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Term Paper

A Study of Growth of Telecommunication Sector In Australia

Submitted by: Debabrata Samal 2011SMF6771 MBA, II Sem

INDEX:
Introduction.................................................................................................page 3 Historical Overview......................................................................................page 4 The universal service context.......................................................................page 4 Universal access in telecommunications......................................................page 5 Form of the USO ...................................................................................page10 Legislative framework for the USO...............................................................page11 Politics and USO...........................................................................................page 11 Economic cost and USO.............................................................................. page 12 Conclusion....................................................................................................page 13

Introduction:
For at least 20 years privatization and liberalization have been championed as forces to lower prices and improve the telecommunication services available to consumers. Yet three years after Australia completed the radical transformation of its telecommunications market and began the privatization of the former national monopoly carrier, the long cherished egalitarian goal of universal service has become a high-stakes policy contest as industry complains about cost-burdens and people in regional and remote Australia demand improved

telecommunications infrastructures. In this environment the policy makers must carefully consider the risks associated with addressing the competing demands of telecommunications companies, new shareholders and key electoral constituencies. This paper uses the Australian universal service obligation in telecommunications to illustrate the unforeseen pitfalls that emerge when the effects of liberalization threaten to undercut the delivery of a long cherished social objective. The prime objective of the paper is to draw the analogy with that of the liberalization in India so as to get an assessment of the situation in India and the way forward thus realize the goal of obtaining an universal network access for all without falling prey to the pitfalls of the liberalization.

History:
Consideration of tenders to undertake a trial for delivery of the universal service obligation in telecommunications in two areas of regional Australia signaled an attempt to address a wide range of economic, political and social forces. The transformation of telecommunications over the last decade has encouraged a struggle between investors seeking to maximize profits from an expanding market and the shift to the information economy and key political constituencies in regional and rural areas concerned about access to advanced telecommunications and other infrastructures that are readily available in the cities. In essence this struggle to accommodate competing corporate, social and political interests in the form and operation of the universal service obligation (USO) is emblematic of a wider debate being waged over access to the benefits of liberalization and privatization programs. Tracing the development of universal

service in Australia provides a unique insight into the social, economic and political pressures associated with encouraging access in the transition to the information age and economy faced by all policy makers during market liberalization programs. It also illustrates the risks associated with failing to balance economic objectives in telecommunications with the aspirations of key political constituencies.

The universal service context:


Claire N. Milne's five-stage typology (Milne, 1998, pp. 775-780) for conceptualizing the development stages associated with universal service policies provides the ideal platform for assessing the Australian situation. Australia, with its largely digital networks combined with household connection rates above 90 per cent, falls within Milne's fifth category for universal service development. Despite a fiercely competitive industry that had brought lower prices, better technologies and choice of carriers to metropolitan areas, 3 per cent of households around the nation, particularly those in remote and rural areas, had neither fixed nor mobile services (Australian Bureau of Statistics, 1998). According to Australian Bureau of Statistics figures, in some regions connection to the fixed network actually slipped after liberalization in the sparsely populated Northern Territory, where distance, harsh terrain and climate make telecommunications a crucial service, connections to the fixed network had dropped by 2.3 per cent to total 91.4per cent of households between 1996 and 1998. Concerns that liberalization had brought no benefit to communities in regional and remote Australia and that existing infrastructures were inadequate to enable access to the emerging information economy were articulated in a major inquiry into telecommunications services. That investigation, sponsored by the state government, argued for expansion of the universal service concept (regulated under Commonwealth government jurisdiction) to include access to broadcasting and emerging new media applications via higher bandwidth telecommunications capacity. These demands for a broadening of the universal service concept beyond its present focus on telecommunications infrastructure toward high-bandwidth communications applications are consistent with Melody's argument that access to a working telephone was no longer sufficient to enable

disadvantaged people to participate in an information age characterized by computer terminals providing access to both public and private sectors (Melody, 1996). While from a users perspective Australia's universal service policy remains largely focused on access to telecommunications infrastructure, albeit with the possibility of obtaining high-bandwidth services tied to a limit subsidy for terminal equipment, its regulatory framework remains largely tied to ideals of fixed telephony and low-bandwidth access to the Internet. On the other hand, the telecommunications industry and corporate consumers facing higher tariffs to crosssubsidize the loss-making services, continue to chafe on the cost of supporting the USO. Yet apart from the limited interest expressed in the pilot tenders there appears to be reluctance from the new carriers to tackle the problems associated with providing reliable services to people in regional and remote Australia. Sorting out these difficulties presents many high-risk decisions for policy makers and raises the question of why universal service policy was not addressed when the initial steps were taken to begin the liberalization and privatization program during the early 1990s.

