Turnbull bets utility over bling in the NBN bout

Malcolm Turnbull has proposed a financially more prudent and far more pragmatic NBN which could equal the technological capacity of Labor's at a $12.7 billion discount, albeit a decade later.

Ultimately the difference between Stephen Conroy’s national broadband network and Malcolm Turnbull’s boils down to the 'vision thing' – and the best part of $15 billion, or perhaps far more.

Conroy’s gold-plated 100 Mbps fibre-to-the premises broadband network is predicated on the 'if you build it they (consumers and applications) will come' approach; Turnbull’s fibre-to-the-node network on providing fast-enough and affordable broadband sooner and far more cheaply.

Conroy’s plan makes existing infrastructure that is still perfectly useable redundant and creates a new national wholesale monopoly funded by taxpayers; Turnbull’s leverages off the existing infrastructure, envisages competition and has user-pays and private co-funding options.

There is no doubt that Conroy’s plan would eventually deliver much higher speeds – 100 Mbps-plus by 2021 versus the minimum average speeds of 25 Mbps Turnbull says the Coalition would deliver by the end of 2016 and the minimum average 50 Mbps by the end of 2019.

The key questions are what consumers would do with those higher speeds and, assuming that there are consumer applications developed that require those speeds, what they would be prepared to pay for them.

The core of the costs within the Conroy plan relate to running fibre to individual premises – which is why the issue of what consumers would do with the extra speed and what they might be prepared to pay for speeds higher than they can get access to today (which is where NBN Co’s entry-level product is pitched) is critical.

You don’t spend $37.4 billion (with a total funding commitment of $44.1 billion) to build a network with capacity that won’t be used within the foreseeable future if the alternative delivers fast-enough speeds for the great majority of households for a capital cost of $20.4 billion and a total funding commitment of $29.5 billion – and has the option of being upgraded to deliver higher speeds in future if required, which Turnbull says his plan would have.

That Turnbull’s NBN would be quicker and cheaper to build is almost irrefutable, given its more limited scope and the fact that it does away with that last and costly fibre link to individual premises, generally using Telstra’s existing copper from the node instead, although it does envisage using fibre for business centres, industrial parks, schools and hospitals where the demand justifies it. One of the criticisms of the Conroy NBN is that it was committed to without any analysis of how much fibre there is already laid and being used by educational institutions, hospitals, businesses and the like.

The cost of the Turnbull NBN is not inconsistent with previous guesstimates of what a FTTN network would cost and it is obvious from the amount of detail the Coalition released today that Turnbull – unlike Kevin Rudd and Conroy when they abandoned their own process for a FTTN network with a $4.7 billion taxpayer commitment in 2009 and instead announced the $37.4 billion version without any meaningful analysis – has at least made some attempt to analyse its costs and revenues.

The problem for Conroy is that so far his rollout hasn’t gone anywhere close to the original plan. For various reasons – including the time it took for NBN Co to negotiate a deal with Telstra but also because of the problems its contractors have had with the logistics of the actual rollout – the Conroy NBN has passed only a fraction of the premises it was originally supposed to have by now.

Earlier this month NBN Co again downgraded its estimate of premises passed by June 30 from an already heavily-revised 341,000 to between about 190,000 and 220,000. Its original corporate plan forecast 1.3 million premises would be passed by the middle of this year.

Perhaps surprisingly, NBN Co is sticking with unchanged forecasts for the cost of the project and it has added only six months to its construction time, sticking with a 2021 finishing date.

The Coalition begs to differ. It says it is likely that Conroy’s NBN won’t be finished until 2025; that its capital costs will be closer to $71 billion than $37.4 billion and that the total funding requirement is likely to be $94 billion rather than $44.1 billion. Conroy might dispute that but, given that he didn’t do any modelling of his NBN before he committed to it and NBN Co has given only limited insights into its business case, he is on weak ground.

NBN Co’s corporate plan envisages average revenue per user more than doubling in nominal terms by 2016 and doubling in real terms by 2018. Turnbull questions whether that can be achieved in a market where spending on telecommunications services has, in nominal terms, flatlined for more than a decade.

If costs are higher than anticipated and revenues lower either consumers directly (through higher broadband charges) or consumers-as-taxpayers are going to have to make up the shortfall.

There is undoubtedly a technology case for Conroy’s NBN – a FTTP network is the Rolls Royce of available broadband technologies today. The economic case isn’t as compelling. Even if everything went according to plan (and so far very little has) the network would generate a return of only 7 per cent.

If NBN Co’s assumptions continue to prove over-optimistic we’d have an extraordinarily costly network useful to the very small proportion of the community who could do something worthwhile with the higher speeds (or at least do something other than downloading multiple high-definition videos simultaneously) subsidised by everyone else.

That’s why Turnbull’s version of an NBN might not be as visionary or as exciting but it is financially more prudent and far more pragmatic.

He also claims that even if it was subsequently decided that the network should be upgraded to FTTP it would, in current dollar terms, still be cheaper than the current network – deferring the final fibre connection for a decade the government would, he says, save $12.7 billion in today’s dollars.

Interestingly, if it wins government the Coalition plans three reviews related to the broadband network.

One, to be completed within 60 days, is of NBN Co’s rollout progress, costs, commercial prospects and strategic options. In effect the review will compare the Conroy NBN with Turnbull’s and recommend a revised NBN Co strategy if Turnbull’s broad assumptions about the state and prospects of the existing rollout prove correct.

The second will be an independent audit of the advice and processes that led to the Conroy NBN and to NBN Co being established without any analysis of the costs or benefits before that decision.

The third will be an independent analysis of the economic and social costs and benefits from broadband which will also advise on the optimal long-term ownership and regulatory arrangements.

While the audit of the processes that led to Rudd and Conroy unveiling the Conroy NBN instead of announcing the failure of their previous attempt to convince someone to build a taxpayer-subsidised FTTN is a political exercise there are important elements within each of the reviews that should have been undertaken by Conroy before he committed to his very expensive version of the NBN. At least Turnbull is prepared to have his NBN subjected to some external scrutiny.