Sunday, 16 December 2012

NBN: Historical Financial Performance of Telcos: O.T.C.

OTC, the Overseas Telecommunications Commission, later Corporation (Australia), was formed in 1946 and merged into Telstra in 1992 as part of the Telco duopoly, granting the OPTUS consortium the second Telco license in exchange for taking over Aussat and its debts.

From the available Annual Reports, I've extracted some of the financial data. The Gross Margin and Return on Equity since the mid-1970's when IDD (International Direct Dialing) was introduced and telephony came to dominate the business. In the 1991 Annual Report, the directors noted that OTC(A) had reduced telephony rates in real terms every year since 1976. At the time it cost around $1/minute to call either Perth or London from Sydney. Telstra STD rates had not tracked the OTC(A) rates.

OTC(A) not only won a series of Advertising and Marketing awards with campaigns over many years, it was one of the cheapest International Telcos, comparing well to the USA and much lower Traditional State Owned "PTT's" like Japan and Germany. This showed up in both Net Traffic Flows (many times more calls originated inside Australia) and in paid-minutes per head of population.

The Gross Margin was generally 20-40% and Return on Assets ended well over 60% [Mislabeled as ROE & RoI below, not RoA.]

There was an accounting anomaly in 1987 figures. Reports from two different years reported the same Operating Profit and Net Assets, but very different Revenue and Expenses.
The final 1992 figure is from a Telstra report and may reflect changes in accounting practices and aligning the End of Financial years (OTC(A) was 31-March, PMG/Telecom Australia/Telstra 30-June).


OTC(A) was converted to a Government owned Corporation ("GBE" now, Govt. Business Enterprise) in the 1970's, IIRC.
It paid Company Tax on Profits, a Dividend to the shareholder, the Australian Government and raised all its own capital on the Open Market.

Summary figures are tabulated, with a conversion to constant dollars (1992). CPI Inflation data was obtained from the Reserve Bank of Australia Inflation Calculator, whom use the ABS series.






Dollar figures are Millions A$.



YearSales-RevRevenueExpensesDepcrOp-ProfitInvestAssetsNett-AssetsROE1992-Inflat-FacRev_92Exp_92Prof_92Net_Asts_92Gross MarginRoE
1970-$38.20$27.60-$10.60-$72.70$56.17-6.12532$233.99$169.06$64.93$344.0627.75%18.87%
1971-$43.70$30.30-$13.30-$78$60-5.77108$252.20$174.86$77.33$346.2630.66%22.33%
1972-$48.90$34.50-$14.40-$84$64.90-5.44318$266.17$187.79$78.38$353.2629.45%22.19%
1973-$53.90$38.20-$15.80-$91$70.25-4.98958$268.94$190.60$78.34$350.5229.13%22.35%
1974-$66.10$40.30-$25.70-$106$78.90-4.3231$285.76$174.22$111.54$341.0939.03%32.70%
1975-$77.60$56-$21.70-$127$86.15-3.75392$291.30$210.22$81.08$323.4027.84%25.07%
1976-$83$70.80-$12.25-$129$90.60-3.31259$274.94$234.53$40.41$300.1214.70%13.47%
1977-$99.80$80-$20.80-$135$91.80-2.94951$294.36$235.96$58.40$270.7719.84%21.57%
1978-$121$94-$26.70-$135$82.70-2.7309$330.44$256.70$73.73$225.8522.31%32.65%
1979-$143$109.80-$33-$143$75.30-2.50261$357.87$274.79$83.09$188.4523.22%44.09%
1980-$176$125-$51-$171.50$82.20-2.2723$399.92$284.04$115.89$186.7828.98%62.04%
1981-$212$162$10$50.10-$195$98.40-2.07539$439.98$336.21$103.77$204.2223.58%50.81%
1982-$260$216$19$43.70-$307$176-1.86381$484.59$402.58$82.01$328.0316.92%25.00%
1983-$300$257$20$42-$411$180-1.69378$508.13$435.30$72.83$304.8814.33%23.89%
1984-$339$275$27$64-$510$148-1.62925$552.32$448.04$104.27$241.1318.88%43.24%
1985-$411$319$29$92-$653$238-1.52645$627.37$486.94$140.43$363.3022.38%38.66%
1986$447$473$372$37$100$116$764$265-1.39977$662.09$520.71$141.38$370.9421.35%38.11%
1987$507$540$416$43.50$125$169$885$307.7043.70%1.28971$696.44$536.52$159.92$396.8422.96%40.30%
1987$971$1,000$836$43.50$125$169$885$307.7057.40%1.28971$1,289.71$1,078.20$211.51$396.84
1988$1,142$1,170$921$53$193$211$952$365.7065.10%1.20291$1,407.40$1,107.88$299.52$439.9021.28%68.09%
1989$1,244$1,280$907$77$294$367$1,140$54263.50%1.11864$1,431.86$1,014.61$417.25$606.3029.14%68.82%
1990$1,459$1,520$1,047$84$385$384$1,310$67560.00%1.04221$1,584.16$1,091.19$492.97$703.4931.12%70.07%
1991$1,627$1,690$1,139$98$453$584$1,500$803-1.01012$1,707.10$1,150.53$556.58$811.1332.60%68.62%
1992-$1,442$1,019-$423-$1,540$1,065-1$1,442$1,019$423$1,06529.33%39.72%





Thursday, 13 December 2012

NBN: Funding with Infrastructure Bonds

Either the Government or Coalition could embrace a funding model for the NBN suggested by Alan Kohler in Business Spectator: Infrastructure Bonds.

Either side of Politics could allow the "Free Market" to vote with their dollars on what they think of the current NBN plans, design and execution. It depoliticises the debate, frees up Government debt and would ease some of the worst Policy concerns the Coalition has over funding

As Kohlers' Bonds are specifically targeted at soaking up foreign investments, the interest rates don't have to be Australian Reference Rate + Risk Margin, but US Rate + Margin: say 4% (0.5% + 3.5%).

Alan Kohler wrote:
For Australia the problem is compounded by the very large flow of safe haven capital inflow now arriving, which is largely blind to interest rates. Money is pouring into Australian dollars, including from other central banks, seeking the security of our AAA rating. That’s making the exchange rate immune from domestic monetary policy.

What to do?

The answer, surely, is to give up and put the money to good use replenishing the national infrastructure.

Rather than wringing our hands about the capital inflow, why not give global investors something to invest in other than Aussie government bonds and export LNG projects?

Specifically – infrastructure bonds to finance a huge national building programme of roads, ports, bridges, airports using money borrowed at super low rates to take advantage of this once-in-a-lifetime opportunity.

It would assist the non-mining economy of the eastern states, cushion the transition from the peaking of the mining investment boom and set Australia up for the future.
What other large infrastructure projects could we invest in that would benefit our common-wealth? Many and more than I could guess. But say:

  • The Very Fast Train up the East Coast
    • Additionally, the direct Melbourne - Brisbane inland rail link.
  • Pacific Highway and Hume Highway: full duplication.
  • Upgrades to existing Ports and new Ports.
  • A second and third Sydney Airport: a passenger and separate freight hub.
    • This slots in with the State Government Transport review underway.
  • Waste water recycling in Sydney, Melbourne and Brisbane, as happens in the old Olympic Village: all these cities have long-term water security issues. The last 10-year drought isn't far behind us and with Climate Change, we should prepare for 'challenges'.
  • Improving mass-transit systems in all major cities, including Canberra. Perhaps "light rail" would be good for the National Capital.
  • Local manufacturing capacity for Wind Turbines and Solar Cells to lower per-unit costs and increase deployment.
  • Agriculture and transport improvement in the Top End.
    • Roads are impassable during the Wet Season. Why aren't Hovercraft, as used in the English Channel for years, an option?
  • Create new high-value manufacturing precincts. Why couldn't Australia become one of the major players in Industrial Robotics? We have the talent and capability, while demand is exploding.
The Infrastructure Bond model could be applied to many useful projects: just as the USA built its Freeway system after WWII to fuel economic growth for 4 decades, Australia could use this cash-inflow opportunity to seed the next half-century of development.

I'm not sure how the interest on the Bonds gets paid... The NBN, Very Fast Train, Ports and Light Rail are all commercial enterprises with good cash-flow: they're easy. But highways aren't and there would be stiff consumer resistance to tollways on the major highways where the only gain is 'safety', an intangible.

The data showing the structural change in the Australian Dollar exchange rate was published by Alan Kohler on his website. Look for [no permalink]:
"Dollar Has Divorced Resources Stocks" [heading]

The index of resources companies in Australia has fallen steeply since mid-2011, yet the dollar has stayed high against the greenback.

Source: Iress
The chart is at: http://1.static.australianindependentbusinessmedia.com.au/sites/default/files/styles/ak_graph/public/kohlersgraphs/2012/Nov/121126-dollar-resources.png


Monday, 10 December 2012

NBN Issues: Considerations for Voters

Whilst there are Technical and Governance/Reporting issues around the NBN Co project, the overwhelming issue is Political.

