S&P analysis raises prospect of NBN write-down

Argues NBN take-up rate forecast is optimistic

An analysis of Australia’s NBN rollout released by S&P Global Ratings has raised the prospect of a potential write-down of the value of the new network.

The S&P analysis states that an NBN-developed forecast of a 73 to 75 per cent take-up rate will be “hard to achieve without a step-change to its wholesale pricing model”.

“Any shortfall in NBN Co.'s revenue target raises the prospect of a writedown and additional government funding to support the company, potentially in the form of debt relief or direct subsidies,” the article states.

“Even if a recalibration of NBN Co.'s wholesale pricing model were to occur, it's uncertain whether retail service providers (RSPs) will realize an enduring benefit. Prevailing incentive structures are likely to continue to push MNOs [mobile network operators] to invest heavily in their own mobile network infrastructure.”

If the government wrote off a portion of the cost of the NBN rollout, it would reduce the financial pressure on NBN. Because the government treats the network as an investment, it is kept off budget — but, over the long-term, it must offer a return on investment for the government.

S&P isn’t the first to raise the prospect of an NBN write-down. NBN chief executive Bill Morrow has rejected the idea.

“If we, the management, felt the asset to which we’re putting in the ground could not earn the value that we think it’s worth then we would put forward for write-downs,” Morrow said last year at a parliamentary hearing.

“We believe there’s a lot of value to be gained from the capital spend that we’re putting in the ground today,” the CEO said.

“We remain very confident in our revenue targets and the strength of our balance sheet,” an NBN spokesperson told Computerworld.

“From the perspective of the government’s investment in NBN, questions about a write-down should be directed to the federal government,” the spokesperson said.

Finance minister Senator Mathias Cormann said there was no basis for writing down the government’s investment in the NBN.

“The government’s investment in NBN can only be written down in accordance with the requirements of relevant accounting standards, and subject to independent audit,” the minister said.

“These standards require there to be evidence that the investment should be written down and do not allow this to be done at the government’s discretion as seems to be implied in some of the commentary on this.

“In fact, the value of NBN can only be written down where the NBN company itself has assessed that this is required for its assets under Australian Accounting Standards.”

That assessment is made independently by NBN and is subject to independent assessment by the auditor general, the minister said.

“The proposition that somehow the government should be making an arbitrary, political decision to write down the value of NBN or any other investment in a government business enterprise is false,” Cormann said.

As of 30 June last year NBN had assessed the value of its assets of just under $15 billion — an assessment that was signed off on by the auditor-general.

“Accounting Standards require NBN to assess its asset value annually and a write down is only permitted where this reflects the underlying facts or circumstances e.g. a variation between carrying value and market value,” Cormann said.

“The NBN has determined independently that a write down is not appropriate at this time.”

The minister said there was also “confusion” about the relationship between the valuation of the company and the internal rate of return.

“Federal funding contributions to relevant projects are either made by way of grants, equity or debt. Grants funding is reflected in the Budget’s underlying cash balance in the year it is expensed,” the minister said.   

 “The NBN rollout is funded through a combination of equity and debt financing.

 “Equity and debt financing is reflected in the budget as an asset and if financed by borrowings also as a liability.

“Any loan issued by the Commonwealth, whether on commercial or concessional terms has to be repaid, which is the basis for that budget treatment.”

 “There are strict rules in place, independent from the government, to determine whether a federal funding contribution can be classified as equity or must be classified as a grant,” Cormann said.

“Namely, to be classified as equity, a federal funding contribution must be able to achieve a sufficient rate of return to the Commonwealth.

“We remain confident that the federal government’s equity contribution to NBN will continue to be treated as equity and not a grant.”

“Turnbull’s multi-technology mix is $20 billion over budget, costs more to maintain, generates less revenue and is more exposed to wireless competition,” shadow communications minister Michelle Rowland said.

“On every measure the long term economics of the NBN have been compromised, with no benefit to the Australian consumer or taxpayer.

“Turnbull fleeced the nation under the false pretence copper and HFC would be faster and cheaper - it wasn’t,” the Labor MP said. “It has been slower and more expensive.”


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