Govt response rubbishes Senate NBN Committee Interim Report

Interim Report

Government Response

Estimated a revised deployment schedule that is at odds with NBN Co's current run rate – allowing the Review to “strip out” $11.6 billion in revenues from the Labor model and adding $13 billion to the Strategic Review's calculation of peak funding

“If anything, the current rollout pace suggests the Revised Outlook 2024 completion date may veer towards optimism rather than the pessimism Labor and Green Senators allege.”

“Establishing and maintaining operationally and commercially effective relationships with construction partners has been a major challenge for NBN Co from the start.” 

“NBN Co's revenues from broadband through its history were a cumulative $30 million up to September 2013 – or $1 for every $54 in overhead expenses. Allowing overhead costs to ramp up so far ahead of revenues means very year of delay in the rollout results in a huge addition to NBN Co's cumulative losses, and the total capital it requires.”

Ignores $4 billion in architectural savings that had already been signed off by previous NBN Co management;

“This can only be a calculated misrepresentation of the facts. Most of the potential savings in capex from the so-called 2.1 Architecture proposals for changes in the design of the FTTP network had not in reality been properly evaluated by a formal business case in September 2013 – much less gained the required technical and Board approvals to proceed, been incorporated into the design process (with its lead-times of multiple months) and implemented in the construction of the network.”

Increased estimates of the capital expenditure of the fibre build by $14.4 billion despite evidence from NBN Co and the Department of Finance;

“Accurate information regarding NBN construction costs per premise was elusive prior to the change of government. Once this data was properly compiled, however, it told a clear story. Average costs per premise up to September 2013 were materially higher for all types of deployment (except greenfield FTTP costs, and customer connect costs for a small sample of multi-dwelling units) than had been disclosed to the public or Parliament.“ 

“Few processes were put in place at NBN Co or its partners to log and learn from experience, benchmark contractor performance, identify and share best practices, or otherwise achieve the improved productivity Senator Conroy apparently believed could spontaneously materialize without such effort.”

Uses “overly pessimistic revenue assumptions” for the FttP NBN that “do not reflect existing strong demand for NBN services” and ignore “important elements of broadband quality”;

“One key reason that projected revenues are lower for the two FTTP scenarios than for other Strategic Review scenarios in the fiscal years prior to 2024 is because FTTP takes significantly longer to construct – and so at each point in time until these versions of the network are finished, there are fewer served premises potentially generating revenue.”

"NBN Co likewise overstated its likely revenues for business customers and from multi-cast products relative to international benchmarks. The proportions of users currently willing to pay for higher NBN Co speed tiers cited by Senator Conroy as being ahead of plan are actually broadly in line with the proportions forecast in both the Corporate Plan and the Strategic Review. But this is before the migration onto the NBN of late adopters likely to wait until the disconnection of the copper network, which may reduce the proportion of users on those higher data rate plans."

“The current level of prices represents an artificial construct, and have little to do with either actual costs or achieving the 7.1 per cent IRR target set by the previous government.”

Assumes “without direct explanation” that Labor will fly a third satellite in 2021, increasing the estimated cost of the satellite deployment without including revenues from that service in its projections';

“NBN Co locked in the design for its two LTSS satellites before its underestimation of demand was realised. Their entire capacity was fully committed to a level of product that can only be provided to a maximum of 209,000 users – a subset of the demand now expected from isolated premises.”

“It is clear there are a number of impediments to a successful rollout in the ‘last 7 per cent’ – and equally clear they mostly arise from inept or inexplicable decisions by NBN Co’s former leadership. Shamefully, failures of planning and execution have set back the rollout of the NBN to those communities with the most urgent need for publicly-funded broadband.”

Includes costs and revenues for the Multi Technology Mix through its assumed completion, but excludes $15 billion worth of revenues that would be obtained from the fibre build after 2021;

“Senator Conroy fundamentally misunderstands how peak funding requirements and return on investment are calculated. The peak funding for each scenario occurs at the point when cumulative combined operating and capital expenses minus cumulative revenues is at its greatest point – typically the year before the scenario turns cashflow positive. Revenues after that point are of relevance to how soon the capital raised to provide funding is paid off, but not to the amount of peak funding.” 

“Focusing on revenues earned in the 2022, 2023 and 2024 fiscal years in comparing the various Strategic Review scenarios is not some silver bullet that transforms consideration of Labor’s FTTP NBN as Senator Conroy and a few others appear to believe.”

Acknowledges that the government's multi-technology model will need to be upgraded within five years but ignores the costs of these upgrades in calculating the total cost of the model.

“The Strategic Review’s discussion of upgrade paths is necessarily illustrative because there is no certainty when (or whether) the upgrades described will be required as a response to increased demand for broadband. In addition, there is also considerable uncertainty about the future path of technological advances, which may continue to extend the life of certain parts of existing networks, particularly lead-in cables.”

“Even if the multi-technology mix NBN has to be upgraded to FTTP at a later date, a net financial benefit arises from deferring the latter expenditure as long as the multi-technology mix NBN operates for about five years, once the time value of money is taken into account.”