The 2013 election will be the 3rd in a row where Broadband is a major issue. Unless the Coalition change their position, funding the NBN Co project to completion will be an running election issue until it becomes self-funding, 2016-2018 if I've understood the Project Plan. Then the electoral question will switch to ownership and whether to keep or sell NBN Co: if it follows Telco history, it will pour rivers of gold into government coffers, hard to give up.

Will voters support continuing the NBN Co project to completion, or cut it short and embrace an apparently cheaper solution pushed by the Coalition?
  • Is the NBN Co project important enough to sway voters?
  • What information do they need to decide?
  • What factors will influence their decision?
  • What are the issues?
This is an attempt to list and briefly describe the issues undecided voters, those who aren't already ideologically bound to a position, will need to weigh in making their decision:

  • Seize the Day!
    • The Opportunity to beat many of the G8 economies into 'Fibre to the Home': USA, UK, Germany, Italy, is one we'll never have again.
      • Fibre Projects are already deployed/underway in Canada, France, Japan, Russia, though mostly local or small regions. [Not]
    • Australia has a history of balkanised infrastructure, e.g. Railroads, creating a drag on the economy and undermining Productivity growth. As well, a history of long delayed technologies: FM radio and Colour TV were decades late here and Cable TV never arrived because of limited rollouts.
      • Australians are Early Adopters of Technology: Do we want, for once, to steal a march on the USA and UK?
  • Bill Shock.
    • Will monthly bills for basic services rise like NSW Electricity prices recently have?
      • Not from NBN Co: they are bound to drop their prices in real terms.
    • Will average consumers increase their spending, as they've done with mobile phones?
      • It's a really good bet that consumers will gladly pay more for more "goodies".
  • Uniform Pricing.
    • The ALP has mandated "uniform pricing", with opaque cross-subsidies.
    • The Coalition wants explicit subsidies (read 'coupons') and different pricing 'bands': if you're in the Country, you'll see what it really costs.
    • Is this a return to the old STD phonecall pricing: In the Bush, you'll pay a lot more for a lot less?
  • Fibre is not about Speed.
    • There are currently very, very few consumers that want, let alone need, more than the basic access rate of 12Mbps.
      • So why does everyone talk about Fibre as offering 100Mbps if nobody wants it?
    • Wireless, WiFi or Mobile Phone, goes just as fast and is everywhere: Isn't Fibre already an Obsolete Technology?
    • Optical Fibre is not "gold plating" nor "a rolls royce" solution: it's a boring family car or people-mover that just does what it does competently, reliably and without nasty surprises.
      • That can't be right: ADSL has only been around 10 years old and the Copper network will support an FTTN. What gives?
        • Fibre is current, Copper is old technology. Each excel differently.
  • The NBN is not about Fast Broadband to the Home.
    • An NBN is about improving Economic Productivity across the whole economy.
    • The prime beneficiaries of an NBN are business not home users:
      • Businesses will have much more affordable high-speed access allowing them to do more over the Internet and adopt new, much cheaper technologies, like "Cloud Computing" and remote data storage and backup.
      • Unless high-speed business access is cheap and commoditised, we can't improve Productivity. The only way there is "everybody gets Fibre".
      • Removing the consumer speed bottleneck allows businesses to embrace newer, more immersive Internet technologies, offering better Customer experience and increased sales opportunities.
  • Project Cost and Economics.
    • Why aren't we maximising the residual value in existing networks?
      • For the same reason we all don't buy everything second-hand: it isn't economic.
    • Our FTTH network is much more expensive per house than Overseas projects. Why?
      • Our "Wide Brown Land" with low population densities has always made Telecommunications more difficult and expensive, with a smaller customer base.
    • Can the project deliver on Budget?
      • Probably. If large, experienced Resources Companies and Large Builders don't always meet schedule and budget, then NBN Co, using private contractors, may not as well.
    • Why don't we run Fibre everywhere in the Bush? Don't they deserve it too?
      • In time, maybe we can include fibre in the electricity wires.
    • Why not wait until we obviously need higher speeds?
      • It takes 10 years to build new infrastructure, when you know you need it, it's too late to start. Forward Planning is necessary 
  • Project Schedule and Priorities.
    • Why's it taken so long to get nothing accomplished?
      • Like a major mine or skyscraper: planning, preparing and foundations take time.
    • Why can't NBN Co pay more and be done in 5 or 3 years from now?
      • There aren't enough spare qualified people.
    • Why aren't isn't NBN Co working first on clearing "blackspots"?
      • First they have to build the foundations: the pieces we now need that Telstra and Optus never built.
      • NBN Co can either build the new network efficiently, at least cost, or run around the country-side in no good order satisfying "demand", at a much higher price.
      • NBN Co is rolling out two big projects besides Fibre: Fixed Wireless and Satellite. These access methods are specifically for rural and remote users and those in "blackspots".
  • Ownership and Funding of the "NBN".
    • Can a Government owned business ever be efficient and well priced?
      • Isn't Competition the magic sauce that delivers the best prices and best goods to consumers? (I.e. All Government Enterprises lack Competition, are prices always high?)
      • Why does or doesn't this fundamental of Economic Theory apply here?
    • Governments these days don't generally start new Business Enterprises: so why did the ALP do this extraordinary thing?
      • Because the Free Market was given over a decade and it did nothing.
    • The Coalition would like "The Free Market" to provide all Telco services: 
      • Is that a good idea?
      • What are the upsides and downsides of that policy?
  • Cost Benefit Analyses.
    • Why weren't they done by the ALP?
      • Costs won't be known accurately until afterwards, and
      • Benefits for new applications and uses are unknowable.
    • Are they relevant for this project?
      • For the same reason didn't Apple, Google, Facebook, Amazon do CBA's: everything (costs, revenues) is unknown.
    • What commercial analyses should we be seeing?
      • The same range-estimate projections used in Venture Capital Business Plans.
      • Tracking and monitoring progress is more important than anything.
      • Because the driver for an NBN, from both Parties, is improving Productivity, baselining it now and providing a yearly Realised-Benefit Analysis is probably the most important part of both NBN Policies.
    • Should the Coalition, having demanded them from the ALP, be offering Cost Benefit Analyses for its own Policy?
      • What's good for the goose is good for the gander.
  • Historical Factors: Why are we here?
    • The 2009 surprise decision by Rudd/Conroy to not use FTTN.
      • Unlike Howard in 2001, they took the advice of their Experts.
    • As a Nation, we stumbled into this position through many twists and turns.
      • Telstra was privatised as a vertically-integrated entity by the Coalition, but created by the ALP.
    • How pivotal decisions led to a radical solution.
      • Telstra consistently used it market position to block new entrants and technologies.
      • The only economic FTTN solution can be by Telstra.
      • Rudd/Conroy "cut the Gordian Knot" by initiating Structural Separation of Telstra and creating a new entity for the "last mile", the only Telco Natural Monopoly.
  • What are we getting?
    • You won't pay an NBN Co bill: what is it delivering?
      • The "last mile" only: the Customer Access Network (C.A.N.)
      • Service Providers connect to the C.A.N. at Points of Interconnect (PoI's).
    • The many layers of the Telecommunications Onion and why you want to know.
      • Customers deal with Retail Service Providers.
      • They need to interconnect to other Service Providers, buy National and International links and backhaul from the PoI's.
      • The C.A.N. is under half the total cost.
    • How the NBN is the best news for Telstra in a decade.
      • Telstra has the largest backhaul network, the best National and International connectivity and largest Residential and Business customer list to spread costs.
      • If they choose, Telstra can be extremely price-competitive.
  • Misdirects, Noise and Smokescreens.
    • Both sides of Politics have introduced a lot of 'spin' into the debate that 
    • All Monopolies are Bad, Kill the NBN!
      • Anyone can build and sell a C.A.N., provided they play by the ACCC, the Regulator, Rules: the NBN isn't and never was a Monopoly.
    • The NBN will stifle Competition.
      • Only for the Customer Access Network, which is already controlled by a single and rather recalcitrant entity, Telstra, the 'monster' (according to Paul Fletcher) created by the Howard Government.
    • Forcing everyone to use the NBN Co C.A.N. is Removing Choice!
      • No, for the first time we'll have the possibility of real competition amongst Telcos, because Telstra can't block and undermine everyone else.
      • You might have to choose been Fibre or using a Mobile Phone Operator
    • It's a Risky Plan.
      • A lot less risky than what's been Policy for the last 10 years: Do Nothing!
    • Duplicating Existing Private Assets is a Waste.
      • Private is the keyword: Some businesses are going to lose, that's why the ALP provided compensation to Telstra and Optus.
      • At some point we have to jump, some assets are always going to be orphaned.
      • Waiting until everything is old, decrepit and completely depreciated is the worst possible strategy.
    • The NBN will increase the cost of the internet.
      • At most, only marginally for basic services, and the 'basic' 12Mbps is double the current average access speed: quite a benefit.
      • NBN Co is regulated to reduce costs in real terms.
      • Retail Service Providers will set the prices to users. NBN Co, as only a fraction of that cost, cannot control what the user pays.
      • Like Mobile Phones and Smartphones, Average Revenue Per User (ARPU) is expected to rise as consumers start to value and use the additional bandwidth. That's voluntary, not forced, behaviour.
    • The NBN is a Colossal Waste of Money!
      • ~$40B barely rates as a major resource project. Compare to over $250B committed funds.
      • In the scheme of things, the $6-8B/year Federal funding needed for only a few years is only slightly above the "noise level".
      • A major cost of the NBN has been paying Telstra for access to its pits-and-pipes.
      • An FTTN network, built to throw-away in as little as 10 years, may be 25%-30% cheaper when rolled out to everyone: that's not a bargain.
    • The NBN is unlikely to deliver value for money.
      • This is based on low rates of take-up, but no mention is made of ARPU's increasing with higher proportions of fast plans.
      • Since the price of ADSL was dropped around 2002/3, take-up has skyrocketed: take-up is more related to price than availability of service.
      • New technologies take time to be adopted. Even if the initial take-up rate is 25%, the long-term equilibrium rate will be the same or higher than today's ADSL rate.
        • It was not until 1986 that Australia achieved 90% domestic telephone take-up!
        • Nobody argues that fixed-line telephones were a failure or not "value for money" as a business.
      • Singapore has an ISP provided 1Gbps cheaply. They do great business, proving that Fibre service can and will be profitable.
    • Nobody else is doing this!
      • Yep, exactly. There are many local and regional Fibre rollouts most doing well. Australia is the first country to take the leap.
      • A Government can a) afford lower rates of return b) be patient with investments c) can be first and d) can borrow money more cheaply than corporations.
      • Saying that private companies aren't doing this yet means a) they can still squeeze their customers on old assets and b) they can't get 50-90% margins yet.
    • Fixed Fibre doesn't provide What Customers Want now: Mobility!
      • While Mobile Phone/Wireless is growing rapidly, it suffers congestion, interference, reception blackspots and will always be more expensive per GB.
      • While we still go home to the same place every night, Fixed Networks will be the cheapest, most reliable and fastest option available.
      • Guess how Mobile Phone Towers connect phone: Fibre. The NBN should benefit Mobile Phone Operators as well, improving coverage and reducing costs.
    • The NBN Demonstrations were cheats: Nobody will get the speed they expect!
      • The User Experience will be many times better than FTTN and ADSL: see the Gungahlin Experiment for details.
      • NBN Co can't guarantee speeds to home users, there are some network factors that mean effective speeds will sometimes be marginally lower than the notional line speed. This is nowhere near the line-speed & error-rate problems of ADSL and an FTTN.
      • The years of preparatory work done by NBN Co have been providing good backhaul for Retail Service Providers.
      • NBN Co is currently building the next level, the Points of Interconnect.
      • The switches and routers in the PoI's are Telco-grade: they are designed to handle everything running flat-out.
      • The NBN GPON Fibre technology is, unlike FTTN exemplified in the Gungahlin Experiment, designed to be congestion-free at the C.A.N.
      • Network Congestion can and will happen, but this will be within the Retail Service Providers: they oversubscribe all links, backhaul and National Interconnect. This is normal commercial practice and how they offer cheaper services. ISP's often run 20:1-50:1 oversubscription rates now - the total customer bandwidth sold versus the size of the pipes back to the ISP and from then to 'the Internet'.

