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News - Written by Renai LeMay on Tuesday, September 3, 2013 15:47 - 36 Comments
It’s just plain wrong: A full refutation of the Coalition’s $94 billion Labor NBN costing
full opinion/analysis by Renai LeMay
3 September 2013
Over the past five months since the Coalition released its rival policy claiming that Labor’s version of the NBN would blow out in cost to $94 billion, Shadow Communications Minister Malcolm Turnbull has claimed on a number of occasions that nobody has stepped forward to refute the Coalition’s costings on the matter. Well, Mr Turnbull: Challenge accepted. This article is that refutation.
If you spend a lot of time around politicians, as I have the unfortunate fate of doing, you will quickly realise that each and every one habitually uses a version of Steve Jobs’ famed Reality Distortion Field to get them through their every day life. People in such positions, at times, really appear to truly believe everything which they say, irrespective of whether it’s objectively true or not, and the strength of their apparent conviction often means that those around them start to believe the same.
In Jobs’ biography, author Walter Isaacson describes a trait which the Apple legend had in this way: “People also had to put up with Jobs’s occasional irrational or incorrect assertions. To both family and colleagues, he was apt to declare, with great conviction, some scientific or historical fact that had scant relationship to reality.” Apple design chief Jony Ive added: “There can be something he knows absolutely nothing about, and because of his crazy style and utter conviction, he can convince people that he knows what he’s talking about.”
Nowhere is this phenomenon more visible in Australian public life than when it comes to Shadow Communications Minister Malcolm Turnbull.
I’ve watched Turnbull perform at dozens of press conferences over the past several years since he was appointed to lead the telecommunications portfolio for the Coalition. I’ve listened to, and read, several dozen speeches which the Member for Wentworth has given. And I’ve followed on a daily basis Turnbull’s blog entries, his Twitter posts, and his interviews with the media.
Other followers of Turnbull’s exploits will know well what I am talking about here. Like Jobs, it is common for Turnbull to make a very strong statement which has no basis in reality. He did it several weeks ago on the ABC’s Lateline program when he claimed NBN Co’s upcoming 1Gbps fibre service would cost consumers in the realm of $20,000 per month. He did it in July when he claimed that NBN Co chief executive Mike Quigley had been “fired” from his role, when in fact Quigley had signalled his plans to retire. And Turnbull has also consistently been loose with the truth when discussing the various technology platforms to be used in either version of the NBN project.
However, perhaps the most grossly misleading statements which Turnbull has made in his time as Shadow Communications Minister have been with respect to the cost of building Labor’s NBN project. From whether the capital investment involved in the NBN should appear on-budget to the retail costs of connecting to the infrastructure and other issues, Turnbull has constantly presented a view of the NBN’s finances over the past several years which is significantly at variance with the publicly available information on the project.
In May the regular misstatements which Turnbull and other senior Coalition figures had been making with respect to the NBN’s finances culminated in one big headline claim: The argument that Labor’s NBN project would not cost around $44 billion, as Labor’s modelling has consistently shown over the years, but more than double that: In fact, Turnbull alleged, the real figure would be $94 billion.
The claim was, on the face of it, not immediately believable. After all, it doesn’t seem possible that NBN Co, a company which employs close to 2,000 staff and has significant external resources; a company which has signed billions of dollars of real contracts with real suppliers for construction work and network equipment, could be wrong enough about its own finances that a $50 billion black hole could exist without its knowledge. It also doesn’t seem realistic that Turnbull, with his small staff commensurate of a Shadow Minister, would be able to accurately calculate the cost of Labor’s NBN construction better than NBN Co itself. The information difference would simply appear to be too great.
In addition, the figure was immediately challenged. Then-Communications Minister Stephen Conroy immediately challenged Turnbull’s $94 billion claim, accusing the Duke of Double Bay of “lying” on the issue. An analysis by your writer at the time published by the ABC showed that, even under the Coalition’s own working, it was unlikely that Labor’s NBN policy would cost anywhere near $94 billion, with the Coalition’s figures being based a worst case scenario for the NBN, where multiple factors went disastrously wrong simultaneously. In addition, fact-checking website Politifact agreed with Turnbull that the NBN was likely to blow out in cost, but said it believed the Liberal MP had overreached somewhat with his $94 billion total. And of course, NBN Co itself rejected the claim.
