Government’s NBN approach the way of the future

December 16, 2013

Labor’s biggest mistake with the NBN was establishing a government owned start-up company to build the largest and most complex infrastructure project in our history. Was it just hubris of Rudd and Conroy to devise this scheme on the back of a drink coaster between Sydney and Brisbane? Or was it giving substance to Rudd’s pledge to put “Government back at the centre of the economy”? Or was it just dumb, naïve, madness?

Perhaps a bit of all of the above. But it is worth reflecting on the scale of the folly. Almost every country in the world is in the process of upgrading its telecom networks to deliver high speed broadband. And almost invariably the model is the same: private sector companies, generally telecoms, are doing the job and Governments are providing subsidies of one kind or another to ensure that people in non-urban areas get a comparable service to their city cousins.

The virtue of this approach is that the Government is up for a sum certain – it makes a political decision and writes a cheque. All of the execution and business risk lies with the private sector firms building the network upgrades – they have decades of experience rolling out networks and the workforce and culture to manage large, distributed linear infrastructure construction.

In New Zealand, for instance, the Government offered subsidies in the form of soft loans to support the rollout of high speed fibre broadband. But to be eligible for the subsidy Telecom New Zealand had to split its network business into a separate company, Chorus Ltd.. 
The cost to the NZ Government in NPV terms is only $600 million.

But back here in Australia, Rudd, Conroy and Gillard were lurching back into a world where government always knows best. . Here it was the private sector telcos, Telstra and Optus, who received the cheques from the Government. And all of the risk of building and then operating the new broadband network was vested in a Government owned start up.

Now sadly we are not starting with a clean slate. And there is a lot of Labor’s mess and wastefulness we cannot reverse.

But in 100 days we have got a lot done. We have renewed the Board. Instead of having no directors with experience in managing or building telecom networks, four out of the six meet that description including the Chairman, Ziggy Switkowski.  The NBN Co has appointed a new CEO, Bill Morrow who has managed, built and turned around major telecom businesses and networks in America, Asia and Europe.

As for technology, we are already seeing very encouraging results.

Labor forbade NBN Co from using “fibre to the basement” which means terminating the fibre optic cable in a multiplex in the telecom room of an apartment or office building and linking into the existing copper local area network. This saves considerable time, trouble and expense. But Labor did not want to compromise in anyway its promise of “fibre to every premises” – regardless of cost.

Since the change of Government NBN Co has been trialling that previously prohibited technology. The first results are in – in an apartment building in Melbourne, over 150 metres of internal copper wiring is delivering download speeds of 108 mbps, upload 48 mbps. That’s blisteringly fast and at a fraction of the cost of taking the fibre into every apartment.

We have also received a Strategic Review which for the first time provides a spin-free account of where the project is at the moment, how much it will cost and how long it will take to complete on Labor’s corporate plan and what options are available to us to complete the project sooner, cheaper and more affordably.

The Review was compiled by the NBN Co itself with independent advice and assistance from Deloitte, Korda Mentha (which concentrated on the business as usual trajectory) and BCG which concentrated on the available alternatives.

I have told NBN and its staff that I don’t want them to ever frame their forecasts or reporting with a view to what they think I want to hear. The object is not to massage the numbers to conform with a ministerial press release or speech, but rather to tell the truth as they see it, to build the network in the most cost effective way – to forget about spin and focus on results.

I do not want to hear Bill Morrow in a few years’ time echoing the words of previous NBN CEO Mike Quigley, when he said recently: “Should I have been more conservative? But the timescales are already set for you, the time frames are already put out there for you so there’s not much you can do.”

There has perhaps never been a project in our history where there has been such a vast gulf between political rhetoric and reality.

If Labor’s plan were continued with the project would have a peak funding requirement of $73 billion, not $44 billion and would generate, on the most optimistic revenue assumptions, a 2.5% internal rate of return, not 7.1%, as claimed by Labor. By 2016 only 22% of Australians would have 25 mbps broadband, by 2019 only 57% would have 50 mbps. It would be complete in 2024.

The Review recommended a different approach be taken, using where feasible the existing copper lines for the last few hundred metres into the home and the HFC networks originally built to carry pay television.

This multi-technology mix, or MTM, model  would have a peak funding requirement of $41 billion ($32 billion less than business as usual), deliver 25 mbps to 43% by 2016, 50 mbps to 91% by 2019 and be completed in 2020.

It would have an IRR of 5.3% on an optimistic revenue trajectory and 3.1% on a pessimistic one. Most importantly broadband prices would be much lower than under the existing Labor plan which would require price rises of up to 80% given the massive capital over investment.

The road ahead for NBN Co is challenging, incorporating additional access technologies adds complexity, but it saves over $30 billion and more than three years of construction. There are important negotiations to be had with Telstra and with Optus. But I am confident the goodwill and spirit of openness will see them concluded much sooner than many think.

We have a lot of work ahead of us, but in less than 100 days we have a new, qualified board and management team. We have a brutally independent and honest appraisal of where the project is now and what its realistic options are for the future. None of it makes for pretty reading. But the days of spin are over, the days of clear thinking, truth telling and hard work have begun.

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