Solving Turnbull's NBN dilemma

Malcolm Turnbull’s natural inclination towards competitive markets and the impact of competition on the economics of the national broadband network would appear irreconcilable. But is that necessarily the case?

As discussed previously (What competition would do to the NBN, March 12) TPG Telecom’s planned roll-out of its own wholesale fibre-to-the-basement broadband network for multi-unit dwellings in metropolitan areas could put a wrecking ball through the NBN’s economics and ability to offer universal wholesale prices across the country. TPG has said it could service up to 500,000 urban end-users with its network.

That economic impact, which NBN Co’s chairman, Ziggy Switkowski, this week estimated at between five and 10 per cent would make it almost impossible for NBN Co to fund the cross-subsidy required to ensure that rural and regional end-users would experience the same wholesale prices as those in metropolitan areas. The impact would be far bigger if Telstra and Optus and others were to emulate TPG, as they have threatened.

It would probably also ensure that NBN Co’s borrowings had to be brought on-budget.  The project, already sitting on highly fragile economic foundations, wouldn’t generate anything approaching a commercial return.

The obvious response from the Abbott Government would be to prohibit all infrastructure-based competition. This would close the loophole TPG is exploiting, which allows companies to expand networks built before 2012 by up to a kilometre, and would protect an NBN monopoly.

Alternatively it could directly subsidise NBN Co’s rural and regional end-users’ wholesale prices from the budget. However, one suspects Joe Hockey wouldn’t be amused at the prospect of both a big new recurrent spending stream and NBN Co’s borrowings appearing within his already challenging budget numbers.

An astute Business Spectator reader has come up with the germ of an idea that might reconcile competitive infrastructure within the metropolitan areas -- the cherry-picking of the most valuable customer bases -- and its impact on the economics of the NBN.

What if, they suggested, the rights to cherry-pick NBN Co’s customers were auctioned off in a process analogous to the auctioning of the wireless spectrum?

Switkowski told a Senate committee this week that NBN Co would be able to lay out the consequences of different industry models and the impact of competition on its finances in its contribution to the cost-benefit analysis of the NBN commissioned by Turnbull. That analysis is due to be handed to the government mid-year.

NBN Co’s evaluation of the impact of competition would provide a baseline for the economic value it would lose as a consequence of competitor-owned infrastructure, as well as the implications of that loss of value for the wholesale prices it would need to charge in rural and regional areas to still deliver a positive and acceptable rate of return.

What if, instead of prohibiting competition or providing a direct subsidy to NBN Co, the government auctioned off the rights to cherry-pick apartment complexes within NBN Co’s urban catchments?

NBN Co’s own analysis of the losses of value (which would need to be validated by the Australian Competition and Consumer Commission to ensure NBN Co didn’t ‘’game’’ the process) would provide the reserve prices for auctions that would almost inevitably see bids from TPG, Telstra and Optus.

If NBN Co were to receive the proceeds from the auctions, the value of the rights – whether received as lump sums or as long term income streams – could fund the cross-subsidy. If the bidding didn’t reach NBN Co’s reserve prices, it would remain the infrastructure provider for the area.

The telcos would need to determine whether the cost of extending existing infrastructure and also contributing to the cross-subsidy would still enable them to generate a reasonable return on their investment.

It would, of course, be far simpler and involve less risk to the NBN’s economics and NBN Co’s finances for the government to just legislate to ban competitive infrastructure, full stop.

Using an auction process would involve quite a lot of long-term assumptions from NBN Co about the level of proceeds required and the reserve prices to be set in order to ensure that it could fund the cross-subsidy and generate a sufficient return to keep itself off-budget. It may also be impossible for telcos to make the combination of infrastructure investment and the need to fund the cross-subsidy work for their shareholders.

If Turnbull wanted to inject competition into process, however, the notion of auctioning off the rights to cherry-pick the NBN’s more valuable end-users is an intriguing and creative one.