Don't add Telstra deal to NBN cost: Quigley

Don't add Telstra deal to NBN cost: Quigley

Summary: It is unreasonable to add the $13.8 billion payment to Telstra, which National Broadband Network Company (NBN Co) counts as an operating cost, to the $35.7 billion capital expenditure cost of the whole network, NBN Co chief Mike Quigley has said.

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It is unreasonable to add the $13.8 billion payment to Telstra, which National Broadband Network Company (NBN Co) counts as an operating cost, to the $35.7 billion capital expenditure cost of the whole network, NBN Co chief Mike Quigley has said.

The government estimated that the original cost of the network would be $43 billion, however in the 36-page NBN business case summary released by the government last week, this figure was reduced to $35.7 billion.

NBN Co said this reduced cost was due to the Telstra deal, however this led to Shadow Communications Minister Malcolm Turnbull and NBN critics with the Alliance for Affordable Broadband to add the $13.8 billion deal to the capital expenditure cost for the network to infer that the network may cost up to $55.2 billion.

Quigley told ABC TV's Inside Business that it was incorrect to add the two numbers together.

"They are two different buckets and what you've got to do when you're looking at the total of the opex [operating expenditure] costs, obviously in taking on those additional opex costs we, in our business case, we get considerably higher revenues as a result of that," he said.

The multi-billion dollar payment covers NBN Co's lease of infrastructure from Telstra, as well as the decommissioning of Telstra's copper network.

The deal will allow the NBN to use infrastructure owned by the telco giant, which Quigley said will help offset NBN Co's costs.

"The deal is absolutely positive," he said.

"It's positive for Telstra, it's positive for NBN Co and as a result of that deal we pay operating expenditure costs higher than we would in a no-deal case but we also have much higher revenues."

Quigley said the deal would improve NBN Co's internal rate of return, although he declined to say by how much.

"I know but I can't reveal that number," he said.

"What I can tell you is that it's substantially better, otherwise we wouldn't have done the deal."

The Senate on Friday passed legislation to split Telstra's retail and wholesale arms, clearing the way for NBN Co to formalise its deal with Telstra. The House of Representatives is meeting this morning to pass the amendments to the Bill put through in the Senate.

Quigley said the project's rate of return would be "above the government bond rate", although it was likely to be below its cost of capital over the life of the project.

"This is an asset that will be of value to the nation," he said.

"While we in NBN Co have done a business case, developed a business case, based on costs and revenue, we have not tried to factor in external benefits.

"But clearly there are external benefits and that's a decision that the government made that this is a project which has national benefits."

The government is expected to contribute $27.1 billion to NBN Co over several years, with the difference between that figure and the network's peak funding requirement to be sourced from debt.

Topics: Government, Broadband, Government AU, Telcos, Telstra, NBN

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Armed with a degree in Computer Science and a Masters in Journalism, Josh keeps a close eye on the telecommunications industry, the National Broadband Network, and all the goings on in government IT.

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38 comments
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  • The payment to Telstra and the yet to be finalised payment to Optus should not used as the total payout figure for the NBN?

    It all comes out of the taxpayer purse as a total cost of the NBN, if it wasn't for the NBN the taxpayer would not paying Telstra and Optus at all.

    Count it, it's $43 billion.
    advocate-d95d7
  • Quigley is absolutely right to keep the capex and opex figures separate. Here's an example to make the point clearer.

    The cost of building the Sydney Opera House was about $102 million (I'm told). That's the cost of doing all the designing, excavation, concrete pouring, scaffold wielding and fitting out the whole structure. That was the expenditure in getting it to completion of all site works - the capex. But! you might argue, the Opera House has cost a lot more than that over the years - hefty power bills, maintenance, repairs, staffing, and so on. Many more millions of dollars. So since you had to pay out all that too, shouldn't you add that to the "cost" of the building? After all, a dollar's a dollar, right?

    Well, that's what is being proposed with the Telstra $13 billion dollar payments. Oh, and interest too! Oh, and staffing and depreciation and anything else people can think of, to generate the $50-60 billion figures that are being wielded about with gay abandon.

    Problem is, neither approach makes sense. Because in neither case is there any provision made for the operational income generated along the way. The Opera House generates a return - all the tickets sold, the tourist groups paying to be shown around, the big artists and orchestras and ballet companies and visiting motivational mugwumps who all hire out the hall. So it's madness to lump in every dollar spent on the place, from building it to changing the lightbulbs to cleaning the shiny white tiles, as one great undifferentiated "cost" without also taking into account the income that is earned along the way.

