Battle of the blowouts: How real can Labor make its Real NBN?

If Labor wants to bring more fibre to the premises into the NBN mix, then it must decide how much extra money it will allow NBN to spend.
Written by Chris Duckett, Contributor

Large infrastructure projects rarely come in on budget, so it should not have been earth shattering that the company responsible for rolling out the National Broadband Network (NBN) revealed last week that it would require an increase in peak funding.

NBN said in its results that the company expects peak funding to be between AU$46 billion and AU$56 billion, with the company working on the funding assumption of needing AU$49 billion to complete its rollout by 2020.

Of course, the schadenfreude for NBN watchers kicks in when it is compared to the Coalition's 2013 election promise of completing the NBN by 2019 at a mere cost of AU$29.5 billion.

In the harsh light of 2015 reality, where did the Turnbullised NBN come unstuck?

Given that fibre to the node (FttN) was to form to basis of the so-called multi-technology mix NBN, one could be forgiven for assuming that the Liberals had an idea of how much it would cost.

They didn't.

In 2013, Turnbull estimated that each FttN connection would cost AU$900, but, as NBN revealed last week, the number that it is basing its calculations on now is AU$2,300 -- that means the former merchant banker cum communications minister was out by a factor of 2.55.

Turnbull was closer to the mark in 2013, when he said fibre-to-the-premises (FttP) connections would come in at AU$3,600 -- NBN now says it costs on average AU$4,600 for each FttP connection, around double the AU$2,200 to AU$2,500 range NBN claimed for FttP under former CEO Mike Quigley.

With cost blowouts occurring under two governments of somewhat different persuasions, the discussion around funding the NBN can focus on the size of the blowout that the politicians and the electorate are willing to accept.

(Image: NBN)

The capital costs per premises released by NBN last week show what the company has to work with: Brownfields FttP connections are AU$4,400 a pop; greenfields FttP costs AU$2,100 per premises; FttN costs AU$2,300 per premises; hybrid fibre-coaxial (HFC) is the cheapest, at AU$1,800; fixed wireless comes in at AU$4,900; and cost per premises on satellite is AU$7,900.

Despite prior assertions, the cost of hooking up a new premises to FttP is less than that of connecting an existing building to FttN. The cost of leasing the infrastructure, such as ducts, makes up AU$700 per premise for FttN, HFC, and brownfields FttP, eating up most of Turnbull's 2013 AU$900 FttN cost per premises prediction.

But in a reverse situation to that in the lead up to the 2013 election, we know the NBN policy the Coalition will take into the future, but we do not know what it is exactly that Labor will put forward.

"What we are doing now is developing our own policy that will take to the next election," Shadow Communications Minister Jason Clare told the ABC last week. "We will announce it closer to the next election, but at the moment we are working with telcos and experts in this area to make sure we put in place the best possible policy to set us up for the future."

(Image: NBN)

As the opposition mulls over the make-up of its Real NBN, and how much FttP to deploy to increase its "realness", it is possible to use NBN's cost per technology to do some, admittedly, very rough calculations.

Taking NBN's numbers that a brownfields FttP connection costs AU$1,100 more than an FttN connection on average, the company could swap out FttN entirely for FttP for around AU$5 billion.

But in a more likely scenario, given an election next year and then taking a year to see out construction contracts and turn the company around, 2 million FttN connections would be built by the end of financial year 2017, leaving 2.5 million premises currently slated to be serviced by FttN to be switched to FttP, at a cost in the realm of AU$2.75 billion.

On the flip side, though, NBN has said it will be able to connect 1.5 to 1.7 million premises each year with FttN once its rollout gets going. By contrast, NBN is slated to have its highest number of FttP premises made ready for service next year, when it intends to hook up 372,000 premises.

Construction speed is of the essence for NBN, as long as its government funding remains capped at the AU$29.5 billion mark set last year. Should Labor wish to modify the network's rollout schedule in any way, it will need to address whether it is prepared to make up the funding gap.

For every seven-month delay in rolling out its FttN plans, NBN said it will cost AU$1 billion, and the same cost over time is replicated in delays to the HFC network.

The most challenging issue for Labor would appear to be what to do with the HFC network, which NBN says is the cheapest technology to deploy in its arsenal, and is set to service one-third of all premises by 2020.

Using NBN's numbers, converting from HFC to FttP comes in at over AU$10 billion, not to mention the delay in completing the network with 4 million premises needing to be switched over.

Labor needs to decide how much extra money it is willing to give NBN to bring more premises over to FttP, and how much extra time it believes is acceptable to improve the network.

Were Labor to blow out the cost of the NBN to somewhere in the range of the AU$74 to AU$84 billion prediction made by the company for an all-FttP network, the question of its utilisation, and therefore the cost recovery of the rollout, would arise.

With the NBN still remaining a majority FttP network, the FttN rollout is set to begin deployment in the next few months. The company has the vast majority of its customers on 25/5Mbps and 12/1Mbps plans. For a company that recoups its outlays by charging for data volumes, it is essential to get customers onto higher-speed tiers.

NBN said in its results that while it will be cash-flow positive in financial year 2022 on its current trajectory, a return to an all-FttP network would be cash-flow positive between 2026 and 2031 -- potentially 16 years into the future.

In its efforts to re-create its version of the NBN, Labor has many decisions to weigh up, and each one will carry direct consequences for the company tasked with its rollout.

At least we have now reached a point where we are not talking about potential blowouts. Rather, it is now a decision of how big the blowout should be, and whether the extra costs are worth the financial pain that would hit the NBN.

"This is Malcolm Turnbull's mess," Clare told the ABC. "He's got no one else to blame but himself for this. He has been in office now for two years.

"Before the last election, he promised he could build the NBN for AU$29.5 billion. It's now blown out to almost double that: AU$56 billion. He's got to take responsibility for his own actions."

Quite so -- but we still await the cost of Labor's Real NBN, and for Labor to own the additional funding it will likely have to provide.

Let the battle of the NBN blowouts begin.

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