economic transactions.
There are real advantages in planning and managing these networks as a collective of regional entities.  It will allow regional initiatives and innovation.  To illustrate this, at present we are given a complex set of low performance service options where a single more advanced one would do the job for less cost to the consumer. 
We are also provided with a national solution to a broad range of differing regional needs.  The technology required to service a city centre is much more complex than that needed in a rural low density context.  We get the city solution whether it works for us or not.
Rural New Zealand could go wireless right now without the technical difficulties that are likely to be experienced in urban areas. 
The current system is also expensive.  I personally have five phones, a data connection and a satellite TV link and multiple contact numbers.  Current technology could allow me to have one phone with multiple identities (numbers) me at work (3 numbers - direct dial, front desk, cell), me at home (private and cell).  When whole family connectedness is taken into account, each home now has a multitude of phones.  We are all paying for a multiplicity of networks and connections when we need only one.
There is no reason why my cell phone could not also provide my data link and the same service - probably also the pay TV.  These multiple connections currently cost me and my employer $300-400 per month, and I am a relatively light user.
The regulatory mechanisms that are in place to compensate for the market failures inherent in the current service model are only making the whole system more cumbersome.  As an example, I understand that Central Southland has high speed fibre optic internet infrastructure but the consumers can’t use it for the next two years because not all phone companies can access the new Telecom cabinets and the regulator will not allow one company to market it until all others have access.  If it is true (and the information came from a Chorus employee involved in installing it) then this is just plain stupid.
The regulatory process is also used for anticompetitive purposes in building delays and barriers that serve the network owners’ interests rather than protecting the consumer’s best interests.
The lack of strategic control and investment is also inhibiting innovation in the use of these technologies. 
As for funding, we as a community are already paying for the current setup; we would just transfer the cash flow to the new arrangement.  In effect we are subsidising an inefficient operation, both directly through unnecessary cost and indirectly through lost economic opportunity, for no better reason than that it is privately owned.

Additional comment
The provision of network infrastructure for telecommunications (or most other utility networks), most particularly in rural communities, cannot be effectively achieved by competitive private ownership of the network. 
The role of infrastructure in an economy
Utility networks provide the foundation functions of society and the economy.  To be effective they must be complete and ubiquitous so that effectively, everyone has equal access.  This cannot be achieved by competitive private ownership of the network for the simple reason that it is uneconomic to provide connections at the periphery and where services are required at a low density.  
Infrastructure has a whole-of-economy function.  Businesses in the cities benefit from irrigation development in the rural hinterland, not just the farmer who owns the irrigator.  The wider community should contribute to the establishment of infrastructure for its own interests.  Similarly, the farmer in the back blocks who can communicate with Fonterra, the accountant and business by internet benefits the parties at both ends of the line.  If infrastructure enables greater economic activity in the country, the benefits flow to all parties that trade with that enterprise.  They all benefit from the infrastructure that enables that increased economic activity.  Private ownership of the network won’t allow this to happen as the infrastructure owner can not capture any of the benefit of the additional economic activity that the infrastructure enables and so will not invest in the additional capacity required to enable that development to occur.
There is a wider range of reasons why competitive, privately owned multiple networks are less economically efficient than a publicly owned monopoly.  Telecommunications networks, as with all utility networks, are natural monopolies.  A single network is the cheapest and most efficient means of providing the required service. 
To be economically effective, networks need to be managed in a manner that allows society to innovate and for the economy to grow and evolve.   Investment in infrastructure needs to be strategically driven, not profit driven.  Utility networks provide foundation services for the rest of the economy.  Infrastructure releases economic potential whether it is within the resources of a nation or the capabilities of a technology.  The optimum level of capacity for an economy will always be uneconomic to the supplier as society requires infrastructure that enables the wider economy to function and to develop.  It creates an opportunity for the economy to grow but that growth can take time and that renders the investment uneconomic in the narrow sense of private ownership.
There are many complexities to infrastructure ownership.  It must have idle capacity to enable growth.  It must not be capacity constrained at crucial peak times. It must invest in technologies long before their use is widespread in the economy.  None of these attributes fit well with the competitive model, which must necessarily view surplus capacity as a cost and long term investment decisions as highly risky, particularly in a market where technological change is such a dominant factor.

