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No Person is Above the Law

As the title of this post makes clear what follows is not about the Network Economy and especially not about the need for Deep Fibre Broadband. Readers who aren’t interested in my opinion on mainstream political matters may want to skip this read.

The release of the Mueller Report on Russian interference in the 2016 US Presidential Election campaign is a chance to step back and reflect on the state of US politics and consider what should now be the best way forward.

All of the television talk shows, which for me have filled a rainy long Easter weekend here in Hong Kong, have been analysing and dissecting the report and searching for a way forward. The main take away from all the initial political punditry is that the Democrats are now in a dilemma about what to do with the report. Robert Mueller’s non-decision on the issue of obstruction has put the ball firmly in the hands of the House Democrats.

Some Democrats, such as Presidential primary candidate Elizabeth Warren, are starting to call for impeachment of President Trump. Others are calling for more investigations, subpoenas and hearings to see what else can be discovered.

Mueller makes it quite clear the the Department of Justice rules preventing the indictment of a sitting President raised “fairness concerns” which “counselled against potentially reaching” a judgement that President Trump’s conduct constituted a federal offense. It is up to Congress to

“apply the obstruction laws to the President’s corrupt exercise of powers of office with our constitutional systems of checks and balances and the principle that no person is above the law”

But the political impeachment process, referred to above, is not the only route to justice.

Mueller highlights “that a President does not have immunity after he [sic] leaves office”. Futhermore, Mueller states :

“Given those considerations, the facts known to us, and the strong public interest in safeguarding the criminal justice system, we conducted a thorough factual investigation in order to preserve the evidence when memories were fresh and documentary materials were available.”

It is in this direction that Democrats, and in particular presidential hopefuls for the 2020 election, should turn their thoughts.

The Democrats have an opportunity to cast the issue of “No Person is Above the Law” as a strong campaign theme for the next election.

The theme would involve the Democrats making it clear that at the next election the American people face a clear choice of whether to uphold this fundamental part of the Rule of Law in liberal democracies.

The next Democrat Presidential candidate should commit to appointing an Attorney-General who would ensure the legal process regarding any potential obstruction of justice by President Trump would restart once he left office. This would be the standard legal process, rather than the political impeachment process, and would be overseen by a Department of Justice lead by Attorney-General who had been approved by at least 60 members of the Senate (and hence require some Republican support).

The evidence procured through the Mueller investigation could be used along with any other material that comes to light from congressional investigations. A Grand Jury would consider the evidence and any indictments would follow.

Most importantly a trial by the third arm of the government, the Judiciary, would be required to achieve a conviction. Trump would be subject to the same process as his disgraced campaign colleagues (ie. Manafort, Flynn, Cohen et al)

The statute of limitations would not expire on most of the issues analysed by Mueller until mid-2022. The Democrats could bolster their campaign position by proposing to change the law to ensure that the clock on the statute of limitations for offences involving the President should stop for their period of office.

Trump would find it very difficult to campaign strongly for such a theme. His actions described in detail in the Mueller Report make it clear that he considers himself above the law. Any potential Trump pardons to assist his family or others would only help the Democrats make their case.

If Trump surprised everyone by not contesting the next election, perhaps resigning and receiving a Nixonian-style pardon from new President Pence before the next election, this would only amplify the campaign theme in favour of the Democrats.

“No Person is Above the Law” would resonate strongly with the American people. A complicated impeachment process involving esoteric concepts of obstruction of justice would play into Trump’s hands and be easily characterised as an extension of the Mueller “Witch Hunt”.

The next US Presidential election will undoubtedly be a referendum on Trump. The best approach is to use the Mueller investigation outcomes to campaign strongly for this fundamental aspect of the Rule of Law.

Rather than taking the low road like Trump’s “Lock Her Up” and “Witch Hunt” slogans, “No Person is Above the Law” would involve the Democrats taking the high road and symbolise a return to true liberal democracy values.

 

NBN Co @ Year 10 – time to get serious about breaking it up

CommsDay, an Australian telco industry newsletter, held its regular conference in Sydney on April 8th and 9th of 2019. This happened to co-incide with the 10 year anniversary of the creation of NBN Co by the Rudd Labor Government in 2009.

I was part of group of speakers invited to give their thoughts on the NBN Co @ Year 10.

In my presentation (a fully copy of which is available here) I called agin for the break up of NBN Co. This is necessary to transition to a policy of infrastructure competition which will drive the necessary future investment in Australian fixed broadband.

Australia’s nostalgic belief that fixed broadband is a natural monopoly has to be overcome. The majority of other developed and developing countries overcame this telephony era policy dogma in the early 2000s. However, Australia missed the change and doubled down on the old monopoly thinking with the creation of NBN Co. Government legislation and regulation was enacted to protect what is now clearly an “unnatural” monopoly, as evidenced by the threats from not only competing fixed technologies but also wireless technologies.

The inevitable characteristics of monopolies are now plain for all to see. Higher prices, less retail competition, declining service standards and most importantly of all no pathway to the future necessary investment in deep fibre infrastructure.

Labor has announced it will hold an economic review of the NBN if it succeeds at the now imminent election.

