High time for Government to upgrade its expectations of NBN Co

The Minister for Communications, Mr Paul Fletcher, has made it clear that the government will not provide any further equity or debt funding to NBN Co now that the rollout of the network is largely complete – see AFR ($$$). A total of $49 billion has been provided by the government thus far with NBN Co raising an extra $6.1 billion from the private sector through a debt placement in May 2020.

With the rollout complete and funding from government now finished what will guide the board and management of NBN Co in its plans going forward?

From its very beginning and during the rollout period the government has formalised its expectations of NBN Co in a letter to the board referred to as the ‘Statement of Expectations’ or SOE. The last formalised version of the SOE is dated 24th August 2016 when the rollout of the Multi Technology Mix (MTM) was getting into full swing. Previous versions had been issued in 2010 (by Labor) and 2014 (by the Coalition to formalise the change to the MTM).

The board of NBN Co has relied on these SOEs to guide its decision process in its use of taxpayers’ funds to build the network and endeavour to implement a range of government policy objectives, such as :

  • upgrade Australia’s broadband infrastructure to ensure download speeds of at least 25 Mbps for all and 50Mbps for 90% of the fixed line footprint.
  • operating the network on a wholesale only basis
  • structural separation of Telstra
  • increased retail market competition

There is still lively debate as to whether these policy objectives have been achieved. For example interference with legacy ADSL systems have required NBN Co to slow the speeds of some NBN services (see here) and many of NBN Co’s wholesale customers (Telstra, Optus, TPG Telecom and Vocus) have been complaining about NBN Co’s direct contact with customers in the enterprise market (see here). However, absent any push by government to change some of these policies,  NBN Co’s business approach is unlikely to be changed substantially in these areas.

With these objectives more or less achieved by NBN Co what will be its guiding principles going forward?

Clearly, an unstated goal will be to reach a financial sustainable position so it does not need to continually go to the debt markets for more funding for operating purposes. NBN Co’s recent debt raising achieves this objective to some degree as long as it meets its forecasts for positive overall cashflows by 2023. This will largely depend on its ability to activate another 1.5 million customers to hit its target of 8.6 million active customers in the same timeframe.

But otherwise what is the NBN Co board and management to take as its direction from here?

Privatisation of NBN Co has been a long term goal of both Coalition and Labor governments. Should the NBN Co board start preparing for such an eventuality without an explicit direction to do so? The only reference in the current SOE is that it “should retain optionality for future restructuring or disaggregation”. How can the board prepare for such an open-ended future?

How does NBN Co’s recent launch of higher download speeds on FTTP and HFC networks fit into the SOE? There is no explicit reference to providing higher speeds in the current SOE. Perhaps such an initiative can be justified as a ‘commercial entity operating in a market environment and can compete and innovate like other companies’. Can this be used to justify investments in the technology upgrades necessary to extend the speed upgrades to more customers beyond the low numbers where they are currently available?

The Minister has acknowledged that growth in broadband downloads is likely to ‘continue to rise strongly’ – see AFR ($$$). How should NBN Co respond to this market dynamic? Investments in upgraded technologies, especially to replace the FTTN technology, may not be commercially attractive, especially in the majority of areas where NBN Co does not face competition.

While there may be speculation about privatisation of NBN Co, the Minister has indicated this is ‘a number of years away’. With the rollout now all but over and the government closing the door to more funding the pressure will be on the NBN Co board to map a way forward. An update from the government on its expectations of NBN Co would certainly help.