Investment risk
The investment risk for infrastructures under private ownership is greatly increased by the fact that Infrastructural hardware are “stranded assets” from the moment they are purchased.  Once purchased they have no worth beyond their value in use.  They have no significant salvage value and no alternative use.  This aspect makes investment in network infrastructure in an area of rapid technological change highly risky as it becomes technologically redundant in far too short a time for an economic return to be made on it.  Much of Telecom’s existing network falls into this category.  Their main value is their incumbency not their service.  A consumer cooperative could destroy this value by simply investing in a new infrastructure and there would be no additional cost to the consumer as a result.
Community ownership would introduce stability and structure to the introduction and utilisation of technological advances.  It could do this by adopting technologies on staged or set replacement periods.  It would progress according to a planned investment path.
Telecommunications as an adaptive technology
The capacity to transmit large quantities of data very cheaply is changing many basic functions and relationships within society. 
Telecommunications capability is critical to the functioning of the economy.  It is becoming even more vital as technological advances ensure that a greater share of the physical function of society and commerce is “virtualised” - that is, being conducted electronically rather than physically.  This trend is going to continue and is spreading from commerce and entertainment into the realms of health and education.  

Southland Insitute of Technology’s English language course’s #1 ranking on iTunesU is an example of what is possible from the most isolated corner of the planet.  It is also a harbinger of what is coming to challenge all educational institutions.  Telecommunications will be the roads of the future and it willalso be the school house and the hospital.  The better and the earlier we build this capacity into the function of our economy and society, the more rapidly our economy and society will progress along it. This won’t happen fast enough if we have to wait for the infrastructure to be profitable.
Communications technology is also about to become the primary substitute for travel as carbon cost policies change the relative costs of physical and virtual meetings. 
Communications technology is the primary technological facilitator of the future growth of the economy.  The SIT experience with iTunesU is an illustration of the possibilities of a virtual planet.  Time and distance are removed from these interactions.  The principal constraint in the future will be lack of system capacity, delay in the itnroduction of new technology and impediments to innovative use of the network.

Regulatory risk
Private ownership of infrastructure is also vulnerable to regulatory risk.  The current political debate over the broadband initiative is a striking example of this.  This is the risk that regulation will be imposed to set service levels or to reduce monopolistic behaviour or to othrwise amend marekt conditions for politcal consdierations with a consequent loss of earning capacity that flows on to a reduction in share value.  This effect is clearly evident in the value of both Telecom and Telstra in Australia.  In both cases billions of dollars of investor value was destroyed by regulated change to the market place.  The offsetting argument is that the share value was created in substantial part by the value of the monopoly rather than the value generated by the business assets and commercial operation.   That however is little compensation to the investors who in good faith bought shares in these privatised puclic services.
The regulatory framework also becomes a forum for anticompetitive behaviour where suppliers debate issues to protect monopolistic advantage or to delay innovation by a competitor.
The status quo
The main reason for retaining the existing service structure seems to be that Telecom is a major element of the capital value of the NZ share market.  This is an unsound concept that is costing the rest of the economy and society dearly.  It is in effect is using what is essentially a public utility to subsidise another facet of the economy.  This subsidy is not justifiable and is sustained at the expense of the wider dynamic of investment in productive enterprise.
It would seem that the current market structure is one based on a belief system rather than logic.
Many of the apparent or claimed operational efficiencies arising from the privatising of formerly public infrastructures have actually been a transfer of costs from the network operator to the network user. It hasn’t resulted in a net benefit to the economy, and generally could be claimed to have had the opposite aggregate effect.
The key transfer of costs has been from the present user to the future user through under expenditure on maintenance and development.  These transfers range from running down the skill base required to maintain the network through to running core infrastructure into the ground.  There are also the costs of lack of peak capacity and system failures that cost the owner a relatively small penalty but impose a huge cost on the whole economy.  The owner does not carry anything like the full cost of system failure.  Nor does the private owner consider system resilience in a civil emergency, or place any value on the essential function of their infrastructure in times of civil emergency.
A core problem with the unregulated competitive provision of network-based services is the tendency for investors to “cherry-pick” by only providing services - or at least full capability services - in the areas with high consumer density.  The “whole of network” capability will only be provided by regulatory intervention or it will exist, as it does in many countries - New Zealand included - as a residue from the time when the network was publicly owned.