Universal access in telecommunications: egalitarian motivations


Universal service in telecommunications has been the subject of considerable research, debate and policy development over the last century. Although it was not explicitly mentioned in any of the legislation governing early telecommunications services, Moyal noted that the concept was initially raised in debate on the merits of expanding the telegraph network and subsidizing uneconomic services to promote national development soon after the Federation of Australia in 1901 (Moyal, 1984). Wilson and Goggin suggested that provision of universal access was implicit in the efforts of the Postmaster Generals Department to build a national telegraph and telephone network that progressively reached new towns and settlements (Wilson & Goggin, 1993). As an arm of the Commonwealth Government, the Postmaster Generals Department was expected to provide public services to all communities. By 1975 it had succeeded in building a telecommunications network that connected 62 per cent of households in Australia. Crucially, the national monopoly Telecom was given the power to pursue this development goal

by offsetting costs of expanding the network and supporting uneconomic services through cross subsidy from profitable services including long-distance and international calls. The legislative reforms to communications spurred a raft of developments in the policy and planning of telecommunications including attempts to quantify and qualify the economic and social costs and benefits of access and services. Significantly, release of the report Telecom 2000 in 1975 provided a major strategic assessment of how Australia might develop its telecommunications system and achieve universal access to telephone service (Telecom Australia, 1975). This early review also unearthed some of the issues related to cost recovery for uneconomic services, subsidy, equipment and standards that would come to plague USO policy two decades later. Submissions to Telecom 2000 largely fell into two categories: those emphasizing social welfare goals including universal access and affordability; and those arguing about the costs to business and taxpayers of cross-subsidy.

While this policy debate raged around it Telecom carried on building its network throughout the country and connected new customers in regional and rural areas. By 1981, when the conservative Government initiated a Committee of Inquiry into Telecommunications Services in Australia (the Davidson Inquiry), about 80 per cent of households had a telephone. The inquiry provided a catalyst for complaints against Telecom over prices and connection and services. According to Reinecke and Schultz some of Australia's largest companies launched vociferous attacks on Telecom over the costs forced on them from higher tariffs to support cross-subsidization inherent in the funding of uneconomic services. In essence the Davidson inquiry argued for privatization of profitable telecommunications activities and identification of the subsidy provided to social welfare activities. With such a radical agenda for the time, the Davidson inquiry attracted considerable criticism for its onslaught against the egalitarian principles that had traditionally motivated provision of telecommunications in Australia. Fearing a backlash from its rural constituents, the Coalition Government ignored the recommendations. The mood for reform of telecommunications cooled further with election of a Labor Government backed by a coalition of union and social forces in 1983. In the meantime, Telecom continued to expand its network and claimed to have reached about 95 per cent of households

by 1990. This achieved the goal set out in Telecom 2000 of connecting 9 out of 10 homes by 1987 (Telecom Australia, 1975). By its second term, the Government began to investigate possibilities for reform in telecommunications including introduction of competition across a range of services. The issue of universal service was placed on the reform agenda following a major statement by the then Minister for Transport and Communications in 1988 who noted that costs of delivery had been supported by the revenue streams generated from longdistance tariffs (Evans, 1988). This statement was a precursor to the initial round of liberalization including passage of the Telecommunications Act (1989) and the Australian Telecommunications Corporation Act (1989). The latter legislation began the transformation of the Australian Telecommunications Commission &Telecom' into the corporate entity that came to trade as Telstra in 1991. Although these reforms were primarily aimed at initiating competition in the telecommunications sector, there was also renewed emphasis on maintaining social goals including untimed local calls and universal service arrangements. The importance of the reforms prompted a flurry of output from consumer groups and government agencies that attempted to scope the social and economic importance of the USO in Australia. The potential political ramifications of changes to the telecommunications regime supporting access in rural and remote areas were not lost on the new regulator Austel. Austel prepared a report that identified discrepancy between the levels of connection in metropolitan areas and those in rural and remote locations. Other findings were that affordability was a problem for some consumers, indigenous communities were poorly served, connection and repair times were inadequate and new technologies should be used to improve services. With political pressure mounting in the telecommunications sector from business, unions, community groups and various coalitions of users, the Australian Parliament's Senate Economics References Committee initiated a review of the reforms and policies. The review canvassed the public policy underpinning the USO and made 21 recommendations on ways to more usefully meet the needs of disadvantaged Australians in both rural and metropolitan Australia. While these reports canvassed the social, economic and political dimensions of the changing telecommunications environment, the introduction of competition and the technological transformation being generated by roll-out of broadband created new terrains for policy and

