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NBN cost blowout means it is poor value for money

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Cartoon by Mark David/@mdavidcartoons

The Government must act to make the NBN commercially viable, writes Paul Budde.

As with any large-scale project, you need a long-term vision on the investment that you are going to make. Once that vision is agreed upon, solid strategies need to be developed. Next is a careful design to ensure that what you have designed will work in practice.

Only then are you going to start with the execution process.

This was, by and large, the process that was launched in the mid-2000s when the country started to consider its broadband future.

In all, some 400 people across the country were involved in the various workgroups that collaborated with the government to develop a vision, the strategies, and a broad design of what became the NBN. This was a solid process and had broad community and industry support.

By 2009 the Rudd Government was ready to launch the plan, to a large extent thanks to the 2008 Global Financial Crisis, as the NBN became a key infrastructure stimulus project. There was a vision based on the national interest, with a focus on the digital economy, smart energy, e-health, e-education and entertainment.

It was stated that the investment would deliver social and economic benefits that were far greater than the monetary value initial investment. Industry groups had worked on technologies, regulations and business models and some clear strategies had come to the fore, with a consensus that the network should be based on the fibre-to-the-home (FttH) technology.

NBN Co was set up and they started with the design of the network. Simultaneously negotiations were launched with Telstra and Optus regarding the use of their infrastructure.

As with any plan of such a scale the preparations were done thoroughly and took most of three years. Unfortunately, the incoming Abbott Government in 2013 threw all of this away and started basically from scratch.

However, they did not a clear vision or strategy. For them it was a political issue. They didn’t like what the previous government had done; they promised a cheaper NBN that could be rolled out quicker. However, the failed on both promises. The original FttH plan was estimated to cost $43 billion to be finished by 2020. The new plan based on the so-called multi mix technology was estimated to cost $25 billion and would be ready by 2016.

The actual costs proved to be $51 billion and it was completed four years later than the promised date

Now obviously if you base your investment plan of $25 billion rising to $51 billion, your return on investment and eventual sale of the project strategies are going to be affected. It has been written in the legislation that the NBN will eventually be sold.

And here is the first problem. The Government has dug a big hole for itself, spending $51 billion is obviously more than they expected. Nevertheless, they would like to recoup that money when they sell the company. Valuations so far have been between $9 and $25 billion, so it highly unlikely that they will recoup their investment.

A key reason why the valuations are so low is that the so-called multi mix technology is a mediocre outcome and very few companies would like to invest $50 billion in such a project. The political problem now is how to tell the voters – what they already know – that this investment has been a dodgy one. The decision in 2013 was a political one and not based on a proper vision, strategy, and design. 

The other problem the government will have to fix is related to this. In order to still get a reasonable return on investment, NBN Co will have to sell its NBN services at prices that reflect the high investment. But that is not the real value of the service. If they based the prices that they are charging the retailers on the proper value of the NBN, its business plan would perhaps reflect a $25 billion investment.

Based on a more realistic valuation, the wholesale and retail prices would better reflect the real value of the service.

As the Government has so far refused to back down, the NBN Co will have to base their prices on the $51 billion investment. As a result, many customers are unable to afford the real broadband services of 50-100 MBs.

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There currently is short-term relief, thanks to the pandemic when the Government allowed NBN Co to provide 40 per cent extra capacity to the users without any extra charges. However, this is a short-term measure, as it undermines NBN Co’s revenue and therefore the valuation of the NBN. As the pandemic continues the government has a problem will it allow NBN Co to continue the current offer?

The Government is pushed into a corner and to address this pricing issue properly they will need to fundamentally change the wholesale pricing mechanism. The Government can expect a serious user revolt if they suddenly withdrew the extra capacity and forced users to pay more for their NBN service.

It is hard to see how the Government will wriggle itself out of these holes. In the meantime, there is no long-term vision on how to upgrade the NBN from here. Any process to move into privatisation will take two to three years. During that period, it is highly unlikely that any serious investments will be made in the fixed broadband market. NBN Co will struggle to generate revenues that will reflect the $51 billion investment and will also have great difficulties to fund much-needed upgrades to FttH or fibre-to-the-curb.

Unless the Government bites the bullet and admit that they have made the wrong decision and start writing down its investment, the NBN will remain at an impasse.

Paul Budde is an Independent Australia columnist and managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.

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