NBN Issues: Seize the Day!


  • The Opportunity to beat many of the G8 economies into 'Fibre to the Home': USA, UK, Germany, Italy, is one we'll never have again.
    • Fibre Projects are already deployed/underway in Canada, France, Japan, Russia, though mostly local or small regions. [Not]
  • Australia has a history of balkanised infrastructure, e.g. Railroads, creating a drag on the economy and undermining Productivity growth. As well, a history of long delayed technologies: FM radio and Colour TV were decades late here and Cable TV never arrived because of limited rollouts.
    • Australians are Early Adopters of Technology: Do we want, for once, to steal a march on the USA and UK?

Sunday, 9 December 2012

NBN: Public Perception of Coalition Policy and Rewinding to 2001

In the 5th year of the Howard Government, a confidential internal Party memo was leaked after a poor Queensland Election result. From the Australian piece on the memo:
"The recurring theme was that government is out of touch, dysfunctional and hurting our own," ... [Shane Stone wrote in Februrary 2001, leaked by Laurie Oakes in May 2001].
And
But the hunt for the rat has not been enough to obscure the substance of the note which described the Government as 'mean, tricky and dysfunctional and out to get its own supporters'.
 The inability or reluctance of Malcolm Turnbull and Paul Fletcher to do more than tease the electorate and commentariat with content-free assertions of "Better Broadband: Cheaper, Sooner, More Affordable" will start to wear thin very soon, if not already to those paying attention.

Public Perceptions can quickly turn against even well regarded Parties and politicians: and the Libs have a history that will catch up with them.

If people start asking, "What have the Coalition got to hide?", the next step is that uneasy feeling of distrust from the early Howard years: they'll be tarred with the "mean and tricky" brush, deserved or not.

Are Turnbull et all master practitioners, able to "tickle the tail of the tiger" and get away with it, or will they misjudge?

In Peter Reith's report on the Coalitions' 2010 Election Campaign (it wasn't a "loss", but it wasn't a "win" either for Tony Abbott), one of the few positive acknowledgements of their opponents was: They had a better Broadband Policy.

That situation still stands and the teasing, with its Perception "Fail" downside, will mar the Coalition chances in the 2013 Election, early or late. The only question is: By a little or a lot?

The roll-out of Fibre to the Home in Australia well ahead of the major Western countries (USA, UK, Germany, ...) is something the electorate may consider a real benefit, considering our laggardly performance with Cable TV (only ever 35%), FM Radio (20 years late), Colour TV (15 years late) and B&W TV (10 years late).

As ever, the electors that are rusted on either side, ideologically opposed to or supportive of Fibre-to-the-Home, aren't a factor: only the folks who can be persuaded.

Will the swinging voters see Full-Fibre as Affordable and Desirable or take on-board the FUD (Fear, Uncertainty, Doubt) that the Coalition has been so successfully spreading? It's Interesting Times.

Saturday, 8 December 2012

NBN: Oh so Expensive! [NOT]

The Coalition is fond of using terms like "Great Big New Expense/Tax/White Elephant/etc", "On the National Credit Card" and "Cut the Waste!".

Are these political hyperbole or real, pressing issues being raised by a responsible Opposition?

Some of the Coalitions' main problems with the NBN seemed to be the cost, the funding (by Govt. Debt) and the amazingly high borrowings of the Fed. Govt. ($150B. no citation) which need to be paid down immediately or we'll all go to Hell in a Handbasket.

What are the figures? What would they look like if scaled back to an individual wage earner?

GDP:            $1,453B [ABS#1 2011-2102]
Federal Tax: $375B  [ABS#2 2012-2013, estimates]
All Tax:        $536B  [ABS#2]

Average Weekly Earnings: $1352.70 [ABS#1 May 2012], or $70,582/year

Calculations:
Fed. Tax Rate:           25.8% [ $375B /  $1,453B ]
Total Tax Rate:          36.9% [  $536B  /  $1,453B ]
Fed. Debt as %GDP: 10.3% [ $150B /  $1,453B ]

Interest on Fed Debt @ 3.25%: $4.875B [See below: Total budget is $12B]

As Average Yearly Earnings ($70,582/year):

Fed. Tax Rate:           25.8% = $18,216.21
Total Tax Rate:          36.9% = $26,037.05
Fed. Debt as %GDP: 10.3% = $7,286.46


Interest on Fed Debt @ 3.25%: $236.81 ($19.74/month)

I think most voters and tax-payers would be impressed with a National Credit Card Bill of ~$20 a month.
It's not obviously outrageous or nearly ruinous as the Coalition would have us believe: a coffee a week.
And equally "a rounding error" in terms of the $26,000/year tax already paid.





The projected Federal Govt. funding for NBN Co is a maximum of $6-8B/yr for 8 years for $30-40B total CapEx. [NBN Co near 2020 will be funding all/most of the roll-out internally.]

In the context of the Federal Budget, this is not chump change, but nor is it nearly "A massive white elephant/waste" - it's at most 2% of the Budget, small but not "noise'.

Most importantly it is NOT an expense, it is an investment. Like all investments, it may not do as well as we'd like and it may do spectacularly well. But Government investments are long-term, we as collective owners of NBN Co can afford to be patient investors.

The question is: Will NBN Co succeed over 25 years?
I consider that a very, very low risk investment.