    The tickets pay for the new lightbulbs, so to speak. The tourists pay for the upholstery on the chairs. And so on. It's all opex - operational expense - where you are spending money and receiving it in, all at the same time, all in the normal course of doing business. And the difference between the income and outgoings is the operating profit or loss.

    Now back to the NBN. The Business Case Summary makes clear that the capital cost - the cost of building the physical assets, laying the cable, all the labour and digging and trenching and so forth - is estimated as $34.4 billion to bring it to day 1 of operation. What's that figure? Haven't seen that one, you say! Yes, I'm actually quoting the build cost, not the total "capex" because there is also an allowance of $1.3 billion for maintenance and repairs up to 2020. That then gives us the headline figure of $35.7 billion, the total capex amount, staggered over a 10 year period; and the more responsible figure to use, because it does contain that early maintenance allowance.

    Bringing us finally to the Telstra payments. These are operational expenditure, because they are quite separate from the cost of building and laying cable. They don't pay for the physical asset. They are, instead, part of a wider business deal with Telstra to do two main things:
    - lease Telstra sites and assets (including locations to place FAN and POI physical assets - which would cost money to lease elsewhere even if Telstra didn't make the deal)
    - migrate customers from copper and HFC to fibre (thus maintaining a substantial customer base for NBN - important for cashflow and long-term viability)

    They are, therefore, part of the expenditure that you pay (structured in this case over 10 years or so) in return for normal costs of doing business (ie leases) and gathering a customer base. Think, if you will, of the alternate outcome - if there were no Telstra deal. As I've said, NBN Co would still have to lease premises somewhere to locate its physical assets, but would not have the advantage of the existing integration of the Telstra exchanges, conduits, ducts and pits. And NBN Co would have to work harder (and at greater cost) to move over customers from Telstra's copper network to its fibre, with lower customer base and therefore lower cashflow over the early period (10-15 years). Now, I don't know all the terms of the deal, but the big ones are clear enough; and it was clearly good enough for both sides to benefit. That's what business deals are. Will NBN Co make other deals with other telcos or other enterprises for that matter? I'm sure they will, and they will generate further opex - further operational expenditure, but with the clear purpose of improving the eventual bottom line.

    And that, in a nutshell, is why you can't just roll together the capex and opex figures.
    Gwyntaglaw
  • Of course we must add the $13.8B us good old taxpayers are paying Telstra to the total cost of NBN. Mr Quigley assures us that the dough is coming out of a different "bucket" so therefore does not count. What a load of old cobblers! It comes out of the taxpayers "bucket". What a sad country this has become under Julia and her mates. There is no money for any desperately needed social program except an NBN (to "future proof" us) and renovating empty defence force housing to look after illegal immigrants. There is no way our socially responsible Labor government could afford to renovate and upgrade the same housing to accommodate kids sleeping under bridges or the tens of thousand of other homeless. The carers allowance is currently $53.35 per week to "help" a carer look after a desperately ill or disabled loved one at home. The government can not afford to increase it due to "budget constraints" We have a friend (a 50 year old woman) currently caring for her wheelchair bound elderly mother who can not (of course) get an aged care bed. All our friend would like is a little bit bigger carers allowance so she could afford to pay some third party to look after her mother one day per week. May be Mr Quigley will get some money out of one of his buckets?
    BTW our friend is very encouraged to know that in 5 years time she will be able to download the latest hollywood blockbuster in less than 3 minutes - wow she's future proofed!

    Shame on this government and shame on Katter, Windsor and Oakeshott for letting it happen
    Brianab
    • Your joking right?

      Did you read anything in the story or is that what Tony "Mad Monk" Abbott or Malcolm "Turnbullshit" Turnbull told you to say?

      Unsucessful troll was unsucessful.

      YOU FAIL!
      GENIII
  • Keeping the buckets seperate may be appropriate, but the total bill from both buckets, is paid by the taxpayer.

    Would this 13.8 Billion cost exist without the NBN ? NO. So it's definitley a cost to create the NBN.
    Andrew Castle
  • Responding to Andrew Castle: no, the total bill from both "buckets" is NOT paid by the taxpayer.

    The TOTAL equity from the taxpayer will peak at $27.1 billion. Now, anyone can see that this figure is less than the capex (building) cost of $35.7 billion, never mind the $13.8 billion OPERATIONAL payments to Telstra.

    In other words, the Telstra payments aren't being met by the taxpayer AT ALL. Our $27.1 billion converts to eventual equity in the project. Everything above that is paid for by operational revenue and borrowings (managed without cost to the taxpayer)
    Gwyntaglaw
  • Pass that one by me again Gwyntaglaw, at some point in time the Australian Government pays the Telstra Corporation $13.8 billion from 'operational revenue and borrowings' - really?

