NBN: Unpicking the Coalitions' Plan

Summary: On an Apples-and-Apples basis, the Coalition's NBN-with-DSL is $3 billion, or 8%, cheaper to rollout, affecting 75% of those currently scheduled for Fibre. The big change is to trade $8 billion in up-front payments to Telstra for $11-$15 billion in "time payments". They've not just created the Digital Privileged by deferring Universal Fibre access, they've increased the upgrade cost to more than $30 billion, payable directly by householders.

If you're looking for an answer to "Which NBN Plan is best?", this isn't it. My intent here is to layout facts, strengths and weaknesses for you to make your own judgement. This will be of interest to just a few: many folk Just Don't Care and most already know which side they'll support in the election. This piece builds on "Correcting the Record".

Both NBN Plans have strengths and weaknesses, but both can be improved, at first pass, considerably.
Both sides currently seem locked into a position and are unwilling to take feedback or public preference into account. Both plans embrace and encourage free-loading, the electorate expecting significant government largesse.


I don't have the data and resources to produce an optimised NBN Plan, but its easy to show that both sides are sub-optimal on different criteria. Labor is rushing to completion, spending money early, whilst the Coalition is locking the network into a makeshift solution for 20 years, whilst transferring considerable costs onto householders. Both plans produce a series of undesirable outcomes, some quite ugly.

Special mention has to be made of the extraordinary measures taken by the Coalition to disguise and hide their data and intents, to actively mislead and to create doubt.
Most obvious is the generation of a worst-case scenario that is only remotely possible, less than one in ten-thousand.
In the documents it is described as "likely", then afterwards claimed as "will".

But is that a surprise? As Richo shockingly said in the mid-1990's, "All politicians lie", meaning they spin, mislead, misdirect and dissemble as their core competency and main public activity.

The effort and detail put into attempting to discredit the other plan completely outweighs the detail provided on their own plan. The 36 page "Background" document contains just two pages dedicated to their own forecasts. That imbalance speaks loudly: "the best form of defence is attack".

There are three levels of the Coalition NBN Plan to describe, after listing its errors and omissions:

• Technical
• Fiscal, Funding & Financial
• Political & Ideological

Active Deceptions and Withholding

The Coalition forecasts, as presented, don't add up.
Critical data, Interest and Depreciation, and later Debt funding, were deliberately removed from the published forecasts.

Whilst we are told in the commentary that Revenue overtakes Expenditure by 2021 and the totals of both from 2012-2021, all data for the last two years are withheld. What are the projected take-up rate and usage then, let alone later when the fiscal differences between the plans really shows up? We're not told.

Telstra is a "drop-dead" project risk as the single biggest creditor of NBN Co, with payments coming as both CapEx, disconnections & lead-in one-off payments and OpEx, 35 years of facilities and ducts access leases. NBN Co has recently published a figure of $11.3 billion for "FTTP Access", presumably the one-off payments to Telstra. Telstra carries the ability to make or break the Coalition plan, is known as a tough negotiator and took 2 years to agree to the current deal, including an Extraordinary General Meeting and shareholder vote.
What's the Coalition treatment of this "drop-dead" project risk? Denial. "Our plan is in their best interests" and "we expect a quick agreement because the copper has near zero value".

Also ignored is the Regulator in charge of these services, the ACCC. It is tacitly assumed that the Regulator will sign-off on any agreement to rent Telstra copper lines, necessarily at higher rates than the current ULLS charge. In the past, this has not been a quick or easy process. Can a new Government merely change the Act the ACCC works under, forcing compliance? That's a fraught path as well.

The Coalition has planned a major fiscal change, to rent, not buy, the "D-side" copper as they call it, needed for a DSL solution. But not only isn't this radical change highlighted, deliberately misleading phrases are used to hide the fact and in interviews where this question is directly asked, the answer is dodged. 72% CapEx is saved on $11.3 billion for FTTP Access ($8.1 billion), replacing it by mortgaging our future to the tune of an extra $11-$15 billion, but they won't mention it even when asked.

There is a contradiction inherent in the Coalition statement "Telstra shareholders will be made whole", or won't be worse off by trading the current payments for renting lines. The current ULLS line rental charge won't return as much, even under an extended lease agreement. How is the shortfall going to be made up? How will the ACCC be made to agree to non-competitive deals?

The claimed $20.5 billion CapEx also fails basic sanity checks. $8.1 billion in CapEx is traded for Opex and only 28% of FTTP network is built or $5.5 billion of $17.2 billion after Access costs. Then  $8.1 billion has to be added for an FTTN. That's $3.6 billion less in construction and $8.1 billion swapped for OpEx, for total CapEx savings of $11.5 billion, yet they turn a real $5.5 billion difference into a claimed $17 billion saving.

Conveniently $6 billion of "Other CapEx" has been ignored. The sub-projets are now identified in detail by NBN Co. Because the breakdown of CapEx and OpEx has been deliberately withheld, nothing is included in the plan.

