KGB: Mike Quigley

NBN Co's chief executive tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

• The initial network infrastructure build, which makes up 10-15 per cent of the NBN, would still be required under a scaled-back fibre to the node plan

• He still expects the network will be able to deliver a long-term return 'several hundred' basis points above the bond rate, even without including externalities

• Aside from the speed, the value of a standardised ubiquitous national network is underrated

• The existing free-to-air TV networks may be significant users of the NBN for delivering entertainment as IPTV grows

• In contrast to critics' claims that no one wants the NBN, the company has been 'overwhelmed' by complaints from people disappointed they won't be getting it in the initial three-year rollout plan

Alan Kohler: Mike, will the exclusion of Huawei cost you any extra money? Will it have an impact on your costs?

Mike Quigley: No, it won't. We have got our contracts for our GPON [Gigabit Passive Optical Network] equipment in place and they're very competitive.

AK: Will it have any impact on you at all? Do you regret the fact that they're going to be excluded?

MQ: It's really not up to me to comment, Alan, on either tender decisions or on security issues.

Stephen Bartholomeusz: Mike, in that update you provided last week, you changed your network deployment definition from homes passed to constructions completed or underway. Why is that? And what impact does it have in terms of the number of homes passed in that three year period?

MQ: Well, if I can be very clear about this, we have changed no definitions at all. The homes passed and the homes activated are what we put in our last corporate plan and we'll be putting it in our next corporate plan. What we announced last week was a three year rollout to make sure that we could inform the public and inform our potential customers of where we'll be going. As you would know, there has been an enormous amount of interest in this project and it's a bit hard to describe how much need there is in the community for information about where we'll be going and when we'll be starting, and that's what we were supplying last week. In the corporate plan that we will be providing to the government by the end of May, we will have the homes passed and the homes activated as we did in the last corporate plan.

Robert Gottliebsen: Mike, if the Coalition wins the election – and I'm not asking you to speculate on that – but if they did, how would that change your corporate plan as you study it now?

MQ: I can only respond to what I read in the papers, Bob. I have no additional information and clearly there have been some hints of perhaps a different approach. I think if that was to happen, we would just have to look at what was asked of the company as a government business enterprise and provide the government of the day with a response on how best to execute on that – as we do with the government today. They ask us to do certain things and we give them feedback on the costs and the technical feasibility of that. That would be what we would continue to do.

RG: Would it be true to say that what you're embarking on now is perhaps the lowest yield return expenditure?

MQ: I certainly think it's true to say that there is some infrastructure that you have to put in place before you can start connecting up customers. For example, the transit network that connects what are called the fibre access nodes, which are like the exchanges from which all the fibre feeds out back to the 121 points of interconnect where we hand off traffic to our customers. All of that infrastructure has to be put in place and that will take about three years, or a bit more, to do all of that. Now, once you have that you have all of that for the whole ten-year build basically. So, there is an upfront investment in the way in which we're approaching the rollout. It's a very sensible way to approach it, both from a design and a construction perspective.

AK: And that's for the ubiquitous NBN as currently designed, right?

MQ: That is correct. That's trying to connect up all of the roughly 1000 fibre aggregation nodes back to those 121 points of interconnect. You need lots of fibre to connect all of those nodes together and that same transit network is also used for the satellite earth stations and also used for the fixed wireless network to serve the rural parts of Australia.

RG: Just a ballpark, are you talking about 20 per cent of the total project is in that upfront infrastructure? Or 10? Just a rough estimate.

MQ: If you're looking at the transit part alone, I think it would be more like, in a rough ballpark, 10 per cent; 10-15 per cent.

SB: Presumably if the Coalition were to win and they shifted to a fibre to the node network, that transit network would still be invaluable?

MQ: You would still need a transit network, yes, to reach all of the outlying places and with a fibre to the node network you obviously need tens of thousands of active nodes all over the country and depending on what sort of speeds and performance you want to get, you've got to push those nodes closer and closer to the end user which is why literally you will have tens and tens of thousands of them.

SB: The delay in getting the Telstra deal through the ACCC has cost you eight or nine months. How severe an impact has that been on the rollout? And can you make up any of that lost time now that Telstra is on board?

MQ: Well, obviously we're going to try and do the build as fast as we can. The finalisation of the Telstra deal was one of the issues, and a major one, that has had an impact on the dates that we put in our original December 2010 corporate plan. Obviously moving from 14 to 121 points of interconnect has had a difference. Executing on the government's greenfields policy has also had an impact on how fast we can go and what our priorities had to be. And as I've said before, we were determined to get good value for money in the construction tender process and so we did change direction on that halfway through to make sure we got that value for money.

