The NBN Investment
In finance, investment is putting money into something with the expectation of gain, usually over a longer term. This may or may not be backed by research and analysis. Most or all forms of investment involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, inter alia, to inflation risk.
If a new business wants to build a factory to produce goods, it needs capital. It would raise this capital by selling shares in the business. This will only be possible if the business can convince people that it will be able to provide a return on their investment in the long run.
The Government created the NBN Co to build the NBN. They expect it to make a 7% return on the money needed to build the network. So they provide the money ( borrowed at a rate not available to private companies, about 3 – 5%) for this as an investment.
So, the NBN investment is an investment expected to make a return. It is not an expense.
If this turns out as planned, it is almost as if we will eat our cake and have it! Too good to be true!
And there are significant risks:
- It may cost a lot more
- It may take much longer than planned
However, do we have a choice? The following would indicate not:
- No private company can do it
- The existing copper network is inadequite and is starting to fail
- Why do a cheaper, quicker solution if we will eventually need more than what that will provide. The quicker, cheaper may turn out more expensive, longer!
- The total benefits are far exceeds the cost if we look a bit further than just the return on investment.
Peek funding required in 2021 would have been $44.1 billion according to the NBN 2012 Corporate Plan.
Before the 2013 election, Mr Turnball said the Coation costed it at $90 bilion - some even mentioned $104 billion. Turnbull’s Assistant Minister has said after the election that NBN Co’s internal review of Labor’s NBN costed it at $56 billion, still high but much closer to Labor’s figure than the inflated estimate the Coalition took to the election.
When asked by iTWire about the disparity between the Coalition’s $90 billion estimate of a FTTP network and the much lower NBN Co estimate (made by the management team the Coalition had put into place) of $56 billion, the best Fletcher could say was that the Coalition estimate “may have been a little high.”
According to the Strategic Review commissioned by the Coalition in 2013, the peek funding requirement for FTTP would have been $73 billion. The Independent Assessment found that revised NBN Co projections extend the completion of the fibre network rollout by three years from June 2021 (as per the Corporate Plan) to June 2024.This does not take into account any possible future improvements in rollout methods and materials (eg skinny fibre).
In an article called "Exploding Malcolm Turnbull's Myths" , Mr Mike Quigley, NBN Co’s Previous CEO does just that. He says:
NBN Co's Corporate Plan 2016 Page 68, released in August 2015, shows a total funding requirement of up to $56 billion for the Coalition’s MTM based NBN. This is an increase of $15 billion from the $41 billion predicted in the December 2013 Strategic Review page 102i. And an increase of $26.5 billion from the $29.5 billion promised in Coalition’s Policy document page 15 of April 2013.
The $15 billion increase from the Strategic Review of December 2013 to the August 2015 Corporate Plan has nothing to do with FTTP costs and the decisions made by the previous NBN Co management. It has everything to do with the persistently over-optimistic assumptions about the true costs and timescale for deploying the newly introduced MTM technologies of HFC and FTTN at scale, and the huge impact that this has had on the complexity of the rollout.
There has been no factual explanation of where the extra cost of $15 billion has come from since the time of the Strategic Review. And there is really only one place where it can have come from - from the FTTN and HFC parts of the rollout. The parts that were costed by the team of consultants and the management team put in place following the September 2013 election.
Mr Quigley then provides detailed costings for each cost element to prove his point. The only argument against him is that he used the upper value of $56 billion in the Corporate Plan which states "up to $56 billion.
When the Coalition’s intention to shift to the MTM model was made public in April 2013 the projection for the completion date, to have at least 25Mb/s to everyone in the fixed line footprint, was the end of 2016 - and the end of 2019 for at least 50Mb/s to 90% of premises. The total project peak funding was going to be $29.5 billion
According to the strategic review in 2013, the peek funding requirement for FTTN would have been $41 billion. This has been increased to $49bn in 2016.
In response to the stratgic review, Technology journalist David Braue wrote in a ABC opinion piece on 13 Dec 2013:
In presenting the long-awaited Strategic Review into the current state of the NBN, Communications Minister Malcolm Turnbull said the review marked "the beginning of the era of truth on broadband, and the beginning of an era where we will have facts to work with, objective analysis instead of political spin".
It's quite a claim since in opposition Turnbull was, in my view, a master of political spin, engaged in a ruthless smear campaign against Labor's fibre-to-the-premises (FttP) rollout while promoting a less technically-capable alternative NBN built on fibre-to-the-node (FttN) technology that, among other things, requires the government to somehow gain control of Telstra's century-old copper phone network.
