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.

Government gives $240 million bribe to commercial TV stations

Channel Ten and Seven shares have soared in the wake of the Government’s cynical bribe of the free-to-air commercial channels yesterday. Ten Network Holdings gained 8.9 per cent to $1.65 and Seven Network rose 2.1 per cent to $6.86 after the Minister for Broadband, Communications and the Digital Economy Stephen Conroy gave hefty licence fee “rebates” to the three commercial stations.

Under the deal, the Government will cut licence fees paid by the networks, which calculated at 9 per cent of gross advertising revenues, by 33 per cent for the 2010 financial year and 50 per cent for the 2011 financial year. The move will significantly boost the earnings for media groups Ten Network, Seven Network and Nine (the latter is owned by private equity company CVC and not on the share market). Instead of paying $286 million in licence fees they will pay $192m in 2010 and just $143m in 2011.

The grubby deal has Prime Minister Kevin Rudd’s hands all over it. He and Conroy brokered it with industry group Free TV Australia chair Wayne Goss, a close friend of Rudd and his former boss as premier of Queensland. The Australian says the deal is part of the post digital cutover negotiation. The government could earn a $1 billion when it sells the analogue spectrum after the digital cutover in 2013. Telecommunications companies want the spectrum to build high-speed fourth generation wireless networks.

But it is not hard to see a more immediate political agenda at work. As Glenn Dyer reminds us, this is an election year. Rudd has been toadying up to all the television networks of late in an effort to look good on what remains by far the more important communication medium available to him. It is unlikely the TV stations will be keen to give him bad coverage now that he has showered them in such largesse. Dyer said the deal is also a sweetener to keep the networks onside during the digital transition.

Fellow Crikey writer Bernard Keane (articled paywalled) is also deeply unimpressed. Keane says the free-to-air networks are already handsomely compensated for the transition to digital. These policies include a moratorium on competition until at least 2014, the award of free spectrum for digital take-up, the most restrictive sports anti-siphoning laws in the world, and a grant of $260m to regional broadcasters to offset digital transmission costs. There is also a 20 percent tax rebate for production costs. As Keane notes, “this is an absolutely wretched decision”.

However outrage has been relatively muted outside Crikey (with the honourable exception of Peter Martin). Needless to say, the television stations themselves are not going to badmouth the deal. On the contrary, the Free TV Australia consortium, which represents all of Australia's commercial free-to-air television licencees, welcomed the announcement. The body’s CEO Julie Flynn called it a recognition of the commercial’s key role in delivering Australian content. “Free TV broadcasters are the major underwriters of Australian content despite the challenge of competing media platforms and fragmenting audiences,” she said. “But it is clear that as we moved to a converged media environment the basis for the old system of licence fees needs to be reviewed".

Conroy himself also sought to sell the decision as content protection even though there was no new initiative in that direction. He said the rebate recognised the importance of ensuring TV audiences have strong levels of Australian programs. It also addresses problems with the digital cutover and the fact that licence fees in Australia are more expensive compared with other countries such as the US, UK and Canada. Conroy said the Australian Content Standard required commercial television broadcasters to produce and screen 55 percent local content between 6am and midnight, 7 days per week, and provides for the production of Australian drama and children’s programming. “Broadcasters have a unique role in preserving our national culture and the commercial television sector invests hundreds of millions of dollars each year in the production of local content,” he said. “New media platforms are bringing a wealth of choice to Australian viewers, but the Government recognises that Australian television broadcasters have an important role in ensuring that Australian stories remain at the centre of our viewing experience.”

The Pay TV peak body Astra called the tax-breaks anti-competitive and against consumer interests. ASTRA’s Chief Executive Officer Petra Buchanan said taxpayers were subsidising foreign-owned broadcasters to meet existing broadcasting obligations. “It is couch potato policy that reduces their incentive to invest compete and innovate,” she said. “By using taxpayers’ money to prop up the old players, innovation and competition in the television space will continue to be curbed.” Buchanan is right to be outraged. This deal is bad as anything extracted during the Packer era and stinks to high heaven. Labour and the Opposition (which also supports the deal) ought to be ashamed of themselves.