Two major costs are transferred to customers with the costs withheld and impact undiscussed:

• Network Termination Devices, NTD's, must now be installed in FTTN services at the owners expense.
• A $2.5-$3.2 billion impost on households.
• Upgrades to full-Fibre are now one-off installs  fully customer funded, against the current minimal build-cost project:
•  at $3-$5,000/premise, that's at least a $30 billion impost on households. 

The current project, with the NTD impost is really only $3 billion cheaper, except for the additional $11-$15 billion in unnecessary line rentals. Is that $3 billion less or $10 billion more?
If you add the future upgrade cost, the Coalition plan is wildly more expensive, based on the Coalitions own statements and forecasts. The need for an outlandish worst-case scenario of the current plan to use as in "Straw-man" arguments becomes brutally clear.

All details of the critical differentiator of their NBN, DSL Nodes, are omitted. The number of nodes, the maximum distance, distance of fibre run, cost of transit networks and most importantly, the cost of network reconfiguration and rehabilitation/remediation. This is an area rich with estimates and analyses since the Telstra/Trujillo 2005 pitch to the Howard government. A lot is known, including about the problems and project risks, yet strangely no detail or discussion is provided of the second highest risk factor to their project.

In 2009, Telstra estimated it would cost $12 billion to build an FTTN to 90% of premises, without needing to pay $20 billion or more for access as NBN Co must. The Coalition DSL NBN is a comparable plan, estimated to be 33% less without the same detailed data and Telco knowledge. Despite this gap, nothing is said to justify such a radically cheaper estimate.

An unjustified figure of "$900 per line" for an FTTN, derived as "25% of $3,600/premise for Fibre", is used. None of the NBN Co estimates or actual per-premise cost of Fibre construction and install has ever been close to this figure.

Not only are details omitted, the cost of the FTTN component, presumably $8.1 billion for 8.9M lines at $900 each, is never spelled out. Why withhold the costing of the centrepiece of the plan? It's not just illogical but counter-intuitive to hide all details of the very thing you're selling.

The factor at the heart of every financial plan, customer demand, is ignored completely. We're told ARPU (Average Revenue Per User) is expected to grow at 3.5% with inflation at 2.5%, despite one of the justifications for 12-25Mbps being "you can watch a lot of video on that". Every credible source is predicting growth in Australian Data Download Volumes of 30%-60%. Yet the underpinnings of nearly 2 decades of exponential growth of the Internet is seemingly ignored.

The on-going phone service for which the copper was laid is ignored. The PSTN, Public Switched Telephone Network, both analogue on which DSL services are piggy-backed and ISDN services used by business, are not mentioned. Will NBN Co now provide all phone services? Via the NTD outlets or via ATA within the nodes? What happens to businesses with ISDN services, are they orphaned, moved to Fibre or provided with an inferior and incompatible Symmetrical DSL service from a node?

There are more than 5M residential and business phone customers affected by the Coalition compulsory acquisition of lines that need to be informed the impact on them and the new options available and costs they'll incur. The operators of all those services may also have a view on fair compensation.

There's a key difference between the FTTP and FTTN rollouts: the copper is cut for an FTTN.

This means every operator who's invested in equipment to provide services directly over the copper, under the ULLS arrangement, is financially disadvantaged. Under the current deal, only Optus and Telstra have been compensated for losses from income producing assets. Under the Coalition plan, every ISP should be entitled to fair compensation for their loss of income and orphaned assets. If compensation is not offered, this will be tested in the courts. There is no discussion of commercial compensation, only the clawback of HFC payments to Telstra and Optus. Either the Coalition is intending to blindside a lot of operators or they've omitted these additional payments from their plan.

There are multiple issues that arise from cutting the copper apart from Operator ownership and compensation:

• "No Disruption" claimed by the Coalition at best applies to analogue PSTN services, but its possible only for those on compatible suppliers, like Telstra.
• Done right, current ADSL services could be migrated to nodes with little disruption
• but because they're PPPoE based, not VLAN, with customer-supplied modems and line-filters, they need to be replaced with a DSL-NTD to be properly connected. That is a significant disruption and cost.

• What Service Level will now be mandated for services provided by DSL nodes vs GPON Fibre?
• GPON Fibre services, or FTTP, will easily achieve and exceed the current "Central Office" based service levels of 99.99% availability. (% avail to be confirmed)
• The Canberra fires in 2003 showed a weakness with Node based services: small batteries.
• DSL nodes fail more often and in extreme conditions, such as floods, fires & widescale events, will fail within hours of reticulated power failure, leaving the community isolated at exactly the time they need reliable communications.
• We've seen from the World Trade Centre attack and Hurricane Sandy that Mobile Phones are not a replacement for fixed-line services, either in the middle of events or in cleanup and recovery afterwards when power is off for extended periods.