research on the USO. It was argued that it was necessary to revisit the rationale for the USO and consider the likely impact of broadband on the way communications services were delivered. In September 1994, the Department of Communications and the Arts released a policy paper that addressed the preparations for the liberalization program scheduled for 1997. It also placed the concept of universal service, particularly access in rural and remote areas, untimed local calls and price cap arrangements within the debate on the competition agenda in telecommunications. With the election of the Coalition Government in 1996, the pathway to wider reform and liberalization in telecommunications was generally agreed by all political parties, although the privatization of Telstra was a significant point of policy disagreement between the various parties. The cost of the USO also remained a contentious issue in the telecommunications industry with the political and regulatory debates echoing arguments presented in the Davidson report 15 years earlier. These were issues that continued to invoke vocal sections of the Government's constituency, particularly business, over the compensation demanded from carriers for delivery of the USO and from rural communities concerned that competition and privatization would place pressure on loss-making services. The trajectory of reforms begun in the early 1990s was maintained in the Telecommunications Act 1997 which has been identified as the third stage in the transformation of Australian telecommunications from government monopoly to competitive market featuring multiple carriers. The reforms swept away remaining impediments to allow open competition across all categories of service whilst placing the telecommunications sector under the general ambit of trade practices regulation. While the reforms were broadly designed to encourage further investment and roll out of infrastructure, they curbed the powers and immunities from local government planning regulations that had been granted under the 1997 legislation in recognition that carriers had not always been sympathetic to community concerns about cabling and location of mobile towers.

The form of the USO:


In Australia, universal service policies have generally been pursued for a variety of social goals. These include ensuring that telecommunications services are affordable, reach people in rural and remote locations and are delivered in a way that improves accessibility for individuals with a disability or those that need to use a public telephone. While there are many similarities in the motivations behind universal service in Australia and comparable countries, there are some significant differences related to geographic and demographic conditions. For instance, distance plays an important role in the nature of the USO in Australia whilst similar policies in the United Kingdom address barriers to telecommunications access associated with urban poverty. Equally, in countries like the United States and Canada where distance and isolation are also factors addressed through service obligations on carriers, state authorities largely regulate local telecommunications although there are significant differences of detail. A second fundamental difference between the Australian USO and the conceptual framework in comparable countries is that consumer affordability is treated separately. According to the Australian Government's Productivity Commission, the USO is one of the two planks in social policy related to telecommunications. In essence, the USO's role has been to ensure widespread access to basic telephony services. The second plank relates to improving the affordability of basic telecommunications services through the maintenance of retail price-controls including price caps and a requirement for untimed local calls. This scenario differs from that in the United States where the universal service regime provides libraries, educational organizations, health facilities and low-income customers services at concessional rates with the former also receiving digital data capability under the obligation.

The legislative framework for the USO:


In 1999, the government revised the legislative framework for telecommunications it had established with the reforms of 1997 and created separate regulation for consumer issues including the universal service regime. It could be argued that the presentation of the Telecommunications Act 1999 which came into effect on 1 July 1999 provided a tactical tool for the government as it strove to complete its reform agenda within telecommunications. Separate legislation allowed the Government to champion its particular efforts to deliver services and maintain standards while introducing competition and completing the privatization of Telstra. It re-enacted and expanded on the USO regime that had been presented in the reforms contained in the Telecommunications Act 1997. The Australian USO arrangements require that the following services must be reasonably available to all people in Australia on an equitable basis, wherever they reside or carry on business: 1. Standard telephone services 2. Payphones 3. Prescribed carriage services 4. Digital data services

Politics and the USO:

The political nature of the USO is readily apparent. It has been shaped by many forces and used as a Trojan horse over the years for various agendas pursued by community groups, unions, business and politicians. While it was under public service management, Reinecke and Schultz cite examples of politicians representing rural electorates pressuring bureaucrats in the Postmaster Generals Department and later Telecom to reschedule connection timetables to get a telephone service for favored constituents because it meant another vote at election time. Similarly, telecommunications unions often cited the importance of community and universal service in campaigns to thwart organizational reforms

that threatened jobs in Telecom. Community lobby groups have sought extension of the USO to cover particular access needs in telecommunications and broadcasting including those of older women and island communities, farmers, consumers and children. Telecommunications carriers have sought redress from Government over the cost of delivering the USO and highlighted a link to investment intentions. Most recently, the Government assuaged the former through upgrades of the technological standards in the USO and promised expenditure of more than $671m from the partial privatization of Telstra on communications infrastructure in rural areas and regional towns. This spending helped counteract growing political dissent over the Government's economic reform and liberalization agendas. However, raising the standard of the USO has become a political catch-cry for telecommunications users in regional and rural Australia. These concerns became more important in policy debate as electorates in regional and rural areas are also key constituencies of the junior party in the coalition that has held Government since 1996. In essence, the full privatization of Telstra and the perceived threat to universal services from liberalization has made telecommunications a particular friction point for communities that have lost key services through wider reforms in the Australian economy. The Government has sought to bolster electoral fortunes through increased spending in regional areas and promised that it will not continue with the privatization if service standards are not maintained.

Economic cost and the USO:

The cost of delivering the USO has long been a subject of debate and research. As noted, the BTCE developed a model to quantify the cost of the USO prior to the initial phase of market liberalization. But cost and methodology became particularly inflammatory issues once the market was opened to competition in 1991. Telstra's claim that delivery of the USO cost it $800m caused consternation amongst competitors and regulators. The level of contributions required from other carriers to compensate Telstra created fears that it would destabilize the fledgling market. To address this dispute, AUSTEL and the carriers (Telstra, Optus and Vodafone) commissioned Ernst and Young (US) to review the BTCE model in 1995. Ernst and Young subsequently recommended development of a new model that used methodology that gave forward-looking projections on replacing network infrastructure. While these shortcomings were addressed, the Government was forced to provide legislative remedies to the cost claims. To alleviate the oppressive effect of Telstra's claim of $1.8b for the financial year 1997}98, the Government passed legislation to cap the figure at $253.32m.

The option of tendering the USO was also canvassed by the Government in 1999 as a means to encourage carriers to develop solutions to the cost claims. Experts, government officials and representatives from carriers proposed a variety of solutions to resolve the thorny question of how the USO might be better delivered. The Department of Communications, Information Technology and the Arts released a discussion paper on tendering the USO that sought expressions of interest and comments from interested parties (DCITA, 1999b). The discussion paper attracted comments on new delivery models and future funding options from Telstra, Vodafone, Hutchison, AAPT and C&W Optus and regional broadcaster Austar as well as consumer and industry groups.

Conclusion:
Achieving universal service in telecommunications must remain an important policy objective for countries that value egalitarian social principles and seek to enter the information age. However, while market liberalization and admiration of competition have become fashionable occupations for policy makers, commitment to addressing the inequalities associated with income, geographic isolation and other barriers to participation must be addressed to make a comprehensive leap into the information age. Although remarkable steps have been made in providing universal service in Australia over the last century, the task remains incomplete and could benefit from the same level of vigor that was applied to the recent program of liberalization and privatization processes in telecommunications. While this liberalization program had clear benefits for many consumers through service choice, lower prices and improved technologies, these are not universally available as competition was largely confined to the cities. Addressing these shortcomings is a true challenge for policy makers and industry alike. While the reforms had the goal of replacing public investment in telecommunications with private enterprise, a combination of factors has delayed separation. In this environment government faces a challenge in proving that liberalization has benefits to its constituents in rural and remote areas or it will face condemnation for failing to maintain the egalitarian ethos that has long underpinned telecommunications policy in Australia.

References:
1. www.abc.net.au/news 2. Telecommunications performance report 1998-99, Australian Communications Authority 3. Customer service guarantee, Australian Communications Authority 4. Digital data service obligation. Fact Sheet, Minister for Communications, Information Technology 5. Bureau of Transport and Communications Economics 6. Australian telecommunications services: A new framework. Statement by the Minister for Transport and Communications 7. Telecommunications infrastructure facilitating sustainable development of rural and remote communities in Northern Australia by Susan Bandias, Siva Ram Vemuri

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