On Tuesday afternoon, communications minister Senator Stephen Conroy and NBNCo CEO Mike Quigley officially launched the 2012-2015 corporate plan for the National Broadband Network at the NBNCo headquarters in North Sydney. We learned that the budget for the project has increased, the delivery deadlines remained on track, and that consumers are favouring the higher available speeds over the cheaper, slower options. Learn all that and more in Gizmodo’s liveblog direct from the event.
Like many corporate launches, press releases with the key details were handed out prior to the speeches. These were the key points we learned from the release:
- Construction for 758,000 premises will be commenced or completed by December 2012, and for 3.5 million households by mid-2015. This was largely what was already forecast. As of June 30, 305,000 premises had been connected.
- Total capital expenditure to build the project has gone up by $1.4 billion (3.9 per cent). Operating expenditure over the same period has gone up by $3.2 billion. We got a lot more , but here’s a key quote: “These changes in costs have been more than offset by forecast increase in revenues that are projected beyond the Fibre Construction period.” In other words: we’ll spend more, but ultimately we’ll make more. The forecast rate of return on the project is now 7.1 per cent, up slightly from 7.0 per cent.
The event officially kicked off with Senator Stephen Conroy kicking into some of the more erroneous recent reporting around the NBN. Traditionally biased coverage of the NBN is a speciality for The Australian, but today Conroy’s main target turns out to be the Australian Financial Review, which has recently run a number of pieces quoting opposition communications spokesperson Malcolm Turnbull on NBN issues. “I’m convinced that if Malcolm Turnbull put out a press release saying the NBN was late because the earth was flat, the AFR would run it,” Conroy states. He suggests that people check out Whirlpool threads or other sources if they want a detailed discussion of actual NBN issues.
Conroy then runs through a list of areas where what he calls “misreporting” have been rife, including construction targets, contracting, financing, and pricing for consumers. “The costs and financing of the NBN have been continually subject to misinterpretation. ” One common trick; adding operating expenses to capital expenses to generate a higher total figure. “This fails accounting 101. It is simply wrong. Didn’t stop Malcolm Turnbull.” Something else making Conroy unhappy: questioning the treatment of the NBN as an investment, which means it doesn’t show up as an annual budget expenditure. “To treat it as an expense would be breaching international accounting standards,” Conroy says.
Conroy then kicked into an article from the AFR earlier in thw eek. “This week Mr Turnbull seems to have finally accepted the accounting treatment of the NBN is an investment, but he goes on to assert that the cost of making this investment should be included in the cost of the NBN. Not surprisingly, the AFR has reported this incorrect assertion as an ‘explosive claim’.” Conroy subsequently adds that if Turnbull’s logic applied to all companies, Fairfax would have to include the cost of Gina Rineheart’s interest costs when she bought shares in the company on its own books. “This is a nonsense and should be utterly, utterly ignored.”
“NBN Co’s financial structures have been independently audited by the Australian National Audit Office,” Conroy points out. I must say, I’ve rarely seen Conroy this angry — and he is making a reasonable point, albeit the kind of accounting point few people will bother to follow through. If you’re convinced that the cost of the NBN is a rort, any excuse to see it as increasing is usually grabbed with both hands.
“A mini-industry has developed recently trying to compare NBNCo progress to the 2011-2013 plan. The original date shifted by nine months [because of negotiating with Telstra]. This is not new. The detailed design of the volume rollout could not start until 5 months ago. The data needed was not available until conditions and precedents were satisfied in March of this year.” In short: without the Telstra deal completed, detailed planning wasn’t possible.
What should be measured, Conroy says, are the targets in the three-year plan being released today. “The plan being released today confirms the project is on track. The area subject to the most confusion is greenfields. There was a significant change to the approach to greenfields after the 2011 plan.” The big change: 73,000 premises were handed back to Telstra, and construction of new homes flagged.
“The number of premises available to be passed is utterly driven by premises to be passed.” With a 25 per cent fall in housing starts, there are fewer opportunities, Conroy said. The number of developer applications for new houses was 40,000 lower than predicted. Conroy suggests that saying a site is short of connections on houses that aren’t built is, again, a “nonsense”.
“NBNCo’s forecast of greenfields premises is based on intended construction activity. If houses are not constructed, that doesn’t mean that NBNCo is missing its targets.”