RG: How did you get around the unions in that changing direction? Because they were going to play hardball…

MQ: It's not our job to deal with the unions directly. That's the job of our construction contractors and we leave that job to them. We deal with them. The industrial arrangements that they put in place is really their business and we obviously have an interest in making sure that they are competitive, the contractors are competitive and make sure we look after the taxpayers' interests. So, that's why we have a competitive process obviously in the construction contracting.

AK: Mike, what are you most worried about now? Is it the take up rates or technology performance or politics?

MQ: Well, there's a whole range of issues obviously in a huge undertaking such as this, a huge technical undertaking. I worry about a lot of things. I'm not frankly that worried about the technical performance of the equipment because we're not using equipment that's really on the bleeding edge of things. This GPON equipment and technology have been around for a while. Probably the thing we're stretching to a sensible limit I think is the two large satellites we'll be putting up for rural Australia to give them a very good service. So, the technical side of it is not such a big worry. The take up rates with the retiring of the copper network, that's not going to be really a big issue for us. And why am I reasonably confident about that? I just looked, for example, at the Australian Bureau of Statistics data which has just come out for the year ending up to December 2011 and what we've seen is an 80 per cent increase in traffic download on the fixed network per user. That's raw band traffic per user per month. It has jumped 80 per cent in a year. In the mobile network the average amount of data per user has gone up just under 6 per cent. Wireless and mobile is absolutely going to be ubiquitous, needed. We will all be using it. But the heavy downloading of big files is going to continue to be done on the fixed line network.

AK: You talk about the take up rate not being an issue because the copper network is being retired, but at what point do you start switching people off? Because it potentially at some point becomes a bit of a problem, doesn't it?

MQ: No, I don't think so. We have an agreement with Telstra which is once we have one of what we call a fibre serving area module – which is about 2500 to 3000 premises – done, we declare that area finished, completed and then we start an 18-month process of retiring the copper in that area. And the senior management of Telstra has indicated they would like to even do that perhaps faster if that's possible to do and we'll all be aiming to do that. So, I don't see the take up rate as being particularly an issue, and in fact on just the trial sites we have, on two of them we're now approaching 30 per cent take up after a relatively short time. This is a very high take up rate for fibre to the premise, on an international basis.

RG: Can I put it a different way? There are a lot of local areas that are very upset they've missed out in this first phase and because they can't be sure what will happen if the Coalition wins the election. Is it possible that a council or a community could go to you and say: ‘Righto, we'll raise the money for you to put the NBN in before the election and you'll pay us back over time?'

MQ: No. We just couldn't do that. It simply wouldn't be possible for us to do that. As I said, this is a big, complex infrastructure project. We are getting a big machine, a big kind of distributed factory into gear to rollout right across the nation. We just can't cope with constant changes in responding to that type of request. We would love to be going to everywhere in the country in three years. It's just simply physically not possible. But I have to say also it has been somewhat overwhelming to see how many people are unhappy about not getting the NBN in the first three years even though there are a huge number of critics. There are a huge number of critics saying, ‘we don't need this', ‘nobody wants it', and yet we've been overwhelmed with people who are disappointed that they're not getting it.

SB: Mike, you referred earlier to a series of issues which have impacted the timing of the rollout. I assume there are financial impacts from those and can you make up some of the financial costs incurred?

MQ: Yes, I think we can. And I don't want to pre-empt the corporate plan that we have been preparing now for some time and that we'll be submitting to the government at the end of May, but of course we're always looking at how we can do things more cost effectively. And while a project such as this always has its challenges, we're still feeling reasonably comfortable that we can deliver in May our corporate plan that the government will find acceptable.

SB: Have the trials reinforced the view that as you progress you will actually be able to lower the costs?

MQ: I have been associated, I guess with construction, with running factories for many, many years and there is no indication that this project is going to be any different. We will find ways to save costs as we keep rolling out. And remember we're doing the same type of thing –not exactly the same, but very, very similar –in each one of these fibre serving area modules. We also have a very enthusiastic and competent group of suppliers, both equipment suppliers, service suppliers and construction folks who spent a day with us, last week in fact, looking at how we can both do things better and more cheaply, more cost effectively, and we understand they need to make a dollar out of this. We're not going to be driving them to not make profits. We want them to make a reasonable profit and I think working together with our suppliers and construction partners we can find ways to keep reducing costs as this rollout moves on.

SB: The reason for the lower than proportional allocations to Victoria – is that because you've had this emphasis on rural and regional Australia?

MQ: Yes. And what you'll find if you look at the numbers and we obviously did that analysis between rural and metro and between states, you'll find that the bigger states have fallen a bit behind as a percentage of premises, whereas once we get going in the smaller states – and if you take, for example, Northern Territory, a very big state, but not a huge number of premises or population so once we get started in the Northern Territory we'd obviously like to finish it. It's economical and efficient to do so, which means the smaller states are a higher proportion after the first three years and states such as Victoria and New South Wales particularly are behind in terms of the premises. Now, the other thing that factors into that is we've been given instructions by our shareholder to finish Tasmania by 2015. So, that's the effect. We try to make sure we've reduced that effect in going from a one-year plan to a three-year plan and each year as we update that those percentages should get closer and closer to being really proportional.