Despite all this, over the past five months since the $94 billion claim was made, a myth has grown up around the $94 billion claim: That it has never been truly tested.
“We’ve been very very transparent, and bear in mind we published that four and a half months ago and nobody has since published (despite a lot of expertise in the field), no one has since published a counter analysis that demonstrates that any of those assumptions are other than very reasonable,” said Turnbull in a doorstop interview several weeks ago.
This article is an attempt to conduct just such a counter analysis. It will examine the core claims which the $94 billion figure is based on, and refute them. Following its publication, it will no longer be possible for Turnbull to make the claim that the Coalition’s NBN costings have not been challenged. It will be possible for Turnbull to respond to this article and argue against the evidence presented therein. But it will no longer be possible for the Member for Wentworth to claim that the Coalition’s $94 billion claim has not been challenged at all.
Note: It is important to disclose that this article has been researched with significant assistance from sources within the Australian Labor Party. This information has been broadly fact-checked by Delimiter during the process, however.
If you examine the Coalition’s NBN background briefing document (PDF), it is apparent that there are four pillars which underpin the claim that Labor’s NBN project will cost $94 billion to deliver. The Coalition states that for the $94 billion figure to eventuate, NBN Co’s revenue must grow much slower than currently forecast, construction costs must be significantly higher than currently forecast, more households must pick wireless alternatives than is currently forecast, and the NBN must take 50 per cent longer to build (an extra five years) than currently forecast. This article will examine each of those claims separately.
Are fibre to the premises costs higher than originally forecast?
The Coalition’s background briefing document states that according to NBN Co’s latest corporate plan (PDF), the average capital expenditure (capex) per premise involved in constructing fibre to the premises is around $2,400, plus some shared capex. However, the document argues, due to factors such as the complex work involved in getting FTTP to multi-dwelling units such as apartment blocks or other ‘non-standard’ premises, the cost would actually be might higher. Based on research from Macquarie Bank, the document estimates capex per fibre premise at $3,600. This adds $12.9 billion to the NBN’s total cost of construction, under Coalition calculations.
However, the problem with this analysis is that it is at odds with what we know of NBN Co’s capex costs.
In a report provided to the Parliamentary Joint Committee on the NBN in April (PDF), NBN Co provided a detailed breakdown of the fibre capex costs on a per-premise basis. The document clearly shows that NBN Co’s costs in this area have rapidly depreciated over time, as the company has become more and more experienced in deploying fibre.
For example, when NBN Co first started rolling out fibre in early stage areas such as Tasmania, its costs per premise were as high as $5,000 to $7,000. Over time, however, this cost has come down dramatically. For new services, the total cost per premise (consisting of the cost of laying fibre to the street and then the cost of connecting individual premises to the NBN) has come down to very close to the $2,400 per premise cost which the Coalition’s background briefing document mentions. This detail can be found on pages 5 and 6 of NBN Co’s report to Parliament.
Furthermore, NBN Co also has some room to move with this figure. The company’s initial budget actually contains a 10 percent contingency figure, amounting to around a billion dollars, to cover issues with the cost of construction. Recent media reports have highlighted that some costs with respect to NBN Co’s cost of construction have indeed blown out — but NBN Co has also been able to find efficiencies with respect to its rollout which have kept its costs within its original predictions. This reflects the growing maturity of NBN Co’s fibre rollout skills, as its per premises capex costs also show.
Will the network take 50 percent longer to complete?
The Coalition’s background briefing document also alleges that it’s not unreasonable to assume that NBN Co’s rollout will take 50 percent longer to complete than the timeframe through to 2021 that NBN Co is promising. The document contains very little detailed justification for this claim (which the Coalition says will increase costs by $14.9 billion), including only five paragraphs of argument on the subject, but there is actually some basis in reality to suspect it could be true.
