The real NBN deal

Business Spectator

The switching on of the national broadband network's first mainland site at Armidale in NSW today is a very minor milestone in the controversial roll-out of the NBN. Two far more significant events have to occur before the NBN is properly on its way.

One is a binding deal with Telstra and the other is actually securing the key contractor to build the network.

It appears that a definitive, signed, deal with Telstra is actually not that far away, with only a few not particularly material matters to be resolved. A concluded agreement is, apparently, probably a matter of weeks away rather than months, with some prospect of it being signed this month.

NBN Co and Telstra had hoped to have a definitive deal some months ago, with Telstra originally hoping to have a shareholders' meeting to ratify it on 1 July. It now appears it is tentatively planning to have that vote at its annual meeting on 18 October.

While Telstra is now committed to securing the deal and the $11 billion of net present value that will flow to it from NBN Co and the Federal Government over time as NBN Co accesses its ducts and trenches and its copper network is progressively decommissioned, it doesn't have absolute control of the timing.

The Australian Competition and Consumer Commission also has to approve the terms of the agreement as well as the detail of Telstra's interim separation. While the ACCC might be expected to be supportive of the NBN given that it had a role in developing the concept, it is under no obligation to work to Telstra's timetable and therefore there are no guarantees that there won't be further slippage in the timeline of the roll-out.

The other critical agreement is for the key construction contract, estimated to be worth more than $12 billion. Last month, after a consultation and tender process lasting a year, NBN Co suspended the tender process, claiming that none of the 14 short-listed companies or joint ventures had offered acceptable terms and pricing.

Despite the Communications Minister, Stephen Conroy, again claiming today that the tender had been cancelled because the companies had tried to "rip off" NBN Co, the outcome of that process has bemused the market (and angered the failed tenderers) because it was a protracted and competitive process.

Subsequently NBN Co has been trying to negotiate a deal directly with individual companies, presumably hoping they will trade off margin for the volume of work they would gain.

It would be very aware that any deal is going to be intensely scrutinised by the failed tenderers and the Opposition to ensure that the terms and conditions and the allocation of risk is superior to those earlier bids, and they don't adversely impact the cost assumptions in NBN Co's business plan. The NBN will be constructed, of course, in a market where the demand for skilled labour is exploding because of the scale of the resources and infrastructure investment boom.

Conroy said today he hoped that the construction contract negotiations would be resolved soon. It would, of course, be a disaster for NBN Co, and Conroy, if NBN Co can't finalise a deal that doesn't create a blow-out in the costs of the roll-out.

It is unclear what the fallback strategy might be if, having rejected the original tenders, NBN Co couldn't find an acceptable alternative. NBN Co has said that the NBN won't be built at "any price", but it is unthinkable that NBN Co and the government would abandon the roll-out.

It would be politically catastrophic for an already embattled minority government, which strengthens the negotiating position of whichever companies it is that NBN Co is negotiating with.

Armidale is one of the NBN's first-release test sites. While it is feasible that NBN Co could start rolling the network out to second-release sites, striking some kind of interim commercial arrangement with Telstra to get access to its ducts and trenches, it appears to want to get the core construction contract and the Telstra deal locked in before pushing the button for the start of a full-scale deployment of the network.

The scale of the project, which ostensibly will cost $35.7 billion, means that any slippage in the timetable or relatively modest increase in costs could wreak havoc on its actual build cost and economics.

The government and NBN Co will also be mindful that the Opposition would, if it were in government, like to shut the NBN down, arguing that it is an overly-expensive technology for supplying sufficiently high-speed broadband.

The faster and the more extensive the roll-out is, and the more binding the contracts with Telstra and the network builders, the more difficult it would be for the Coalition to abandon the network.

While the flow of cash to Telstra under the deal would be a trickle rather than torrent in the early years of the NBN, the prospect of the deal being torn up, of losing the $11 billion of NPV and facing structural separation under a Coalition government, means Telstra will be doing its utmost to co-operate with and help NBN Co.

Getting the network built on time and on budget is, of course, quite a separate challenge to creating a commercial business around it which also produces a competitive and level playing field for retailers of telecommunications services and delivers affordable high-speed broadband to consumers.

While many are sceptical that the network can be built for $35.7 billion, and even more doubtful that it will deliver even the very skinny positive return NBN Co assumes, if it doesn't get built on time and on budget it is inevitable that all the other outcomes will be badly distorted. Hence the pressure to lock up the deals with Telstra and the key contractor urgently. 

This article was first published on Business Spectator on May 18. Republished with permission.