NBN write-down could cost tens of billions
As Australia drops further down global internet speed rankings and the cost of the national broadband network continues to rise, experts fear taxpayers face a double hit – a write-down plus an upgrade, which could add up to tens of billions of dollars.
With the NBN rollout entering its final stages, leaked emails reveal some of the serious concerns held by technology industry experts about the completion of the $51 billion infrastructure investment.
In the unusually frank correspondence, sent between members of a discussion list hosted by advocacy body Internet Australia, industry veteran Robin Eckermann acknowledged the copper-based fibre-to-the-node network (FTTN) would “unquestionably need upgrading in the future, and it will inevitably cost more than if it had been done from the outset”, while Internet Australia chairperson Dr Paul Brooks argued it was time to move on and that “trying to work out who to pin the mess on is pointless”. RMIT associate professor Mark Gregory said the NBN was in “a sad state that cannot be dismissed with weasel words”, adding that at some point supporters of the Coalition’s mixed-technology model for the NBN were “going to have to do a mea culpa”.
The heated debate was sparked by the release of the latest Ookla global speed-test rankings, which showed Australia’s internet has dropped five places to 60th place, behind New Zealand, China, Malta and Trinidad and Tobago. The news came as the NBN last week confirmed to a federal parliamentary committee that only three states and territories – New South Wales, Victoria and the Northern Territory – will achieve the network’s download speed target when, or if, the rollout is completed next year. Western Australia and the ACT will be worst off, with only 85 and 84 per cent of premises respectively reaching the targeted speeds of 50 megabits a second.
The debate confirms the NBN’s business model is in trouble as it nears its targeted completion date of 2020. The network is coming under mounting pressure to lower the wholesale prices it charges telecommunications companies for access to the network. However, lowering those prices would affect revenue and could force a write-down of the value of the network. The industry expects this could slug taxpayers to the tune of $20 billion.
Labor sources are concerned about the NBN’s cash-flow position, which could lower the book value of the finished network and have serious implications for their future NBN policy. A comparison of the NBN’s latest corporate plan and the Abbott government’s 2013 strategic review of the network suggests the switch from Labor’s fibre-to-the-premises NBN to the Coalition’s so-called “multi-technology mix” is likely to have hurt cash flows to the tune of at least $500 million a year, and possibly upwards of a billion dollars.
This reflects higher running costs – including powered nodes and extra complexity – of up to $300 million a year, as well as lower revenues of up to $300 million, due to unwillingness to pay for slower speeds and missed opportunity to provide fibre backhaul services for 5G mobile towers. It also includes potentially $300 million a year in extra capital expenditure, which could include constantly augmenting the hybrid fibre coaxial (HFC) and FTTN networks to keep up with demand. A cash-flow hit of even half-a-billion dollars every year would, by itself, lower the value of the NBN considerably.
Finance Minister Mathias Cormann rejected any suggestion that a write-down was likely. “The government is not considering a write-down of its loan or equity as there is absolutely no basis for such a write-down,” he said. “In fact, the value of NBN can only be written down where the NBN Company itself has assessed that this is required for its assets under Australian Accounting Standards ...
“The proposition that somehow the government should be making an arbitrary, political decision to write down the value of NBN or any other investment in a government business enterprise is false,” Cormann said. “Those arguing for a write-down in order to facilitate lower prices – and higher margins – for other businesses with commercial interests in this industry are essentially arguing that the taxpayer rather than customers should carry more of the cost burden of the services provided by NBN and accessed by NBN customers.”
The ultimate decision will be based on the advice of the government’s auditors, at arm’s-length from government.
Asked for comment about the prospect of a write-down, an NBN spokesperson told The Saturday Paper there was general confusion between the write-down of the network’s assets and a write-down of the government’s equity and debt investment in NBN. NBN declined to comment on any cash-flow comparison between the finished Labor and Coalition models for the network, rejecting it as a hypothetical exercise.
On Thursday night, in an address to The Sydney Institute, shadow communications minister Michelle Rowland said a clearer picture was emerging about the financial impact of the Coalition’s mixed-technology model (MTM), which Labor dubs the “Multi-Technology Mess”.
“The ongoing cost to run the NBN has gone up,” she said. “The ongoing cost to remediate the NBN network has gone up. The revenue potential has come down. The result of this is the cash flows of NBN have been reduced.
“To put it simply, the Coalition’s approach 1) has cost more to build, 2) does not provide consumers with the same speed or reliability of the original plan, and 3) leaves taxpayers at least several hundred million dollars a year worse off – potentially over half a billion per year worse off over the medium term.”
In the leaked Internet Australia discussion, Eckermann, chief architect of Canberra’s rollout early last decade, suggested the Coalition’s MTM, developed by Malcolm Turnbull in 2013, is not the only major problem facing the NBN.