In March this year, for example, NBN Co drastically cut its rollout forecasts for the end of June down from an initial 341,000 premises, to between 190,000 and 220,000 premises. The company has acknowledged it is suffering from construction delays, in part due to issues with its contractors, and in part due to issues with Telstra’s existing network infrastructure, such as the need to remediate areas where the dangerous substance asbestos has been used decades ago in the infrastructure’s construction. In addition, even in areas where NBN Co has stated that it has completed its fibre network rollout, up to two thirds of premises in those areas were not technically able to connect at the disclosure date, causing more doubt in NBN Co’s figures.
So will NBN Co continue to experience delays? Yes, it probably will, but if you believe the company, it is finding efficiencies in other areas of its rollout that will ensure its long-term targets will be met. NBN Co chief executive Mike Quigley said in July: “I should be clear, this short-term issue will not affect the long-term delivery of the NBN or the overall cost of the project. NBN Co remains on track to deliver fast, affordable and reliable broadband to every Australian by 2021 as set out in our Corporate Plan.”
There’s a bigger issue here, however. Whether NBN Co experiences delays or not is not really the issue in terms of this article. The actual issue is whether or not those delays actually contribute to the $94 billion blowout cost which the Coalition’s policy document alleges. In April, NBN Co chief financial officer Robin Payne was asked about precisely this issue by the Joint Parliamentary Committee into the NBN. Payne replied:
“The biggest impact of a one- or two-year delay will not have much impact on the internal rate of return. With a two-year delay we would probably still expect to see an internal rate of return of around seven per cent. Where it does have a big impact is on the peak funding requirement. Under the existing plan, we have a peak funding requirement of just over $44 billion. If we extended the rollout, it would reduce that peak funding requirement because we are spending capex after a time when we have gone to cash flow positive. That would come down by $2 billion or $3 billion.”
Payne didn’t examine the five year, situation. However, it’s hard to see how this would change his view that not only would a significant delay in the NBN rollout not affect NBN Co’s finances, but it would, in the view of NBN Co’s chief financial officer, be likely to actually improve the situation in terms of its costs.
Will more Australians take up wireless-only solutions instead of the NBN?
The third cost blow-out factor alleged in the Coalition’s background briefing document refers to the idea that more Australian households will ditch fixed-line telecommunications entirely and consume broadband principally through wireless avenues. This is an idea which has grown in popularity throughout the NBN policy’s life, principally because of the growth of uptake in mobile broadband in Australia, driven by the development of continually higher 3G/4G speeds.
The Coalition’s policy document points out that NBN Co’s corporate plans have estimated the number of wireless-only customers by the 2020’s to be about 16 percent nationally. More premises will have access to wireless services through platforms such as smartphones, but the telecommunications industry widely regards wireless and fixed broadband as complementary.
However, the Coalition’s document points out, since the NBN policy was announced, the number of mobile broadband subscribers in Australia had increased from 1.4 million to 5.9 million, overtaking fixed broadband subscribers in 2012. In addition, NBN Co itself had discussed the issue with the Australian Competition and Consumer Commission, in a letter made public that suggested if NBN Co raised its prices to the maximum permitted by its agreement with the regulator, that wireless-only households could rise to as much as 30 percent.
Based on this information, the Coalition’s background briefing document assumes that wireless-only households could constitute as much as 25 percent of Australian premises by the 2020’s. This could add $1.9 billion in required funding to the NBN project, the Coalition alleged.
The problem with this analysis is that it represents a worst possible case for the NBN; and not the expected case; or the case that is being demonstrated by the available evidence so far.
Asked about the issue, NBN Co spokesperson Andrew Sholl told The Australian newspaper in March that the scenario was an “entirely theoretical construct anyway” and the maximum pricing scenario was something NBN Co was asked to model by the ACCC as it considers the agreement to set price caps and other key terms for NBN Co. Sholl added: “It is neither planned nor intended that we would price in this manner.”