The Coalition decided not to go down the NBN Co break up path in 2014 when it was recommended by its own panel of experts. I supported the NBN Co breakup option at the time, not for ideological reasons, but because the telecommunications industry is a dynamic, innovative, technology based industry and only competition can liberate the benefits of this technology in efficient and effective ways.

Governments can have a role in driving technological innovation if there is general community and bipartisan support for the goals and the technology direction. This is normally only the case in areas such as national defence, health and education. The NASA space program, for a period during the Cold War, was such a government sponsored program that created enormous spin-offs, but it also eventually succumbed to questions of benefits versus costs.

The Coalition made a big mistake in not even considering the break up of NBN Co in its strategic review of late 2013. Unfortunately the haste and pressure to get building something overwhelmed the need for some calm and considered thinking about the best way forward.

Hopefully, Labor will learn from the Coalition’s mistakes and undertake a considered review of all the economic options for the NBN if they come to power in the next months.

“Basic Infrastructure for a Good Life”

“It [fibre] is basic infrastructure for a good life”. So ends a new book by Susan Crawford, a Professor of Law at Harvard Law School, on the plight of delivering better broadband for Americans.

The book “Fiber: The Coming Tech Revolution and Why America Might Miss It” 1 comes at an interesting time as the hype around 5G and the tech wars between the USA and China appear to be continuing to escalate.

The title seems to play on this theme and endeavour to push the strategic rivalry beyond the usual artificial intelligence, semiconductor and 5G battlefields into a broader question of national infrastructure.

After all, the creation of the American national highway system by President Eisenhower was mainly in response to the need to be able move US forces quickly and efficiently around continental North America in response to any threats during the Cold War.

However Crawford does not head in this direction. Her focus is not on strategic rivalry between the USA and its real or imagined foes. Crawford, who has previously written on the power of the telecom and cable monopolies and was a Special Assistant to President Obama on broadband policy, stays focussed on purely civilian matters.

For Crawford, fibre infrastructure is the 21st century equivalent of the basic utility infrastructure built in the 19th and 20th centuries that most people take for granted today – namely roads, railways, sewage, water, telephony and electricity infrastructure.

“It [fibre] is basic infrastructure for a good life” she concludes at the very end of the book.

I approached this book initially from the perspective of trying to find any nuggets that will be useful for Australia’s recovery from its own unfolding broadband nightmares in the form of the government funded National Broadband Network (NBN). For non-Australians, this project was launched in 2009 to provide full fibre to the home to 93% of Australia’s businesses and homes. But the fibre rollout ceased in 2013 after a change of government and the remaining premises are now only getting DSL and cable broadband upgrades.

Crawford has been an advocate for government intervention and ownership of fibre broadband infrastructure for some time. In this book she suggests that the US government should fund “much more than $US80 billion to wire all of the country’s last mile with fibre” – a figure some officials have estimated would be needed to upgrade cable and fibre system.

Australia’s taxpayer funding of the NBN is currently planned to be approximately $A 50 billion. When scaled using comparative GDPs, this is equivalent to a $US 510 billion spent on broadband upgrades across the USA.

So how does the USA compare to Australia in terms of the availability of high-speed broadband?

 

Data for Australia (2022) taken from NBN Co 2019-2022 Corporate Plan 2
Data for Australia (2018) from Australian Bureau of Statistics 3
Data for USA (2017) Internet Access Services : Status as of June 30.2017, Federal Communications Commission 4

As can be seen above, Australia currently has more full fibre connections than the USA, but this is not forecast to grow given the brownfields fibre NBN rollout has stopped. The USA has significantly more HFC connections as a result of the dominance of Comcast and Charter communications and the high coverage and penetration of cable TV. At the end of the NBN rollout in Australia, DSL will still be the predominant technology serving 40% of broadband connections.

In terms of broadband user experience the USA currently rates 8th on global rankings provided by Speedtest / Ookla with download speeds of 111 Mbps. Australia is ranked 60th with download speeds of 33 Mbps.

Please click the chart below to expand for more detail

Data from Ookla Speedtest Global Index 5

Australia’s higher percentage of fibre connected premises appears not to have helped in raising its standing in global speed rankings. The low takeup of 100Mbps download plans on the NBN even where fibre is available (due to high price points) seems to be the main factor in negating Australia’s current advantage in terms of the fibre rollout. The higher speeds available on HFC compared to DSL also provide another advantage for the USA v Australia in this comparison.

The inevitable conclusion to draw from the above is the taxpayer funded rollout of the NBN has not provided a better experience for Australians. Rather the high costs of the services to consumers combined with the continued deployment of older technologies (DSL in particular) means Australians are still languishing well down the global broadband speed rankings.

Many will argue that the original fibre rollout to 93% of premises would have catapulted Australia to the top of the rankings. However, the costs of 100Mbps and 1Gbps services would need to have been significantly reduced to ensure the higher speeds were taken up. This would only have been possible if the government, as NBN Co’s shareholder, had agreed to both the inevitable financial losses and also agreed to support NBN Co financially on an ongoing basis.

However, Crawford does not cover any of these issues with the Australian NBN in her book advocating public sector funding of fibre rollouts in the USA.

Instead, Crawford benchmarks the USA against the usual leaders in fibre broadband rollouts – namely South Korea, Singapore, Hong Kong (where I currently live and work) and Japan. Sweden, and in particular Stockholm, is also highlighted and some passing references are made to New Zealand.