Now the really good stuff for most of us: what we pay as consumers. Again, Conroy suggests, this has been inaccurately “Within 24-48 hours, back of the envelope calculations became accepted.” A widely-misreported $200 per month cost for consumers was often used. Conroy notes that Abbott still claiming “three times the cost” of current plans (in his recent Budget reply, for instance), which is, based on current plans. “Retail service providers have started offering services at prices equal to or better than current offerings,” Conroy said. He then talked up the value of WhistleOut and other sites to compare those plans. (He should actually look at Lifehacker’s Planhacker, of course).
More tellingly, Conroy points out that basic Telstra line rental following recent rises is now higher than the cheapest NBN plans from Exetel and SkyMesh.
With that dismissal over, we move onto the actual plan. There has been “considerable progress”, says Conroy: all legislation passed “despite ferocious opposition”, definitive agreements with Telstra now established and unconditional; the ACCC has approved structural separation and an Optus deal to sign over all its cable customers; NBNCo has signed contracts on all three technologies across every state and territory in Australia.
And then Conroy reiterates a key point: “The plan released today is the first NBNCo operational plan. The targets released today are the first against which NBNCo can be measured.”
What should we get from the NBN? “Wholesale broadband prices are projected to fall over time in both real and nominal terms.” And has the process been too slow? “Despite a nine month delay in the Telstra plan, construction has only been delayed by six months.”
There’s a clearly defensive air from Conroy, though it’s one I suspect many Gizmodo readers will sympathise with. “Every step of the way, the Government and NBNCo have demanded that taxpayers get value for money in contracts. I make no apologies for the NBN being a long-term infrastructure project that will take 9-10 years to finish. I make no apology for fibre to the home. I make no apologies for the fact that NBNCo is being made for the next 50 years and beyond, not just today.”
Conroy then returns to one of his favourite comparisons: the Sydney Harbour Bridge. “If the Harbour Bridge was designed based on current demand, that would be one lane each way at best.” This demonstrates a lack of foresight by Abbott and Turnbull, Conroy says.
With that, we pass on to Mike Quigley, the NBN CEO, for some more details.
The original corporate plan was from a startup-like organisation, Quigley says, and we’ve moved on, he says, before repeating the main target number figures for further emphasis. Consumers are benefitting, he suggests: “Our wholesale prices are right where we wanted them to be to put retail prices exactly where we wanted them in the market.”
“If takeup is faster than we predicted, then wholesale prices will also reduce faster,” Quigley says. He carefully doesn’t directly tie this to retail price drops, but you’d expect them to happen.
Quigley emphasises that the Optus HFC deal wasn’t in the 2011-2013 plan, which has changed several elements of expenditure. “The scope of the project has improved since that time.”
The big changes from the 2010 plan to 2012 which Quigley calls out fall into two broad categories: scope (such as the Optus deal), and timing or costing (such as the Telstra delay or increasing quantity of infrastructure rented from Telstra). Some of those changes were in the definitive agreement with Telstra but not the original corporate plan.
A key change — and one which is of interest if you care about the details of NBN implementation — has been the adoption of ‘build drops’. “In the original plan, we were going to put drops from the street to a home once there was an order for a service,” Quigley said. “We will now be putting those drops in when we build down a street. That is more efficient given the high take up rates we anticipate, but it does bring some costs forward. It’s better in the long run but it does bring some further ahead.”
The Optus HFC cable deal will add another 500,000 customers, so “obviously the capex costs for connections and opex costs for migrations have gone up”, Quigley said. “Also, not surprisingly, we have an increase in revenue because of the customers.” In other words: costs go up pre-2021, but go down post 2021.
Tracking the costs is complex, and not easily reduced to a single figure. Capex has actually dropped slightly, because some capex has converted to opex as some Telstra infrastructure, particularly dark fibre, has gone down in cost. Conversely, estimates of network distances to be covered have gone up, as mapping data isn’t always accurate, especially in rural areas. However, equipment costs have gone down. Staff costs have gone up in some areas, but fallen in others. Another change that makes comparisons difficult: capex figures in the old plan assumed a finish in December 2012, while the new plan runs until mid-2013. The newly quoted figures cover a longer period, which also contributes to the increase.