Compared against our many Defence projects ($4B for just 6 Wedgetails), yearly NBN Co funding is quite modest. Given the Defence CapEx over the last 25 years is many times that of the NBN infrastructure, something all of us will directly benefit from and will contribute for decades to Productivity and fuel economic growth, I don't understand the Coalitions' trenchant criticism and implacable opposition to the investment.

How can it not be waste to burn money on Defence projects which may or may not get used, that all too frequently get cancelled, run late and over-budget and fail on deliverables, but its wasteful to invest in solid, useful Infrastructure shared and used by all parts of the Economy, that we know will contribute to better lives and outcomes? I just don't get this Coalition view...

Compared to $415B in planned/committed/'in the pipeline' Mining & Gas projects. (Deloitte Access Economics, Feb. 2012) the NBN doesn't rate a headline and the whole NBN Co budget is almost a footnote. Likewise, major resource projects take around a decade from inception through to full operation. The NBN Co timeline is sensible and prudent, not "behind schedule" or a sign of incompetence.

Compared to the $261B committed to Mining Major Projects, May 2012, NBN Co is not "a major project".
http://www.bree.gov.au/media/media_releases/2012/20120524-mining-industry.html
http://www.theresourcechannel.com.au/page/2012-projects-update

What about in the context of the $375B Federal Budget?
Is funding NBN Co $6-8B a year a massive impost?

It's almost trivial compared to Social Benefits and minor compared to Health, Education or Defence - all expenses, not investments, but in terms of small expenditures, it rates down there with the 9% Superannuation levy.

Federal Budget
http://www.abc.net.au/news/2012-05-08/interactive-budget-2012-how-its-spent/3971410

$130B (30+%) C'wealth budget on social benefits/entitlements
$61B Health
$49B State Govts
$30B Education
$22B Defence
$12B Public Debt Interest [not quite the $5B calculated above, we have old debt as well.]
$8B super interest (CSS/PSS/etc)
$3.5B superannuation
$6.5B Fuel and Energy
$2.7B Road Transport
$2.7B General Research

The $6-8B/year of funding for NBN Co falls in amongst the small items of the budget, but then again, the Fed. Govt. have very, very few income producing assets (a.k.a. 'investments'). I think it's quite something for a Government to invest in sound sectors when the Free Market has failed in them for a couple of decades.

That's not just "opportunistic policy", but sound business judgement, which, by this measure, was particularly lacking in the 11-year Howard Government: Selling the Farm is not good business, even if it is to pay-down debt.



I think most voters and tax-payers, who aren't ideologically opposed or committed to an NBN FTTP rollout, would consider the NBN a modest Capital Investment and as a 25 year investment, very sound.

But there are some major weak-points in the ALP vision and execution - and we've not had a public debate nor had the Government answer important questions. Presumably because the Coalition is too busy running around shouting "The Sky is Falling, The Sky is Falling!", rather than taking a reasoned debate up to the Government:
  • After the Warambool Exchange Fire, where are the Public Contingency Plans by NBN Co?
    • We can hope they've got good designs, but real data beats hoping hands-down.
  • Where are provisions for Accounting for Realised Benefits?
    • The whole point of any NBN is as an Economic Multiplier: the Benefits need to be counted or the whole experiment is just another Political Extravagance.
  • Why the "Big Bang" conversion? Why couldn't we roll out Fibre over 25 years?
    • Greenfields housing development is around 1%/year of the market. Starting with that in 1990, we'd have had ~25% of the Network already converted.
      • Likewise, once we have the Internal Network (PoI's, transits, ...) built, we could roll-out to all new developments and 2-3%/year of existing premises based on demand and need.
      • The ALP has never made a case that we need FTTP as soon as possible.
        • Were they pushed into this position solely because of the intransigence of he Opposition? If so, the Coalition should "man-up" a take responsibility for their actions and the consequences they've caused.
    • Where was the investigation and discussion of temporary stop-gaps, like small-area WiFi (802.11)? Everywhere there are Early Adopters who not only want "faster and better", but are prepared to pay a premium to get it.
      • There's a great source of revenue going begging: but completely ignored by the Masters of Private Enterprise and Free Market, the Coalition.
    • Why has there been no discussion or facilitation of individual investment?
      • Asking consumers & voters to put their money where their mouths are, is a real test of what they think.
      • We know from the sale of Telstra that "Mom & Pop" investors are out there in droves and willing to punt real money on the Telco sector, given the chance.
  • Why prioritise by availability/location of contractors? Those in "blackspots" present a current unmet demand.
    • The Fixed Wireless and Satellite deployments have been scheduled early: they address the most egregious blackspots as early as possible. [That's A Good Thing.]
      • So why hadn't the Howard Govt. done this by 2007? The OPEL deal was late, didn't keep promises and WiMax was never good technology choice. If it was, there'd be many large-scale deployments overseas.
    • Why is there no mechanism for groups of people/areas to fund, fully or partially, early deployment?
      • Those willing to pay should get preferential treatment - because they provide the common equipment/facilities that others will later benefit from.
      • Why has the Coalition, with their focus on Individual Responsibility and Free Markets, not pushed this, the obvious "User Pays".
  • Where has been the discussion of "Single Access Pricing", otherwise known as cross-subsidies?
    • Australians like to characterise themselves are "Allowing a Fair Go" and for helping those in he "The Bush".
    • Instead of the ALP or Coalition mandating a Policy Position, why haven't the electorate been asked what they are prepared to pay for, and what they won't.
      • With the advent of the Internet, we have the means to do this.
      • The AEC (Australian Electoral Commission) has the expertise to make it happen...
The biggest and most important failure-by-omission of NBN Co is its inability to look for and exploit locally available opportunities: forced on them by the "Big-Bang" rollout and compressed schedule (10 years for a rollout more than 10 times the area of the UK isn't dawdling around):

  • Obvious new, reusable technology, like TransACT's VDSL-FTTN here in Canberra, could be a stop-gap measure. They get 55,000 premises passed for a few hundred dollars. Later on they get to rollout GPON FTTP at a more leisurely pace, less debt, more internal funding and riding the technology cost-curve down for another decade.
    • TransACT can't be the only new, high-quality network around.
  • All the 11KV single-wire electricity wires in Country Australia could be recabled with a Fibre Optic core.
    • This isn't cheap and wouldn't be done quickly
    • but would offer country folk the same high-quality, upgradeable infrastructure as those of us lucky to live in urban centres.
    • It would be a good time to upgrade the Pole and Wire infrastructure in fireprone areas and bundle in the marginal cost of insulated wires where needed:
      • The Federal Government could 50% fund this large undertaking, by grant or loan.
      • The State Governments could pay 25%,
      • and Power Distributors and Users front up with the remaining 25%.

All this says NBN Co is being run by Political Agendas, minor tactical advantage and bragging rights, not The National Interest - on both sides of Politics.

Overwhelmingly, its about our Great Leaders Egos, not our Common-Wealth.

Wednesday, 5 December 2012

NBN: What happens to NBN Co under the Coalition?

Abbott famously directly Turnbull to "demolish/destroy the NBN" (delimiter-Oct-2012, bbandguide-2010).

If they win the 2013 election, how will they do that? (delimiter reports a 'pause')

In a Business Spectator piece yesterday commenting on Joe Hockey in the Australian, Rob Burgess gave us an insight of the mechanism of the NBN Co funding 'pause':
And Hockey is promising not to borrow again. The Coalition, to date, has said it will cut spending and deliver tax cuts if it wins power in 2013, and stop issuing so many Commonwealth government securities – Malcolm Turnbull's 'cheaper, sooner' broadband plan is just one example of how this will be done.

It sounds like a no-brainer – surely we don't need to keep borrowing to build inefficient state-owned enterprises? And if we sack a few thousand public servants and use the money for tax cuts, won't that money be spent by the private sector on investment/consumption?
Burgess doesn't speak for the Coalition, nor is this a policy statement, but it does come from what has appeared over time to be an informed source.

What will the impact on NBN Co if the Coalition stop funding it relatively early in the build-out?

  • Sunk costs can't be unspent and existing debt will have to be repaid, possibly very quickly.
  • Deployed services, infrastructure and installations could remain in service.
  • For the project to proceed, new sources of funding, debt or equity would be needed.
    • Could NBN Co issue its own bonds?
      • What rate would the market demand?
      • Would they be able to fully fund their project?
    • If the Coalition prematurely offered NBN Co sale,
      • would they sell the whole company, at firesale prices?
      • would they offer 25%-33% each to Optus and Telstra? (and get their buy-in)
Killing projects early usually doesn't leave much of value. Think of a city skyscraper that is barely built to street level. A huge amount of money has been spent in digging the hole, setting foundations and forward ordering long-leadtime items. If the project is abandoned, it can't even be sold for land value: it will cost a new owner dearly to demolish what's there and restart. 

