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

Economy & Markets||
NBN upgrade backflip
Image by Alex Anstey

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.

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?





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