    Please elaborate how the Telstra Corporation is prepared to wait until NBN revenue and customer uptake is high enough to pay them the billions owed (sometime in the next two decades after completion I guess), and where are the borrowings coming from, and yep you guessed it at what interest rate, no one lends money of that size without a hefty interest rate, and where in all the NBN documentation are you getting this detailed financial information about the Telstra payment from?
    advocate-d95d7
  • Umm like Telstra paid themself off 10 times

    1. You said the NBN will NEVER pay for itself because it’s “not a total monopoly like Telstra’s last mile”.
    2. Then, after the OECD report you said, the NBN is a monopoly – “one horse race”.
    3. Then you said (quote) “the NBN is just like Telstra’s last mile”.
    4. Lastly, you actually claimed the complete opposite and said the NBN will be even more of a monopoly than Telstra’s last mile…

    So now that you have completely flip-flopped (refer 4), please now justify your claims in #1…

    Then once you have answered that please answer my other questions you also dodged.

    Is Mike Quigley a liar? He says, NBN prices will be equal to or better than the comparative current plans available and in time will reduce further… you say they won’t.

    was there a business case, CBA or price list for OPEL?

    RS-ef540
  • So much for "future proofing" Aussie internet users with fibre to every home...

    Here's a quote hot off the press from http://www.breitbart.com describing Hong Kong's roll out of 4G wireless comms.

    Quote: "The latest generation of wireless Internet that will allow people to watch a crystal clear movie or live sporting event on the street or atop a hill is being deployed throughout Hong Kong.
    The Long Term Evolution (4G) network will give super high speeds across the city and could mean the end of computers ever needing to be plugged into a wall for a connection to the net.
    The so-called "fourth generation" system is being rolled out by Hong Kong mobile network operator CSL in partnership with telecoms equipment maker ZTE Corporation.
    "The first launch of an 4G network any place in Asia is truly historic," Joseph O'Konek, CSL's chief executive, told AFP.
    "For a lot of people, this will be their first experience of the Internet. They are at a huge advantage to previous Internet generations because they are leapfrogging all those fixed line technologies.
    "It is truly going to unleash the power of human networks as this kind of system rolls out more and more across the world."
    4G enables faster data downloads and uploads on mobile devices compared with a third-generation network.
    The system will give speeds of up to 100 megabits per second (Mbps) and should make the high quality viewing of full length movies or realtime live sporting events possible anywhere in the city.
    4G networks are already operating in Europe, Scandinavia and North America. Japan will have an 4G system before the end of the year and huge growth in 4G connections is expected over the next five years, especially in China.
    Meanwhile CSL's owner, the Australian telecoms giant TELSTRA, said it is looking to make acquisitions to strengthen its position in the Asia-Pacific region.
    "Organic growth is always the best growth. But you do need to acquire new technology that's going to allow you to fuel the growth in the future," David Thodey, the company's CEO, told the Wall Street Journal." End Quote

    NOTE WELL! - the second last paragraph re good old Telstra... now that is interesting.

    So much for wireless being not up to the job...just wait until G5 emerges
    Brianab
    • HAHAHA.

      Wireless is the future you say? LOL. There goes any credability you had left. Go back to listening to Allan Jones.

      Once again YOU FAIL.
      GENIII
  • gosh brian, is someone paying you to spam this into every forum you can find? found this exact same monologue posted on at least three now.

    Just so your aware, 100mbps is an artificial limit placed upon fibre, its well capable of doing much more. And the wireless network is quoted as "upto 100mbps" which means real world speeds are most likely going to be far less.

    please dont speak until your educate yourself. And for gods sakes, stop mindlessly copy pasting your blather into multiple forums.
    Pablosan-1a609
  • Brianab, imo you have inadvertently hit the nail on the head re: wireless...

    "JUST WAIT"!

    Yes we have waited, yes we do continue to wait (for wireless promise after promise) and in relation to current technologies, fibre has no equal and wireless is basically, a handy backup...

    I simply look to my mobile phone...when it rings I have to run outside onto the front porch and position myself in such a way I can actually receive the call! I am in a large area (not rural) and this is the wonder technology you laud for us all?

    At some some stage we have to enter the market and stop waiting and praying for the next "great white hope"...!

    In the meantime if wireless does in fact finally offer what they keep promising (but not delivering) within the NBN build time, then great, it can be utilised in some way too...!

    So let's not be a nation that hopes and waits, let's be a nation that does...!
    RS-ef540
  • All figures I've quoted have been from the Business Case Summary. You know, the one that isn't supposed to have any figures (except it does).

