Chapter Two
The Implementation Study
Background to the Implementation Study
2.1
The background to the commissioning of the Lead Advisor (McKinsey-KPMG)
to provide an Implementation Study to the Government was comprehensively
detailed in the committee's Third Report.[1]
2.2
Also detailed in that report was the Government's failure to make
publicly available the only interim report provided by the Lead Advisor. It was
an interim report the Government received on 14 August 2009, a mere eight weeks
after the Lead Advisor's appointment.[2]
2.3
The Government received the Implementation Study from the Lead Advisor
on 5 March 2010.[3]
Despite repeated calls in Parliament and from industry and other stakeholders,
the Government repeatedly refused to publicly release the document until 6 May 2010.[4]
The Implementation Study does not justify the NBN progressing
2.4
The Implementation Study was conducted within very limited parameters. As
the Implementation Study itself states,
[e]xplicitly, it does not:
- Evaluate Government's policy
objectives;
- Evaluate the decision to implement
the NBN via the establishment of NBN Co;
- Undertake a cost-benefit analysis
of the macro-economic and social benefits that would result from the
implementation of a superfast broadband network.[5]
2.5
Because the Implementation Study does not evaluate the merit of the Government's
policy objectives (because it was instructed not to), it provides no analysis
whatever of whether the NBN is good policy for Australia. It simply does not
address whether the NBN project should even proceed.
2.6
The Implementation Study also does not provide a cost-benefit analysis
of the NBN. It does not consider, at any point, whether the project represents
value for an enormous outlay of Australian taxpayers' money. The Implementation
Study is premised on the assumption that the project will be implemented. At no
point does it consider whether it should be.
2.7
At no point has there been a cost-benefit analysis of the macro-economic
and social benefits that would result from the implementation of a super-fast
broadband network in Australia. The Implementation Study explicitly does not
undertake that analysis.[6]
2.8
In its Third Report, the committee stated:
The committee is appalled that, at the time of reporting,
almost eight months after the announcement of the commitment to a massive
investment of $43 billion for the FTTP NBN, the government still refuses to
comply with its own legislative requirements that the NBN must undergo a
rigorous cost-benefit analysis.[7]
2.9
Almost six months later, nothing has changed. There remains no analysis
about whether or not the social and economic policy implications arising from
the NBN merit a multi-billion dollar investment. The Implementation Study is
not a substitute for that analysis.
2.10
In the absence of a cost-benefit analysis proving to the contrary, the
committee believes the NBN is not justifiable policy. Too much public money is
at stake to be thrown away without transparent, accountable, independent
assessment of the merit of starting, let alone progressing, the project.
2.11
All in all the committee does not accept that the Implementation Study,
nor other evidence given to the committee, supports the NBN in its current
form.
2.12
The committee believes that there are better ways to provide fast broadband
of a capacity and speed required by most Australians at a cost considerably
less than the $26–43 billion suggested by the Implementation Study. The
committee believes that by working cooperatively with the industry, a better
arrangement could be implemented providing affordable fast broadband at an
earlier time than is proposed by the NBN in its current form.
2.13
Accordingly, the committee recommends that the Government abandon the
National Broadband Network project.
Recommendation 1
2.14 That the Government abandon the National Broadband Network project.
2.15 That if, in the alternative, the Government insists on progressing the
NBN, it be progressed in accordance with the recommendations contained in the
remainder of this report.
Relevance of Implementation Study compromised
2.16
The stated purpose of the Implementation Study was to 'advise Government
on how best to implement its stated policy objectives' of building the NBN.[8]
As described above, the underlying premise for the analysis in the Implementation
Study was that the NBN project would progress, not the question of whether it
should.
2.17
The committee believes that the Implementation Study should only have
been commissioned after a thorough cost-benefit analysis of the NBN had been
conducted.
2.18
If the results of a thorough cost-benefit analysis had actually
justified the massive expenditure that the NBN will involve, then the committee
believes that the Implementation Study would have been an important document to
commission. However, it needed to be, and should have been, completed prior to
the commencement of the roll-out of the network and key decisions on network
architecture, product offering and the legislative framework for the NBN being
made. That is, the Implementation Study should have been conducted as part of
the policy analysis leading up to the 7 April 2009 announcement.
2.19
The committee feels that the Implementation Study is an exercise in retrofitting
a justification for the Government's commitment rather than adequately
explaining how the NBN can and/or should be implemented.
2.20
Because the Implementation Study was not handed to the Government before
5 March 2010, and then was not made public to industry and key
stakeholders before 6 May 2010, any relevance and value of the
Implementation Study was fundamentally compromised.
2.21
During the time in which the Implementation Study was not publicly
available, NBN Co was making irreversible decisions on network architecture and
product offering. To take just one example, NBN Co has already finalised its
plans for the roll-out of the NBN in Tasmania which is due to commence
providing retail services to Tasmanians within the next two months. Industry
stakeholders, future retail customers and telecommunications analysts have had
to operate in the dark. The time for public consultation on this document
should have been prior to critical decisions having to be made. The 6 May 2010
release date was too late.
Failure to release the Implementation Study
2.22
As described above, the Government received the Implementation Study on
5 March 2010 but, even in the face of widespread and sustained criticism,
refused to make the document public until 6 May 2010.
2.23
At the same time as it was refusing to make the Implementation Study
public, the Government was unashamed in publicly acknowledging the central
importance of the document to discussions on the NBN. The Hon. Stephen Conroy,
Minister for Broadband, Communications and the Digital Economy, stated at a Communications
Day Summit in Sydney on 20 April 2010:
[The Implementation Study] is a detailed and comprehensive
document.
It includes advice among other things on the detailed
operating arrangements, network design, financial analysis, the structure of
the company and the legislative framework around how the NBN should operate.
It is over 500 pages long and contains 84 recommendations.
