Budgeting an NBN hold up

It's no surprise the the NBN Co's rollout has fallen behind schedule and the hold up poses a significant threat to the government's future budget surplus ambitions.

By the end of next month, when NBN Co submits a revised corporate plan to the federal government, it will become clearer whether the economics of the massive project have been materially affected by the significant slippage in its rollout schedule.

Mike Quigley made the point in the KGB Interview published today that while the eight-month delay in completing NBN Co’s deal with Telstra and having it ratified by the Australian Competition and Consumer Commission was the major reason for the slippage in the original timetable it wasn’t the only one.

NBN Co lost the debate about the number of points of interconnect to the network – it wanted 14 but the ACCC insisted on 121 – and the government’s policy that fibre-to-the-premises has to be installed in greenfields developments and major changes to the construction tender processes last year have also contributed to the roll-out falling behind schedule.

How far behind schedule NBN Co has fallen isn’t clear and won’t be until the latest corporate plan becomes available.

Last week’s announcement of NBN Co’s three-year coverage plans used different language to the initial corporate plan, referring to constructions that it planned to have completed or underway rather than the "homes passed" targets in the December 2010 plan.

It expects to have started or completed construction in areas with 3.5 million premises by June 2015, whereas the December 2010 plan referred to 4.2 million premises passed and 2.6 million connected by that date. That was interpreted by some as a very significant lowering of NBN Co’s coverage targets, with Goldman Sachs analysts forecasting that only 2.7 million homes will be passed by June 2015 and only 1.4 million connected.

Quigley made it clear that NBN Co hasn’t changed its definitions and that the new corporate plan will include its forecasts for homes passed and activated, which will enable a direct comparison between the original plan and NBN Co’s revised forecasts and therefore an ability to determine how much the delays have impacted the rollout.

The extent of the impact of the delays is important at two levels. With an election next year and the Opposition promising to halt the NBN’s fibre-to-the-premises network rollout and instead build a fibre-to-the-node network, the extent to which premises have been passed and connected becomes a significant political and financial issue.

As Quigley said, the response to the three-year plan last week was focused more on who wasn’t going to get the NBN in their area within the three years than who was – the more premises connected to the NBN the more difficult the politics of denying the rest the same speeds.

By 2015 – and it is going to be extremely difficult for the Coalition to get control of the Senate and therefore gain the ability to legislate its own broadband plans without a double dissolution, which will absorb considerable time – about 25 per cent of premises, if not more, may have been passed by the NBN and quite a few copper lines will have been decommissioned.

Certainly Quigley believes NBN Co can make up some of the lost time as it gains more experience and now that it has Telstra’s very active cooperation. It is in Telstra’s own financial interests to help accelerate the rollout and lock in the largest possible payments and annuity income streams that it can ahead of any change of government and broadband policy.

It should be noted that some of NBN Co’s spending, and some of those homes passed or connected, will be via satellite and wireless technologies that would also be part of the Coalition’s broadband plans and that, as Quigley agreed, the core transit network that will be built over the next three years or so would also be central to a fibre-to-the-node network. The spending on the satellites, wireless infrastructure and the transit network won’t be wasted regardless of the outcome of the election and the future shape of the network.

The other dimension to the delays in the rollout is their cost.

The NBN’s economics have from the outset been only marginal, with its forecast returns, as Quigley said, "only a few hundred basis points above the long-term bond rate."

A significant blow-out in costs or delays in generating revenue which materially lowered anticipated returns could have real political significance if the government’s equity contributions to the project – originally estimated at about $27 billion – also start blowing out and, more particularly, if lower returns forced the project’s costs to be included in the federal budget.

Quigley was understandably coy about talking about the financial impacts of the delays, given that the new corporate plan is still being finalised, although he believes some of the lost financial ground can be recovered and that the network can still ultimately generate a return above its funding costs. He is confident that the revised corporate plan will be one the Gillard government will find acceptable (although it doesn’t really have a choice but to find NBN Co’s plans acceptable).

The new corporate plan will be studied closely, not just to determine how much the rollout and its costs have been affected by the delays but to see how NBN Co plans to make up for the lost time, higher costs and revenue losses or deferrals. Its immediate customer base – the telcos that will provide retail services off the NBN – will be particularly interested in any changes to its revenue assumptions.

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