“Oh dear!” Eckermann wrote. “It seems I have truly stirred up a hornet’s nest of denouncement.”
Eckermann’s own estimates were that if the NBN fixed up its unaffordable pricing, average download speeds would immediately double to about 66 Mbps with just the stroke of a pen. Otherwise, he warned, “users will continue to self-select speeds well below those of which their lines are capable, and over time more users will defect to ever-more capable mobile networks. Australia will continue to languish in the Ookla rankings.”
The reaction from Internet Australia members was swift, with RMIT professor Mark Gregory responding that Eckermann’s argument was “nothing new” and the rollout of redundant technology under the Coalition’s MTM was to blame. “There is no problem to solve if the infrastructure was fit for purpose,” he wrote on the discussion list. “If you make the wrong technology choice, you have no room to move with the business model, and the NBN MTM did this in spades. Would you pay a premium for a lemon? Well, most Australians won’t either … so arguments that the cost should be reduced through a writeoff simply accept that the NBN MTM is a stuff-up and the taxpayer has to foot the bill.”
Gregory says taxpayers will have to foot another hefty bill sooner rather than later, which he has begun to tally up. In a recent industry presentation, he reckoned the cost of upgrading the network to fibre-to-the-premises technology at up to $16 billion and said he will refine the estimate in a forthcoming paper.
Gregory says the figure could be reduced to $8 billion if the NBN brings fibre to the footpath – so-called “fibre to the kerb” – and telcos cover the cost from the premises to the street. In countries such as Britain, he says, the cost has been reduced further by mailing self-installation kits to homes and businesses. Nonetheless, once the write-down and borrowings to fund an upgrade are taken into account, the equity value of the NBN may be as low as $2.5 billion, Gregory tells The Saturday Paper.
Meanwhile, anticipating huge and increasing demand, comparable countries such as New Zealand are rolling out networks with one gigabit per second and even 10 Gbps capacity.
But according to Paul Brooks, trying to compare Australia’s NBN with New Zealand’s is “pointlessly backwards-looking”. Brooks, an experienced telecommunications engineer who was involved in an early Communications Alliance NBN project in 2009, has tried to depoliticise the NBN debate, and steered Internet Australia away from “shouting from the rooftops” and denouncing the NBN via media release or on Twitter. Brooks took over as chair of Internet Australia in late 2017, after former chief Laurie Patton resigned along with half the board who had concluded the organisation had become dysfunctional. Under Patton’s leadership IA was a staunch campaigner against the MTM.
Brooks wrote in the Internet Australia discussion that “trying to work out who to pin the mess on is pointless … We are faced with a reality of where we currently are as a starting point – the egg will not be unscrambled …
“Beyond 2020 (next year!), or 2022 now when the current iteration is scheduled to be ‘finished’, and leaving ideology aside, how do we make the most of the hand we’ve been dealt with and transform it into something better?”
“How will Australians watch the Tokyo Olympics streamed in 8K television?” Mark Gregory asked in the discussion. “The answer is to take a holiday to New Zealand! Heavily compressed 8K still requires about 50 Mbps per channel. Reasonable quality 8K requires 100-120 Mbps. Currently only 90 per cent nationally will get a connection ‘capable’ of 50 Mbps …
“Rolling out the obsolete FTTN in 2014 was a national disgrace – there is nothing anyone can say that can justify this madness.”
Two months out from the federal election, of course, the Coalition government won’t admit any such failure. In response to the NBN’s recent admission that some states will fall short of the 50 Mbps target, Communications Minister Mitch Fifield reverted to the boilerplate statement that the Coalition’s rollout “will be completed six to eight years sooner and cost $30 billion less than Labor’s plan”.
In a recent essay for The Monthly, former NBN chief executive Mike Quigley said this statement is “demonstrably false”. It is based on NBN costings which, as Quigley’s successor Bill Morrow told a senate hearing in 2015, did not calculate what it would have cost to finish Labor’s original NBN, but rather what it would have cost to start on Labor’s NBN, switch to the Coalition’s MTM, and then go back to Labor’s model – much more expensive. Not only that, the NBN’s projections made the crazy assumption that the cost of rolling out fibre-to-the-premises would never fall, which flies in the face of international experience – in New Zealand, for example, rollout costs have dropped 44 per cent.
The NBN itself, meanwhile, is promising that as the network rollout is completed, Australia’s average broadband speeds will improve, and is envisioning medium-term upgrade pathways for all three main fixed-line technologies to speeds of 10 Gbps. They won’t come cheap.
This article was first published in the print edition of The Saturday Paper on Mar 16, 2019 as "Node pain, no gain". Subscribe here.