It is a significant and important document for the future of
this sector.[9]
2.24
The committee has already stated that the Government's failure to
release the Implementation Study was a deplorable demonstration of political
posturing which failed every criterion of accountable, transparent,
evidence-based government and policy.
2.25
It is not only the committee voicing such views. In an opinion piece in
the leading industry publication, Communications Day, on 28 April
2010, the respected telecommunications expert Mr Kevin Morgan explained how the
Government's conduct has put 'sanctions on open debate':
NBN 1.0 [ie the original Request For Proposal process for
bids to design and build a Fibre to the Node NBN] was marked by secrecy, a cone
of silence excused by probity. That secrecy led to an inevitable policy failure
as the government dodged critical issues such as the regulatory settings and
possible compensation to Telstra. Now NBN 2.0 [ie the Fibre to the Premises
proposal] is being framed in a similar cone of silence with decisions being
made without public debate or scrutiny.
The Senate Select Committee has sought to step into the void
but its work has been hampered because key parties such as DBCDE, the ACCC and
NBN Co have been unwilling or unable to give any real insights into how
decisions on the NBN have been made or what the real plans are for the future.
The reticence of public servants to offer insights either formally or informally
is understandable. Unauthorized disclosure of information could attract two
years jail under the Crimes Act.
Such sanctions on open debate and the sharing of information
may well maintain the integrity of government decision making but they do not
create the environment for rational policy formation. The NBN should not merely
be open access – it should be planned and built in a wholly open environment
where all parties have equal standing and access to information. Anything less
threatens further policy failure leaving Australia with a network shaped by
little more than political expediency and ambition.[10]
Process of decision making:
duplication?
2.26
During the course of its inquiry, the committee learned that, despite
the cost of the Implementation Study, the conclusions and recommendations made
in it are not necessarily being followed.
2.27
It emerged in evidence given to the committee by NBN Co CEO,
Mr Michael Quigley, that NBN Co is itself making the final decisions
on its product offering and network architecture, and that when making those
decisions, NBN Co uses the Implementation Study as a reference tool only. In
addition to the Implementation Study, NBN Co has regard to the results of its
own processes of public consultation, and any other material it thinks fit.[11]
2.28
In his oral evidence to the committee, Mr Quigley denied that this was a
process of costly duplication:
Mr Quigley—As you would expect, there is a complementarity
between the issues that the implementation study was studying and what we are
doing.
Senator FISHER—Is complementarity in any respect the same as
duplication?
Mr Quigley—No. I would not use the word ‘duplication’.
Senator FISHER—So there is no overlap between the
implementation study and the sorts of studies that NBN Co. has been undertaking
itself at NBN Co.’s cost—for example, into the network architecture?
...
Mr Quigley—In some of these very complex issues, there is a
lot to be gained—a tremendous amount to be gained—by having a very productive
debate from two angles. As we know, this is a project in which—
Senator FISHER—So that is not duplication?
Mr Quigley—It is not duplication.
Senator FISHER—That is value-adding, is it?
Mr Quigley—It is value-adding. If I were in private
enterprise, spending on a project of this size, we would not hesitate to spend
that sort of money upfront to make sure that the issues were investigated from
every angle possible.[12]
Committee view
2.29
While the committee understands the need for 'productive debate' on
complex issues such as network architecture, it remains concerned that the
Implementation Study does not represent value for money. Given the government's
delaying tactics, the committee believes the $25 million spent on commissioning
the Implementation Study would have been better spent obtaining a thorough cost-benefit
analysis of the NBN project itself.
Release of the Implementation Study
2.30
The Implementation Study was finally released on 6 May 2010. The
timing of the release raised almost more questions than the Implementation
Study answered.
2.31
The Government chose to release the Implementation Study at a time that
would give parliamentarians and the industry little chance to absorb the
document prior to the Budget three day Parliamentary Week and less than one
week before this committee – set up by the Senate to specifically inquire into
the NBN – was due to report. It is important to remember that the Senate
previously agreed to extend the committee's reporting date so as to enable the
committee to closely examine the Implementation Study and any Government
response to it. Paragraph 2A of the committee's revised terms of reference instructs
the committee to:
...examine the findings of the National Broadband Network
Implementation Study, the Government's response to the Implementation Study and
any subsequent impact of that report for the national Broadband Network policy.[13]
2.32
The decision to release the Implementation Study so close to the
committee's intended reporting date of 12 May 2010 compromised the committee's
ability to address the Implementation Study in sufficient detail in this report.
2.33
It is quite clear that the timing of the release of the Implementation Study
is politically motivated and the committee may well ask why it has taken so
long to release this document. The only answer could be that the Government
deliberately tried to curtail any in-depth analysis of both the document or any
future Government response. That may well be because neither the Implementation
Study nor Government announcements to date provide a concrete, detailed business
plan outlining the specifics of how, when, and for how much the NBN will be
(not 'might be') rolled out in every street in Australia.
Analysis of the Implementation Study
2.34
The Implementation Study is a 534 page analysis of what might be some of
the challenges when implementing the NBN. The committee considers that there is
no point in rehashing that analysis. In any event, given the timeframe, the
committee has not had sufficient opportunity to analyse the document in detail
or subject it to public consultation.
2.35
But even from a preliminary analysis of the document, it is evident that
some of its most important conclusions, for example regarding the cost of the
project and whether Telstra's involvement is necessary, are based on some
fairly audacious assumptions and in some crucial areas lack sufficient detail
in evidence or analysis to withstand much criticism.
2.36
Further, although the Implementation Study highlights a range of issues
that will be important in implementing the NBN and the areas in which Government
action or decisions by NBN Co will be needed, in many areas it fails to give
the specific details of the actions needed. Simple questions like what the
specific product offering will be in specified parts of Australia, how much it
will cost end users, the extent of Government subsidies, the timetable of the
NBN roll-out to different locations, and the feasibility of some of its
suggestions and recommendations, are not answered.
