SteveJ on NBN: ER-edition: NBN: Numbers from the Turnbull Copper/Node Plan

The Coalition doesn't have an "NBN Policy" for a Government expenditure program, neither does the ALP. The NBN is vitally different: it's a business and investment.

Treating the NBN as a normal policy is wholly misleading. It's a business, pure and simple.
Money is being borrowed to invest, meaning it must both break-even and pay-back, in full, and go onto make a Return on Investment (ROI).

Investments also carry risk, the taxpayer must also be prepared to pick-up the multi-billion dollar tab if things go.

Turnbull is pitching the Australian voter and taxpayer to stump up $30 billion for a business he wants to create, but he's not provided the necessary key data: pay-back period, Return on Investment and downside risk.

There's a simple test of "one of the most detailed policy statements from an opposition":

Would what's been put before the Australian public be full and sufficient for either the board of a major company like BHP Billiton, or for a merchant bank like Macquarie?

The answer is a resounding No! What's needed for this pitch is a good Business Plan, including the detailed financial forecasts to 2040/2050 Turnbull has already prepared.

I find it astounding that both the Parliamentary Budget Office (PBO) and the entire Mainstream Media, including icons like Alan Kohler, don't seem to understand this fundamental point and called Turnbull on it.

This post documents the entire numbers in support of the Coalition investment pitch: it's not only woefully incomplete. but information has been demonstrably deliberately withheld. This is a business, not a political, transaction and such behaviour, if ASIC were to deem itself as having oversight, would bring severe and enduring penalties, even criminal prosecution.

The demonstrable deliberate withholdings are:

Turnbull supplies many summaries from spreadsheet tables for 2011 to 2021, even out as far to 2025 (pg 28, not included), yet he chooses to truncate the most critical data, his financial forecasts to just 5 years, 2014-2019. Where's the other 25 years of the forecasts?

Turnbull explicitly tells us in his "summary financials" that he's run the forecasts until at least 2021, but withheld the data.

There is also $2 billion of Capex between 2019 and 2021 that is not discussed.

The CapEx & OpEx statements cannot be correct:

The Coalition claim they only altering the $28.5 billion component of the $37.4 billion full CapEx by substituting a Copper/Node solution for 75% of fixed lines.
At most, the Coalition is replacing $21.375 billion of CapEx and somehow claiming savings of either $15 billion (to 2021) or $17 billion (to 2019).

This puts an upper bound of $4.375 billion on the full construction costs of the Copper/Node.

But around $11 billion of the Fibre $28.5 billion is for contracted fixed payments to Telstra that must also be paid by the Coalition. The full construction budget for Fibre, including the $3 billion Transit network common to both Fibre and Copper/Node builds, is $17.5 billion, or $13.25 billion that can be replaced by the Copper/Node solution.

The claimed savings of $17 billion are ~$4 billion are more than the budget available. This is impossible.

If the Coalition has adopted, but not made explicit, a "Rent not Buy" approach to its Copper/Node solution, then Telstra must still be paid it's $11 billion.

OpEx must be significantly higher than the current plan,
instead, Turnbull also claims savings in OpEx of $4 billion.
Both claims of lower CapEx and lower OpEx cannot be true.

Payments to Telstra, the single biggest NBN Co creditor are never mentioned.

The modelled construction costs are only ever implied at $900 per line passed. For the 8.968M lines, that's a total project cost of $8.1 billion for the Copper/Node solution.

But the same insert that gives us that construction cost also makes very plain that they also expect a "CapEx Reuse" of 50%.
Translated, the plan includes planned wastage of $450/line, or $4 billion. This planned waste has to be added to the cost of construction.

Extracts from "The Coalition’s Plan for Fast Broadband and an Affordable NBN"

pg 8:
New statement of expectations

The statement of expectations will specify a limit on the public capital available to NBN Co. This limit will be $29.5 billion.

NBN Co will be required to achieve these objectives while providing a positive after-inflation return on all post-election equity invested by taxpayers.

pg 9:
We will require NBN Co to amend its rollout plan with effect from the soonest commercially feasible date to grant priority to the identified inadequately served areas.

Broadly, it is the Coalition’s expectation that execution of the rollout described in this policy will take place over six years from 2013 to 2019 inclusive, and be completed in 2019.

Approximately 65 per cent of the FTTN portion of the rollout is expected to be completed in the four years to 2016-17. The remaining 35 per cent will be deployed in 2017-18 and 2018-19 and will in most cases be in areas served by hfC networks. [CapEx rises by $2 billion after 2019]

pg 10:
Where the NBN is rolled out using FTTN, existing communications services at a given node will cut over to NBN Co control on the same date. [What payments will be made to Telstra and other Telcos? When?]

