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What now for the NBN as taxpayer investment is capped?

Private investment needed for future of highspeed broadband network. AAP/Lukas Coch

What now for the NBN as taxpayer investment is capped?

Private investment needed for future of highspeed broadband network. AAP/Lukas Coch

The Abbott Government’s first federal budget has allocated funds for capital investment into the National Broadband Network (NBN) to continue up to 2017-18 but with a cap of A$29.5 billion.

This falls well short of NBN Co‘s original forecast of A$44.1 billion not withstanding various estimates of cost blowouts and new NBN Co leadership’s revised forecast of A$72.6 billion.

The Coalition under Tony Abbott’s leadership in opposition and in government has long maintained that NBN could cost less and be rolled out quicker.

That commitment was confirmed this week by Communications Minister Malcolm Turnbull following the budget announcement on spending.

In a statement, he said the budget provides A$20.9 billion in equity funding to NBN Co to cover up to 2017–18. This is on top of A$8.6 billion already committed bringing the total to the capped A$29.5 billion.

This new approach to NBN implementation will save [A]$31.6 billion in funding costs, get the NBN finished four years sooner and enable nine out of ten Australians in the fixed-line footprint to get access to download speeds of 50 megabits per second or more by 2019.

New sources of funding needed

NBN Co CEO Bill Morrow now faces some difficult decisions in deciding how best to allocate resources to meet the objective of providing high-speed broadband across Australia.

NBN Co CEO Bill Morrow. AAP/Paul Miller

Since the Coalition’s election in September last year the NBN has been subject to a number of reviews and a wholesale clean out of management.

With many reviews, such as the cost-benefit analysis, yet to report, the strategic direction for NBN Co is uncertain making it difficult to comment on future developments with accuracy.

What can be said with certainty is the capping of the government’s investment gives a clear indication that Coalition’s NBN will be vastly different from that proposed under Labor.

But some issues will need to be addressed so they do not provide a thorn in the side to NBN Co or hinder the rollout of broadband across the community.

The funding cap amplifies the need for private investment. Only A$57 million has so far been earned in revenue related cashflow against the A$7.3 billion invested to date.

NBN Co will therefore be required to increase revenue and raise funds through private equity or debt financing to ensure it can fund both operational expenses and future capital investments. But it will need to show an attractive rate of return potential to lure Australian institutional investors, superfunds and other international investors.

Alternatively NBN Co will be forced to secure loans to bridge the gap. But whether the Abbott government would offer debt guarantees to the company remains an open question.

NBN Co may seek to reprioritise the rollout of the planned network by cherry picking more profitable connections in metropolitan regions. But this may detract from the rollout of services in areas with a higher capital cost, such as regional towns and outer suburban areas, which are often those areas that have the most to gain from the provision of broadband.

Deals with telcos

The A$11 billion deal with Telstra to lease part of its existing network is currently under renegotiation. This might extend to accessing existing fibre-to-the-cabinet, hybrid fibre-coax and dark fibre in addition to copper infrastructure to speed up “new” NBN rollout.

NBN rollout a mix of old and new cable technologies. Flickr/Stephan Ridgway, CC BY

A changing technology mix means that some existing copper will not be decommissioned, entering operation as part of the NBN.

The outcomes of the renegotiation and the terms of any new agreement will impact the rollout and the future technology mix. Fibre-to-the-node in some form and maximising the use of existing copper infrastructure appears to be a dominant base for such mix and existing carrier infrastructure may offer opportunities in a funding constrained environment.

By further reviewing its construction and installation methods NBN Co may be able to achieve some cost savings and curtail cost blowouts.

Network competition

The NBN Co is operating in an uncertain regulatory environment. The current rules were set up with the NBN Co being a monopoly wholesale infrastructure provider.

Communications Minister Malcolm Turnbull. AAP/Andrew Taylor

But internet service provider TPG’s plan to rollout its own fibre-to-the-basement network is changing the telecommunications landscape requiring a regulatory response. Failure to clarify this would force NBN to lose opportunities in rolling out to rapidly expanding apartments sector with a customer base often opting for higher tier services.

Australia would then see its history repeated once more with parallel network rollout similar to the hybrid fibre-coax rollout by Telstra and Optus.

Maintaining the wholesale monopoly for NBN Co could have possible competitive consequences. Currently there appears to be a confusion in the way wholesale services are defined with potential restrictions on emerging market opportunities. NBN review panel’s terms of reference is seeking input on clarification of this.

Relieving NBN Co of its wholesale-only constraints, or at least redefining its limitations, would allow it to provide network connectivity directly to business end-users such as mobile base-stations, large businesses, governments and national infrastructure such as power grids which offer high growth potential.

This approach would be good for NBN Co as it would open new revenue streams that would support the government’s desire for the company to increase private investment.