Graeme Philipson
June 20, 2017

Calls for an end to Telstra ‘subsidy’

Policy

Calls for an end to Telstra ‘subsidy’

The end is nigh: The Productivity Commission has joined a growing chorus

The Productivity Commission has released a report calling for the called for phasing out of the Telecommunications Universal Service Obligation (TUSO). The TUSO is a subsidy the government (which is to say taxpayers) gives to Telstra to compensate it for its statutory obligation to provide telephone connectivity to all Australians, at the same price.

The TUSO is a hangover from the days when Telstra was a government-owned monopoly. As Telstra was progressively privatised and the telecommunications market opened to competition, it was government policy to ensure no consumers were disadvantaged. The report summarises how the TUSO came into being:

“It was introduced in the 1990s (when the sector was being deregulated) to ensure ‘reasonable access’ to a standard telephone service and payphones for all Australians on an ‘equitable’ basis, regardless of where people reside or work. At that time, telecommunications was centred on basic telephones, and the TUSO was enacted to benefit consumers by affording them a ‘provider of last resort’ for voice telephony.”

As the largest provider and the former monopoly, Telstra was that provider of last resort, and was offered a subsidy to ensure it provided the service.

The Productivity Commission report says that modern telecommunications technology has made the TUSO ‘anachronistic and costly’. It says that the massive public investment in the NBN is providing voice-capable broadband to all premises across Australia by 2020, at a higher quality than has previously been available.

“Wholesale prices will also be capped nationally and across its different technology platforms. As such, the NBN has been designed to narrow the city-country digital gap, with cross-subsidies from commercial to non-commercial services within a funding envelope.”

In short, the Productivity Commission is saying that the NBN makes the TUSO obsolete, and that it should be phased out over the next three years.

The report also says that the actual value of the TUSO is hard to determine. It puts a price on the subsidy of $3 billion over 20 years, at Net Present Value (NPV). Elsewhere in the report it costs the TUSO at $253 million a year. But it then goes on to say that:

“… as a non-contestable obligation upon one provider and partly funded by other providers, (the TUSO) effectively stymies competition.

“In imposing this obligation, the Australian Government did not demand transparency and accountability of Telstra. The basis for its funding (a total of around $3 billion in net present value terms over the 20-year contract to 2032) is unclear and disputed.

“With the limited evidence available, the Commission estimates suggest that the TUSO could imply an annual standard telephone service subsidy ranging anywhere between $250 and $2800 per TUSO service.”

The report also outlines the cost of other government programs that help ensure telecommunications access. The largest of these is the Telephone Allowance, a payment to welfare recipients to ensure they have access to telephone and Internet. This costs $611 million a year.

Other telecommunications access programs are” the Mobile Black Spot Program ($48 million), the Payphones USO ($44 lion), various programs to support digital inclusion ($29 million), the Emergency Call Service ($22 million), the National Relay Service ($22 million), Voice only Customer Migration ($17 million), and Remote Indigenous telecommunications programs ($5 million), for a total of $1.051 billion.

The TUSO has long had its critics. Most vocal amongst them has been the Competitive Carriers Coalition (CCC), a grouping of the smaller telcos, including Vodafone but excluding Telstra and Optus. The CCC has been banging on for years about what it calls Telstra’s ‘corporate welfare’.

Unsurprisingly, the Productivity Commission’s report has been welcomed by the CCC. “The need to abolish the intolerably opaque and out of date TUSO can no longer be ignored after today’s damning Productivity Commission report,” said the CCC see in a statement.

“The Government now should accept that the Regional Broadband Scheme – a new levy designed to subsidise rural NBN services – could not operate at the same time as the TUSO,” the CCC said.

“The two schemes are both a form of tax on competitive communications services. It is abundantly clear that the hundreds of millions of dollars in direct subsidy being paid by consumers every year to Telstra under the TUSO cannot be justified.

“The Productivity Commission has spent months examining the TUSO, and yet it cannot do better than estimate the subsidy per service is between $250 and $2800 annually. Such imprecision would simply not be tolerated in any other welfare program.

“But beyond being imprecise, the TUSO is also unnecessary and destructive of competition – it simply does more harm than good.

“Taxpayers expect some value for money. The Government should immediately act to end a scheme that stands exposed as little more than corporate welfare for Telstra.”

Telstra has not responded to the Productivity Commission report. It is no doubt preparing its response. Get ready for the usual self-serving arguments.

In an interview with the Australian Financial Review, Telstra executive director of regulatory affairs Jane van Beelen said that the TUSO is still needed.

“It would be better to review the purpose and scope of the TUSO in around four years' time, when the NBN rollout is close to complete. It may be appropriate when they have completed their network, if they are in a position to provide voice infrastructure to an acceptable standard.

"In the current political environment in Australia, I don't see any great will to get rid of the TUSO that guarantees all Australians a fixed line service."

The Government has a long record of caving into Telstra, as the ACCC’s recent decision on mobile roaming showed. We will hear a lot more about the TUSO.

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