2.37
After an initial overview of the Government's commentary on the
Implementation Study, the rest of this chapter will highlight the key areas of
the Implementation Study that are in need of closer examination and debate. Those
areas and concerns cast significant doubt on the Government's claims that the
Implementation Study proves the NBN is a viable project which can be built on
time and to budget and without NBN Co reaching any agreement with Telstra for
the use of Telstra's assets or, more crucially, for the seamless migration of
Telstra's millions of fixed-line telephony and broadband customers onto the
NBN.[14]
Government's media response to the
Implementation Study
2.38
The Government released the Implementation Study with a media release,
the first page of which was as follows:
The Rudd Government today released the National Broadband
Network (NBN) Implementation Study which confirms that high-speed broadband for
all Australians is achievable, and can be built on a financially viable basis
with affordable prices for consumers.
The comprehensive report was prepared by McKinsey & Company and KPMG, and has 84 recommendations for the Government about the NBN.
These cover the technology, financing, ownership, policy framework, and market
structure of this important infrastructure project.
Minister for Broadband, Communications and the Digital
Economy, Stephen Conroy said:
'After months of detailed and rigorous analysis, the
Implementation Study confirms that the Government’s National Broadband Network
is achievable, viable and will transform life and business in Australia.'
The Implementation Study also confirms that while
infrastructure sharing and other commercial arrangements with existing
telecommunications companies can benefit the project, the NBN will be
financially viable even without the participation of Telstra.
Key findings and recommendations from the Implementation
Study include:
-
The NBN will deliver world class
broadband infrastructure to all Australians;
- The $43 billion total capital cost
of the NBN is a conservative estimate and there are opportunities to
significantly reduce the build cost;
- The peak investment required by
Government is estimated at $26 billion by the end of year 7, of which $18.3
billion will be required over the next four years;
- Government should retain full
ownership of the NBN until the roll-out is complete to ensure that its policy
objectives are met – including its competition objectives;
- The fibre component of the NBN
should be extended from 90 to 93 per cent and cover the 1.3 million new
premises expected to be built by 2017-18;
- Entry level wholesale prices on
the fibre should be set at around $30-35 per month for basic broadband 20Mbps
plus voice service, to drive affordable retail prices and better value for
money for consumers compared to what is available today;
- Fibre to the premise is widely accepted
as the optimal future proof technology with wireless broadband a complementary
rather than a substitute technology;
- Next generation wireless and
satellite services will deliver peak speeds of at least 12 Mbps (and much
higher for many wireless users). Satellite services will deliver average data
rates which are more than 20 times higher than most users of these technologies
experience today and much higher than average DSL usage today;
- NBN Co can build a strong and
financially viable business case with the Study estimating it will be earnings
positive by year six and able to pay significant distributions on its equity
following completion of the roll-out; and
- The Government can expect a return
on its equity investment sufficient to fully cover its cost of funds.[15]
Costs of roll-out and the
likelihood of take-up
2.39
The Implementation Study projects that the NBN can be rolled out with a
peak Government investment of $26 billion and that the total cost of the NBN
'is affordable within Government's initial cost estimate of $43 billion'.[16]
As a 'conservative' estimate of the total capital costs of building the NBN,
the Implementation Study estimates that at the 'high end of plausible
expenditure range', the NBN could be built for $42.8 billion.[17]
2.40
The committee is concerned that a number of the assumptions made in the
Implementation Study to underpin the cost analysis may not be supported, in
which case there could still be significant cost blow-outs and increases in the
overall cost of the NBN. Two key assumptions are take-up rates and wholesale
pricing.
2.41
Submitters and witnesses providing evidence to the committee did not
have the benefit of the Implementation Study during the committee's
consultation process and were therefore unable to comment on its analysis.
However, a number of analysts have since provided commentary on the
Implementation Study in the media. One of those analysts included the
telecommunications expert, Mr Kevin Morgan, who had previously provided a
written submission to the committee.[18]
In an opinion piece in Communications Day, Mr Morgan was one of a number
of analysts querying the validity of the key assumptions made in the
Implementation Study regarding take-up rates:
The NBN Implementation study appears to have been reversed engineered
in to the government's original cost estimate – it's a post hoc rationalisation
for spending $43 billion.
...
Under the revised ‘business case’, private equity through
privatisation would not be introduced until at least 15 years into the project,
by which time there might be some retained equity and government equity will
have been replaced with government guaranteed debt to give a typical 50/50 debt
equity ratio.
With privatisation, the government might get its remaining
equity back and if the NBN enjoys, as the study foreshadows, overbuild
protection, then private investors will enjoy a monopoly built on free
taxpayers' funds.
If the assumption the government will fork out S26 billion to
earn negligible return is bizarre, then the assumption take-up rates will
exceed 70% and could approach 90% is heroic.
This compares to FTTH take up rates in the USA and Holland
which have levelled off at 30%.
Despite such realities, the study argues the attractions of
fibre for RSPs will drive take up to effectively 100% of fixed line households.
Bear in mind 20% of Australian households don’t have a computer. Nevertheless,
the study believes consumers will be won over by RSPs offering retail services
built on an entry level 20Mbit wholesale offering.
[The Implementation Study recommends that NBN Co charge an
entry level $30-35 wholesale access price]. But this $30-35 wholesale access
price could well more than double with retail mark-ups: so will
consumers—especially those who just want the equivalent of a standard telephone
service—be keen to migrate when they only pay $30 per month for access now?
True, that a 20 Mbit wholesale product has far greater
functionality. That’s the key to winning over the RSPs who then will then
migrate customers over to the NBN but given RSPs can already offer 8-20 Mbit
ADSL 2 on near fully depreciated DSLAMs for an access fee of $15 over copper in
metro areas will they rush to the NBN? They will be foregoing a $15 per month
margin.