Forecast revenue from users has changed slightly, largely because the Optus customers migrating from HFC are more likely to want speedier (and pricier alternatives), Quigley suggests.
Crucial, forecast for uptake now includes more customers on higher speeds. The projections include fewer customers on mid-tier slower plans based on demand so far, though NBNCo still assumes lots of 12/1 customers (the cheapest option). Comparison of CVC and wholesale DSL prices shows NBNCo is a favourable option already.
There are now 500 NBN plans on offer, Quigley points out. A comparison of 25/5 to ADSL2+ (the former is necessarily faster) shows very favourable price comparisons even now. That doesn’t work so well for 4G broadband since, as Quigley points out, only 4 per cent of active 4G plans offer 20GB per month. “That’s the fact of mobile versus fixed. We need both networks. We need mobility, but we need networks such as the NBN for capacity. [Wireless] can go at reasonably high speeds, especially with LTE and 4G, but providing capacity is very difficult.”
It’s at this point that the total capex cost — $44 billion — gets explicitly mentioned for the first time. You can bet THAT’s the figure that will be hammered (without explanation) by the news media. Peak government equity in the project will be $27.5 billion. Despite those shifts, Quigley notes the main financial goals haven’t changed.
An interesting random fact: on current plans in 2027, NBNCo starts to pay tax (and estimates it will owe at least $1 billion).
Quigley’s summary? “We’re a year in, nine years to go, we’ve built the company, we’ve done the big deals with Telstra and Optus and for construction and equipment, we’re on track for three-quarters of a million premises to commence by the end of the year, and our internal rate of return is marginally up from 7.0 to 7.1 per cent. The prices are just where we wanted them, and people are getting better services.”
A final shot to remind people that NBNCo is not a standard commercial organisation: “For a company such as NBNCo, our aim isn’t to generate higher profits; our aim is to get wholesale prices down as far as we can.”
And now the Q&A commences
First up: how to fund the extra $3 billion?
Conroy: “We have built this into the forward estimates and when we do our mid-year economic update it will be built into there. We’ll be raising more bonds earlier than originally forecast. To try and suggest that there will be an increase in taxes because of the NBN would be a fabrication.”
Q: Why the delay due to the Telstra agreement? Should the interim access deal help?
Quigley: ACCC had approved specific interim activities and trial sites, but “what we couldn’t get was the national duct data which allowed us to do all the planning. I can’t overestimate the complexity and the large-scale job that getting that was.”
Q: Will that delay affect Telstra payments for its copper network?
Quigley: “We’ll be going as fast as we can. We’re keen on paying Telstra all the money they’re due as fast as they can.”
Q: Can you rule out further blow-outs?
Conroy: “3.9%. That’s a blow-out?” Quigley: “It takes longer to get going but you can drive process improvement as you continue.”
Q: Can we discuss the numbers in terms of homes passed, which was the old metric?
Conroy reiterates that the plan changes make that difficult and the metric isn’t being used any more. “We’ve had challenges, no question, but the premises forecasts numbers were based on estimates.” Quigley says 286,000 premises will be passed in “brownfields” sites by this time next year. By June 2015, should be 2.5 million.
Q: Are we assuming future delays? Does everyone have to connect?
Conroy: “Customers have always had the capacity to say no. In terms of future delays, no.” Quigley: “As you move forward, you make your best estimate; that’s what we have done. The start-up issues, they are behind us.”
Q: So the build-drop does go to the premises?
Quigley: Yes — it connects fibre from multiport into the edge of the building. When someone requests an order, all that has to happen is the fibre from the PCD on the side of the home to the network terminating device.
Q: So is that opt-out, not opt-in?
Quigley: No, you can turn that down — they’ll know we’re coming.
Quigley notes that communicating with the general public has cost more than expected, but most people see it doesn’t cost more. Notes values of homes have gone up where fibre is connected overseas.
Q: Why is only 20% uptake for wireless NBN being predicted?
Quigley: “Because we recognise there will be other competing wireless services, and because the copper is being retained in those areas.”
Q: How much will be saved with optional battery backups for home NBN services?