These countries have all followed different paths to fibre global leadership.

South Korea and Japan have involved governments and private industry pursuing national goals in close co-operation. This is normal practice for these countries where strategic national development is a combined public and private undertaking.

Singapore and New Zealand have used direct government subsidies to established telcos to stimulate the building of fibre networks on a national scale.

Stockholm, in many ways the forerunner of city based municipal fibre networks, has involved public authorities using their access to rights of way and city infrastructure to create an open access dark fibre network that has enabled efficient and extensive competition to develop at the retail level.

Hong Kong has followed a purely private sector funded infrastructure competition model with government purposefully de-regulating bottleneck copper access to encourage fibre builds.

In the USA, Crawford draws on the experience of over 500 municipal fibre networks to highlight that grass roots communities can succeed despite the challenges of working against large companies and a system that is designed to beat them. Chattanooga, Tennessee, is the poster child city with a fibre network built by the public owned electricity authority that now connects 100,000 premises (amounting to a 60% take-up rate).

A number of other smaller cities are profiled but it is clear that many communities in the USA will find the challenges too great. At one point Google Fibre was the hope for these cities, but since they pulled out of further city fibre network builds in late 2016, these municipalities will need to do the heavy lifting themselves. As one municipal fibre network advocate says, “It’s a lot to get up to speed. It’s a long learning curve. It’s a long move to get there”.

A more hopeful case may be found in San Francisco, where Crawford outlines the efforts by the city’s Board of Supervisors to build a municipal fibre network that will be commensurate with the hi-tech image of the city and Silicon Valley. However, as Crawford predicts, this challenge to the incumbents (AT&T and Comcast) will likely become a “kind of holy war”.

The clear message is that the USA needs communities and governments to take on the likes of AT&T, Verizon, Comcast, Charter and CenturyLink in order to have any hope of building fibre networks that will match the leaders in Asia and increasingly China.

But Crawford comes across as believing that the communities will only have limited successes. Hence the call for the Federal US government to step and provide extra direct funding and more incentives (eg. tax breaks) for private new startups to take on the established telcos in the USA.

But Crawford does not go as far as calling for the effective nationalisation and re-monopolisation of fixed broadband infrastructure such as that undertaken in Australia. Competition between municipal and private networks that are supported with government funding on one hand and the existing large broadband providers is preferred given the state of the American market.

For Australia, the idea of local or state governments taking an active role in fibre infrastructure is far-fetched. The Australian constitution clearly makes telecommunications a federal responsibility – hence any such community or state action will be difficult. The best that can be hoped for is that local and state governments ease processes for building the necessary civil infrastructure.

So unfortunately this book does not provide any insights or plans that can help Australia out of its current broadband predicament.

However the book does provide some compelling stories of how fibre broadband can bring more value to communities than on-demand TV entertainment (i.e the Netflix / YouTube phenomenon). Fibre, given its low latency and near unlimited bandwidth, is vital for education, health and the upcoming backbone of IoT and 5G networks. The social and economic benefits of fibre are not quantified but rather equated with the major infrastructure rollouts of the 19th and 20th century (eg. water, sewage, electricity, road networks etc).

The comparison with the benefits of electricity networks is most compelling. Crawford explains how Lyndon Johnson, the Democratic President of the 1960s, became a hero in his local communities of the Hill Country near Austin, Texas through his advocacy for the provision of electricity to these rural communities. “He brought the lights. No matter what Lyndon was like, we loved him because he brought the lights”, the local community beneficiaries are quoted as saying.

In my view, there is a case for government funding of fibre buildouts into areas that the private sector finds uneconomic. Good quality broadband will be fundamental for all citizens wherever they are located to be able to participate in the 21st century society and economy.

The Australian experience shows that  taxpayers’ money can also be wasted on building out fibre (and broadband infrastructure more generally) into urban and metropolitan areas that the private sector can deliver more economically as long as competition is the driver.

It is much better to save the government funding for the communities that the private sector will never touch or where competition is not able to drive private sector investment so that as many people as possible can have “basic infrastructure for a good life”.

This book is well worth a read for those who are interested in a better understanding of the complexities and vested interests involved in delivering broadband infrastructure. This is especially the case in markets like the USA and Australia where the private and public sectors are not aligned in their strategies for building this important infrastructure for the 21st century.

For a more detailed analysis on my views on what to do with the NBN please check out my piece in the Australian Journal of Telecommunications and the Digital Economy (https://telsoc.org/ajtde/2018-11-v6-n4/a162)

Notes:

  1. Available on Amazon or https://yalebooks.yale.edu/book/9780300228502/fiber 
  2. NBN Co 2018 Corporate Plan available at https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/media-centre/corporate-plan-report-2019-2022.pdf 
  3. Available at http://www.abs.gov.au/ausstats/abs@.nsf/mf/8153.0/   Note NBN Co FTTN/B connected premises of 30 June 2018 have been manually re-allocated to DSL rather than categorised as “Fibre”
  4. Available at https://docs.fcc.gov/public/attachments/DOC-355166A1.pdf   
  5. Available at https://www.speedtest.net/global-index 

Is an NBN quick fix possible?

As we enter 2019 there will likely be increasing excitement about the prospects of a new Labor government taking control of the NBN policy and fixing the mistakes of the last 5 years of Coalition’s NBN policy.

