A Faster, Better NBN Could Be Coming - After The Election

Image: SMH / Adam Turner

The future shape of the telecommunications sector is probably going to be determined by the progress Telstra makes this year on its "T22" strategy and the big decisions confronting Labor if - as appears probable - it wins government at the federal election. Here's how Labor and Telstra's NBN ambitions might merge.

The two issues overlap. A key element of the T22 plan is to separate all Telstra infrastructure other than its wireless network – including all of its national broadband network revenues and relationships – within a new Telstra InfraCo.

Telstra has made no secret of its ambitions for that entity. It is positioning it so that it can offer the government a solution to the problem of the ugly economics of the NBN.

As its chairman, John Mullen has said, NBN Co pays Telstra about $1 billion a year for access to its ducts, pits, exchanges, fibre loops and copper and will continue doing so until at least 2046.

If InfraCo were completely separated and distanced from the continuing Telstra, presumably through some form of demerger, and merged into NBN Co there would be very substantial value created, value that isn’t available from any other source.

Including the NBN payments, InfraCo has earnings before interest, tax, depreciation and amortisation of about $3 billion a year from Telstra’s fixed networks, international sub-sea cables, exchanges and wholesale operations.

Given that it was, from the outset, Labor’s plan to eventually sell the NBN to private investors, a value-adding transaction that created a wholesale-only infrastructure-based company would be a sensible way to maximise taxpayers’ interests.

It would also help minimise taxpayer losses.

While the NBN rollout is progressing steadily, albeit with the delays and cost increases associated with problems with its planned HFC deployment, the economics of its offer aren’t working.

NBN has an estimated peak funding requirement of $51 billion. While it has lowered its internal rate of return target to 3.2 per cent (the original Rudd/Conroy version assumed a fanciful 7 per cent IRR) the need to produce a positive IRR to keep that $51 billion off-budget is compromising the usefulness of the network and the take-up of the higher speeds it promises.

NBN’s wholesale prices mean higher speeds are expensive for consumers but produce no margin for retailers.

Within a model that requires steadily increasing average revenues per user to achieve cashflow break-even – which implies the take-up of higher-speed packages – the only way NBN Co has been able to convince more consumers to take up its 50 Mbps offer is to discount the price to what it was charging for its 25 Mbps option.

Given that they can’t make any money from re-selling NBN capacity, it isn’t surprising that the big telcos – Telstra, Optus, Vodafone and TPG – are busily upgrading their wireless networks, with Telstra racing to roll out its 5G network.

Wireless might not be a perfect substitute for fixed line broadband but it could result in a significant number of consumers by-passing the NBN, further damaging its economics.

Should Labor win, the economics of the NBN would become even more challenging, given Labor’s commitment to introducing more fibre to the current mix of technologies.

While there is no dispute that fibre represents the superior and more future-proofed technology, nor that it would lower future operating and maintenance costs, it would add considerably to the capital cost of the network, which would flow through to the retailers and ultimately consumers.

If NBN Co were directed to add a lot more fibre instead of the current multi-technology model that factors the cost and speed of the network build into the decision-making, its appeal to consumers and its ability to generate a positive IRR would be severely challenged.

There would be little point in adding more fibre to the network and if few were prepared to pay to access the higher speeds it could deliver.

The obvious solution, and one that Labor hasn’t ruled out, is to have a substantial write-down of the taxpayers’ $29.5 billion of equity in NBN Co. That would enable NBN Co to significantly lower its wholesale prices, enabling retailers to generate positive margins and consumers to access higher speeds at prices they would be prepared to pay.

It would be a big write-down. The rough guesstimate in the industry is that it would need to be at least $20 billion but potentially as much as twice that level to get the economics of the network in tune with the original vision of affordable high-speed broadband for all. Adding more fibre would obviously increase the scale of the write-down required.

A new government could accept the need for the write-down, blaming its predecessors for the necessity, while planning to recover some of that value with a strategy that dovetails with Telstra’s ambitions.

Telstra’s T22 strategy (which involves a lot more than the separation of its fixed line infrastructure) is designed to be complete in 2022. Coincidentally, or otherwise, NBN Co is targeting a modest initial cashflow surplus in that same year.

If InfraCo and NBN Co were to be merged, that year would become a key reference point.

There are a number of mechanisms for achieving the bi-partisan objective of eventually selling NBN Co while ensuring, of course, that it remains a wholesale-only business completely distanced from Telstra.

The most value-adding and loss-minimising, however, would probably be to use InfraCo as the vehicle for a merger and subsequent stock exchange listing or sale in order to capture the synergies and value that only InfraCo can deliver.


This article originally appeared in Digital Life, The Sydney Morning Herald's home for everything technology. Follow Digital Life on Facebook and Twitter.


Comments

    Do it! Merge NBN and InfraCo and put the NBN out of its misery. Save $1 billion a year. This should have been done in 2010 on day one of the NBN. Even Telstra wants to do it! Do you know how rare that is? We need a wholesaler like New Zealand's Chorus.

    Last edited 04/01/19 9:31 pm

    I live 20 minutes from the Melbourne CBD and I'm still waiting for the first one.

    I don't see that NBN (or internet in general) needs to be a profit for the Govt. I view it as essential infrastructure like roads. A road by itself doesn't produce a ROI (barring toll roads of course) and the NBN should be the same. The returns come from the products and services that make use of the infrastructure.

    I'm concerned that the less control (ie: more privatisation) that happens with the NBN the higher the prices will be.

      I agree. While its nice to work towards a profit, essential infrastructure should be about providing the essential service first, and cost second. When you worry about the cost, you see Governments sell off those assets for short term gain, and denying the long term pain down the track.

      Just look at selling off the electricity sector for example, which was claimed to be about creating competition and reducing the cost to the consumer, only for it to be the opposite.

      With something like the NBN, if done right it should have been a monopoly anyway, at which point it generates enough wholesale income to create a positive cashflow. And be profitable, or at the least revenue neutral. We didn't get that. Instead, we got something the private sector can overbuild and overcharge for, continuing the trend of looking after shareholders first, and customers second.

      Government owned infrastructure is the reverse of that, and its something we should be doing as a country more as we move forward, not less. History has proven that private ownership of essential services just doesn't work out well for the end user.

    I'll vote for whichever mob promises to sort it out.

Join the discussion!

Trending Stories Right Now