In summary there is little to support the penetration rates suggested
by the study—other than the implicit threat of overbuild protection. This means
the study is effectively predicated on a de facto monopoly which raise
significant competition policy concerns.[19]
2.42
Mr Grahame Lynch, founder of Communications Day, also provided a
damning next-day analysis of the Implementation Study's assumptions about
wholesale access charges and take-up rates, commenting that:
...when interpreting the government spin about affordability
and seven year break-even points and the like, it’s worth remembering these
forecasts are [far] from inevitable and derived from some contentious beliefs
and assumptions.[20]
2.43
Mr Lynch's analysis identified two forecasts that he believes 'are not
so inevitable' but which seem to underpin the Implementation Study's overall
positive projections. The first was an assumption about wholesale pricing:
The study, rightly, identifies that retail service providers
will not happily migrate from ULL and LSS based services to fibre unless there
is an economic advantage for them in doing so. As a result, it makes great play
on preserving current copper pricing for entry-level pricing, but it also makes
the heroic assumption that overall retail “conditioning” costs for such
elements as active equipment and backhaul will fall in the NBN environment.
Indeed, it quantifies this so-called "indifference" premium between
copper and fibre at around $12-24 per month. I’m not so sure.
The study explicitly models a wholesale ARPU for NBN Co at
$35-38 – a blend of such varying tariffs as a $25-30 "voice only"
tariff, a $33-38 tariff for voice, "basic broadband" and IPTV, and,
intriguingly, a $60 tariff for small business.
$38 NBN ARPU: Given the NBN is explicitly designed as a
replacement to the Telstra Wholesale 'network' business, I note that, today,
Telstra Wholesale’s average monthly ARPU for broadband services is $24.12, its
monthly ARPU for voice services is just under $22—this includes the gamut from
fully conditioned 'ready for resale' services through to $2.50 LSS and $16 ULL
offerings. Of course, not all access providers are equal. One of the largest
ones I know of is believed to spend as little as $8 per service to Telstra for
network provision, largely because it is geared towards LSS-derived broadband
services in its product mix. Wholesale prices for HSPA services are less
competitive, but come in at between $12 and $40 or so depending on data usage.
The study recommends all variety of incentives to induce RSPs
to migrate across such as discount offers, free connections and the like, but
of course these add to overall project cost and need to run the gamut of
competition law. And most significantly it recommends that NBN Co should be
able to discriminate on the basis of the type of end user such as a mobile base
station, a school or a business. Should that eventuate that would certainly
provide ATUG with a new crusade!
At the end of the day, I'm not so sure that the NBN study's
proposed 'entry-level' pricing is entry level enough, nor that the small
business market will take enthusiastically to $60 wholesale buy prices for
services that are today 'end-user' agnostic.[21]
2.44
The second 'shaky assumption' identified by Mr Lynch regarded take-up:
The study undertakes a great deal of examination of various
scenarios for rates of return and the like, but provides little clarity on how
many activations it thinks the NBN will gain. One chart models what three
scenarios – low demand at 70% take-up of "fixed broadband", 80% 'mid
level' and 90% 'high demand' but it isn't clear if this applies to NBN or the
entire fixed market. Another chart is more detailed, implying that by 2015,
there will be just 31-35% takeup among the homes passed (about half), rising to
54-63% by its completion date and then 75-90% by 2035. 6-12% increases in
takeup on an annual basis are projected in another section. But confusingly,
another reference in the document provide a slightly contradictory tone - for
example, a detailed explanation on the relative merits of fibre and wireless
costs makes the startling observation that NBN takeup is expected to be lower
in the wireless areas because of competition from DSL and 3G!
Elsewhere the report also assumes that NBN Co will be able to
increase wholesale prices by between 0-2% a year throughout the project, a
highly contentious assumption given that prices have generally been decreasing
by greater amounts in recent times.
The study seems to believe that the advent of fibre will
stimulate fixed network usage because of its greater functionalities, and also
because it will clearly provide speed and competition advantages in markets
with a lack of DSLAM deployment or with low speeds because of loop lengths and
pairgain.
But some of its supporting arguments are dubious to say the
least, for example it believes the NBN will gain take-up advantages over
comparable projects overseas because of the "pride" Australians will
feel in it. Hmmm.
PSTN DECLINES, THE UNCONNECTED: The bullish estimates of
uptake also would seemed to be belied by a few other inconvenient truths:
overall PSTN revenues are declining by over 7% a year and at an accelerating
rate, even fixed Internet revenue is flat. Some 30% of internet connections are
now wireless and increasing at a double digit annual rate, while at the other
end, 28% of households don't have Internet access. Don't expect that latter
figure to change too fast, some 22% of households don't have a computer either!
Overall household expenditure on communications as a percentage of income has
remained incredibly stable across decades and the wireless sector is becoming
more and more adroit at staking its claim on it.
The report adopts another contradictory tone on the wireless
front: it predicts that wireless broadband growth will slow down partly because
providers will not be willing to invest in additional backhaul capacity. At the
same time it says that backhaul capacity will become cheaper for fixed carriers
and assist the decision to migrate to fibre, even though both would seem to
face exactly the same growth issues! Similar leaps on logic are detected in the
report's consideration of video - it rightly considers at some length the
difficulty of monetising the NBN through video services as a result of the sunk
cost advantages of incumbent broadcast networks, but then elsewhere drops a
gratuitous reference to the advantage of fibre over wireless in providing next
generation HDTV![22]
2.45
Even in November, in its Third Report, the committee was voicing
similar concerns about wireless take-up rates. In that report, the committee
noted its considerable concern that take-up rates on fibre may not reach
ubiquity given the increasing preference of Australian consumers for wireless
solutions.
The latest figures [on wireless uptake from the Australian
Bureau of Statistics, June 2009] demonstrate a remarkable continuation of the
increase in wireless broadband uptake, growing from 1.298 million in December
2008 to 1.961 million in June 2009 ...The committee is concerned that the
government’s requirement for FTTP technology to underpin the NBN ignores this
trend in wireless broadband uptake, impacting the ability of the network to
meet future demand.[23]
2.46
The Implementation Study's answer to these concerns was:
Rather than substituting for fixed-line broadband
connections, as has been widely assumed, most mobile broadband connections are
for users who also have a fixed-line connection at home. This suggests that
mobile broadband is a complement rather than just a substitute for fixed
broadband.