For example on New Years’ Day the Australian Financial Review published an article titled “NBN upgrade necessary and likely with Labor government” (paywall $$$). Various industry commentators in the article highlighted the need for more fibre investment and in particular the deployment of Fibre to the Curb (FTTC) to replace as much as possible of the Hybrid Fibre Coax (HFC) and Fibre to the Node (FTTN) rollout that has formed the basis of the Coalition’s plans.

Telecommunications consultant, Paul Budde, was quoted as saying Labor would switch to FTTC.

Telstra’s new Head of Networks and IT, Nikos Katinikas, said rapidly developing video-streaming technology and bottomless consumer demand for video-streaming meant only fibre-optic technology the premises (ie. FTTP) would reliably support the demand.

An RMIT Associate Professor in Network Engineering, Mark Gregory, agreed that FTTP would be needed to meet consumer demand and be cost effective.

But how realistic is this as a fix for the NBN? Can a Labor government turn around the plagued NBN project by a quick technology upgrade?

Firstly, there is the issue of the NBN rollout being approximately 80% complete with 9.4 million out of 11.8 million premises already passed by the current technology mix (although close to 1.4 million are unable to connect at this stage). This would mean an upgrade would involve replacing existing technology that has already been installed and paid for by taxpayers. Such a replacement would mean the rollout cost for the HFC and FTTN premises already installed (approximately 6.0 million at the time of writing or over half of the planned network) would be substantially wasted. On NBN Co’s numbers this amounts to approximately $14 billion of wasted investment. Both of these numbers would rise substantially by the time a Labor Government could take office and re-direct the company’s rollout.

The replacement cost using FTTC for the HFC and FTTN would like be higher than the investment that needs to be written off. The FTTC technology requires more fibre to be installed closer to the premises of customers. NBN Co estimates the cost of FTTC to be approximately $3,000 per premise which is approximately 30% more than the cost of HFC and FTTN. As a result a minimum of an extra $18 billion would be required to fund the upgrade to FTTC.

Of course many will argue that the costs estimated by NBN Co for FTTC are inflated to make the decision to change from FTTP to FTTN/HFC seem justified. This may well be the case and innovative ways to install fibre are likely to reduce this cost if a concerted effort is made to adopt world best practices and learn from deployment that are happening in many comparable markets. But the cost is unlikely to ever be cheaper than the initial installation of FTTN and HFC. So at a minimum the cost is likely to be $14 billion but could be somewhat higher.

Secondly, there is the issue of NBN Co’s financial position and ability to fund further investment. At this stage NBN Co is predicting a break-even at a free cash flow level in FY 2022. However this is contingent on hitting the ARPU forecast of $51 per month and achieving a take-up of approximately 73-75%. However, the major RSPs (Telstra, Optus and TPG Telecom) are calling for lower wholesale fees and also upgrading their 4G/5G mobile networks to be able to take some of their business away from NBN Co.

If NBN Co’s ARPU remains at the current $44 per month and take-up drops by 10% then NBN Co have advised that cashflow will be impacted by approximately $1.5 billion per year. As a result NBN Co will be in a negative cashflow situation, leaving no prospect of funding the investment needed to replace the FTTN and HFC networks with FTTC from NBN Co’s own operating business.

This would leave the Labor Government having to fund the entire upgrade plus bridge any negative cashflows with further equity and debt injections into NBN Co.

There has been much talk of an accountancy write-off of the existing equity and debt invested by the Federal Government into NBN Co. This has been driven by the belief this would provide scope for NBN Co to reduce its prices. This would only be possible if NBN Co was on-track to meet its targets of $51 per month and 73-75% take-up (ie. become cashflow positive). However, in the case where NBN Co is not in this situation (ie. has negative cashflow) then this accountancy trick will not impact the funding that is needed to keep NBN Co afloat. In fact the write-off, if it is connected with lower wholesale prices, will actually exacerbate the negative cashflow since ARPUs would be lower. A $10 per month drop in ARPU would mean $1 billion per year less cashflow that must be supported by the Federal Government.

In short the ability for the Labor Government to instigate a quick fix on the NBN by performing a technology upgrade is wholly dependent on the Labor Government also being prepared to invest a substantial amount of new investment into NBN Co to firstly keep it operational and secondly to fund the additional investment. An investment of another $20 billion is likely over a period of 5 years to be able to make this a reality. This would likely still however only achieve a break even cashflow business based on the most optimistic views of reducing operational expenditure and increasing revenues from business customers.

While it would be great to have a quick fix of the NBN mess that Australia has landed in after almost 10 years of trying quick fixes the reality will likely be just more taxpayers’ money being spent for minimal benefit.

It is to be hoped Labor recognises the complexities and issues involved and takes an in-depth and considered review of the NBN if it gets into office. All possible options should be on the table for reform and in particular ensuring NBN Co does not fall back into the hands of a private monopoly owner (eg. Telstra’s InfraCo) who will have even less interest to invest in upgrades. The recent experience in many Australian industries shows that privatisations that don’t ensure robust and effective infrastructure competition between multiple players ultimately end up dudding the consumer and costing the taxpayer more than is gained in the actual sale process.