Investment risk from technological change
The current status of the market and the subject of the attached article is the risk of investing in new technologies when these are rapidly evolving.  This creates a “first mover” disadvantage.  This is where one market entity introduces a new technology at great expense only to be overtaken by those who delay their investment so that they can take advantage of yet further improvements in technology. 
The second risk is that even where technologies are introduced across the market the life of the technology can be so short that there is insufficient time for an economic return to be generated by the investor. 
There is also the reverse situation that is currently evident in the move from CDMA to 3G, in that the incremental benefit of change is, in the short term, minimal slight or even negative for the majority of users and that rtechnologcal advances can only be induced through the subsidised replacement of the consumer’s personal equipment.
As well, there are technologies that threaten the entire existing investment.  This is where the “stranded asset” element of infrastructure investment really bites.  It is possible now to introduce a new infrastructure that completely or largely eliminates any residual use and hence value in the existing physical network.  This is one of the opportunities for communities to invest.  The regions could just leapfrog the entire existing network infrastructure.  Local government could provide telephones as a rate-funded service in the same way that it provides sewers, water and roads.  It is perfectly affordable for the community to do this.  It does not need outside investment as the consumer community already pays for the services it consumes.  If the cash flow from existing telecommunications services provided to the region were to be diverted by the community to fund a new network, the locals would not see any difference except a significant improvement in service, and perhaps a reduction in cost.
Telecommunication should be much cheaper than it is and it should have much better capability.  The current market structure is both delaying access to new technologies and increasing the cost through anticompetitive behaviour and inherent cost inefficiencies, particularly duplication of investment.
If there is a regional difference in affordability through lower density of demand there may need to be some national level of funding support.  Again, road funding is a good model for achieving this.  However, the expected cost of a new network is in the order of $2000 per connection in capital costs which should translate to an annualised capital cost on a five year lifecycle of $600.  The current cost of connection in Southland will be producing annual charges of approximately $1000.  This is also paying for a service that is still largely based on technologies that have long since passed their use-by date.
The average cost per household probably exceeds $2000 when cell and work phone connections are taken into account.  This amounts to an annual cash flow across Southland of $100 million annually.  As a service purchaser, we should we looking to the future best interest of the community and have no sympathy for the investors’ current asset value.  It is the service we purchase that is the key issue.  If an existing investment is destroyed because we can buy a service that better provides for our interests, then as a consumer we have that right . 
Out of the Silos
A key issue that appears not to have been considered concerns the inter-linkages within society and the economy that the narrow interest private infrastructure provider cannot and does not have an interest in addressing.  These are the unanswered questions, such as: how could health services benefit from modern communications technology? How will education change with the introduction of new “placeless” education processes? Again clear evidence of how this will work is apparent from SIT’s success on iTunesU. 
The investment and development decisions for health and education infrastructure are affected by strategic decisions for investment in communications technology.  Investment decisions in one drive or are driven by investment decisions for the other.  As an example the recent amalgamation of the Otago and Southland Health Boards was not only unnecessary but was a 1980s response to current issues that is ignoring the likely future development of health services.  Local government is not immune to this effect either (which is why the changes in Auckland’s local government structure are a waste of time and money). They are an unimaginative response to last century’s issues not to the opportunities and challenges of the future.  Technology should be driving us to operate more collectively across many public fucntions than we do service but amalgamations aren’t the answer; changes in processes and relationships that are facilitated by development in communication and information technologies are. 
Regional networks
The regional community’s wealth is based on rural businesses.  If the foundation of the economy is not fully linked into the support sectors then the network is failing to fulfil its most basic function.
Rural regions particularly need the opportunity to control the level of service for communications technology.  That this is quite achievable at a greater level of autonomy than proposed is evidenced by the community telecom cooperatives that are widespread in rural USA. 
What needs to be owned communally?
While outright ownership by the community is the most obvious alternative to the status quo, there are alternatives that provide the best of private enterprise with the advantages of public ownership.  The core issue is that the right to determine the level of network service needs to return to community control.  There is a collective interest in having a monopoly service that meets the needs of the collective interest.  This does not mean that either the network or the services provided over it has to be publicly owned as the provision of network hardware and the operating system, can be done by private interests, by contract to the consumer community. The provision of services over the network would be by private companies and even where these have a public good component, they can be provided by contractors. 
Infrastructure and the services provided through it are different business in the same way that roads and freight companies are different.  The more services that can be provided by private enterprise over the public network, the better.  Freeing the network from the commercial interests of the dominant service providers should lead to a surge in commercial innovation.
Under this model the current market structure would in most respects appear to remain unchanged.  The existing regulatory framework would be removed, or not applied where communal control is in place as it may be that the model discussed here is applied in rural regions and not in cities where sufficient demand supports competitive service delivery.  This would reflect the American Cooperative Telecoms model.  Some parts of the market in the US are serviced by private investment and some by communally owned regional networks.  In New Zealand, however, it would seem logical to have a single network using a common technology.
NZ’s Carbon footprint
The expected increase in the cost of carbon-based fuels is not only likely to drive demand for greater capability in communications technology; the technology will enable society to cope with reduced mobility.
Funding and affordability.
In rural regions the community is currently likely to be paying more for its connectedness than would be required to fund the replacement of the entire network with the most up-to-date wireless technology. 
Regions are paying for three networks with fragmented main trunk capacity.   They are getting neither the best service available nor the best value for money.
It would be quite possible for regional councils to establish a community cooperative in effect by rating for the provision of phone and network hardware and even data services and providing both the network and the handset.  This is something that should be able to be done under the existing local government legislation if it had community support.  It would certainly be a good place to start the discussion as a consumer cooperative can hardly be seen as being anti-competitive. Indeed it would restore the balance of market power between supplier and consumer that is so badly lacking from the present market place.   It would also enable the community to plan strategically for its future telecommunications and telecommunications-supported needs.


