Inventing market failure

Governments need problems.  Without them, there would be nothing to solve.  Australia's broadband situation has presented governments across the country with ample opportunity to intervene.  But is Australian broadband caught in a trap of underinvestment and market failure?

The importance of high-speed internet access to a nation's economy is encouraging a great deal of policy experimentation around the world, and Australia's state governments are enthusiastically embracing them.  The Western Australian government pledged $1 billion to invest in a state-wide broadband network, modelled on a similar network in Alberta, Canada.

The New South Wales Government is tendering out a wireless broadband service, which is to echo the trend in the United States and Europe towards municipal WiFi.  Municipal wireless networks tend to haemorrhage money, get bogged down in politics, and in the end deliver far less than they promise, so Sydney consumers should be glad that there are already a number of private wireless operators able to meet their demand.

There is perceived political benefit in attempting to deliver broadband to consumers.  Queensland Premier Peter Beattie announced late last year a plan to pipe fibre directly into Brisbane homes, but private companies would have to pay for it, build it, and operate it.  Beattie's grand broadband initiative consisted of little more than a press release about how good a new network could be.

The federal government, having subsidised rural telecommunications since we first got a federal government, now feels compelled to update those subsidies to include broadband at increasing speeds.

If the prevailing political winds are to be trusted, it seems that governments have concluded that the marketplace cannot provide the level of telecommunications expected by consumers in the 21st century.  But there is little good reason for their pessimism.

In the United States, Verizon is investing US$18 billion in fibre-optic cable straight to the home.  It's an enormously risky investment, and has its fair share of critics who note how uncertain the industry's terrain will be when the rollout is completed in 2010.  But nevertheless, Verizon has laid US$18 billion worth of chips on the table, to the benefit of US consumers.

An investment the size of Verizon's would be almost impossible in Australia.  Australia's forced access policy would place any investment immediately into the hands of the ACCC, which would be likely to require it to give access to its competitors at a price of the regulator's choosing.  The disincentive to invest is obvious.

But the federal government has refused to reform the Trade Practices Act to encourage greater infrastructure investment.  Instead, we are left with a set of telecommunications regulations which are designed to induce competition into a government-owned, 20th century telecommunications monolith, rather than regulations more suited for the 21st century consumer demand and technology.

The access provisions of the Trade Practices Act are far more draconian than in other jurisdictions.  But entrepreneurial firms need to be given the freedom to invest on terms of their own choosing.

Some commentators have argued that the government should do that investment itself, but it would be better if the risk inherent in building a new network is borne by the companies that will profit from it, not Australian taxpayers.  Would the government also commit to building every telecommunications network into the future?  It is unlikely that a fibre optic network will be the last network Australian consumers demand.

Politicians are always eager to assert market failure -- it gives them opportunities to gain publicity, deliver services which might translate into votes, and forge reputations for "getting things done".

But Australian telecommunications is caught in a trap of poor public policy, not market failure.  If the government wants to encourage investment, it should at least try to fix the problem.