It is time to stop the merry go-round of short term quick fixes and develop an industry plan that ensures sustainable long-term investment in telecommunications by private players where competition is viable and by governments where Australia’s geography makes it uneconomic.

For a more detailed analysis on what to do with the NBN please check out my piece in the Australian Journal of Telecommunications and the Digital Economy (https://telsoc.org/ajtde/2018-11-v6-n4/a162)

 

Why a write-down for NBN Co is not the main issue

The possible write-down of taxpayer’s investment in NBN Co is again making news. The Labor Opposition have again put a spotlight on this issue by challenging the chairman of NBN Co, Ziggy Switkowski, to justify his statements that no write-down is necessary at this point in time. Both Switkowski and the Minister for Finance, Senator Cormann, have engaged in the debate with Labor (see here and here $$$).

But while this may make good political headlines, the real problem for NBN Co is not the write-down but whether it can generate enough revenue to remain operational. In other words can NBN Co continue without more taxpayer funding over and above the $51 billion that has already been committed via equity and debt.

NBN Co is currently forecasting it will be marginally (ie. $100 million) cashflow positive in FY 2022.

The main reasons for the debate regarding write-downs are the growing calls for NBN Co to reduce its wholesale prices. The effect of this will be to reduce NBN Co’s revenues and hence the argument goes that this will reduce the value of the company. But the more immediate problem is that this will mean NBN Co is not cashflow positive in FY 2022 and may never reach it depending on the size of the price decrease.

Futhermore, if NBN Co starts losing customers to fixed wireless broadband competitors, which is now clearly a possibility given Optus 5G announcements this week (see here), then this will also reduce NBN Co’s revenues.

So the question really is not about a write-down of the taxpayer’s investment which is after all, mainly, a question for the accountants.

The real question is how will NBN Co be funded beyond the build phase if its revenues are not able to fund its ongoing expenses.

For a more detailed analysis on what to do with the NBN please check out my piece in the Australian Journal of Telecommunications and the Digital Economy (https://telsoc.org/ajtde/2018-11-v6-n4/a162)

NBN Co’s target of 8 million activations by 2020 is looking very doubtful

One of the first jobs Bill Morrow undertook when he became CEO of NBN Co in April 2014 was to set some goals for the company to provide focus for a work force that was understandably looking for some direction after the change of government the year before.

I was on the way out the door at the time but can recall the mission goals that Bill was setting for the year 2020 quite clearly, namely:

  1. Universal access to high-speed broadband
  2. More than 8 million premises activated on the network
  3. $4 billion annual revenue
  4. Customer satisfaction
  5. Best place to work

I will leave goals 1, 4 and 5 for another day and just focus on 2 and 3 in this post.

These goals were subsequently made public in some of NBN Co’s presentations (eg. NBN Co’s half year results presentation in February 2015).

Bill set the target year as 2020 to co-incide with the planned end of the rollout and also the time for when NBN Co would be looking to become financially independent from government.

But now as we near 2020 it seems that these two targets are heading into dangerous territory.

Firstly, the 8 million premises activated target is already slipping. In NBN Co’s 2017 Corporate Plan this target was mean to be hit by June 2020 (ie. the end of the financial year). By the 2018 Corporate Plan this had shifted to end of calendar year 2020 with only 7.5 million premises activated by June 2020.

Now it is looking like the even the end of calendar year 2020 target of 8 million activated premises is very doubtful. Currently NBN Co is running well under the 32,000 activations necessary to hit this target – see my rollout progress page for more details. On its current trajectory of approximately 23,000 per week an outcome of 7 million premises by the end of calendar year 2020 is more likely.

As a result the $4 billion annual revenue target is also looking shaky. Based on 7 million activated premises, annualised revenues will amount to only $3.7 billion assuming the current $44 per month ARPU. The revenue for calendar (and financial) year 2020 would be considerable less as the 7 million premises looks like being achieved at the end of the year.

So both the activation and financial targets are looking considerably doubtful as we enter 2019.

NBN Co’s financials are of particular concern given the doubt that has been raised over the sustainability of NBN Co’s ARPU by its key customers (eg. Telstra and TPG Telecom).

Currently NBN Co is expecting to receive it’s last funding contribution from government in FY20 and generate a small amount of positive cashflow ($0.1 billion) from FY22. However, with activations and ARPU under pressure it highly likely that further funding will be required beyond FY20.

Of course, this is all without consideration of upgrading the network to have deeper fibre deployed (eg. FTTC or FTTP). If a Labor Government takes charge of the NBN during 2019 it will need to grapple first with how to fund NBN Co to keep it afloat. This will be more urgent that finding extra funds to upgrade the network to the Labor vision of FTTP.

——————————–

I have recently had a paper published in the Australian Journal of Telecommunications and the Digital Economy titled “What Now for Australia’s NBN”. This is a long paper (over 10,000 words) but goes into some depth of the tragic history of Australia’s telecommunications and how politics eventually created the NBN we know today.

The paper also looks at possible ways forward from here.

You can access the paper at this link for free : https://telsoc.org/ajtde/2018-11-v6-n4/a162

Thanks to the TelSoc (publisher of the journal) for granting public access to this paper.