RG: Mike, do you think this is going to be a major election issue; that this is the chance the Labor guys have got to regain some ground because of the demand for this service?

MQ: Yeah, I'd like to think it wouldn't be [an issue], but I'm perhaps I'd be a bit nave if I was to assume so. I mean we would just like to obviously get on with the job and build the network because certainly all of us here in NBN Co believe this is a great national asset that we will have at the end of this build, so we'd like to get on and do it, but being realistic I think it is likely to be an issue at the next election. We certainly haven't seen any decrease in the intensity of the political debate around the NBN and while I would like to think that it would perhaps subside, I think I'd be a bit optimistic thinking that's the case.

RG: Do you believe you're going to service the capital that you've raised in time?

MQ: Well, as you know we had assumed in our last corporate plan that we would need $27 billion in equity from the government on which we would provide a return of a few hundred basis points above the long-term bond rate and then we could go to the debt markets and raise debt. Now, we still believe once we had the Telstra deal done, once we'd begun the rollout, once we've got a sufficient number of homes and businesses passed and we have got a take up rate and we're starting to retire the copper, I think we will find people who are interested in investing, in providing some funding for the company. Now, those things are always very difficult to predict, but the best advice we've got is that at some point in the future once we've got those things under our belt, we will be able to raise debt.

RG: Could that happen before the election?

MQ: Before the election, we wouldn't even attempt it before the election. We wouldn't be sufficiently far advanced I think to go the debt markets at that time.

SB: But you're still confident that the project will deliver something above its cost of capital, Mike?

MQ: Yes. Now, remembering what we've talked about is a long term IRR [Internal Rate of Return] of a few hundred basis points above the long-term bond rate which the government is perfectly happy with. And, if I can also stress, we have tried to factor into our business case no externalities at all, no productivity improvements for businesses, no economic benefits or social benefits, what this may mean for public education or public health. We've factored none of those things into the business case at all.

AK: Can you tell us whether your view about how the NBN will be used has changed at all over the past twelve months or so, and in particular as you start to deal with potential customers?

MQ: I think we're becoming more comfortable that the growth rates in downloads are in fact what we expected if not a little bit higher. What we're seeing in technology trends around the world, when I speak to telcos in other places, I think there's a growing recognition, while we need wireless, it just isn't going to do the heavy lifting and most big telcos around the world are building 3G and 4G networks as fast as they can and then trying to get traffic off them as fast as they possibly can. So, everybody I speak to who is in the industry recognises we need a good, solid, fixed line infrastructure. What I think is becoming more and more apparent as we try to solve the issues – the demographic changes that are taking place especially in supplying social services – the value to a nation of a standardised, ubiquitous, national network I think is now really starting to be seen. It's something that's not talked about enough. We only just seem to talk about speed, but a standardised, ubiquitous, national network has an enormous amount of value.

AK: On that subject, I understand that Hutchison Vodafone is testing a fixed line phone service on the NBN. Do you think that a big company like that, or other big companies, will compete against Telstra in just straight old, plain vanilla, fixed line phone services using the NBN?

MQ: I don't think people will be likely to just compete on plain, old vanilla, fixed line phone services. I think what we're going to see is bundling –

AK: Yeah, that's kind of what I mean that bundling –

MQ: I think that will happen. I think we'll see more products coming into the market place and I think we're going to see an increase of fixed-mobile convergence. It's been talked about for many, many years now. I think there's an opportunity for that to happen. And what we're also seeing is the trend for people wanting to get content and material on the devices that they want to use at the time they want to use it. The other trend that's happening right across the world is the number of devices; the number of connected devices is going up quite rapidly. And people are using devices simultaneously, concurrently. People looking, for example, at IPTV and at the same time they're using their iPad.

SB: There's been a lot of talk about IPTV over the NBN, Mike. Are we also likely to see the existing free to airs on the network?

MQ: You very well may see that. I think once the network really does roll out it will be a complementary medium to other channels. For example, if you're going to broadcast a very popular sporting programme right across the nation, then clearly satellite has some real advantages in that. But I think we will see in the future a combination, and we will see material that perhaps comes to a smaller demographic, more specialised and that's what is happening. It is in fact, as we all know, it's fragmenting. A network such as the NBN will be used for delivering entertainment services and perhaps displace some of the existing channels and complement some others.

AK: Mike, thanks very much for being interviewed today.

MQ: It's a pleasure.

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