The business model and investment model for the national broadband network has been built on a very unclear footing, "and the question can even be asked whether there is a business plan at all”, according to telecommunications analyst Paul Budde.
“This is the key reason there is now so much confusion and negativity surrounding the project,” Budde comments in a blog detailing his lengthy submission to the Joint Standing Committee on the National Broadband Network Inquiry into the business case for the NBN.
“At least in its original plan there was an overarching vision from the government on the social and economic benefits of the NBN, and this was supported by a range of ‘digital economy’ and smart grid policies,” Budde writes in his submission.
“This original view was largely abandoned when the current government came into power in 2013. Prior to that, Tony Abbott, at that time the leader of the Opposition, launched a campaign to ‘Kill the NBN’. This was only just avoided, thanks to the then Shadow Minister for Communications, Malcolm Turnbull; but there was little room for a positive policy towards the NBN within that poisonous political environment.
{loadposition peter}“After the 2013 elections and for the reason mentioned above little interest was shown in developing a long-term vision for the NBN in relation to the national good, because that could be taken to be a political endorsement of the project.
“The government never took full ownership of the NBN, instead using every opportunity to talk the project down, blaming the previous government.
“The new government failed to provide its own national vision for the infrastructure and a broad level of policies concerning the country’s need for the NBN. Instead it concentrated on detailed policies in relation to ‘cheaper’ technologies. A better approach would have been for the government to provide its NBN vision in relation to health care, education, government service, e-commerce and so on.
“Just one example here to illustrate that point – the government could have mentioned using the NBN for the development of e-health services aimed at lowering healthcare costs by distributing more services through digital systems. Such policy parameters should then have been handed over to engineers, who would have been able to develop a fit-for-purpose infrastructure with appropriate costing models and implementation plans.
“The lack of a business plan also left the financial situation of the NBN in limbo. Is it a nation-building project or not? What was clear was that the government required a return on investment, which could indicate that it sees the NBN just as a commercial venture,” Budde wrote.
Budde says in his submission that it is important to look at the original NBN initiative within the market and industry context of that time.
“Based on the situation back in the 2000-2009 period there was no opportunity to develop a viable business model for a national broadband network, basically because of lack of co-operation from the very dominant and powerful telecommunication provider Telstra. Although their attitude changed after 2009, a private market model was never tested again,” he wrote.
Budde points out that under the current telecoms laws and regulations, it is now even forbidden for private enterprise to build residential fixed broadband networks.
“Several providers have indicated that they are interested in building commercial FttH networks in selected areas, and Telstra had already indicated in 2007 that it would be willing to build an FttN network to 50% of Australian premises.
“After the massive policy changes to the NBN in 2013 no new business model was developed, and this has created the current messy situation with a relatively low level of broadband quality – with hindsight it would have been better to let private enterprise develop their own high-speed broadband networks. Recent research from the Melbourne School of Engineering has indicated that such a network would have been built anyway by private enterprise by now.”
Budde said in his submission that the only reason for the government to be involved in the NBN would be if they see it as essential national infrastructure.
“This would be one of the first questions that needs to be answered before building a proper business plan. Without that you simply cannot build a business case for it,” he said.
“Although it is unclear precisely what the government’s position is on the issue, to all intents and purposes the NBN is, of course, essential national infrastructure. While national plans and policies differ, all western economies are building their NBNs and there is nearly always bipartisan support for these plans.
“While this might not have been specifically articulated by the government the fact that it is investing some $50 billion in the NBN means that they must see some social and economic benefits. So why not talk about them?
“The confusing situation in Australia can be rectified with the stroke of a pen, but this requires the political will to do so, and there doesn’t seem to be any hope of that,” Budde said.
In his submission, he said that while a full review of the NBN is inevitable, it is most unlikely that this will be initiated by the current government “and it looks as though we need to wait for the next election before we reach clarity on which business model can be built”.
He writes that failing to address these issues will continue the current confusion and undermine the financial situation of NBN Co.
“Based on the current financial model, the company will be unable to meet its financial requirements. As explained below, it will be very difficult to increase its prices to address that issue,” he said.
“Most users have a monthly budget for home broadband of between $50 and $80. If the NBN cannot deliver a service at such levels customers simply will not buy their service (as we clearly saw this in relation to the 25Mb/s and 50Mb/s situation). Worldwide, the norm in the broadband access market is that new upgrades are provided at roughly the same price we now pay for a 50Mb/s service, at roughly the same price that Australians received a 4Mb/s service 1- years ago or a dial-up service before that.
“In five years’ time we will get 100Mb/s for the price of 50Mb/s (we see this already happening in some countries with more advanced broadband networks). This is facilitated by a reduction in cost for the telcos, made possible through new technologies.
“So, the revenue options are limited, and this is obviously a risk to NBN’s financial model,” Budde submitted.
He said the real value of broadband resides in the value that it provides to society and to the economy – “but these social and economic benefits don’t show up on the balance sheets of the NBN company”.
“It is therefore important for the government to put a value on this and take that into account in the overall business model.
“Or the government can take its hands off the NBN and privatise it. Indications from several sources such as the ACCC and PwC indicate that making this an attractive project, capable of appealing to outside investors, would involve a significant write-down of the government’s investment in the NBN.”