Moreover, research in multiple markets consistently suggests
that between 70 and 90 percent of mobile subscriptions are not substitutive.
Less than a third of Australian broadband households today are mobile only,
according to Telsyte research. That number is estimated at between 20 and 25 percent
in the US, 24 percent in the UK, and 9 percent in France.
This suggests that less than 200,000 of the nearly 664,000
mobile broadband accounts added in the six months to June 2009 were added by
mobile-only users. The 470,000 remaining were complementary—purchased not by
people replacing their fixed broadband accounts but supplementing them.[24]
2.47
The Implementation Study concluded from that analysis that:
Mobile broadband growth does not directly substitute
fixed-line services; they are complementary in many cases, and address
different user bases.[25]
Committee view
2.48
The committee believes that no credible case has been made for the NBN
in its current form and agrees with respected independent analysts that there
are too many questions left unanswered and too many gaps in the case in favour
of the NBN for the committee to support the NBN in its current form.
2.49
As already discussed above, the absence of any realistic cost-benefit
analysis leads the committee to conclude that the current proposal is unlikely
ever to be built and that there are no sound facts supporting the position that
the NBN in its current form could ever operate other than as a highly subsidised
Government-owned instrumentality relying on on-going taxpayer support for its
very existence.
2.50
The committee believes that competition between parallel networks of
Telstra, Optus, Vodafone and others will mean that the NBN will be unable to
attract customers at prices suggested in the Implementation Study when
currently, services for very fast Broadband are available (without NBN) and
will continue to be available at prices considerably less than NBN Co's
suggested wholesale price.
2.51
The committee is also worried that estimations of the take-up of FTTH of
70–90 per cent take-up of fixed-line broadband services, and 6–12 per cent
increases in take-up on an annual basis, are unrealistic. Assumptions that the
NBN Co will be able to increase wholesale prices between 0–2 per cent a year
throughout the project are highly contentious given that prices have generally
been decreasing by greater amounts in recent times.
2.52
The suggestion that the NBN will gain take-up advantages over comparable
projects overseas because of 'pride' Australians will feel in the new network
is just ludicrous and immature.
2.53
The suggestion that take-up rates will exceed 70 per cent and could
approach 90 per cent is heroic compared with FFTH take-up rates in USA and the
Netherlands which have levelled off at 30 per cent.
2.54
Similarly, suggestions in the Implementation Study that the $30–35
wholesale access price is irrelevant when one considers that it could double
with retail mark-ups so that consumers who want an equivalent of a standard
telephone service will be unlikely to migrate when they only pay $30 per month
now for the access. Given that Retail Service Providers can already offer 8–20 Mb
ADSL2 for an access fee of $15 over copper in metropolitan areas, it is difficult
to see the majority of those customers rushing to NBN.
2.55
The committee agrees with the following analysis from Professor Henry
Ergas:
The assumptions, notably about take-up, have already received
extensive comment. It hardly needs to be said that there are many uncertainties
involved in projecting demand for fixed network high-speed service. Whether the
Study has paid enough attention to the emergence of mobility as a dominant
feature in consumer preference (as highlighted by the strong demand for the
Kindle, the iPhone and even more so the iPad) is especially questionable. Its
views about the long-term progress of data rates over wireless are at odds with
other studies, and make its conclusions about the demand for NBN Co’s service
seem unduly optimistic.
Additionally, it is surprising, to say the least, that the
Study projects very high levels of penetration for the NBN even in a scenario
in which Telstra competes with the NBN using both its copper and HFC networks.
While the Study claims that the economics of the copper network would force
Telstra to progressively decommission copper, this part of its assessment shows
a scant knowledge of the operating costs of the Australian copper network. It
also seems to ignore the HFC network and the scope not only to upgrade it, but
to extend its reach in areas where unit revenues are high and incremental
expansion costs low. The likely effect would be not only a fall in NBN Co’s
market share but also in its unit revenues. If the Study did not take that
possibility into account, it is seriously deficient; if it did, its failure to
release the relevant results is unfortunate. [26]
2.56
The committee does not believe the analysis in the Implementation Study justifies
the conclusion reached and remains concerned that the increasing trends towards
wireless will continue unabated and will compromise the assumptions of take-up
rates which underpin the Implementation Study's assessment of the commercial
viability of the NBN. Wireless take-up rates and the increasing preference of
consumers for mobile devices such as the iPhone and the Kindle all suggest a
trend away from fixed-line infrastructure. The committee remains concerned that
rapid advances in technology could overtake the completion of the build of the
NBN which would make the NBN a financially and technologically risky
undertaking. The Implementation Study does not appear to have adequately (or at
all) addressed this issue.
Services to the final 10 per cent
2.57
To date there has been very little analysis and certainty about how the
final ten percent of premises (those outside the original 90 per cent fibre
footprint area) would be serviced under the NBN. More specifically there has
been very scant detail about the quality and speeds of service to these
premises, access prices for them, and likely arrangements for government
subsidies to make the broadband services affordable to remote and regional
Australians.
2.58
The Implementation Study outlines some details on these matters, but
there remains little certainty about exactly what will be done, and what the
prices will be, until the Government makes its response to the Study.
