You go back, Jack, and do it again

Posted on Tuesday, December 04, 2018

The alternate title for this rant is “A bad idea whose time has come again”: Italy toys with the idea of a nationalized broadband carrier.

Reuters reported that “The far-right League and its coalition partner, the anti-establishment 5-Star Movement, want to create a company that combines the networks of former monopoly Telecom Italia and smaller, state-controlled Open Fiber to help Italy catch up with the broadband services of European rivals.”

There are a number of reasons (not all of them bad) for the continuing nostalgia for state-owned carriers.

  1. The electrical grid analogy. Unfortunately for the self-esteem of many telecom operators, my guess is that most customers see very little differentiation in most telecom services, especially something as generic and basic as broadband. They see value in the content but not in the mere carriage of bits. They plug their WiFi modems into an ethernet (or fiber) wall connection just like a toaster into an electrical outlet. The electrical grid is (Sometimes? Often?) nationalized so why not broadband?
  2. The essential service idea. Like the electricity flowing through your toaster, the IP flowing through your WiFi router has become an essential service. In fact, for some, maybe even more essential. Brownouts and full power failures happen, and we just break out the candles and board games. Without power, WiFi routers do not work but if we have electrical power but the Internet is out, we are very frustrated. Why is Internet reliability considered to be as important as electricity, gas or water?
  3. The filthy capitalists concern. Outside of the United States perhaps, there is a queasiness about investors making money from essential services. As my mother says when she contemplates private health care, “it does not feel right”. (For any Canadian readers, what would Tommy Douglas say?) Profit-driven companies are assumed to be mean-spirited penny pinchers with the temerity to cut off people’s access to their favorite cat videos just because they did not pay their bill.
  4. It will be cheaper. If investors do not have to be paid, it has to be cheaper right? The Economist has been complaining for several years now that one of the casualties of the last financial crisis was the public’s loss of faith in the economics and finance professions. Politics, which deals with what the public believes not with what is necessarily correct, is seen to be a far better arbiter than the market of difficult issues like prices. And politicians’ perennial desire to please will ensure that those prices are kept low.
  5. The money will be invested where it is needed. As in the previous point, the objectives of investor-owned organizations are not perceived to be the same as those of the State so at the very least, regulation will ensure they are more aligned than they might be if Adam Smith’s ‘invisible hand’ was the only guiding principle.

As far-right League lawmaker, Alessandro Morelli was quoted saying, private investors were welcome “but infrastructure of strategic importance must be in the hands of the state”. He explicitly drew the connection to state lender, CPD’s, control of gas and electrical networks. The entity already controls Open Fiber and has a 5% stake in Telecom Italia.

We tried this once and it didn’t work

The sixth and final not-so-good reason this kind of idea comes up time and again is that human beings have short memories.

Telecom networks were considered essential services at the beginning of the last century. So were electrical grids. Governments – and those that they served – did not want foreign influence over a strategic resource. Most countries apart from the US and Eastern Canada perhaps, started state-owned telecom companies. In some cases, they were not companies at all but part of the Ministry of Communications. In other cases, there had been private companies but either they wobbled and were nationalized to maintain service continuity or they were expropriated because “infrastructure of strategic importance must be in the hands of the state”.

In the US and Eastern Canada, Rate Base / Rate-of-Return regulation allowed investor-owned telecom companies to have monopolies but without the thought-to-be-inevitable price gouging. Furthermore, these companies were happy to follow government orders to build in non-economic areas because Rate Base / Rate-of-Return regulation guaranteed the investment was paid for through an implicit subsidy from low-cost areas to high-cost areas.

And so voice telecom networks were broadly deployed in many countries (at least the urban parts) just as the technocrats and / or voters wanted it to be.

Except this did not bring happiness.

  • There were no greedy capitalists collecting profits but there were equally greedy employees getting well-paid with above average benefits.
  • Generous labor laws for government workers meant there was no incentive to do things effectively or efficiently. Some ‘entrepreneurially-spirited’ employees found they could charge – under-the-table, of course – to ‘accelerate’ ineffectively or inefficiently delivered services.
  • Sometimes management knew where capital should be invested but the Finance Ministry needed the cash for something else like roads, schools or health care.
  • Sometimes the bureaucracy simply lacked the vision to know what to do. Or the reward system – such as it was – discouraged risk-taking. Or senior managers were politicians or senior bureaucrats, either bidding their time for a better post that might be in something completely different or thrown out when there was a change in government, whether they were doing the right thing or not.

By the 1980s the Anglo-Saxon countries were fed up with monopolies – whether state-owned or investor-owned – and by the 1990s the rest of the world agreed. The profit-motive and multiple players meant lower prices, newer technology and overall better service. The winners were customers.

As a result, there are few remaining monopolies although most of them are still government owned. In Latin America, Costa Rica, Cuba, Uruguay and Venezuela would stand out for still having government-owned monopolies, at least for fixed telecom services like broadband.

The biggest losers were the unions, to a lesser extent non-unionized employees and, in many countries, corrupt politicians. Unions and politicians are no doubt behind some recent attempts to return to what should be a by-now discredited business model.

But mostly, I think, the bad old days have been largely forgotten.

Voters want a more ‘forgiving’ public utility that would find it politically nearly impossible to disconnect essential services for non-payment and which dutifully follows national policy directives to invest in shiny toys.

They naively assume that the service quality they enjoy under market-disciplined operators (who consider customer service to be a competitive imperative) would continue under a bureaucratic model (which considers customer service to be a cost to be minimized).

And, maybe, most of those thinking state-owned broadband companies are a great idea are younger than, say, forty and never had to get phone service under that model or wait days / weeks / months for repairs. (When I arrived in Bogotá twenty years ago, most homes had two telephones because the unionized, municipal phone company could take up to six months to repair a line and there were only one million mobile lines in a country of 40 million people.)

You go back, Jack, and do it again.

Title Reference: Steely Dan (again!) from Do It Again, off their 1972 debut album Can’t Buy a Thrill. The song got to number 6 in the US and Canada which made it their second-highest charted single.



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