The company building the national broadband network, NBN Co should not have to make the same commercial returns as other telecommunications players, communications minister, Senator Stephen Conroy, has argued.
Speaking on the ABC’s Inside Business on the weekend, Conroy said the NBN Co shouldn't be held to higher commercial return standards than those imposed on telcos like Telstra (ASX:TLS).
“Telstra have made the point themselves; they cannot build a business case to reach 100 per cent of Australians [with a fibre-to-the-home network]," Conroy said. “The best they have said they will be able to do is to reach 60 per cent of Australians. That is five capital cities and a little bit up and down, north and south of Sydney.
“So we have never taken the approach that we need to make the rate of return that the telco sector is used to. This is a project which returns all of the government’s money and interest costs, and makes a modest return of six to seven per cent."
Conroy said the government would keep full control of NBN Co in its early years to deliver policy and competition settings, as well as to ascertain pricing to encourage uptake.
"That is why this report is so important, because it begins the change in the paradigm that will take place as the national broadband network is rolled out," he said.
The comments come after the NBN Implementation Study's release last week, which stated the government will need to pay up to $26 billion to NBN Co for the first six years. After that the company should be able to attract “investment-grade commercial debt". If it optimises this debt, it should be able to pay back up to $20 billion within 15 years.
Additionally, the report said NBN Co is expected to have a value of $40 billion within 15 years and be among the top 20 companies listed on the ASX.
The issue of whether NBN Co will make a sufficient commercial return has persisted in spite of the Federal Government’s efforts to position the NBN as an infrastructure project.
Before the NBN Implementation Study was released, Pipe Network's CEO, Bevan Slattery, publicly debated with NBN Co, saying the company's stated intention to seek a 20 to 30 year return on the government’s investment was considered “abnormal” within the telco industry.
“Unlike many utilities (water and power reticulation) Telco is a much higher risk of capital (and return),” Slattery said in response to NBN Co chief executive officer, Mike Quigley’s comments made during a recent CommsDay summit.
“A utility can seek a return on capital of beyond 10 years, not a telco project," Slattery said, pointing to the relative speed of technological change for telcos compared to traditional utilities. Several analysts have also questioned the ability for NBN Co to get a commercial return, with a BBY financial analyst as a result suggesting the NBN will not be a cash cow for Internet Service Providers.
However, little focus has been placed on the much broader macro-economic and socio-economic benefits the NBN may have. Indeed, despite much public commentary in the wake of the study, scant attention has been paid to the potential GDP growth high-speed broadband networks offer.
When the NBN was first announced, conservative estimates by economic think-tank, Access Economics, suggested a fibre-to-the-node (FTTN) broadband network would provide between $8 billion and $23 billion to Australia's GDP over 10 years.
In a report commissioned by IBM, titled The economic benefits of intelligent technologies, Access Economics also claimed an investment of $12.6 billion in FTTN technologies would provide 33,000 jobs by 2011 in an economy operating at less-than-full employment.
Though the report's authors cited insufficient data when deciding not to use the Government’s $43 billion fibre-to-the-home (FTTH) NBN plan as a basis for the report, it noted such a network had a potential for greater benefits.
The NBN could also be substantiated if it’s used to reduce the cost of services in other key economic sectors, according to an OECD report supporting the development of national FTTP networks. The research found that the cost of building high-speed broadband networks can be recouped through the delivery of online data services in electricity, health, education and transportation services.
The OECD report indicates cost savings in each sector would need to be between 0.5 per cent and 1.5 per cent over 10 years to justify building a national FTTP network. Notably, the OECD has also joined the chorus of parties calling on the Federal Government to provide a business case for the NBN.
When asked if additional cost benefit analysis needs to be done on the weekend, Conroy deflected the question, pointing instead to the roll-out plans.
“We've announced the first five mainland test zones where we're starting construction in a few months and we're delivering service to those in the early part of next year. We're actually getting on with the job,” he said.
Speaking at a media conference in Sydney, Mike Quigley said the trials would validate network design, construction and installation techniques to test the requirements of the NBN across a range of different geographies and climates. The sites, Quigley said, had also been selected based on their demographics and ability to support a sample pool of at least 3000 premises. At a recent Senate hearing, the NBN Co executive also denied any political motives behind choosing the test sites.
On the issue of obtaining a deal with Telstra, Conroy reiterated his ‘win-win’ comments but added the government would be prepared to aggressively compete, should an agreement not be reached.
“All competitive environments in the corporate world are pretty ferocious," he said, "and the telco sector has been very veracious and so we would expect that we will have to price, we will have to behave in a very competitive manner and so we understand that that is the consequence of not reaching a deal but this report is based on no deal.
"It's based on stand-alone, build it yourself and this is what the financial recommendations are.”