Infrastructure Australia has released a report titled “Australia’s Infrastructure Plan” (available here).

The wide-ranging report covers many pressing needs for upgrading the infrastructure required for Australia’s energy, telecommunications, water and transport services.

A key recommendation in respect of  telecommunications is that NBN Co should be privatised in the medium term.

The report supports the model recommended by the Vertigan Panel in Oct 2014 for NBN Co to be separated into different lines of business according to technologies and then privatised to maximise infrastructure competition (and hence reduce necessary government regulation).

I have previously come out in support of the Vertigan Panel recommendations and the earliest possible implementation of a split of NBN Co (see here).

The ACCC Chair, Rod Simms, was also adamant that separation was a necessary pre-condition to privatisation (see here and here) in commenting on the Vertigan Panel report.

Now some 18 months later we have another report calling for a “scoping study to assess the most appropriate approach, structure and timing to deliver a privatised NBN model”.

The Government’s formal response to the Vertigan Panel’s recommendations in Dec 2014 stated the following (see here) :

So the Government’s preference was clearly stated for NBN Co to be “readily separable”. However there has been no published independent report, to my knowledge, on the costs and viability of this approach and NBN Co appears to still be operating as a single integrated business.

So is separation before privatisation of NBN Co still on the table?

After the network is substantially built and operational in 2020 NBN Co will be a fully-fledged monopoly telco. It will have deployed a variety of network technologies covering FTTP, FTTN, HFC, Fixed Wireless and Satellite. Newer technologies such as FTTdp and DOCSIS3.1 have been promoted by NBN Co as likely technology upgrades.

But more importantly NBN Co’s operational processes and supporting IT systems will be integrated across all these technologies. Most of these processes will have common work flows and resources being used across the different technologies.

Any separation of NBN Co into separate business units for eventual sell off will be extremely difficult without any parallels in other markets.

The separations of British Telecom and Telecom New Zealand into separate retail and wholesale entities have been drawn out and complex affairs. Even after many years many of the IT systems and functions are subject to contorted commercial agreements and heavy regulatory oversight.

But NBN Co’s separation would be along technology lines in order to create a viable long term market structure for infrastructure competition like most other developed countries. Unpicking the operational and IT systems to share across competing entities would only be possible if NBN Co designed for this outcome from the outset.

However even more important will be the financial considerations. The latest NBN Co Corporate Plan estimates up to $56 billion of government equity and debt funding will be necessary to build the network. The forecast returns out to 2040 on this investment is 2.7 to 3.5%.

If NBN Co were sold off as a private monopoly the required returns would likely be around 10%. If it were separated and then sold to competing entities then the returns would need to be considerably higher again.

In order to meet these needs the price paid for NBN Co or its assets will have to be significantly less than the up to $56 billion funding forecast by NBN Co (assuming the buyers are not able to raise prices significantly).

Reports that PwC have valued NBN Co at approximately $27 billion in 2024/25 (see here) confirm that a significant write off will be necessary.

But, importantly, the total sale value for a separated NBN Co to competing companies will be much less than a sale of a monopoly to one buyer.

So as time passes the chances of NBN Co being separated and privatised seem to grow more and more remote. Not only does the cost of the separation increase due to the embedded processes, IT systems and resources but the likely write off will increase as more funds are sunk into NBN Co.

The time window for a possible separation and privatisation of NBN Co is closing. By 2020 the more likely outcome of any privatisation will be a sale of NBN Co as a monopoly to maximise the return to Government and to minimise any write-off.

For those of us old enough this will be a familiar outcome. During the Telstra privatisation of the 1990s and 2000s the Government preferred to maximise the sale proceeds by allowing Telstra to dominate Pay TV cable infrastructure (via FoxTel) and the telephone network cementing a private monopoly over fixed telecommunications infrastructure.

Telstra, like any profit maximising monopoly, refused to invest in network upgrades like FTTN and FTTP without Government funding or regulatory holidays. Somewhat ironically the Telstra share sale price premium obtained by taxpayers has ended up being spent on the NBN rollout.

Australia may see a re-run Telstra privatisation scenario in the 2020s, where a new private monopoly will once again only invest in further infrastructure if the taxpayer provides the funding. If so Australia will have not learnt anything from its painful history of the last 20 years of telecommunications policy.