2.59
In the interim, however, one point is clear: those in the last ten
percent will receive a significantly inferior service. The Implementation Study
proposes that the NBN be built in a way which departs from the Government's
stated objectives of providing broadband services of 12 Mbps to all
Australians, with 90 per cent to receive services of up to 100 Mbps. The
Implementation Study concludes that providing broadband speeds of 'at least' 12
Mpbs would be 'prohibitively' expensive and would take the cost of the NBN
beyond the $43 billion target figure. The Implementation Study therefore
redefines the target speeds for wireless and satellite in terms of 'peak' as
opposed to 'committed' speeds, something which will see end users on the urban
fringes or in regional and remote areas outside the fibre footprint with
substantially inferior services to those end-users serviced by fibre:
The Implementation Study believes that Government's objective
of delivering at least 12 Mpbs should be defined in terms of peak data rates to
be enabled in the final 10 percent due to the prohibitively high cost of
delivering average data rates of 12 Mpbs.[27]
2.60
A further point to note is the extent to which the Implementation
Study's proposals for servicing the final ten percent – to the extent it
provides any concrete certainty on the matter – have a striking similarity with
the coalition's previous OPEL project.[28]
Mr Grahame Lynch provided a particularly insightful commentary on the matter in
another opinion piece in Communications Day:
The NBN Implementation Study, for the first time, provides
some substantial detail on how the NBN might look for the final 10% – or perhaps
7% – who will not get access to a Layer 2 only FTTH network. And, somewhat
bemusingly, it contains a recommendation for a direct return to the original
Opel Networks idea. It remains to be seen if minister Conroy will be happy with
that one!
The study seems to have taken the original $43b cost
projection and worked backwards: basically asking how much extra fibre you can
get for your bucks under that scenario. The answer: an extra 3% over the original
90% based on the quite interesting finding that is cheaper to activate fibre
than wireless for the 3% of premises at that level of population density.
For the next 4%, a terrestrial wireless network will be the
go and according to the study’s writers, the best solution there is not to have
NBN Co build one but to tender out to private enterprise. Yes, this is a direct
return to the former government’s wireless tender policy that led to the
aborted appointment of Optus-Elders JV Opel Networks to build a rural WiMAX
network. NBN Co should only build this network
as a last resort, suggests the study.
The final 3% would gain access to two KA-band satellites,
which would also be used to fill in black spots in the wireless footprint – serving about 350,000 households in total. For obvious lead time reasons, such
a solution would not be available for some years, so the study also proposes
that NBN Co should aggregate existing satellite demand and bid for interim
capacity from an existing supplier.
The study acknowledges that getting wireless and satellite
tech to hit the 12Mbps mark creates a massive cost challenge. Even with an
external antenna, a household would have to be located within 7km radius of a
wireless base station to get the required speed. It also talks of a 12Mbps peak
data rate, which seems somewhat of a comedown from the 12Mbps average which was
implied in earlier announcements.
The idea behind tendering out to the private sector is the
hope that one of Telstra, Optus or VHA will come to the party with their
existing rural tower and backhaul networks and save the NBN some money. The
successful tenderer would be able to offer both wholesale and retail services
side-by-side, but perhaps with some top-ups or mandates to ensure universal
service provision where retail competition is not present. The study provides a
number of tips as to how such a tender should be designed, presumably with the
controversy over Opel in mind.
$5.3B FOR THE LAST 10%: All up, the study estimates that its
hybrid fibre/wireless/satellite solution for the last 10% will cost up to $5.3
billion, not including backhaul costs which add another few billion to the mix.
This is not an insignificant investment and questions do need to be asked as to
its efficacy. A KA-band satellite solution, for example, is estimated to cost
$11,000 per premises, largely because of the need to deploy a second satellite
for redundancy and the tremendous insurance premiums associated with satellite
launches. And that wouldn't deliver an ample 12Mbps per user throughput, indeed
the study suggests something like 300-400kbps is more likely.
Elsewhere in the study, KPMG and McKinsey suggest a solution
for urban areas which could also draw on its rural wireless idea.
The study says that NBN Co should consider using the existing
HFC networks – which cover around one-quarter of the proposed NBN footprint – to provide high-speed broadband services ahead of fibre deployment. It's an
interesting idea, made all the more compelling by the fact that neither Telstra
or Optus consider their HFC networks to be core infrastructure and also by the
fact that technological developments in the HFC space would see those networks
more than capable of providing NBN-style speeds well into the future. With some
caveats, the study recommends that NBN Co be given the option to acquire an HFC
network. Which begs a question - if it is good enough to get one of Telstra,
Optus or VHA to tender for and provide a wireless service in the bush, why not
so the same in the inner cities for HFC? It could certainly save quite a lot of
wasted overbuild capital and take some of the tension out of the whole 'urban
planning' challenge that the NBN will face.[29]
2.61
In the absence of further information, the committee questions whether
the evidence provided by the Implementation Study on wireless and satellite
solutions are well thought out. The wireless solution proposed by the
Implementation Study sets the onus on the Government to undertake a request for
tender process to determine a commercial provider to establish a wireless
solution in the last ten per cent, and in the absence of there being any
suitable tender, that NBN Co provide these services itself. The committee is
concerned that years after the cancellation of the Coalition's OPEL proposal,
regional and remote Australians are still years away from receiving adequate
services – wireless or otherwise.
Roll-out timetable: prospect of
delay and cost implications
Implementation Study recommends
delaying roll-out
2.62
The committee was surprised to read, in the Implementation Study, a
recommendation that the roll-out be slowed down in order to improve the NBN
Co's returns over time 'if costs are higher or take-up lower' than expected.[30]
2.63
The committee believes any extension of the eight-year roll-out
timetable is unjustifiable. The committee believes that, given the investment
the Government is committing, such a detrimental impact on Australian taxpayers
left to wait for broadband services would be deplorable.
Can NBN be rolled out in eight-years
in practice?
2.64
The Implementation Study outlines a range of issues that will impact on
the successful roll-out of the NBN and whether it is feasible to achieve under
budget and within the projected eight-year timeframe. Some of the most
significant identified are:
- The enormity of the task required in terms of number of premises
needing to be visited per workday (estimated at 5000)[31]
and the labour intensiveness of the roll-out;
-
Regulatory matters such as infrastructure sharing and access
arrangements; and
- Development and landowner consent requirements, in particular for
multi-dwelling units which represent 1/3 of Australian premises.