Conroy: Emergency Services overwhelmingly preferred informed choice, not compulsory rollout. Quigley: Typically, 50% say yes. If it ends up higher, we’ll spend more. “When people understand, they say ‘but I’ve got a phone over here, is it good for that?’ and it’s a cordless phone. There’s not much point backing up a cordless phone.” Estimates “hundreds of millions of dollars” in not making it compulsory.
Q: Will wage rises be a challenge?
Quigley: “We have made our estimates, we have contracts and we have very regular meetings now with [our suppliers]. We’re confident with the projections we’ve made on those costs.”
Q: What happens with contracts in an election context?
Quigley: Contracts are never in perpetuity — there are always exit clauses. We don’t place orders way in advance, but options are there. “I can’t give a number that says ‘it’s this amount of money the company has committed’.”
Q: Is there an issue if the NBN is abandoned?
Conroy: “Malcolm Turnbull is engaged in an act of sabotage on the NBN. He says he wants to complete the NBN, but not the NBN we’re talking about. He has made a whole range of inconsistent statements.”
Conroy notes change in claimed speed requirements for average Australians by Turnbull from 12Mbps to 24Mbps over the time the NBN has been active. “Malcolm Turnbull is engaged in a dissembling operation to mask the fact that he plans to sabotage the network. The price you will pay in Tasmania or regional Australia will skyrocket because he’s going to end cross-subsidies. And he can only bring it on [the budget itself ]if he wants to breach international accounting standards.”
Conroy reiterates one of the frequent criticisms of the Opposition: the total lack of detailed plans on how the NBN would be implemented. “No-one should be fooled that they are planning to implement the NBN as we have planned, 93% fibre to the home and the rest satellite and wireless,” Conroy says.
Quigley adds: “You’d need to do a complete rearchitecture if you want to do fibre to the node”, which typically only done by the incumbent. Conroy: points out that Turnbull’s oft-repeated claim of being able to do a rollout of fibre-to-the-node at one-third the cost depends on the incumbent doing it, which is essentially impossible now.
Q: Are greenfields sites keener on slower speeds? Quigley:
“I wouldn’t say we’ve seen any significant shift there.” Notes this is early days and the assumption is that even in 2028, 38 per cent of people will be on 12/1. “If we’re being conservative on that, that’s good news because prices will go down.”
Now some online questions:
Q: When is the next update on sites?
Quigley: Every quarter, on a yearly rolling basis.
Q: Does the build-drop reduce costs for customers who don’t take it up?
Quigley: That happens without any cost to end users — they only pay when they order a retail service.
Q: Given the Coalition’s misleading statement, would you like a Queensland-style law about misleading parliament?
Conroy: Ministers who mislead resign, “the shadow frontbench doesn’t take that seriously”. “If Malcolm Turnbull and Tony Abbott actually decided to start telling the truth, a number of things [I referred to] would not be said.”
Q: What’s the cross-subsidy for rural households given a 20% takeup?
Quigley: “The cost per subscriber does depend on takeup.” With satellite, the more customers, the lower cost. “What I would like to say is we’re seeing takeup of the interim satellite is in fact exceeding what we expected at this point in time because the service is such an improvement over what we’ve seen beforehand.” Quigley notes that capacity extensions on fixed wireless is expensive given “spectrum is very limited”.
Q: Have geospatial problems been overcome?
Quigley: We’re working as we go. “We have put in place a very rapid continuous delivery of our IT systems. We’re doing drops of new software weekly, sometimes twice-weekly, so every time we hit an issue we confront it. We have a better view of obstacles now than we had.”
Q: Strata committees don’t always agree to connect NBN to a building; is there any way to help that?
Conroy: “Telstra and Optus faced this. If the strata says no, we declare it ‘frustrated’ and we move on. We can’t storm the building. We still have property rights in Australia.”
Q: How much more do build drops cost?
Quigley: No specific number (not billions). “It’s a substantial figure but it’s a good investment.” Overseas experience suggests 20-30% takeup makes build drops more sensible.
Q: Are analysts correct in saying the Opposition version would be cheaper?
Conroy: Of course you can, it’s like a one-lane road; it’s cheaper but less useful. Quigley: “You can’t cost a completely different architecture.”
And that was that.
There’s bound to be lots of coverage of this in the days to come, and I expect much of it will ignore this detail in favour of the “cost blowout” angle. We’re a long way from the NBN being finished, but we’re also very much past the point where it could easily be dismantled.