Backflips and somersaults – the NBN black comedy takes a new twist

by | Sep 25, 2020 | Economy & Markets

There are those who do back-flips, and triple backward somersaults with a twist. Then there is Communications Minister Paul Fletcher. The saga of the National Broadband Network continues as the Government this week announced a large-scale upgrade to fibre, heralding it as “an idea whose time has finally come”.

It’s cost $14.5 billion more than budget, is under-performing and now the Government wants to spend another $3.5 billion to upgrade it, while competition looms.

Australia is ranked 50 in internet speed worldwide. We’re well below almost every country in Europe and North America and many including ‘developing’ countries in South-East Asia. And we are failing badly when compared with our cousins across the ditch. Kiwis enjoy twice the average download speed of what Australians enjoy.

Australia could have had a world-class telecommunication infrastructure utility. Instead, it has ended up with a substandard national broadband network that may be obsolete within a decade without further significant investment in fibre.

Gary McLaren

Image Michael O’Sullivan

As Gary McLaren, former NBNCo chief technology officer says, 5G, the next generation of mobile networks being rolled out by Telstra, Optus and TPG/Vodafone over the next few years, promises speeds and reliability on par with, or better than, what NBNCo is offering the majority of Australians, at competitive prices.

When Communications Minister Paul Fletcher announced last Thursday a further investment of $3.5 billion in the NBN, he said the upgrade was “in response to increased demand for faster speeds”. Except that such demand was predicted more than a decade ago. The original plan would have met that demand now, and much higher demands into the future as consumers want high definition video, live sports, games and quality video conferencing and to connect more and more devices to the network.

Paul Fletcher backflip

Image AAP

And unlike his predecessors in the Communications Minister portfolio, Fletcher cannot claim ignorance of the complexities of telecommunication technology. As a former Optus executive, he had a front row seat to the shambles that has been Australia’s telecommunications policy for decades.

Click for an explainer

For those unfamiliar with Telco jargon, fibre is a technology that not only offers consistently fast speed but has an almost unlimited capacity for being upgraded to meet future demand. The multi-technology mix of the revised NBN consists of fibre, copper (the old phone network), coaxial cable (the Pay TV networks originally rolled out by Telstra/Foxtel and Optus) and wireless (both cellular and satellite).

The final cost of the build and operating losses to date is $51 billion according to the updated NBNCo’s Corporate Plan just released. The roll-out was more or less (99%) complete in July this year.

When the national broadband network (NBN) was first announced by Labor before the 2007 election, Kevin Rudd touted it as a $15 billion “investment in Australia’s future”. When it became a real plan a few years later, the figure was $43 billion, later revised to $45 billion once NBNCo was formed and detailed budgets were done. It was going to connect 93% of households using fibre optic cable by 2021.

That vision has disappeared in the rear view mirror of brutal party politics. The network provides those speeds to only 18% of households and of the rest, most get speeds of between 25 and 50 Mbps.

When the Abbott government came to power in 2013, the NBN project was behind plan and over budget, and then communications minister Malcolm Turnbull was told to “fix it”. A new board and executive team were put in place and decided to downgrade the network speed and quality to contain costs and speed up the time taken to build the network.

Turnbull’s revised plan, using a mixture of technologies instead of all fibre, was expected to cost $29.5 billion and be completed by 2019.

Abbott & Turnbull right on the NBN … for all the wrong reasons

The final cost of the build and operating losses now is $51 billion according to the updated NBNCo’s Corporate Plan just released. The roll-out was more or less (99%) complete in July this year.

This week’s announcement allows NBNCo to incur more debt and raise total funding to $57 billion. Some $3.5 billion will be required to fund an upgrade of a mix of technologies to allow 70% of households to access speeds above 500 Mbps. Some 2.2 million households are already directly connected to fibre, and the upgrade will allow an additional 2 million households to connect. When the upgrade is completed in 2023, about 40% of households should have access to the fastest speeds using fibre. Still a far cry from the 93% of the original plan.

As noted, 5G technologies and more nimble private companies building both competitive cable networks and wireless alternatives offering faster speeds pose a huge challenge to the NBN.

Importantly for the mobile carriers who will own the 5G networks, operating margins will be much better than reselling NBNCo cable.

NBNCo can’t sell direct to consumers. It has more than 200 resellers all competing to sell the same service at low profit margins. The three main carriers (Telstra, Optus and TPF/Vopdafone) are the largest resellers, representing 90% of NBNCo’s revenue. The only incentive for them to be involved currently is the lack of alternatives to meet broadband demand. Once that changes, NBNCo no longer has a captive market.

The Coalition Government has already flagged that it wants to privatise it, and Telstra, the only realistic industry buyer in the foreseeable future, is salivating at the prospect of buying back an asset at a discount after it has already sold it once (as part of the original NBNCo setup).
Other potential buyers are private equity players and big overseas pension funds who like to acquire infrastructure assets with secured revenue streams.

Then there is the option of floating NBNCo on the stock market. Tony Boyd of the AFR reckons it could be worth $100 billion (including debt) by 2025, comparing it to other infrastructure assets such as Transurban at 22 times EBITDA. This ignores the fact that unlike toll road users, telco customers will be able to bypass the NBN “highway”. Moreover, NBNCo has a very different cost structure and is exposed to market and technology related risks that a toll road operator is blessed without.