This is an important contingency and one that NBN Co must plan for in detail before the 2013 election.
Hopefully by the 2013 election, early or late, the Fixed Wireless and Satellite components will be fully deployed, or already paid for and able to be completed. Regional Backhaul is already in place and the 121 Points of Interconnect must be in construction now.

Will the Government allow NBN Co to publish, in whole or part, it's contingency plan for a Coalition funding "pause" (read halt and never any more)?

I hope Conroy allows this as it may influence some voters: the wilful destruction of a once in a generation infrastructure refresh and deliberate waste of some billions is an "interesting" political act. To some, it will be as heinous and long-remembered as Meg Lees backflip on the GST, the cause of the demise of the Democrats.

An NBN Co statement will answer an important question: How much value is the Coalition prepared to destroy for the sake of an ideological position?

In the current "Economic Rationalist" view of the Coalition, the deliberate waste of upto $10B of public money, just to win political points, should, you'd think, be unthinkable This would open them to a decade or more of attacks for "lack of vision", "destroying our future competitiveness" and "wanton waste".

Mr Turnbull could, but on past performances don't expect it, conduct talks with NBN Co prior to the 2013 election on how to maximise their value under a Coalition administration. That would show real concern for minimising waste of public monies, not blindly following an ideological position.

Tuesday, 4 December 2012

NBN: Coalition vs Expert Panel, the other issues.

Previously, the 10 Observations by the 2009 Expert Panel and their Specialist Advisor firms, whom assessed the FTTN NBN Tenders and the core Observation: an FTTN won't be not cost effective.

How do the other 9 Panel Observations apply today?
  • The GFC is still washing through globally, but major projects are now being funded in Australia ($260B is currently committed to major resource projects). The Government acted early and funded the NBN itself via NBN Co, destined to be privatised.
  • Still, nobody had come up with detailed project plans showing "value-for-money" outcomes of an FTTN, nor how to do it in 5 years. There are no good figures on what an NBN FTTN would cost and it wouldn't be quick.
  • The Government solved the regulatory and competition issues with Telstra by leaving them untouched in with Mobile/Wireless and getting a voluntary Structural Separation Undertaking very specifically targeted at an FTTP NBN, rolled out by NBN Co.
  • New versions of Fixed Wireless and Satellite were included by NBN Co, due for deployment mid-2013.
  • A competitive, open wholesale market is being setup via NBN Co. No special protections were provided for the other Telcos.
    • Special consideration was necessary to buy assets from Telstra and to compensate Optus for overbuilding its HFC network.
    • Smaller ISP's whose DSLAM investment will be rendered valueless aren't, to my knowledge, being compensated. Probably because of the 2021 completion date.
  • It seems the Panel was right: there was a way to build a viable NBN.
The 10 Observations, preceded with notes:

Australian resources companies have raised $300B in the last few years. Things aren't back to pre-2008, but are good.
  1. Since the Panel was appointed in March 2008, and the RFP issued in April 2008, the environment surrounding the process to select a Proponent to roll out and operate a NBN for Australia has changed dramatically.
No business would've gained debt or equity funding to build an NBN, but the Australian Government could still borrow with its AAA-rating, still very cheaply. It viewed NBN Co and other major infrastructure as "Phase 3" (long-term stimulus) of is stimulus package.

As the Federal Government has wound back its stimulus programs, the continued weakness in the Australian Economy has shown up in "the two speed economy". The economies of the Eastern States under Liberal governments committed to Austerity measures, are shrinking: they are experiencing local recession, highlighting that Government stimulus spending would still be economically useful.
  1. There has been a once-in-75-year deterioration in capital markets that has severely restricted access to debt and equity funding. As a result all national proponents have either found it very difficult to raise the capital necessary to fund an NBN roll-out without recourse to substantial support from the Commonwealth or have withheld going to the market until they have certainty that their Proposal is acceptable to the Commonwealth.
Nothing on the public record has changed. The 2008 submissions, though confidential, are still the best attempts at costing an FTTN NBN - and they aren't good enough for investors.
  1. All Proposals were to some extent underdeveloped. No Proposal, for example, provided a fully developed project plan. None of the national Proposals was sufficiently well developed to present a value-for-money outcome.
The NBN Implementation Study looks at the Marginal Costs and set a limit of 93% premises connected with fixed-line, the rest Fixed Wireless and Satellite.
  1. While no Proposal submitted a business case that supports the roll-out in five years of an NBN to 98 per cent of Australian homes and businesses with a Government contribution of $4.7b, each Proposal contained attractive elements that, taken together, could form the basis from which a desirable outcome might be achieved.
The Government took on-board the regulatory issues and devised a proposal acceptable to both Telstra and the ACCC. Since the Telstra SSU and NBN Co SAU (Special Access Undertaking), the Telstra share price has recovered from its lowest ever share price (under $3) to a five year high. It seems the shareholders, the ultimate representatives of The Free Market, believe the NBN is good for Telstra, as well as Australia.
  1. The Proposals received through the RFP process, the public submissions received on regulatory issues and the report of the Australian Competition and Consumer Commission (ACCC) have been highly instructive. They provide a good evidence base for the Government as it moves forward.
We got a new Network, didn't cobble together a patchwork solution from all the old parts.
  1. The Proposals confirm there are multiple approaches to delivering high-speed broadband and that, with the right technology mix and incentives to create sound business cases being developed, the goal of providing high-speed broadband services to 98 per cent of homes and businesses can be reached.
NBN Co went for "next generation" Fixed Wireless and Satellite for the last 7% of premises.
  1. In particular, the Proposals have demonstrated that the most appropriate, cost effective and efficient way to provide high-speed broadband services to the most remote 10 per cent of Australian homes and businesses is likely to be a combination of next generation wireless technology (supported by appropriate spectrum) and third generation satellites.
Building an FTTN would be a waste of money and impossible without Telstra: This advise was followed.
  1. The Proposals have also demonstrated that rolling out a single fibre-to-the-node (FTTN) network is: ... (not an efficient upgrade path, and not without paying Telstra)
 The NBN Co network is designed to promote strong competition whilst removing Telstra's control and the need for protections to other Telcos. The "open-access" wholesale Customer Access Network seems necessary and sufficient to "continue to promote the long-term interests of end-users". Backhaul options in regional areas were the first thing addressed by NBN Co.
  1. The Panel’s analysis of the Proposals has highlighted the importance of competition and not just technology to drive improvements in services; the need to improve competition in backhaul supply, particularly in regional areas; the desirability for a wholesale-only provider of any bottleneck infrastructure; and the desirability of improved regulation of the telecommunications industry to provide investor certainty and speed of outcomes. The Panel was not attracted to what it saw in some cases as proposals for excessive overbuild protections. Focusing on using next-generation technology solutions may reduce the need for such protection.
We'll not know if the FTTP NBN was the confidential solution.
  1. The Panel can see a way forward to achieve the outcomes sought by the Government and has provided that advice in confidence to the Government because of the commercial sensitivities arising.

NBN: The 2009 Expert Panel "Observations"

The 7-member Expert Panel and the firms of specialist Advisors who were appointed to review/assess the Tender Proposals for an FTTN NBN made 10 "Observations", since published, at the beginning of their report in early 2009.

I've commented on the core Technical/Regulatory Observation, an FTTN is a throw-away and only Telstra could build a viable solution, which led the Rudd/Conroy to their FTTP NBN solution.

What else did the Expert Panel observe?
  • The GFC had changed the game and no business enterprise would be able to raise the money. The implication was: the Government has to do this itself if it wanted it done now, or wait an extended time and hope the financial markets recovered.
  • Nobody had come up with detailed project plans showing "value-for-money" outcomes, nor could they do it in 5 years. There are no good figures on what an NBN FTTN would cost and it wouldn't be quick.
  • The regulatory issues of dealing with Telstra and its competitors fairly were complex and difficult, though there seemed to be solutions.
  • An FTTN by itself could not economically reach the last 10%, let alone 2% of premises. New versions of Fixed Wireless and Satellite would be needed in an NBN.
  • Unless Telstra was tamed and a truly competitive, open wholesale market setup, no viable NBN was possible. Other Telcos were still extremely nervous after Telstra's response to the failed 1998 attempt by Optus to build a national Cable TV network and demanded protection.
  • After all this, the Panel still thought there was a way to build a viable NBN.
The 10 Observations, preceded with a summary:

