Monday, February 14, 2011

NBN Corporate Plan review tells government to watch assumptions

Greenhill Caliburn have completed their review of the NBN Co business plan and say it is as good as could be expected from “an Australian blue chip company.” Federal Communications Minister Stephen Conroy said the report confirmed NBN Co's key assumptions underlying revenue and cost projections which provided the Government with a reasonable basis on which to make commercial decisions about the broadband network. "As with any infrastructure project, there are always risks, contingencies and external factors and the Government will work closely with NBN Co to put in place agreed performance indicators to track its performance and adjust strategies or operations as needed,” Conroy said today. (photo: ABC News Damien Larkins)

The government asked Greenhill Caliburn to review the corporate plan and provide a commercial assessment, identifying and analysing the plan's key assumptions and potential risks. The company released its executive summary of the review today. In 2009, the Government formed the NBN Co to run the broadband network to bring superfast broadband to 93 percent of the population and a mix of satellite and wireless for the rest. The NBN Co released the final version of its corporate plan in December to provide a detailed overview of the expected technological, operational and financial framework for the development of the NBN expecting to commence large-scale construction by the middle of this year.

The government asked Greenhill Caliburn to review NBN Co Limited's Corporate Plan and provide a commercial assessment, identifying and analysing the plan's key assumptions and potential risks. Greenhill Caliburn is an independent firm listed in the New York Stock Exchange specialising in the provision of financial and strategic advice. Their baseline position having reviewed the plan was that “taken as a whole, the Corporate Plan for the development of the NBN is reasonable.” They said key assumptions underlying revenue and cost projections appeared be in line with a range of available domestic and international benchmarks, and were consistent with the stated policy objectives of the Government with respect to the NBN.

The key assumptions in the plan are network design, regulatory considerations and completion of agreements with third parties. Variation to these assumptions could affect NBN Co’s business strategy and return profile. Similarly NBN Co’s long term revenue forecast contain “inherent uncertainties” and are subject to shifting technologies and consumer preferences. Nor did the review conduct an in-depth analysis of NBN Co’s future funding requirements. However, Greenhill did say NBN Co is likely to be able to obtain debt funding over time with government support.

The Corporate Plan provides a detailed overview of the expected development and operation of the NBN, including a 30-year business forecast. The principle objectives are providing 93 per cent fibre network coverage by the end of 2020, delivering a wholesale-only open access platform, and providing an entry-level mass market product peak information rate of 12 Mbps with the potential to deliver up to 1 Gbps in the future. Recent Government decisions affecting the NBN include the increase of points of interconnect to premises from 14 to 120 and new requirements for Greenfield developments.

But decisions still need to be made to stop market participants from "cherry picking" the most commercially attractive areas ahead of the NBN build, passage of enabling legislation to grant powers and immunities to facilitate the rollout of overhead cabling, passage of greenfields legislation to mandate corporate developers install fibre-ready equipment and execution and performance of the agreements with Telstra hatched out in June last year.

The Corporate Plan estimates it will cost a massive $35.9 billion to build the NBN fibre network and its total funding requirements will be $37.1 billion. To generate the revenues necessary to repay this high build price, it is important a high number of users can be attracted to and retained on the NBN to a total of 13 million homes, schools and workplaces by 2020. They will also need to provide higher value products and services and keep the costs down to what is planned. Trends towards “mobile centric” broadband networks and consumer pushback on the usage-based pricing model could have negative impact on plans. Greenhill Caliburn has recommended a close monitoring of the Telstra customer migration and initial release phases relative to plan and the establishment of NBN Co monitoring arrangements particularly during the early stages of the project when key decisions are made.

Predictably, the Opposition has said the Greenhill report backs up their arguments against the NBN. Shadow Communications Minister Malcolm Turnbull said the report’s support for the NBN was “grudging” and lacked answers for a range of critical areas. “This report, like the other multi-million dollar consultants' reports the Government has commissioned, fails to address the single most important issue,” said Turnbull. “What is the most cost-effective way to ensure that all Australians have access to high speed and affordable broadband?” Conroy’s rather glib response is that the plan showed taxpayers would get their investment back, with a return. “The NBN will provide a rate of return significantly higher than the government bond rate and all Australians will gain access to this world class network,” he said.

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