This situation is similar to the way in which the mainstream media has reported other correspondence about modelling which NBN Co has had with the ACCC. In February this year, for example, NBN Co sent a letter to the ACCC detailing four theoretical cases for recovering its costs. The Financial Review only reported one of those cases; and it wasn’t the expected case.
In addition, statistics published by the Australian Bureau of Statistics have consistently shown that while the uptake of wireless services has radically grown over the past decade, the amount of data downloaded by users is not significantly increasing relative to that downloaded over fixed broadband networks.
Taken together with the fact that NBN Co is seeing much higher uptake of its fibre broadband services than it expected, and the fact that those customers who are taking up such services are choosing higher value monthly plans in much higher proportions than are expected, there is a significant body of evidence that indicates that the figure of 25 percent of Australians using only wireless for broadband will not eventuate. This isn’t surprising; in fact, it represents mainstream thinking in the telecommunications industry; which, again, broadly views wireless and fixed broadband as complementary and not as competing solutions.
However, again it’s important to look at the bottom line. Even if you assume that the Coalition is right, and that 25 percent of Australians consume only wireless broadband and not fixed broadband, this is still, according to the Coalition’s own estimates, only going to add a relatively small amount — $1.9 billion — to the NBN’s bottom line. In the worst case, it’s not a huge deal for NBN Co’s costs.
Will NBN Co’s revenue grow more slowly than forecast?
The last assumption in the Coalition’s background briefing document is a complex one; it relates to NBN Co’s revenues, and particularly the average revenue per user (ARPU) on the network — a common measurement in the telco industry.
In its document, the Coalition points out that NBN Co is projecting “extremely rapid growth” in its ARPU between 2012 and 2021, with its wholesale ARPI starting at $22.46 per month in 2012 and then rising to $62.11 by 2021. The document states: In nominal terms, ARPU growth over this nine‐year period will average 12 per cent. If inflation is assumed to be 2.5 per cent, ARPU increases at an annual rate of just over 9 per cent in real terms. Is this rate of growth realistic? It is clearly out of line with recent experience and there are many other data points that suggest it is doubtful.”
The document uses a range of measures to attempt to debunk NBN Co’s revenue projections, including looking at the total annual telecommunications spend in Australia over the past century, projections of the revenues of Australia’s major telcos and ISPs and international revenues from comparable fibre networks. The ultimate addition to NBN Co’s cost, according to the Coalition’s calculations, could be $8.3 billion. The document concludes:
“While FTTP and FTTN will both provide consumer value beyond current broadband and telephone services, it’s implausible to imagine the share of wallet captured as wholesale fixed line revenue could rise as sharply as NBN Co expects, or that wholesale fixed line spending will grow strongly as a share of consumption; virtually all the evidence suggests otherwise.”
The problem here with the Coalition’s calculations is that they appear to be based on inaccurate assumptions. NBN Co chief executive Mike Quigley was asked about this specific issue during an April hearing of the Joint Parliamentary Committee into the NBN. He responded that the $22 figure initially assumed by the Coalition in its calculations was inaccurate. Quigley said:
“I want to address the observation [Mr. Turnbull has] made that our average revenue per user is trebling. I think that was on the basis of the number that would have been in the corporate plan at the very beginning, which was $22.”
“What you will have seen, if you look at the graph of average revenue per user, is that in those very early days there was a kink down. That kink down is an artefact of the fact that we had a very small base of subscribers in those early years and you are growing almost exponentially in [the] number of [sub]scribers. So when you do the ARPU calculation, you end up with an ARPU that is misleading. You may observe, in fact, the lowest possible price we have for an [access virtual circuit] for the access portioning, even ignoring [connectivity virtual circuit], is $24. So if you start, you cannot really start with an ARPU of $22; it does not make any sense. You cannot take the number from $22 to $68 and say it has trebled when you are starting from an ARPU that is actually below what the lowest AVC cost is. Our real ARPU today is $38.”
“There was another issue there with the $22—that is, it was based on us assuming that people would take up very small amounts of CVC—the [retail service providers]. They are in fact taking up a higher rate. We also have seen that people are taking up higher speed tiers more often. So our ARPU, our starting point, should not be $22, it should be $38. If you do the calculation again, based on actuals, it is a very different picture.”