The Strategic Review's revelation that the Coalition had seriously underestimated the costs of its alternative policy going into the election - and made rollout promises that it can not deliver - made the review a Pyrrhic victory for Turnbull, who had previously concocted a worst-case scenario putting Labor's version of the NBN at up to $94 billion.
The reality is much humbler - $73 billion if the current FttP rollout is continued, versus $41 billion for the Coalition's mostly FttN model. Factor in potential financial and social returns, and it's not even clear that the Coalition's option represents the best value-for-money option.
The cost of maintaining the current copper based network currently is about $750 million per year and will increase as the copper gets older. Replacing it with a modern fibre network over the next 10 years seems like a good idea. Replacing it with a fibre to the premises configuration would mean all copper is eliminated. The passive nature of this configuration would reduce maintenance substantially.
How much is it in the scheme of things
Make the following assumptions:
- It will take 10 years to build the NBN.
- The schedule for funds required will be as shown in the table above.
- Interest on the money borrowed by the government for this investment will be 5%pa compound.
- The NBN Co income will be as shown in the table above.
A quick calculation will show that the total funding requirement (capex + opex – revenue) will be $40.4billion. Compound interest (calculated yearly at 5%) will be $11.2billion. The total cost for the government is then $51.6billion or $5.16billion per year.
According the Budget 2012, how it’s spent document, the amount budgeted for 2012-2013 is $372.3billion. Using the assumptions listed above, the cost for the NBN for each of the ten build years is 1.4% of the 2012 Australian budget. Shortly after the build has been completed, the NBN will be producing income and the debt will be reduced.
Cost to Users
Cost to get connected
Unless you require your indoor network connection to be installed in a very difficult position, installation will be free.
Monthly connection cost
NBN Co provides a wholesale service to ISPs who purchase connections from NBN Co. The price that a end user pays depends on which ISP you choose. In general you can expect to pay the same or less for the same level (or better) than what you currently pay. This has been proven to be the case to date. Many ISPs have already published their NBN prices on their internet sites. You can look at some of these prices here.
The Telstra Deals
The original deal with Telstra was signed after long negotiations Between NBN and Telstra. This was a major reason why it took a long time to start the rollout. According to the agreement NBN had to pay Telstra $5 billion in infrastructure payments, $4 billion in disconnection payments and $2 billion in Commonwealth agreements. The infrastructure payments was partly for the use of Telstra's ducts and pits and was calculated to save the NBN many millions of dollars. Telstra retained ownership of this infrstructure and was responsible for its maintenance.
On 14 December 2014, again after lengthy negotions, Telstra and Communications Minister Malcolm Turnbull announced the re-signing of the landmark deal. However, NBN Co would take over ownership of the copper and HFC for the purpose of using them where it sees fit in for its multi-technology NBN rollout. NBN Co will also become responsible for the operations and maintenance of the two assets.
Mr Quigley recalls the Original and Coalition Telstra deals:
The FTTP Brownfields build relied on a complex deal which was negotiated with Telstra. It provided NBN Co with access to existing ducts, pits, exchange space, dark fibre links and lead-in conduits. That deal saved NBN Co billions of dollars in not having to replicate the Telstra duct network.
Perhaps, even more importantly, part of the deal was for Telstra to decommission their voice and broadband copper and HFC networks. HFC is the pay-TV network which uses a combination of fibre and coaxial cable – hence the name Hybrid Fibre Coax.
The decommissioning part of the Telstra deal meant that NBN Co’s revenue profile was effectively ‘underwritten’ because of the virtually guaranteed uptake as Telcos, including Telstra, transferred their wholesale and retail customers onto the NBN.
A mandatory requirement in that original deal was Telstra taking responsibility for ensuring everything they provided to NBN Co was fit for purpose. This insistence by NBN Co that Telstra take responsibility for the quality and performance of the facilities they delivered was one of the reasons it took a long time to finalise the deal. But it was the only way that NBN Co could ensure that it – and the Australian taxpayer - would not incur unknown and unbudgeted costs.
That deal was subsequently renegotiated after the Coalition came to power, and unfortunately under that new Telstra deal those protections have been diluted. This has resulted in a reduced cost exposure for Telstra but an increased exposure for NBN Co. Which explains why Telstra’s CEO said that the renegotiated deal is “undoubtedly better for Telstra shareholders”.