• Telstra has 10,000+ nodes already deployed, RIMs and CMUXs. They will be orphaned when the copper is cut. Will they be leveraged? The building approvals, civil works, power, "ties" to pillars and uplink fibre are all there. Reusing these cabinets would be "cost-efficient" and require yet another new, costly agreement with Telstra. This important detail goes unmentioned.

Telstra and other network operators already have extensive Fibre networks within the Customer Access Networks,  surely reusing that as much as possible would be cost-efficient for FTTP. No. It's completely the wrong type: NBN Co are using 12-core ribbons in 'tubes' of 12-ribbons, with 846 cores, i.e. 6-tubes, the usual underground cable used to pass premises. Most fibre out there is thin and can only support a few nodes: it's separate cores in 12- or 24-core cable. Incompatible and under-sized for the NBN Co rollout. The mantra "reuse what's there" is wrong an misleading.

The Coalition uses "self-evident" justifications, with no supporting data or modelling, for several policy points:

• It's more Cost-Effective to use existing services than over-building them with GPON FTTP.
• Unrestricted competition always leads to more efficient markets and lower prices. Even in Common Infrastructure Natural Monopolies and despite the complete failure of Cable TV "competitive" rollout in 1994-1997.
• Installing on a "needs first" or priority-basis will have no impact on roll-out efficiency or cost.

Technical

The Coalition is proposing:

• Leaving the Wireless & Satellite roll-out "as is".
• Maintaining FTTP rollout for Greenfield sites of more than 100 dwellings
• Criteria for Prioritising roll-out and impact on Project Efficiency.
• Allowing HFC and 3G/4G operators to compete
• Removing Cherry-Picking restrictions
• Slowing down the Brownfield FTTP rollout after 2014 to around 40% of premises passed.
• Stopping Brownfield FTTP rollout in 2019, with
• FTTP 28% (2.8M) total premises passed
• From Jan-2015 to Dec-2017, passing 8.9M premises with VDSL2
• at guaranteed 25Mbps, either 800m or 400m.
• ~60,000 nodes implied.
• From Jan-2018 to Dec-2019,
• upgrading 90% of FTTP premises to guaranteed 50Mbps
• no explanation as to how
• These areas unexplained:
• PSTN & ISDN phone services
• DSL-NTD features and install
• Conversion of ADSL/PPPoE services to VDSL/Layer-2 Bitstream (VLAN)
• Migration of ULLS services.
• Passing premises with GPON Fibre to comply with direction "upgradeable to Fibre"
• Material waste & stockpiling through FTTP cancellation.
• Telstra RIMs & CMUXs, reuse, refurbishment or replacement.
• Copper CAN:
• Reconfiguration
• Rehabilitation
• Replacement
• GPON FTTP 

Fiscal, Funding & Financial Issues

• The forecasts supplied are incomplete:
• Essential line-items are missing (Interest, Depreciation, Debt)
• Common years after 2019 are not included, only totals are provided.
• No CapEx breakdown of the 4 separate rollouts are not included.
• subscriber numbers, by rollout type, are unspecified
• Take-up rates & timing are unspecified
• Consumer demand, Data Volume Downloaded, is not modelled.
• The impact of Video, a prime justifcation, is not modelled
• $6 billion in necessary "Other Capex" is missing.
• Significant costs, NTD's and Fibre upgrades, are transferred to customers without comment.
• Costs, Risks and Terms/duration of Telstra contracts aren't discussed/revealed.
• Financial impacts on & compensation for non-Telstra operators not stated.
• The costs of the FTTN are not provided, justified or detailed.
• Coverage and take-up timing details aren't detailed.
• The major funding change, rent not buy, 8.9M lines from Telstra is not mentioned, nor the impact explored.
• The necessary charges to not disadvantage Telstra shareholders are well in excess of approved
• Major project risks and their mitigation are not discussed:
• Telstra SSU payments variation
• per-line rentals and other facility access/rental (RIMs)
• ACCC approvals

Political & Ideological Issues

The Coalition policy seems driven by two ideological stances:

• The CapEx must be reduced at any cost, ignoring all undesirable outcomes & illogical processes.
• Competing services to The Big Bad Monopolies, Telstra and NBN Co, must be allowed, whether they are commercially viable or economically sound, or not.

Cherry picking, the servicing of the most profitable market segments by competitors, is back on the agenda. The first NBN Co plan estimates it would have ~$1.5 billion impact on Revenues.
Trading CapEx for OpEx on the copper lines will destroy margins on the FTTN by loading it with very high costs. This will increases the rate and impact of Cherry Picking from every source: HFC, 3G/4G mobile and other fixed-line competitors. If existing ISP's can maintain their ULLS services, they will undercut NBN Co significantly on Telstra line rental.

The failure of Cable TV in Australia, but nowhere else in the world, when Optus and Telstra both rolled out networks down the same streets to just 2.7M homes in 1994-97, then wrote off most of their investment within 5 years, demonstrates the problems in the Telco marketplace.


More to Come.