Goldman Sachs had collapsed and the "sub-prime mortgage" debacle had turned into the biggest banking and liquidity crisis ever in history.
  1. Since the Panel was appointed in March 2008, and the RFP issued in April 2008, the environment surrounding the process to select a Proponent to roll out and operate a NBN for Australia has changed dramatically.
The resulting Global Financial Crisis/Great Recession had dried up investment funds. No business would get debt or equity funding to build an NBN.
  1. There has been a once-in-75-year deterioration in capital markets that has severely restricted access to debt and equity funding. As a result all national proponents have either found it very difficult to raise the capital necessary to fund an NBN roll-out without recourse to substantial support from the Commonwealth or have withheld going to the market until they have certainty that their Proposal is acceptable to the Commonwealth.
Despite 1,000 page submissions resulting from 9 months of work, nobody presented costed, credible plans.
  1. All Proposals were to some extent underdeveloped. No Proposal, for example, provided a fully developed project plan. None of the national Proposals was sufficiently well developed to present a value-for-money outcome.
No one proposal suggested it could roll-out an FTTN in 5 years, not to 98% of premises.
  1. While no Proposal submitted a business case that supports the roll-out in five years of an NBN to 98 per cent of Australian homes and businesses with a Government contribution of $4.7b, each Proposal contained attractive elements that, taken together, could form the basis from which a desirable outcome might be achieved.
The proposals, and the ACCC report, between them raised significant and useful regulatory input. Presumably on mechanisms and problems in fairly dealing with Telstra.
  1. The Proposals received through the RFP process, the public submissions received on regulatory issues and the report of the Australian Competition and Consumer Commission (ACCC) have been highly instructive. They provide a good evidence base for the Government as it moves forward.
An NBN might be built patched together from parts of all proposals.
  1. The Proposals confirm there are multiple approaches to delivering high-speed broadband and that, with the right technology mix and incentives to create sound business cases being developed, the goal of providing high-speed broadband services to 98 per cent of homes and businesses can be reached.
For the most hard to reach, the last 10% of premises, "next generation" Fixed Wireless and Satellite would be necessary.
  1. In particular, the Proposals have demonstrated that the most appropriate, cost effective and efficient way to provide high-speed broadband services to the most remote 10 per cent of Australian homes and businesses is likely to be a combination of next generation wireless technology (supported by appropriate spectrum) and third generation satellites.
Building an FTTN would be a waste of money and impossible without Telstra.
  1. The Proposals have also demonstrated that rolling out a single fibre-to-the-node (FTTN) network is: ... (not an efficient upgrade path, and not without paying Telstra)
 To "continue to promote the long-term interests of end-users", strong competition (versus the status quo of Telstra blocking/controlling every play) is necessary underpinned by "open-access" wholesale arrangements. Backhaul options, particularly, needed to be opened up in regional areas.

Many of the proposals sought protection from Telstra repeating their 1998 HFC Cable TV "overbuild" of Optus, destroying both businesses and the prospect of a viable Australian Cable TV industry.
  1. The Panel’s analysis of the Proposals has highlighted the importance of competition and not just technology to drive improvements in services; the need to improve competition in backhaul supply, particularly in regional areas; the desirability for a wholesale-only provider of any bottleneck infrastructure; and the desirability of improved regulation of the telecommunications industry to provide investor certainty and speed of outcomes. The Panel was not attracted to what it saw in some cases as proposals for excessive overbuild protections. Focusing on using next-generation technology solutions may reduce the need for such protection.
There was a solution, but it was confidential due to commercial constraints.
  1. The Panel can see a way forward to achieve the outcomes sought by the Government and has provided that advice in confidence to the Government because of the commercial sensitivities arising.

NBN: What does the Coalition know better than the Exprts? (short)

I've never understood a central point about the Coalition Broadband Policy, post 2009:
What do they know, as in understand better, than the members of the NBN Tender Assessment Expert Panel?
The Expert Panel made some observations on core Technical and Regulatory issues which I've never seen directly addressed, nor ever refuted, in Coalition documents or statements:
    In a nutshell: an FTTN is a throw-away and Telstra have to be paid for their assets or using them, making it uneconomic for anyone but Telstra.

    If the best minds in the country came to this conclusion, 3 years ago now, what do the Coalition know that they didn't? How does the Coalition justify supporting an uneconomic, born-obsolete solution?


    Checkout on the Department's NBN website who the panel were and their biographies.  a
      They were seven folk with impeccable Technical, Economic, Business, Legal and Regulatory knowledge and expertise, backed by Specialist Advisers. You couldn't find better in Australia or from around the world.

      Their mission was plain: assess the competing bids and report on them against the Governments' Criteria and Objectives.

      The Request for Proposal, RFP, Clause 1.3, lists the Governments' 18 Objectives and Clause 1.4 of the RFP lists the Evaluation Criteria: the usual you'd expect for a large tender.

      The two Panel Observations are not affected if the publicly stated Coalition Broadband Objectives are substituted, indeed most of the key Objectives are identical, especially:
      • 90+% fixed-line coverage, rest covered by Fixed Wireless and Satellite.
      • 12Mbps effective downlink be universally available.
      There are two clear points of difference in Coalition Policy Objectives:
      • enables uniform retail prices on a national basis;
      • continues to promote the long-term interests of end-users;
      Whilst the Paul Fletcher MP book, Wired Brown Land, does call for Regulatory reform, perhaps an open-access network, it isn't a Coalition Policy document.

      The only low-cost FTTN solution available under the current Regulatory regime that can fulfil the Coalition tag-line of "Better Broadband: Cheaper, Sooner, More Affordably" seems to be a closed-access Telstra solution. i.e. an updated version of the 2005 and 2007 proposals, in parallel with competing Broadband solutions from existing fabrics: HFC (Optus) and the few small FTTN solutions, like TransACT.

      The core Expert Panel Observations that an FTTN couldn't be economic unless built by Telstra, and even then it is a dead-end investment, a throw-away, still stands today.

      In what world could the electorate want a Telstra-only FTTN as a Broadband solution? It wasn't an option in 2005, less so today after the NBN FTTP rollout has started.

      What other wrinkles can the Coalition add to wish away the fundamental Technical problem: an FTTN doesn't provide a cost effective or efficient upgrade path?

      NBN: What does the Coalition know that the Experts Didn't in 2009?

      I've never understood a central point about the Coalition Broadband Policy, post 2009:
      What do they know, as in understand better, than the members of the NBN Tender Assessment Expert Panel?
      The Expert Panel made these observations on core Technical and Regulatory issues which I've never seen directly addressed nor ever refuted in Coalition documents or statements:
      8. The Proposals have also demonstrated that rolling out a single fibre-to-the-node (FTTN) network is:
      • unlikely to provide an efficient upgrade path to fibre-to-the-premises (FTTP), because of the high costs of equipment associated with rolling out a FTTN network that would not be required for a FTTP network (i.e. FTTN is not a pre-requisite for the provision of FTTP); and
      • likely to require exclusive or near-exclusive access to Telstra’s existing copper sub-loop customer access network (CAN), the so called ‘last mile’, thereby confirming that strong equivalence of access arrangements would be essential. ... In any event, the Panel considers that no Proponent could accept the cost risk [compensation to Telstra] and continue to have a viable business case.
      In a nutshell: an FTTN is a throw-away and Telstra have to be paid for their assets or using them, making it uneconomic. If the best minds in the country came to this conclusion, 3 years ago now, what do the Coalition know that they didn't? How does the Coalition justify supporting an uneconomic, born-obsolete solution?

      Who were the panel? The Department's NBN website says and their biographies:
      The Panel is chaired by the Secretary of the Department of Broadband, Communications and the Digital Economy, Ms Patricia Scott.

      The other members of the Panel are:
      • Dr Ken Henry AC, Treasury Secretary.
      • John Wylie AM, Lazard Carnegie Wylie CEO. [investment bank]
      • Laureate Professor Rod Tucker, University of Melbourne.
      • Professor Emeritus of Communications, Reg Coutts, University of Adelaide.
      • Tony Shaw, former Australian Communications Authority Chairman.
      • Tony Mitchell, Allphones Chairman.
      The Expert Panel was assisted by Specialist Advisers:
      The Department had appointed a number of specialist advisers, following competitive tender processes, to assist with the National Broadband Network.
      • KPMG Corporate Finance (Aust) Pty Ltd was appointed as the Investment, Financial and Commercial Adviser
      • Gibson Quai - AAS Pty Ltd was appointed as the Technical Adviser
      • Corrs Chambers Westgarth was appointed as the Legal Adviser
      • Frontier Economics Pty Ltd was appointed as the Regulatory Economics Adviser
      • Following a call for Expression of Interests to all members of the Department's Legal Services Panel, the Australian Government Solicitor (AGS) was appointed as probity adviser for the NBN project under the Department's Deed of Standing Offer with AGS.
      The Technical, Economic, Business, Legal and Regulatory knowledge and expertise of the Panel and their Advisers seems impecable: you couldn't find better in Australia or from around the world.

      Their mission was plain: assess the competing bids and report on them against the Governments' Criteria and Objectives.