It’s interesting to note that Quigley is actually acknowledging that certain aspects of the Coalition’s argument here are correct: That ARPU will not treble over the next decade; in fact, it will not double. It will only rise modestly. The difference is the starting point.
A common sense reading of this argument easily shows the mistake in the Coalition’s reasoning. Most Australians are not paying anywhere near $22 per month for broadband services today — there are very few broadband plans available below $30. In fact, most Australians are paying upwards of $40 to $50, or even closer to $70-$80 in many mid-range cases, for broadband, and they will be paying similar costs under the NBN. Quigley’s statement of current ARPUs being closer to $38 matches that common sense reading of the situation; and given the constant increase in use of broadband services over the past decade, it’s not a stretch to assume that ARPUs will rise by the proportion NBN Co is suggesting.
In fact, there is already evidence that ARPUs on the NBN may increase even faster than NBN expects. In October last year, NBN Co revealed that 44 percent of NBN customers who had so far signed up to its fibre infrastructure had signed up for the fastest (and most expensive) plans available — 100Mbps. “Only 16 percent of the active services on our fibre network are for the entry-level speed tier of 12Mbps,” said Quigley at the time. And ARPUs may increase even further when NBN Co formally launches its 1Gbps plans later this year.
The news mirrored survey data released in late June by analyst house Telsyte, which found that 85 percent of Australian consumers wanted to be able to connect to the Internet at speeds of 50Mbps and higher.
If uptake levels of the 100Mbps speeds continue to be strong, NBN Co has stated that it is likely that it will be able to use the increased revenues from such high uptake of the highest-level speeds to drive down the real-world consumer cost of accessing the NBN over time, as the network will pay for its own construction much faster than NBN Co has been anticipating – a fact raised by NBN Co chief executive Mike Quigley in another Senate Estimates hearing in May last year.
None of the analysis above should come as a shock to anyone. After all, NBN Co is under constant scrutiny, and its two corporate plans have been pored over extensively by experts. In February 2011, for example, the Federal Government published a review by Greenhill Caliburn of its first corporate plan (PDF). The firm wrote:
“Greenhill Caliburn has reviewed the Corporate Plan and relevant supporting documentation provided to us. Based upon our review, we believe that the Corporate Plan has been completed to high professional standards, providing the level of detail and analytical framework that would be expected from a large listed public entity evaluating an investment opportunity of scale.
Based on our preliminary view, as more fully described in our Report, and subject to the assumptions contained in the Corporate Plan itself, Greenhill Caliburn believes that, taken as a whole, the Corporate Plan for the development of the NBN is reasonable. In general, key assumptions underlying revenue and cost projections appear to be in line with a range of available domestic and international benchmarks, and are consistent with the stated policy objectives of the Government with respect to the NBN. Accordingly, we believe that the Corporate Plan provides the Government with a reasonable basis upon which to make commercial decisions with respect to NBN Co.”
After several years of real-world experience, NBN Co’s second corporate plan was released in August 2012. Sure, there were quite a few differences between the two plans. But in general, that real-world experience pretty closely matched NBN Co’s initial estimates. And the release of NBN Co’s third corporate plan, which is expected to occur after the Federal Election this Saturday, is expected to further fit within the company’s guidelines.
Shadow Communications Minister Malcolm Turnbull, as well as other senior Coalition figures, have claimed repeatedly over the past several months that the Coalition’s NBN policy financial estimates have not been substantially challenged. Well, they have now. But the greater truth is that it’s NBN Co’s detailed corporate plans, and the company’s own projections based on real-world experience of its own rollout, that has not been substantially challenged. NBN Co’s rollout has definitely experienced many problems and will doubtless continue to do so. It’s rollout is behind, and it has a lot of work to do to catch up.
However, this doesn’t mean that Labor’s NBN policy will cost $94 billion, as the Coalition’s policy document alleges. That allegation just is not backed up by sufficient evidence to be credible. And it’s time everyone in the debate, including Turnbull himself, acknowledged that fact.
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