A national network broadly on track

The NBN is experiencing rollout delays and cost blowouts now, but as the project develops and efficiencies kick in these will be almost immaterial by the end of the 10-year project – assuming it survives past an election.

Given the delays and the changes to its original plan for the national broadband network, today’s revised NBN Co corporate plan was always going to look significantly different to the one it released last year. Perhaps the most surprising aspect of it is that the NBN remains broadly on track.

It is behind schedule because NBN Co lost nine months between signing a definitive deal with Telstra last year and gaining Australian Competition and Consumer Commission approval for it. It also lost time because the Federal Government changed the scope of the rollout to include greenfields developments and the ACCC insisted on 121 points of interconnect for the network rather than NBN Co’s preferred 14.

It is also somewhat over budget, with increases in both the forecast capital and operating costs, some of which relate to the delays, the changes in the scope and nature of the network and the $800 million deal with Optus which will lead to the closure of its HFC network.

Neither the delays nor the increased costs, however, are particularly material in the context of such a large project with a decade-long construction timeline.

The delay, NBN Co’s Mike Quigley says, can be whittled back to an over-run of only six months by the time construction ends in June 2021 rather than at the end of 2020 as originally envisaged.

Capital expenditure is forecast to increase by $1.4 billion, or 3.9 per cent, to $37.4 billion and operating costs by $3.2 billion to $26.4 billion. Some of that increase, however, relates to the Optus deal which will increase both capital and operating costs during the rollout phase but bring forward increased revenues.

NBN Co also gained access to more of Telstra’s infrastructure than it originally planned, which generates increased operating costs but lower capital expenditures while changes to the way customer connections are managed will also increase capital costs in the near term but generate longer term efficiencies.

As expected, NBN Co has also experienced some increase in construction costs but also some offsetting reductions in equipment costs.

Overall, one could conclude that in "net, net" terms, NBN Co is managing to stay more or less in line with its original game plan. Indeed, it is now forecasting a minute increase in the return it will eventually generate, from 7 per cent to 7.1 per cent, assuming the NBN rollout as NBN Co and the Gillard government envisage it is ever completed. Tony Abbott and Malcolm Turnbull may well determine that.

If the NBN is completed on the revised forecasts, the taxpayers’ equity commitment to the project will have risen from the original $27.5 billion to $30.4 billion because of the increased costs. The total estimated funding requirement for the NBN has been increased from $41 billion to $44 billion.

The delays mean that, as NBN Co disclosed when it released its three-year stage on rollout plans in March, the deployment of fibre is way behind the original schedule.

By the end of this year it expects to have started or completed construction that passes 750,000 premises, compared with the original estimate of 1.72 million.

In fact very few premises will actually be passed or connected until the NBN starts gathering real momentum in 2014 – by the end of this financial year only 661,000 homes will have been passed and NBN Co is forecasting that only 92,000 of them will be connected with active services. By 2015, however, by which point the rollout would be running at its peak scale, it expects to pass about 3.7 million premises and have 1.6 million of them connected with active services. Today there about 13,500 premises connected to the network.

That would suggest that if the Opposition wins next year’s election they would be able to halt the rollout and shift to their preferred fibre-to-the-node model, supplemented by alternate broadband technologies. By the time they would be in a position to do that, of course, there will be a lot of fibre and dollars sunk into the network.

Whatever type of network is ultimately built, there is more growth occurring in broadband generally and in fixed line broadband than NBN Co had originally assumed and its initial experience has been that customers have taken up services faster than it had expected. If those trends continue, it says they might enable it to reduce wholesale pricing earlier than it had anticipated.

The broad message from NBN Co’s updated corporate plan is that it is broadly on track despite some of the unexpected changes to the business plan. That is, it is on track unless or until it is derailed by the Coalition.

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