  1. All that just spilled out of your head?
    I need time to digest.
    (That's a whale of a post - lesser beings than yourself might struggle with the amount :-)

  2. Carrier Pigeon20 June 2011 at 20:24

    You're getting out there!

  3. Darkhorse, these posts are fantastic. Would you be OK with us reposting for a larger audience?

    Really really good stuff. We're needing more of this economic analysis.

    drop us a line thestandardnz (at) gmail (dot) com

  4. One mistake that you're making here is to assume that a private enterprise will provide a service better than a government department. Recent studies have started to show that this is incorrect - government departments are usually better and far more efficient especially in regards to natural monopolies such as telecommunications.

    Network services also tend to be uneconomic at the margins, yet that is where they are most important because it tends to be at the margins - in rural New Zealand - where our export income is earned. And the margins sustain the core. The whole network loses functional value if the uneconomic services are not provided.
    The services that you describe are not uneconomic but are unprofitable. There is a significant difference.

    Councils and the Crown “own” the roads but in most cases those roads are established and maintained by private enterprise through contractual arrangements with the owner.
    But there's no proof that the private enterprise is any better or cheaper (more efficient) than the government at providing those services. In fact, due to the profit motive, they must be less efficient.

    Also, go read this

  5. Thanks for sharing such impressive perspective with us. Your information is delicate in which there is description about Telecommunications Network.

    Business Grade VoIP | IT Consultant