2.65
The committee's concern is that there are potentially major problems in
all of these areas that could have significant implications for whether the NBN
will actually be built within the eight-year roll-out.
2.66
To take just a few, the Implementation Study notes that there may be
substantial delay and increased cost caused by development and landowner
consent requirements and disputes with local governments, but these do not
appear to have been sufficiently taken into account in the modelling:
...given the large range of local authorities within the fibre
footprint, it would not be surprising if disputes arose in some areas. In the
absence of voluntary agreement, NBN Co would need to rely upon the regime
contained in Schedule 3 of the Telecommunications Act 1997.
The cost implications of delay or prevention of network
roll-out in various areas could be substantial.[32]
2.67
The committee believes such landowner and development consent obstacles
are likely to arise, and indeed were raised by submitters during its public
hearings in April 2010.[33]
The Implementation Study does not detail how significant any cost or delay
implications could be if and when such consent obstacles arise.
2.68
Further, the committee is concerned with the potential for significant
obstacles relating to workforce numbers and training to impede the network's roll-out,
also compromising the eight-year roll-out timetable. The Implementation Study
identifies the enormity of the NBN roll-out task, stating:
Recognising that the implementation task is enormous, a
pragmatic approach is needed. Up to 250,000 kilometres of access network and
backhaul fibre must be buried or strung overhead, along most roads across the
country. Up to 5,000 customer visits per workday could be required over the
8-year roll-out.[34]
2.69
However, whilst acknowledging the nature of the task, there is only a
limited, separate consideration in the Implementation Study of whether there is
currently an adequate workforce, or sufficient training and safety standards,
or what might be the implications for delay and cost blow-outs if these matters
prove challenging. Again, the committee's concern is that these issues will
substantially affect the feasibility of the roll-out. The committee discusses the
matter in further detail in chapter 7 below.
2.70
Finally, in terms of the fraught area of access rights to bodies
corporate, the Implementation Study notes that there may be significant
difficulties in adequately servicing multi-dwelling units but does not provide
any certainty for how the issue will be addressed in practice. Given approximately
one third of Australians live in multi-dwelling units, the committee is
particularly concerned with this impediment.
2.71
The authors of the Implementation Study did not have the benefit of any
extensive trialling of fibre-optic roll-out across different geographic
environments to be able to determine the likelihood of impediments to the roll-out
eventuating. The committee is hopeful that, following the trials currently
being conducted by NBN Co,[35]
a detailed, roll-out plan addressing the issues will be developed. In the
meantime, however, the committee remains deeply concerned that it is unlikely
the NBN can be rolled out within the allotted eight-year timeframe. The
committee is therefore deeply concerned about what might be the implications of
a delayed roll-out to premises which will wait many more years for superfast
broadband facilities to arrive.
Commercial viability
2.72
The committee has not sought to test the accuracy of calculations made
in the Implementation Study or the economic validity of their premises. The
committee firmly believes these must be properly analysed in the interests of
transparency and accountability. In any case, they are critical to the accuracy
of the Government's claims that the NBN provides value for money and a
sufficient return on the Government's initial investment of at least $26
billion in building the network.
2.73
The committee notes the following analysis of Professor Henry Ergas
which appeared in the media in the few days between the release of the
Implementation Study and the presentation of this report:
There are also a number of seeming errors in the analysis.
For example, the Study uses the Modified Internal Rate of Return (MIRR) instead
of the Internal Rate of Return (IRR). However, neither the MIRR nor the IRR is
relevant to deciding whether to go ahead with a project; what is relevant is
whether the project has a positive NPV.
Moreover, that NPV needs to be assessed at different levels
of the assumed cost of capital, as well as for different revenue and cost
scenarios; the Study neither estimates the project NPV nor sets out the
sensitivity tests around it. This in itself seriously reduces the value of the
Study.
Even more surprisingly, at a number of points in the Study,
costs are discounted to the present at 9 per cent, which is higher than the
bond rate which the Study (incorrectly) takes as the cost of finance (a point
discussed below). The effect is to reduce the present value of costs. It can be
perfectly correct to discount costs and benefits at different rates, but this
is subject to two constraints: the differences must reflect differences in systematic
risk; and the weighted sum of the rates should equal the discount rate for net
income under the project. Neither of these conditions seems to be met in this
case.
The most serious problems with the Study lie in the
conclusions that have been drawn from it. In particular, the Study does not
show that the project is commercially viable; on the contrary, all it shows is
that under the assumptions the Study team made, the project’s internal rate of
return is slightly higher than the bond rate. This raises two obvious
difficulties.
NOT COMMERCIAL: First, the bond rate is far below a
commercial rate of return. As the Study acknowledges, a commercial rate of
return would be several percentage points above the bond rate: the Study itself
suggests a range for that required commercial return that goes to 12.4 per
cent. The Study also acknowledges that the Competitive Neutrality provisions
enshrined in the Competition Principles Agreement require that capital used in
the project be costed at that commercial rate. And readers will not need to be
reminded that the government repeatedly claimed that such a commercial rate
would be earned by the project. Those claims are comprehensively refuted by the
Study.
Second, the bond rate is not even the cost of finance to the public
sector. Here the Study errs by ignoring the Department of Finance’s own
Handbook of Cost Benefit Appraisal which says that “the Government’s borrowing
rate does not reflect the true opportunity cost of the use of capital funds”, a
point also stressed by the Productivity Commission in its comprehensive study
of the choice of discount rates for public sector investments. Rather, the cost
of finance to a project must be grossed up to take account of the systematic
risk of the project. (Additionally, and also ignored by the Study, where there
are losses that will be financed by taxpayers, the net loss must be grossed up
by marginal deadweight cost of taxation). This would yield a cost of public
funds for the project close to or even above the private sector pre-tax WACC.
Regardless of the precise level of that rate, it is clearly far above the
Study’s estimate of the project IRR. It is disappointing that the Study does
not get this right, as it has a significant bearing on its conclusions and as
the correct approach would be obvious to any practitioner in this field.
