NBN may go down to the wire

The plan for the NBN unveiled yesterday doesn't necessarily mean the rollout will be completed, and even assuming it is there are likely cost blowouts and lower-than-anticipated returns looming.

Once the $11 billion-plus deal between NBN Co, Telstra and the federal government was cleared by the Australian Competition and Consumer Commission last month, the path was clear for the acceleration of the national broadband network that NBN Co’s Mike Quigley unveiled yesterday. It doesn’t necessarily mean, however, that the rollout will actually be completed.

While both NBN Co and the Gillard government will be anxious to get as much of the network in place and as many homes and business connected ahead of next year’s federal election, the numbers provided yesterday suggest that the Opposition’s plan to halt the rollout and create a different kind of NBN using a mix of different and lower-cost (and lower speed) technologies remains viable.

That, of course, pre-supposes that the Opposition (a) wins the next election and (b) has the capacity to get legislation to stop the rollout and implement its own policy through the Senate. The former may appear almost a formality at this point but the latter may be somewhat more difficult to achieve.

What Quigley said today (and it was subtly different to what Julia Gillard said about the rollout) was that the NBN would be completed or underway in a third of the country, containing about 3.5 million homes and businesses in the next three years. Gillard said those premises would be connected or in the process of being connected within the three years.

As we’ve seen from the experience to date, passing premises doesn’t mean connecting premises. NBN Co could today connect to 18,000 premises but has seen only 5500 of them take advantage of the opportunity. A take-up rate of about 30 per cent is not bad at this stage, given that to date the process has been largely a trial for the network’s construction rather than a full-blow drive for customers.

With Telstra now on board and with an incentive – $11 billion in net present value terms – to cooperate, not just with NBN Co to build the network but to get its own customer base onto it, one would expect to see the speed of the rollout quicken and the take-up rate improve.

It is in Telstra’s own interests to maximise the footprint of the rollout and the connections to it regardless of what happens at the election, given that will maximise the amount of cash it receives from NBN Co, some of it for decades. The Coalition would have to negotiate with Telstra, and compensate it in some fashion for the loss of further income from NBN Co, to implement its own policy.

Nevertheless, even if it were to take the Coalition until 2015 to stop the rollout – and one would expect that if it could get it through the Senate it would cease the rollout at least a year earlier than that – two-thirds of the country wouldn’t have been fibred up and within the one-third where the network has been deployed there would probably be a majority of premises that wouldn’t be connected.

The rollout, partly because of the delays in getting the deal between NBN Co and Telstra executed and ratified by the ACCC, is already eight months behind schedule. By the end of this year NBN Co hopes to have 750,000 premises passed, compared with the 1.72 million in its original schedule. The half a million customers it originally hoped to have signed up by June next year looks an impossible objective, although Quigley will presumably do everything he can to make up some of that lost time.

The NBN is, on NBN Co’s numbers and assuming it does get completed, going to cost more than $40 billion to build and fund through to the point where it generates positive cash flow, although the sluggish start probably means some blow-out in those numbers and NBN Co will need significantly better take-up rates in future to keep the costs somewhere within a ballpark of its corporate plan.

The government is said to have received at least a draft of a revised corporate plan (it was originally supposed to have been lodged pre-Christmas but the delays in completing the deal with Telstra would inevitably have impacted it) which presumably will be made public reasonably soon.

Any significant blow-out in the costs and/or reduction in anticipated returns would be damaging for the government and threaten to bring the entire cost of the NBN onto the federal budget, which would an unsettling prospect for Wayne Swan. It is the cost, rather than any objection to the concept of ubiquitous high-speed broadband, that has caused the Opposition to oppose the rollout.

Contrary to Julia Gillard’s assertion that the choice for Australia is stark – "it’s a choice between broadband and no broadband," she said – the difference between policies represents a choice been near-universal (93 per cent of premises) fibre capable of delivering speeds of up to 100 Mbps or the Coalition’s completion of the network with a mix of fibre-to-the-node, cable and wireless that would deliver lower but for most households (although not necessarily all businesses) fast-enough speeds.

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