    My summary above was taking the long view, not looking at year-by-year cashflow. Over the long term (ie 15 years and above) the story is quite straightforward: $27.1 billion in seed capital, towards construction of a productive asset costing $35.7 billion. Since government contributions are lower (over the whole timeframe) than the capital expenditure, and full equity passes to the shareholders (the Government), the Government is getting a reasonable investment in equity. (In the medium term, once borrowings commence, a small amount of equity will also belong to the debt market; but this is temporary.)

    Of course, for the first 3-4 years, the cashflow for most outgoings, including the Telstra payments, are from Government revenues. That's a cashflow matter, though, not a foregoing of equity. From that point on, enough cashflow is generated from operational income to make the Telstra payments, and contribute towards remaining capex.

    Also don't forget that the Government cash injection, like the Telstra payments, is staged over the 10 year build term. It's certainly not a case of the Government plunking down $27 billion, or $35 billion or $50 billion all up front - and then waiting and hoping that everything will pan out. The outlays at first are surprisingly modest (compared to the scare figures!), and my calculations show that full Government equity of $27.1 billion will not be reached until around 2019, at which time income will be quite significant and robust, and the network nearly finished.

    All this is based on the published assumptions and outcomes; I've just worked backwards to construct a range of 20-year scenarios that would meet those outcomes. There's not too much variation, either - though I don't claim that my figures will be exactly the same as in the official NBN Co publication, to be published in mid-December.

    And no, I have NO insider information, nor am I paid to write any of this.
    Gwyntaglaw
  • The 100Mbps quoted for LTE/4G is a bandwidth *per cell*, not per user. So if there are 2 users connected, they each get 50Mbps. 10 users all get 10Mbps, etc etc.

    For a real-world example, you need look no further than Telstra's "42Mbps" 3.5G NextG network. While they claim it offers "up to 42Mbps", in reality users get a maximum of about 8Mbps and often far less than that.

    You may benefit from more detailed information and a descriptive diagram found at http://nbnmyths.wordpress.com

    Oh, and the other posters are quite correct as to the future speeds of fibre. It's currently commercially capable of about 100Gbps, and experimentally of about 70Tbps. That's only about 70,000 times faster than 100Mbps 4G wireless!
    HazTechDad
  • Dear RS,
    The mental picture I conjure up of you "positioning yourself in such a way" reminds me of page 116 of the Kama Sutra. If you care to study that worthy tome you will discover that the position thus represented will greatly facilitate the receiving of mobile phone calls on front porches.

    So maybe you are in a poor reception area - 90% of us are not and that percentage is growing daily. Maybe of course you simply have the wrong carrier for your area.

    When will you guys get it? I'm not against an NBN, or a fibre network - in fact I'm all for it! What I'm against is spending $50 plus billion on fibre to every home. It just isn't necessary and in your heart of hearts you must know that.

    Not that it matters - it will not happen - see what has happened in Victoria; NSW and Queensland will follow in 2011. A federal election will happen sometime in 2011, the coalition will be returned, Windsor and Oakshott will lose their seats and some level of sanity will be re-injected into federal politics.

    RS have a great Christmas
    Brianab
    • Prediction FAIL

      A federal election will happen sometime in 2011

      HAHAHA
      GENIII
  • I too look forward to another Fedaral coalition government and many more Howard like years of comms apathy and accompanying thumbs twiddling...

    Also, thank you I will enjoy my Christmas, as the nation progresses.

    I too wish you a great Christmas, whilst suggesting you don't try to ring the grand kiddies on that second rate wireless mobile...unless you have a comfy porch!
    RS-ef540
  • The key to your assertions of course is this:

    From that point on, enough cashflow is generated from operational income to make the Telstra payments, and contribute towards remaining capex."

    Why do you assume this WILL happen? - and if it doesn't meet the CAPEX and OPEX requirements where does the money comes from ?

    "and my calculations show that full Government equity of $27.1 billion will not be reached until around 2019, at which time income will be quite significant and robust, and the network nearly finished."

    Projection outcomes to around 2019 on vague spin generalities like 'income will be quite significant and robust' is crystal ball gazing at best.

    No one knows what the uptake will be, no one knows if all the gee whiz products that justifies the technical advantages of FTTH will be used by the majority of customers to keep revenue flow going, the NBN may have to kept propped up taxpayers for many decades to come.
    advocate-d95d7
  • Before having the audacity of questioning another, why don't you firstly answer your own contradictory indiscretions?
    RS-ef540
  • Before having the audacity of questioning another, why don't you firstly answer your own contradictory indiscretions?
    RS-ef540