NO BENEFIT ANALYSIS: That the project fails to cover its
capital costs, properly estimated, does not mean it is undesirable. That
assessment would require a comparison of the project’s properly estimated costs
to the properly estimated benefits. The Study is not intended to undertake such
a comparison and does not. However, what can be concluded from the Study is
that if cost-coverage is the relevant criterion, the project fails, probably by
some 10 to 15 billion dollars.
The government, in releasing the report, has suggested that
its findings mean that the substantial funding the project requires will not be
a drain on the Budget. Even were this claim correct, and for the reasons given
above it should not be, it is obviously wrong to suggest that the funds used in
this project do not detract from other uses of resources. This project will not
be funded by manna from heaven; rather, it will be funded by the taxpayer, who
will bear the very significant costs and risks involved. There is therefore no
doubt that discontinuing the project would yield large savings that could be
used for other purposes; obviously, there is the question of whether those
savings would be justified. This question the government could only have
answered if a proper cost-benefit appraisal had been undertaken.[36]
2.74
At a minimum, the passage quoted above rings alarm bells about the
commercial viability of NBN Co and the desirability of the NBN project as a
whole. The committee believes these issues must be subject to further analysis
and public consultation.
Recommendation 2
2.75 That the Government require the Department of Finance and Deregulation (the
DoFD) to calculate the net present value of the NBN, using the data and
assumptions contained in the Implementation Study, and based on a calculation
of the weighted average cost of capital in accordance with the usual principles
applied by the DoFD in relation to public capital expenditure.
Unresolved matters of concern
2.76
In relation to a number of highly significant aspects of the NBN, the
Implementation Study outlines key issues but does not provide certainty as to
how these challenges will be solved.
2.77
The committee is of the view that many of these issues will have a
serious impact on the Government and NBN Co's ability to implement the NBN and
that they do not support the Lead Advisor's overall recommendation that the NBN
can be implemented within the eight-year time period and within the initial
funding envelope.
2.78
Uncertainty surrounds such critical questions as:
(a)
the future of the Universal Services Obligation under the new NBN;
(b)
arrangements for infrastructure that is dependent on copper-based
services such as traffic lights;
(c)
exactly which premises are within, and which are outside, the NBN fibre
footprint;
(d)
the sufficiency of existing resources (including workforces) to cope
with a roll-out of this size;
(e)
the final specifications for installation and deployment of the network;
(f)
product specifications such as average speeds (as opposed to theoretical
peak or maximum speeds) that consumers will be able to obtain on each of the
different technologies;
(g)
arrangements for migration of customers, particularly for those
consumers currently locked into phone, internet and pay TV plans and what will
be the financial consequences for them of a switch to the NBN;
(h)
the specific content of safeguards that need to be built into the
governing legislative framework for NBN Co to ensure that, subsequent to privatisation,
all Australians continue to receive adequate broadband services;
(i)
the long-term plans for pricing (both wholesale and retail) on the
network; and
(j)
the physical impact that the roll-out of the NBN will have on each
premises.
2.79
In the absence of answers in the Implementation Study, there remain no
concrete plans for how the NBN will be implemented. For that the public and
stakeholders will have to wait for the Government's response which could be at
best a couple of months away. More probably, the consumer will need to wait
until NBN Co actually provides its product, price and service offerings down the
streets in the coming years.
Recommendation 3
2.80 That the Government provide a comprehensive response to the
Implementation Study as soon as possible.
2.81 That the response clearly articulate in detail:
- a mandate for NBN Co and when, how and where that mandate will be
formally recorded;
-
the proposed funding arrangements for NBN Co, including a
statement of all intended future equity contributions to NBN Co or NBN Co
subsidiaries, the quantum and timing of each, and the arrangements the
Government will make to formalise its funding agreement with NBN Co;
- a business plan for the NBN, where necessary developed in
consultation with NBN Co, and including a cost-benefit analysis;
- the proposed timetable for the roll-out of the NBN to all
Australian premises, including the type of services that will be available in
particular, identified locations;
- the future of the Universal Service Obligation and how services
will be guaranteed and funded for regional and remote Australian premises.
Further work of the committee
Need for committee to consult on the
Implementation Study
2.82
As already described, in the very short period between the release of
the Implementation Study on 6 May 2010 and the presentation of this
report on 18 May 2010, the committee has not been in a position to fully digest
the contents of the Study, or stakeholder and public concerns about it. Given
that the Government does not intend to provide a response until after its
consultation process has been undertaken, the committee has, for obvious
reasons, also not been in a position to examine, as expressly included in the
committee's terms of reference, the Government's response to the Implementation
Study.
2.83
However, the committee's preliminary assessment of the Implementation
Study, and the reaction of expert analysts in the press, indicate that
significant doubts remain about some of the critical assumptions underpinning
the Implementation Study's most important and rash conclusions.
2.84
The committee believes that, given the results of its preliminary
assessment of the Implementation Study and the amount of taxpayer money that is
at stake for this enormous project, it is appropriate that the NBN project
remain the subject of scrutiny and reporting requirements. The committee also
notes that given the Government's conduct of the NBN to date, conduct which has
seen it withhold critical information from key stakeholders and the public and
continually time announcements for political gain as opposed to transparency
and accountability, this is a Government project which must be held subject to
continued scrutiny of a Senate committee.
Details of further hearings and
submissions process
2.85
As outlined in chapter 1 of this report, on 12 May 2010, the Senate
agreed to extend the final reporting date for the committee to 17 June 2010.
The extension was granted to enable the committee to consider and report on the
Implementation Study.
2.86
The committee invites submissions, the deadline for which is 27 May
2010.
2.87
The committee will also conduct public hearings on the Implementation
Study.
2.88
Further information is available on the committee's website at: www.aph.gov.au/Senate/committee/broadband_ctte/index.htm.
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