NBN Co offsets $5.5 billion hit to cashflow with lower payments to Telstra / Optus

NBN Co released its Corporate Plan for the period FY19 to FY22 on 31 August 2018 with headlines that implied that everything is still on target to be completed in 2020. The network is forecast to be ready to connect 11.7 million premises with 8.1 million premises actually connected by December 2020.

The Corporate Plan shows an increase in peak funding to $50.9 billion (up from $48.7 billion) as a result of three main issues, namely :

  1. Rollout delays for the HFC network have resulted in a revenue impact of $0.7 billion and additional optimisation capex of $0.2 billion, hence a total impact of $0.9 billion
  2. Wholesale pricing changes have resulted in $0.7 billion of revenue deferral.
  3. Upgrades to Fixed Wireless to alleviate congestion will cost $0.8 billion.

The total impact is approximately $2.4 billion which is more or less in line with the extra $2.2 of peak funding that will need to be raised from the private debt markets.

However a deeper analysis shows that there has been more significant deterioration in the mix of revenue and capital expenditure with reduced payments to Telstra and Optus helping to offset the damage.

High Level Changes

The below graph shows the revenue, capex, non-capex and the contingency reserves over the period from FY18 to FY21 side by side for the last two corporate plans.

The changes between the two plans are more easily seen in the below waterfall chart that shows how the net $2.2 billion of cashflow changes over the 4 year period are made up.

The total revenue forecast for the period has decreased by $2.1 billion and capex has increased by $3.4 billion. This has been offset by a decrease in forecast non-capex expenditure of $2.0 billion and a decrease in the contingency reserve of $1.3 billion.

The loss of revenue and increase in capex are significant. The revenue has declined by 13% and the capex increased by 25% compared to the forecasts for the period provided in the FY18 Corporate Plan. The total impact to NBN Co’s cashflows of these two items is $5.5 billion.

Capex Changes

The $3.4 billion increase in capital expenditure is summarised in the following graphs.

See footnote 1

The increases in capex have mainly come from FTTN/B, FTTC and Fixed Wireless. As explained by NBN Co, the Fixed Wireless increase is due to costs required to relieve congestion in this part of the network as takeup and usage has increased.

For the fixed network technologies it is useful to perform a comparison of capex / premise added during the FY18-FY21 years from both the FY18 and FY19 plans.

The change in Capex / Premise per technology (see chart below) for the period highlights the significant movements in costs per premise for each of the fixed technology types.

 

See footnote 2

As can be seen from the above it is clear that the FTTP technology capex per premise (which are predominantly Greenfields premises) has come down in cost considerably while the capex costs of the the Multi Technology Mix technologies have increased substantially between the FY18 and FY19 plans. The HFC cost has increased by nearly $600 per premise.

It is also apparent that while the capex for HFC has increased by $0.2 billion the impact is in fact far greater because of the reduced number of premises now allocated to the HFC technology. Total FTTC capex costs have increased due to the increase in premises allocated to FTTC (an extra 400,000), however the costs of FTTC have also increased per premise. The cause of the increase of approximately $250 per premise in FTTN/B is not clear from NBN Co’s latest corporate plan.

Non Capex Changes

Over the period FY18 to FY21 NBN Co is forecasting a reduction in non-capex spending of $2.0 billion. This combined, with reducing the contingency reserve of $1.3 billion, offsets the $5.5 billion hit to cashflows from revenue and capex to come up with a net new funding requirement of $2.2 billion.

The changes in non-capex spending are as follows :

See footnote 3

The decrease in Interest / Working Capital is understandable given that NBN Co is drawing down its financing facility from the Australian Government more slowing than anticipated in the FY18 plan due to the delays in the rollout.

However, the reduction in Subscriber Payments is not so clear cut. The drop of $0.7 billion is a drop of 8.6% . The number of customers connected by NBN Co mainly drives these payments to Telstra and Optus as part of their negotiated deals. Under the latest plan the number of customers activated as of FY21 decreased slightly to 8.4 million from 8.6 million. This represents a decrease of 0.2 million or 3.3% over the period from FY18 to FY21. This seems too small for such a large drop in the Subscriber Payments by itself.

What other reasons could there be for such a drop in Subscriber Payments?

The change may be due to a higher mix of activations that do not involve migrations from the Telstra and Optus copper and HFC networks. This is difficult to determine as it seems the overall mix of Fixed Wireless, Satellite and Greenfields connections have not changed too much. The reason maybe that NBN Co are picking up higher numbers of customers from other fixed networks such as those provided by TPG Telecom in Canberra, Geelong and Ballarat. Another reason may be that NBN Co is predicting more migrations from Telstra and Optus that will not satisfy the criteria for the Subscriber Payments. NBN Co can claw-back some of these payments if the customer moves onto non-NBN Co wireless connections within a set period of time.

In any case the decrease in Subscriber Payments, if forecasts become reality, will be a worry for Telstra and Optus unless of course they are picking up extra revenue by using their own wireless networks to bypass NBN Co.

Summary

NBN Co have made substantial changes to their planned expenditures over the critical 4 year period from FY18 to FY21. The period is forecast to require $23.4 billion of funding (with over 90% coming from debt rather than equity) and represents almost 50% of the total required funding of the entire project.

The large hits to cashflow ($5.5 billion) from lower revenues and higher capex are partially offset by lower subscriber payments to Telstra and Optus (for reasons which are not entirely clear) and by reductions in the budgeted contingency reserve and interest and working capital expenses.

