Sunday, 14 April 2013

NBN: Turnbull's DSL-NBN Budget set to increase by $10-20 billion

Mr Turnbull is staking his Political career on his "Fibre to the Node" NBN plan. That Plan has a number of critical assumptions that are not examined, risk-adjusted or mitigated.

Here is the most stark, from page 12 of "The Coalition’s Plan for Fast Broadband and an Affordable NBN"
Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable.
That's not nearly the case... We can expect the Telstra Board and Senior Management to be both prudent and highly engaged in taking this decision. Just like the original NBN Compete/Co-operate decision, they will take this question to their shareholders, with the same clear, careful and compete supporting analyses from independent experts.

The financial story is on Page 78 of the Explanatory Memoranda, pg 9 of Grant Samuels analysis.
On Page 12 of the Grant Samuels analysis we learn more of the decision process and analyses:
Other alternatives were considered by Telstra but did not produce a superior outcome 
Over the course of the last two years as the NBN has evolved and the CCS Act progressed, Telstra has considered a number of alternative proposals, including:
  • demerger of the networks business; and
  • sale of the copper network to NBN Co. [emphasis added]
However, each of these were considered by Telstra to have significant drawbacks compared to the Proposal and were ultimately discarded.
According to Grant Samuels, Telstra is expecting a $4.7 billion NPV benefit from the NBN Co transaction. Part of the benefit is an NPV savings of $11.6 billion in Operational Expenses. The real CapEx and OpEx impact of these figures is much higher because of the discounting of the cost of capital in NPV's. The actual uninflated cash value would be 2-3 times the NPV, or $10-30 billion extra.

Which highlights another defect in the Turnbull Plan, or my limited understanding of it:
If Telstra donates all its Copper phone assets to NBN Co, who maintains it? Do they get just the last 1500m, or the whole lot? Who hires & trains staff? What happens to the current Telstra workforce? Is this handover a single-event or drawn out till the end of the project, 2019?
If Telstra gives both ownership and control of its Copper Customer Access Network (CAN) to NBN Co, then it has nothing to do with maintaining it, unless NBN Co contracts that back to them. In which case, as Alan Kohler has pointed out over a very long time, Telstra can charge the maximum it thinks NBN Co can afford, probably well above costs because of the commercial & opportunity costs involved.

Will the ACCC have input to this wholesale agreement or not? I do not know... But it sounds like an internal B2B contractual arrangement, not a regulated service.

From the public Grant Samuels analysis, it seems it would cost Telstra an NPV of $11.6 billion to maintain it Copper CAN - and if NBN Co assume the asset, they assume the costs of maintaining the asset. I may have read that wrongly, but I don't think so... A wrinkle is that maintenance costs will decrease because of the remedial work needed to make VDSL2 work. This is far from free: it is trading CapEx for OpEx.

That additional $11.6 billion is way, way more than the NPV $5 billion facility access/rental Operational Expenditure already built into the NBN Co plan. So under the Turbull Plan, NBN Co Operating Expenses at least triple just to Telstra.

This one issue, due consideration of the Telstra shareholders interests, turns a $20.5 billion project into a $30-$40 billion misadventure. [Update: Mr Turnbull wrote a piece for the Fin Review today saying that Telstra Shareholders had nothing to worry about. a.k.a. "Trust Me! I'm a Politician." Those statements should be reserved for the Telstra Board alone. To me, they constitute specific financial advice.]

This is all there in black and white and has been on the public record for a very long time.
Messers Abbot, Turnbull and Fletcher have banged their drum very loudly, but it seems failed to consult with the people who can make or break their project, not the Telstra CEO, not their Board, but the owners of Telstra: the shareholders. From past experience, they won't be about to just give away something of considerable value.

Perhaps Mr Turnbull has forgotten Economics 101: Price is what the market will pay, based on the value to a specific buyer at a specific place and time. What's scrap to you might be worth a fortune to me...

The copper CAN is only of scrap value to Telstra when decommissioned, albeit well over $1 billion. To a DSL Network operator, it has a far higher value, including avoided costs. Someone has to pay for maintenance and not maintaining it was 66% the value of the deal to Telstra.

The Government can only forcibly resume property, including the copper CAN, if it pays reasonable compensation. It cannot direct Telstra to give away its assets,  incur new OpEx costs it hasn't budgeted for, nor offer less than the benefit, an NPV of $4.7B,  they've already agreed to and expect to get.

No comments:

Post a Comment

Note: only a member of this blog may post a comment.