A more accurate valuation would be to compare NBNCo to New Zealand’s Chorus, a broadband infrastructure provider in a less regulated and more competitive market. Chorus is currently valued at 5.4 times last year’s EBITDA. That would value NBNCo at a more realistic $25 billion, $2.5 billion less than its anticipated remaining debt in 2025.

Boyd, Fletcher and the majority of those responsible for telco industry policy remain of the view that telecommunications infrastructure is a “natural monopoly”. It is a view shared with almost nobody within the industry and such a monopoly does not exist in any other comparable country.
Gary McLaren is adamant that the only way out of this malaise is to reintroduce competition at all levels of the industry. He is suggesting that the first stage is to break up NBNCo into technology and functionally based operating units and privatise those, as suggested by the Vertigan inquiry in 2014. Any further government funding should be for subsidising and upgrading services in rural and remote Australia.

NBNCo is already facing competition on all fronts, and not just by 5G. Australia’s third largest Telco, TPG (merged with Vodafone), is offering fibre to the building in the major cities. No.4 telco Vocus has its own international cable connectivity and major inter-city transmission capacity that can compete with the NBN for so called backhaul (the trunk lines of data transfer between hubs).

It will take many years and a lot more policy somersaults to catch up as the taxpayers continue to foot the bill for one of the most egregious public policy failures of our time.

How did the ‘clever country’ end up with a $90 billion botched NBN?

ABOUT THE AUTHOR

Kim Wingerei

Kim Wingerei

Kim Wingerei is a businessman turned writer and commentator. He is passionate about free speech, human rights, democracy and the politics of change. Originally from Norway, Kim has lived in Australia for 30 years. Author of ‘Why Democracy is Broken – A Blueprint for Change’. 

8 Comments

  1. Avatar

    25 G download would be good, I hope they look at an upgrade of FTTN customers as well.

  2. Avatar

    I’m confident Fletcher can rig NBN 3.0 so that the rich, like Malcolm and Lucy in Point Piper, will continue to buy much better internet access and speeds than the plebs. Just like our two-tier schooling system.

    For Trump, Johnson, and Morrison, the most appalling thing about COVID is that it momentarily interferes with the core business of government, enriching the rich.

  3. Avatar

    Abbott didn’t instruct Turnbull to fix the NBN, he directed him to demolish it.

    Also why is the last mile not a natural monopoly? We witnessed in the 90s what happens when competing roll outs occur.

    • Avatar

      Exactly. First time I’ve seen it claimed that Abbott instructed “fix” the network, it was “F… the network. There have been many stories over the past decade he was told to destroy it, mission accomplished.

      .. and we’ve seen what happened to the competing Optus HFC network, bought by nbn and THEN scrapped as unusable. What happened to due diligence?

      Talking to an Optus tech as the cable was rolled out in mid 90’s I was told it only had a lifespan of about ten years due to degradation and sensitivity to any break in shielding.

      The only reason the current mess came any where near meeting demand was the temporary upgrade by NBN, and the large number of underserved premises that have already found alternatives. {I went from bad adsl {3-5Mbps} relayed from functional copper on a nearby property… to 4G {70-100Mbps}. }
      This was a few years before the pathetic NBN wireless offered the same adsl performance below the crest of a nearby hill. Still no usable copper out front either… Must be my fault for living in outer melbourne suburbs.

      Fletcher’s speech was an amazing recap of all the nbn failures to date, you just need to invert the majority of his statements to reality.

  4. Avatar

    I’m so disappointed in this whole mess

    We should have built a good network, and allowed users to pay it down. Build it once, then milk it. Once the assets are paid down, look for efficiencies in operational costs and run it to make 5-6%, for the benefit of all of us.

    ISP’s are moaning about the high price of wholesale, and rightly so. It was inevitable that the costs would need to be recouped.

    What is not necessary, is a bunch of Neo-con free market zealots selling off our kitchen sink to someone who will exploit it for a 25% margin, or even worse, sweating our national asset to the maximum price the market can sustain.

    It’s time for the media to get behind the NBN, we all own it. We want the best for it, not to line someone’s (telstra’s) pockets.

  5. Avatar

    This whole problem is down to the Australian people for voting in this government in the first place, you got what you deserved. Look at the mess in the UK 7000 Covid 19 cases in one day, conservative government, USA over 200k dead and still rising another conservative government. WAKE UP AUSTRALIA

  6. Avatar

    Kim, the passage of time exemplifies what a disaster this government has deliberately made of broadband. The 2007 election promise was to introduce a $4.7 billion Fibre to the Node project, but none of the proposals were deemed capable of providing the rollout (Telstra famously failed to meet the bid requirements). In 2008 Conroy/Rudd went for the visionary Fibre To The Premises instead at $43-45 billion. Unfortunately the 2013 election led to the promised destruction of the NBN by Turnbull/Fletcher. So now we have a $51 billion Fibre to the Node project which as you set out, is a lemon with a limited lifetime.

  7. Avatar

    “He is suggesting that the first stage is to break up NBNCo into technology and functionally based operating units and privatise those, as suggested by the Vertigan inquiry in 2014”

    And what bullshit that report was. It recommends we only need 14Mbps by 2023.

    “In 2023, the median household (the 50 per cent proportion of households, as indicated by the
    line from the vertical axis across to the 2023 profile) requires bandwidth of 15 Mbps. The top
    5 per cent of households have demand of 43 Mbps or more. The top 1 per cent of households
    have demand of 45 Mbps or more. The top 0.01 per cent of households have demand of
    48 Mbps.”

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