The changes are on top of the risks that many commentators have outlined around the threat to take up due to NBN bypass by new wireless technologies (eg. 5G) and the optimistic average wholesale revenue projections per user (ie. $52 per month compared to currently $44 per month).

Notes:

  1. Table 8 of NBN Co’s FY19 Corporate Plan has FY20 capex for individual technology items adding up to $3.4 billion but the total cost is presented as $3.6 billion. To make the totals balance an extra $0.2 billion of capex has been added to Common & Other capex
  2.  The rounding of expenditure to the nearest $0.1 billion and premises to the nearest 0.1 million may affect capex / premise technology figures.
  3. The Unallocated / Rounding category is necessary to balance NBN Co’s figures for Opex, Subscriber Payments and Interest / Working Capital costs with the overall reduction in non-capex spending of $2.0 billion

End of FY 2018 post on NBN rollout

Below is the end of financial year 2018 snapshot for the NBN rollout.

Rollout Progress as of 28 June 2018

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Update : NBN Co have been in contact via Twitter (see this thread) and advised they do not have a FY18 Target for Ready To Connect premises. The 8.7m target is just for Ready For Service premises.

To understand this comment from NBN Co I need to explain some background. This is a bit long winded but important if you want to understand the issue fully.

Ready For Service was a metric started at the beginning of the rollout (yes – when I was Chief Technology Officer) that measured the number of homes that were expected to be offered a service based on the initial network design for a particular geographic area. However, after the build of the network there are always problems with connecting every home that was in the design. Factors come into play that change the actual network build from the design because of local conditions. As a result not every home can be connected in the original design.  For these homes NBN Co created a special category of service – called Service Class Zero (or SC0) – that classified the home as Ready for Service but not able to connected to the network. Unfortunately, in the early stage of the fibre rollout there were numerous problems with contractors and designs that caused the SC0 number to blowout to over 30% of the Ready for Service number. NBN Co was roundly criticised, quite rightly, for presenting the Ready for Service number when it was affected by such a large number of homes that could not be connected. This also caused confusion with customers and RSPs as they were being told there home was Ready for Service when in fact they could not connect to the network.

In 2017 NBN Co introduced the Ready To Connect terminology and started reporting these numbers weekly in their reports. Ready To Connect was essentially the Ready for Service number minus the Service Class Zero number. This was a positive change that should have been done much earlier. I had assumed the target for Ready To Connect would be the same as Ready for Service – ie the target should be to eliminate the SC0 problem. In fact NBN Co had largely achieved this by reducing SC0 to less than 2% of Ready for Service in 2016 (see graph below).

However it now seems that NBN Co don’t see it this way. The 8.7 million target for FY18 is just for Ready for Service – not for Ready to Connect. This is somewhat convenient because the number of SC0 premises has increased to approximately 13% of NBN Co’s Ready for Service premises  – mainly due to their problems with the HFC network.

NBN Co has not responded directly to my question about what the Ready To Connect target is for FY18. After some digging I found this statement in the 2017 Corporate Plan for 2018-2021 (p 37).

The difference between ready for service and ready to connect was approximately 250,000 at the end of FY17. nbn forecasts this will peak at approximately 400,000 by the end of FY18 before substantially reducing to approximately 150,000 in FY19. nbn forecasts that all premises will be ready to connect in FY20.

So based on this information, I am making the assumption that NBN Co’s target for Ready to Connect is 400,000 less than the Ready for Service number of 8.7m premises. As a result the figures and graphics below have been updated to account for this. I have also highlighted the underperformance in managing the SC0 issue which as blown out to over 1 million premises due to the HFC issues.

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This is the final update for the 2017/18 financial year from NBN Co.

It is clear that NBN Co have missed both their Ready to Connect and Activation targets by a significant amount in the financial year.

For Ready To Connect the target was to go from 5,400,000 to 8,300,000 premises – an increase of 2,900,000 premises. However the achievement was 6,965,649 which was an increase of 1,565,649. As a result NBN Co achieved only 54 % of its FY17/18 target.

The Service Class Zero target was to go from 250,000 premises to 400,000 premises (ie. an increase of 150,000). The FY18 actual result was an increase of 802,105. As a result NBN Co achieved 19% of its target if we use the inverse of the percentage to account for a lower actual number being a better outcome.

For Activations the target was to go from 2,300,000 to 4,400,000 premises activated – an increase of 2,100,000. However the achievement was 4,030,582 which was an increase of 1,730,582. As a result NBN Co achieved 82% of its FY17/18 target.

The remainder of the usual graphs below show NBN Co’s rollout progress as of the end of the FY17/18 year.

The chart below estimates the revenue impact of NBN Co’s activation rate continuing below its target since the end of 2017. This graph looks at the the cumulative number of actual premises activated versus the target and then computes a corresponding cumulative revenue position against target. It is based on the ARPU reported by NBN Co each quarter – currently $44 per month.

It starts from a net zero position for activations and revenue as of 1 July 2016 (ie. the time span of the graphs).

At the end of FY2017 NBN Co were approximately break event against target. During the first half of FY 2018 NBN Co was ahead of its target until it started to turn in December 2017.

At the end of FY2018 NBN Co were approximately $18m below the cumulative target.