      The Request for Proposal, RFP, Clause 1.3, lists the Governments' Objectives:


      1. covers 98 per cent of Australian homes and businesses;
      2. is able to offer broadband services with a minimum 12 Mbps dedicated downlink transmission speed over each connection provided to a premises;
      3. supports symmetric applications such as high-definition video- conferencing;
      4. is able to support high quality voice, data and video services;
      5. uses fibre-to-the-node or fibre-to-the-premises network architecture;
      6. enables uniform retail prices on a national basis;
      7. is rolled out and made operational progressively over five years from the date of execution of a contract between the Commonwealth and successful Proponent;
      8. continues to promote the long-term interests of end-users;
      9. has sufficient capacity to meet current and foreseeable demand and has a specified upgrade path within clear timeframes, consistent with international trends;
      10. facilitates competition through open access arrangements that ensure equivalence of price and non-price terms and conditions, and provide scope for access seekers to differentiate their product offerings;
      11. enables low access prices that reflect underlying costs while allowing Proponents to earn a rate of return on their investment commensurate with the risk of the project;
      12. provides benefits to consumers by providing choice to run applications, use services and connect devices at affordable prices;
      13. provides the Commonwealth with a return on its investment of up to $4.7 billion;
      14. is compatible with the Government’s related Fibre Connections to Schools initiative;
      15. meets Government requirements for the protection of Australia’s critical infrastructure;
      16. is consistent with national security, e-security and e-safety policy objectives including compliance with laws relating to law enforcement assistance and emergency call services;
      17. is consistent with Australia’s international obligations; and
      18. facilitates opportunities for Australian and New Zealand small and medium enterprises (SMEs) to provide goods and services to the project.
      And Clause 1.4 of the RFP lists the Evaluation Criteria, not in order of importance:
      1. the extent to which the Proposal meets the Commonwealth’s objectives for the NBN project (as set out in clause 1.3);
      2. the capacity of the Proponent to roll-out, maintain, upgrade and operate the network;
      3. the nature, scope and impact of any legislative and/or regulatory changes that are necessary to facilitate the Proposal;
      4. the cost to the Commonwealth of the Proposal;
      5. the acceptability to the Commonwealth of the contract terms and conditions proposed by the Proponent and the extent to which the Proposal departs from the Commonwealth’s notified commercial terms (if any); and
      6. the extent of the Proponent’s compliance with the RFP.
      The Evaluation Criteria are straightforward and would be the same for any Tender evaluation like this.

      The two Panel Observations are not affected if the publicly stated Coalition Broadband Objectives are substituted, indeed many of the key Objectives are identical:
      • 90+% fixed-line coverage, rest covered by Fixed Wireless and Satellite.
      • 12Mbps effective downlink be universally available.
      There are two clear points of difference in Coalition Policy Objectives:
      • enables uniform retail prices on a national basis;
      • continues to promote the long-term interests of end-users;
      Whilst the Paul Fletcher MP book, Wired Brown Land, does call for Regulatory reform, perhaps an open-access network, it isn't a general Coalition Policy.

      The only low-cost FTTN solution available under the current Regulatory regime that will fulfil the Coalition tag-line of "Better Broadband: Cheaper, Sooner, More Affordably" seems to be a closed-access Telstra solution. i.e. an updated version of the 2005 and 2007 proposals, in parallel with competing Broadband solutions from existing fabrics: HFC (Optus) and the few small FTTN solutions, like TransACT.

      But overall, the central Expert Panel Observations that an FTTN couldn't be economic, unless built by Telstra, and even then it is a dead-end investment, a throw-away, stands.

      In what world could the electorate want that Telstra-only FTTN as a Broadband solution?

      What other wrinkles can the Coalition add to wish away the fundamental Technical problem: an FTTN doesn't provide a cost effective or efficient upgrade path?

      Monday, 3 December 2012

      NBN: How did we get here?

      Why are we facing a 2013 election with the Coalition wanting to wind back the clock 25 years and the ALP wanting to jump the technology 25 years?
      A full Optical Fibre Customer Access Network sounds like a good idea, technically and economically, but nobody has ever explained why we need to undertake a Big Bang conversion project, Now! (through to 2021). Is the question "either/or Copper/Fibre", or "how quickly" can we economically move to Fibre?
      The answer lines in a series of Partisan Political decisions starting with the 1982 Davidson Enquiry into Telecommunications.



      The two major Political Parties needed to reform Telecommunications to address a triplet of issues:

      • A general Market Failure since 2003/4 in providing any significant Broadband Network improvements or proposals to ever upgrade the C.A.N. to fibre, subsidised or not.
      • The decay of the copper phone Customer Access Network and the steady lessening of Australia's relative Broadband speed and market penetration.
      • The market dominance of Telstra and their active interventions in destroying new entrants and blocking change:
        • The Optus HFC Cable TV rollout, costing Telstra shareholders several $B's.
        • The failure of TransACT combined telephone and FTTN in Canberra, 2002. A modest $30M-140M write-off ($40MM on 'Phase 1', no 'Phase 2'. Total $150MM spent, sold for $10MM).
        • The failure of Agile/Internode phone/ADSL experiment.
        • The ACCC's unprecedented action in being forced to issue multiple "competition notices" against Telstra.
      Legislators, the Regulator (the ACCC) and competitors to Telstra all agreed that an Open Access C.A.N. was needed to allow the status quo to be changed, and this would require Structural Separation of Telstra's wholesale and retail divisions, especially of the telephony/DSL C.A.N.

      In his book, "Wired Brown Land", Paul Fletcher MP, one-time Optus executive, details the history 
      with an Optus/Coalition viewpoint, and describes Telstra post-2004 as "a monster".


      With the hung 43rd Parliament, the two major Parties adopted their usual adversarial, not collegiate, stance - but more so, forcing each Party into extreme positions on issues they might not have taken if not within this Political Pressure Cooker.

      Even if the Government had wanted to slowly and sensibly transition to a full-fibre C.A.N., it couldn't: any low-rate-of-change plans they put into operation would be surely reserved by the Coalition when, not if, they next won power. Getting any legislation through both houses of the 43rd Parliament was also very difficult with neither major party having a majority in either house: small parties and independents held the balance of power and would demand concessions/changes to pass any version of legislation.

      The August 2010 election saw the continuance by Gilard/Conroy of the 2009 NBN-2 policy of Rudd/Conroy, and the on-going opposition to it as "wasteful and inefficient" by the Coalition, offering a Private Sector solution, not unlike that which included OPEL, the Optus/Elders alliance that would've seen the largest WiMAX network in the world. (A guess, not a fact on WiMAX). It would seem that WiMAX has been currently overtaken by the 4G/LTE standard.

      In the 2007 election, pre-GFC, Kevin Rudd had promised upto $4.7B grant, an amount Telstra floated to John Howard in 2005, to subside a private sector build of an FTTN National Broadband Network, NBN-1. In 2008, the tender was opened, with Telstra the first to deposit the $5MM surety. However, at the end of 2008, Telstra appeared only to release a 12 page Press Release, not a Tender Response. There apparently was a Telstra bid, but it was deemed non-compliant on the grounds of not providing credible plans for engaging Australian SME's on their project, and hence, after multiple legal opinions and requests for additional information from Telstra, their bid was excluded from consideration.

      At the end of January, 2009, the Expert Panel reviewing the NBN-1 tenders submitted their report to the Government. It contained some surprises, summarised in this late 2009 presentation by Prof. Reg Coutts, a member of the Expert Panel:


      • The GFC constrained all the bids considered [access to debt/equity reduced]
        • Note: Telstra was excluded
      • Multiple technology approaches
        • FTTP feasible to reach 90% of households (& business)
        • Broadband wireless and advanced satellite for the 10% of households
      • FTTN not the way forward!
        • Unlikely cost effective evolution to FTTP
        • Compensation risk re Telstra [cutting into the Telstra-owned copper meant buying it]
      • Backhaul a key “bottleneck” for regional BB
      • Established evidence basis for a way forward



      With these "Key Aspects" of NBN-2 noted by Prof. Coutts:

      • FTTP architecture - 90% of households (& workplaces)
        • Mandated for “green fields” from July 2010 - stalled!
        • Communications Alliance activities
        • Tasmania
      • Backhaul network
        • A$250 budget (initial) and initial links
      • Broadband wireless - 10% of households
        • Terrestrial wireless
        • 3rd Generation satellite
      • Regulatory change
        • To transform the sector
          • Started with ╩╗duct information╩╝ requirements
        • Industry structure review
      • Other Aspects
        • New public wholesale company (NBNCo)


      The public, and I'm guessing the Industry, were surprised when a $4.7B subsidy turned into a $43B proposal for a Government Enterprise. Post-GFC, especially in the light of multiple stimulus packages with less-than-stellar execution and resulting political backlash, this seemed "A Brave Decision, Minister."

      It seems Rudd/Conroy took the advice of the Expert Panel seriously and embraced the political risk.
      And that later Gillard/Conroy bought into the Policy, with all its attendant downside.