Completion of the NBN will implement the structural separation of Telstra.

pg 12:
Where NBN Co extends fibre beyond an exchange but not to user premises (i.e. deploys FTTN) it will be required to plan and build in readiness for future upgrades that take fibre further into the field. All FTTN designs must be upgradeable. [FTTN is being built to throw away.]

NBN Co and Telstra

NBN Co will seek permanent access to Telstra’s copper between premises and concentration points such as pillars, cabinets or exchanges. Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable.

pg 18:
The Coalition will spend $20.4 billion on capital expenditure to build its alternative NBN. [No mention of $22 billion CapEx by 2021].
The total funding required for the Coalition’s NBN is $29.5 billion.

Extracts from Coalition "NBN Policy Background"

pg 6:

NBN Co has separately signed contracts that involve payments over forty years to Telstra with a face value exceeding $50 billion if paid in full. These include a ‘PSAA’ payment of about $1500 each time NBN Co takes over a premise previously connected to Telstra’s networks.

pg 9:
And since there is no disturbance at the user premises and less digging up of streets, fibre to the node (or FTTN) upgrades in established areas typically cost only 20 to 33 per cent as much as running fibre optic cable all the way to end users (‘fibre to the premises’ or FTTP).

In truth, however, most of the reductions in operating costs claimed for all‐fibre networks are miniscule compared to the interest payments on the extra investment required to construct them.

pg 12:
For network operators, the costs of incremental gains in bandwidth are also non‐linear. As discussed, for the past decade data rates have been lifted with upgrades that cost only $200 or so per premise for the upgraded components at either end of copper or HFC lines.

pg 13:
Deferring an expensive and irreversible investment commitment such as FTTP, to the extent this is possible, is prudent commercial management if it permits more information about actual usage and investment returns on fibre to emerge. [As it did on 19-Apr-2013, the 31-Mar NBN Co results, and was not included by the Coalition.]

pg 15:
We can estimate 50 per cent of the capex required for FTTN is later applicable to FTTP ... [Planned 50% wastage of FTTN investment. Becomes part of project cost.]

The cost of FTTN upgraded to FTTP after three years of operation (less than a third of its probable lifespan) measured in current dollars is $3633 per premise, while FTTP built immediately measured on the same basis costs $3755 per premise.

Comparison of the same two scenarios over the probable decade‐plus lifespan of FTTN shows starting with FTTN rather than FTTP it has an even more pronounced financial advantage.

The cost of FTTN upgraded to FTTP after ten years of operation measured in today’s dollars is $2963 per premise, while FTTP up front measured on the same basis costs $4003. Applied uniformly across the 12.2 million premises Labor’s NBN proposes to pass by June 2021, the savings in today’s dollars from deferring FTTP for a decade would total $12.7 billion.

pg 18:
But the public has never been provided with any explanation of the basis for this assertion. There has been no disclosure of what assumptions about capital structure, NBN Co operating margins, end user behaviour and charges, NBN Co privatization date and terminal value are required to make it add up. [Turnbull criticises Labor for non-transparency, while engaging in much more himself.]

pg 19:
Before examining the Corporate Plan, it should be noted that there are two ways to approach measuring the total cost of the NBN:

‘Required funding’ represents the sum that NBN Co needs to raise from taxpayers or investors to pay for its network and any operating losses it incurs while the network is built, up until the time that NBN Co becomes cash flow positive and financially self‐sufficient.

‘Capital expenditure’ or capex is money spent by NBN Co on enduring fixed assets such as equipment, structures or buildings. Capex is what most taxpayers would think of as ‘investment’ in the NBN and the associated infrastructure to support it (e.g. computers and IT to manage the network).

pg 33:
The capital funding already required by Labor’s NBN will probably never earn a return. And as the headline cost of the network rises, the Government will find it harder to hide behind the Budget rules keeping GBEs off the books.

A significantly less capital‐intensive NBN such as the policy proposed here by the Coalition is the only way to ensure NBN Co can continue to have a legitimate claim to remaining off Budget, in addition to being the only way to avoid very large increases in prices.

pg31:
Brownfield FTTP ... lowers per‐premise costs from $3600 up to 2014 to $2700 from 2015‐2019 (still 10 per cent higher than the FTTP estimate in the revised Corporate Plan).

SUMMARY FINANCIALS

Revenue over 2012‐2021 is $16 billion, versus $23 billion in the current NBN Co plan.
Opex over 2012‐2021 is $22 billion, versus $26 billion in the current NBN Co plan.
Capex over 2012‐2021 is $22 billion, versus $37.4 billion in the current NBN Co plan.
Capex to 2019, when the rollout reaches 100 per cent coverage, is about $20.4 billion.
The NBN is projected to be cash flow positive in 2020‐21.