Please note this is just an estimate to gauge the financial impact of the slowing activation rate on NBN Co’s financials.

NBN Co Funding from the Australian Taxpayers

With the commercial viability of the NBN Co being called into question and the prospect of a write-down in the Australian Government’s investment becoming more likely, here is an overview of funding provided by Australia’s taxpayers for NBN Co under the different political parties.

Note : For the election year of 2013/14 the funding has been split 50:50 between Labor and the Coalition.

ARPU Progress as of 31 Mar 2018

NBN Co needs to raise ARPU to $52 per month in order to hit its financial projections by 2020.

The below graphs show the ARPU progress and also the contribution from different technology types (AVC revenue only).

Note : NBN Co released a special promotion offer in December 2017 which sees the 50/20Mbps AVC price reduced to the same as the 25/5Mbps price (ie. $27 per month) on the fixed network technologies.

 

Australia’s Electricity Market heading in an NBN direction?

As many of my blog entries describe, Australia has experienced two decades of dysfunctional policy when it comes to telecommunications.

In parallel, Australia’s electricity market has been following a spookily similar path when it comes to the introduction of competition and the management of monopolies.

Although the markets are very different, with the electricity market involving state governments and environmental factors, the trajectories are now becoming more synchronised.

The similarities begin with the disruption of new technologies. In the electricity market it is the introduction of renewable energy sources and technologies that allow decentralisation of energy generation (eg household photovoltaics, batteries and co-generation). In telecommunications it has been the introduction of broadband and mobile technologies.

De-regulation and privatisation has been the other common thread. Policy makers have followed similar paths in taking what were once government owned utilities and looked to develop market oriented solutions to drive efficiency into what were previously state-owned bureaucracies.

As as happened with fixed telecommunications (although noticeably not mobile telecommunications), the electricity market it seeing the concentration of market power create outcomes that are not in the consumers interests.

This is most clearly on display in the electricity market with the development of the “gentailers” which is the trend for large electricity companies to combine generation and retail functions in order to have more power over the market of electricity provision.

AGL, a large Australian private energy operator, is now in the firing line and under government pressure to sell the old coal generation plant in Liddell, NSW rather than retire it in 2022. AGL acquired the Liddell plant in 2014, after the ACCC originally ruled against the acquisition on competition grounds. The ACCC decision was overturned on appeal to the Australian Competition Tribunal. The acquisition was from a wholly owned NSW state owned company. The similarity with the privatisation of Telstra as Australia’s fixed telco monopoly are spookily similar. Government would rather pocket the high sale price than pursue policies that enhance competition.

Now after only 4 years the Federal Government is being lobbied by its own backbenchers to either buy the Liddell coal power station or build a new coal power station in the La Trobe Valley of Victoria (where another old coal power station was retired in early 2017). No private sector company is willing to build coal power stations given the advances in renewables and the potential for battery and pumped hydro.

The Federal Government is also investigating a potential $4.5 billion upgrade to the Snowy Hydro scheme to provide further pumped hydro capacity into the market.

Government intervention in the electricity markets is just as ironic as the telco markets. In a similar fashion to the Telstra – NBN tragedy, rather than follow the advice of competition regulators, governments are taking the short term option of selling their assets in ways that restrict competition to pump up the sale price they receive only to have to reinvest and re-enter the market themselves later when competition is not delivering the outcomes they want for consumers.

The similarities between telecommunications and electricity markets will be interesting to follow – both are experiencing technology disruptions that should encourage competition and better outcomes. But this will only occur if governments are prepared to get out of these markets at reasonable sale prices reflecting the future competition risks rather than sell them as ongoing monopolies / oligopolies.

If ever there was a case for the old adage that “you cannot have your cake and it eat too” then this is it. Government’s need to be realistic in there sale expectations otherwise this problem will be come circular and never ending.

The future privatisation of NBN Co must only proceed after NBN Co is broken up. Otherwise you can expect government to have re-enter the market in the future to fix the lack of competition.

ACCC recommends NBN Co break up

The ACCC released its final report on the Australian telecommunications market on 5 April 2018.

Although not mentioned in its press release or in the accompanying fact sheet, the ACCC makes an explicit recommendation for the Government to push forward with the breakup of NBN Co.

Nevertheless, the Australian Financial Review picked this up in its main headline on the ACCC’s release.

The recommendation specifically advised the Government to continue planning for the NBN Co’s breakup.

This is a new recommendation that was not in the initial draft report released in October 2017 to which I provided a submission.

It seems my submission has had some influence in getting the ACCC to explicitly recommend for the breaking up NBN Co. The final report highlights my submission as follows :

The ACCC final report also provides further details on NBN Co’s activities being undertaken to prepare for future disaggregation.

It appears the Government has withheld from publication the report commissioned by NBN Co on the its OSS and BSS in readiness for disaggregation. This report should be made public and open to comment given the importance of this to any future break up.

The ACCC has recommended that the form of any disaggregation and privatisation of NBN Co should be part of the terms of reference for the Productivity Commission’s future inquiry into the NBN. Such an inquiry is a legislative requirement prior to any privatisation of NBN Co.

The Government, whether Coalition or Labor, has been appropriately advised. It is to be hoped that they will take this into account in their future policies for the NBN.