      Both the Coalition and ALP regard "Broadband" as necessary to the future economic development and competitiveness of the Australian Economy and supporting many aspects of our society.
      Their interpretation of "Broadband" and Policies to implement it are quie different.

      But they agree on one point, which was underlined by Paul Fletcher in his book: Telstra as a single, dominant, vertically-integrated entity in the Australian Telecommunications market prevented change and innovation by others. "What's Good for Telstra, is the only thing that will happen!" seems to be the practical upshot.

      Both major Political parties viewed Structural Separation of Telstra, breaking apart the wholesale (C.A.N.) and retail companies, as essential reform, but differed in their preferred method of implementation.

      If both sides of Politics agreed by the end of 2006 that Telstra was "a monster" and that Structural Separation of Telstra was necessary for an Open-Access C.A.N. and a healthy, competitive Telecommunications Industry in Australia, what happened?

      Paul Fletcher in his book attributes the problem solely to Kim Beasley, circa 1988, in merging Telecom Australia and O.T.C. (the domestic and international Telco arms) into Telstra before granting Optus the duopoly Telco license (in exchange for buying AUSSAT) and setting up a technical regulator, Austel.

      But the Howard Government were the last with their "hands on the tiller": in late 2006, the last tranche of government shares in Telstra, the T3 float, were sold.

      Up until this point, it was possible for the (Howard) government to quite simply and without commercial or regulatory interventions or challenge, structurally separate Telstra. They could've, like BHP and Bluescope steel, allocated shares in he two (or more) new entities a 1:1 manner for existing shareholders, including the government, who could've continued with the T3 float, risking partial subscription in one or both of the new entities. BHP split itself along these lines, it was not unknown nor unusual.

      My view is that Australia ended up with the "Telstra monster" precisely because the Howard Government chose not to Structurally Separate it. It was because an un-separated Telstra had prevented an open-access FTTN or evolution of the C.A.N. that the Rudd/Conroy government had to embrace the NBN-2 recommendation of the Expert Panel, whether it was good politics or not.

      This does not excuse the ALP from all responsibility. At some point, it must have been possible to create a bipartisan policy that would've avoided the problems we are currently trying to circumvent, and which we will have to wait until 2021 to know if they've been resolved or made worse.

      There is a quite reasonable history on-line for the period 1980-1997.

      From personal communications with ex-Telstra Engineers, I've been told that Telstra, circa 1988 and it's first long-distance Optical Fibre (MEL-CBR-SYD), had setup then disbanded a planning unit for the rollout of a Fibre Customer Access Network. The Telstra management as early as 1990 understood that Optical Fibre would be needed in the subscriber loop, but had actively walked away from it.

      [I haven't researched this further: there may be some hard evidence of this on the public record.]

      Elsewise, I've talked to many current and former Telstra technicians and 'linesmen' and they have one consistent message: the State of the C.A.N. is worse than it appears "on paper". Since the massive downsizing post merger with OTC, management focus has moved to "profits" - and maintenance to the existing quality standards was deemed "uneconomic" (a guess, no refs), so rules were relaxed and minimising costs prioritised over maintaining the integrity and viability of the network.

      We got to the point of needing to do a Big Bang replacement of the Customer Access Network, with Government funding, one short-sighted Partisan Political step at a time. Nobody wanted what happened, but they let it happen anyway.

      NBN: The Politics of Broadband

      The 2013 election, be it early (before 30-June), or in August/November, is going to be the third election  on the trot where Broadband will be a major issue.

      Peter Reith, in his Report to the Liberals on the 2010 Federal election, says
       Labor’s only real policy advantage was on the NBN.
      Will the Coalition go to the 2013 election with a single new Broadband policy, or like 2010, just tweak the last one insignificantly: 2010 Libs Policy?

      Computerworld, for the 2010 election, provided a very good comparison of the three major Party policies. The areas covered were:
      • Fast broadband infrastructure
      • Internet filtering
      • Telecommunications reform
      • Distribution of IT responsibilities
      • E-health
      • Government 2.0
      • ICT innovation and industry advocacy
      • Computers in schools
      Far too often in that piece, the Coalition had no Policy position.

      These were the 2010 Coalition Policy points:
      1. Establish a National Broadband Commission
      2. Prepare a National Broadband Database
      3. Establish a Fixed Broadband Optimisation Programme
      4. Commit up to $2 billion of Funding for New Fixed Wireless Broadband Networks
      5. Fund new satellite services for the remaining three percent of the population not covered by other technology
      6. Break the backhaul bottleneck by establishing a new national fibre optic network to deliver competitive ‘backhaul’
      7. Implement Pricing and other regulation to support competition and Broadband
      8. Provide a way forward to a higher bandwidth, more fibre-intensive Australia
      9. Conduct a major review of the Universal Service Obligation
      10. Review greenfields estates
      11. Support consumers
      12. Maintain Do Not Call Register but oppose extending it to business phone numbers
      13. Target mobile phone coverage blackspots
      The ABC summarised the Policy was for $6.3B spending:
      • 97% of homes would have access to networks (Fixed Wireless being the fallback) which would deliver broadband at speeds of between 12 Mega bits per second (Mbps) and 100Mbps by 2016 through a combination of technologies.
        • 3% remaining homes covered by Satellite.
      • $6.3b of investment to get a private sector network up and running speeds of between 12Mbps and 100Mbps
      • another $2.75b to extend the fibre-optic network
      • $750m to improve DSL services
      • $2b for improved rural regional and metropolitan wireless networks
      Starting from this position, how will Mr Turnbull achieve his Policy tag-line: "Better Broadband: Cheaper, Sooner, More Affordably"?

      Which I regard as code for:

      • "Cut the waste"
        • Extend the life of existing technologies as long as possible
        • Reuse as many technologies as are available
        • Push the limits and lifetime of the Copper Customer Access Network as far as possible.
      • Monopolies Are Bad:
        • Competition is the only way to achieve good infrastructure services
          • at best possible quality/speed/range and
          • at best possible prices
        • The Coalition have decided NBN Co must be a monopoly because:
          • they've defined Points of Interchange and Technical Standards of Interconnect and
          • Legislation, whilst allowing competitors, requires they offer "Open Access" to all Retail Service Providers on the same basis as NBN Co: at PoI's, Layer 2 'bitstream'.
          • I'm uncertain if NBN Co pricing is an upper ceiling for competitors.
          • The NBN Co fibre connection fee, as "provider of last resort" is (apparently) $800/premise versus $1500/premise for commercial installers.
      • Only Private Sector Businesses can be "Efficient"
        • All Government Businesses are seemingly deemed to be inefficient by the Coalition.
        • Only "The Free Market" is capable of providing Telecommunications services.
      Of the 2010 Policies, what will be left after NBN Co has finished deployment of 12Mbps Satellite and Fixed Wireless in mid-2013?

      1. Establish a National Broadband Commission (questionable)
      2. Prepare a National Broadband Database  (questionable)
      3. Establish a Fixed Broadband Optimisation Programme (questionable)
      4. Commit up to $2 billion of Funding for New Fixed Wireless Broadband Networks
      5. Fund new satellite services for the remaining three percent of the population not covered by other technology
      6. Break the backhaul bottleneck by establishing a new national fibre optic network to deliver competitive ‘backhaul’
      7. Implement Pricing and other regulation to support competition and Broadband  (questionable)
      8. Provide a way forward to a higher bandwidth, more fibre-intensive Australia
      9. Conduct a major review of the Universal Service Obligation  (questionable)
      10. Review greenfields estates  (questionable)
      11. Support consumers  (questionable)
      12. Maintain Do Not Call Register but oppose extending it to business phone numbers  (questionable)
      13. Target mobile phone coverage blackspots (maybe, considering the Telstra 4G rollout)

      Or from the ABC Summary:

      • 97% of homes would have access to networks (Fixed Wireless being the fallback) which would deliver broadband at speeds of between 12 Mega bits per second (Mbps) and 100Mbps by 2016 through a combination of technologies.
        • 3% remaining homes covered by Satellite.
      • $6.3b of investment to get a private sector network up and running speeds of between 12Mbps and 100Mbps
      • another $2.75b to extend the fibre-optic network
      • $750m to improve DSL services
      • $2b for improved rural regional and metropolitan wireless networks
      If voters didn't like the 2010 Coalition offer of "let's throw some money at the Private Sector to upgrade DSL, Mobile and extend Data-over-Mobile" I can't see why they'd like it even as much when the NBN roll-out is moving into high-gear.

      Especially, the Coalition is ideologically committed to selling NBN Co into private hands as soon as it can - well before it has completed its network, established itself in the market, ensured the completion of the Telstra Structural Separation Undertaking (SSU) and, most importantly, denying access to Federal Government borrowing and significantly increasing the demanded return (3.5% above the RBA reference rate: approx 7%p.a.).

      None of which makes good business sense: it seems you can't define a better strategy to destroy value of NBN Co and its network and to undermine its economics and abort the Telstra SSU.