NBN Co CEO resists price cut pressure
- 11 February, 2019 18:57
Calls for largescale wholesale price risk the long-term viability of NBN Co, according to the company’s CEO, Stephen Rue.
Appearing today before a parliamentary inquiry into NBN Co’s business case, Rue rejected calls for a “write-down” of the value of the company.
The term has a “very specific meaning,” the CEO said.
“NBN Co assesses the carrying value of its assets, applying an annual fair value assessment in accordance with accounting standards,” Rue told the hearing. “This looks at the replacement cost of assets and the expected future cashflows of the business. Based on recent assessments, no impairment issues exist, and we do not see any basis for a write-down.”
He said that people calling for a write-down, in fact, are seeking to have the wholesale prices levied by NBN Co on its direct customers, the retail service providers (RSPs) that sell NBN services to the public, “fall dramatically”.
Rue said that NBN Co wants retailers to “be successful”. However, he added, “NBN has to be successful too”.
“We need to have enough cash in the business to complete the build, connect Australians, and also to maintain and upgrade the network as future demand emerges,” the NBN Co chief executive said.
The question of a write-down has been raised because of the way NBN Co was originally established. In order to keep it from appearing as an expense on the budget, the NBN has been treated as an investment by the Commonwealth that will, eventually, deliver a modest return on the equity the federal government has contributed to the project. The most recent corporate plan released by NBN Co forecasts an internal rate of return of 3.2 per cent.
A decision by the government to write-off part or all of its equity contribution to NBN could reduce the pressure required to return a profit, although may be politically unpalatable. The move, critics of the status quo argue, could in turn flow through to reduced wholesale prices (and, maybe, reduced prices for households).
Labor’s broadband spokesperson, Michelle Rowland, recently indicated in an AFR interview that the opposition was open to the idea of a write-down. However, she told the paper, a write-down “needs a trigger and it is not a decision for governments to make, but the possibility of that happening looks more likely”.
“For a write-down to occur there has to be some change in pricing or the accounting rules need to be undertaken in a particular way,” the shadow communications minister told the AFR. “It is typically done by NBN Co.”
At a 2018 Senate Estimates hearing NBN Co chairperson Ziggy Switkowski said: “I could certainly generate and do generate figures around $50 billion for the value of this enterprise [NBN Co] in the early 2020s.”
In response to a question put on notice from the hearing, NBN Co said it had “not sought advice from any organisation on matters of sale valuation or privatisation”.
In a statement issued last month Rowland and shadow finance minister Jim Chalmers said that NBN Co had “failed to produce any evidence to support the Chairman’s claim that the NBN could achieve a market sale value of $50 billion.”
“Furthermore, NBN Co has confirmed the company has not received advice from any advisory firm, investment bank, market analyst, or suitably qualified professional, to support the Chairman’s claims,” the statement said.
Last year, an analysis of the NBN released by S&P Global Ratings argued that NBN Co’s 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 document said.
In addition to telcos pressing for NBN Co to cut its wholesale pricing, the company also faces a challenge from the imminent launch of 5G wireless services.
Late last month Optus was the first Australian telco to reveal pricing for a 5G service. The telco is launching a fixed wireless 5G service for households for $70 a month with unlimited data and a download guarantee of 50 megabits per second. The price is equivalent to Optus’ NBN offering based on NBN Co’s 50Mbps wholesale tier (which Optus says delivers typical evening speeds of 40Mbps for its customers).
NBN Co has long indicated it expects a proportion of households to go wireless-only, but that enough will rely on fixed-line services to make its business viable.
Its corporate plan notes that with “mobile operators continuing to focus on the development and deployment of 5G, mobile substitution could impact long-term revenues”.
Rue told the committee that the “vast majority of data is still carried over fixed line – in fact 97 per cent – and data growth is not forecast to decline any time soon”.
“It is indeed widely expected to more than double in the next four years,” the CEO said. “It is this data growth that will ensure that fixed line and mobile technologies will remain complimentary into the future with fixed line continuing to carry the vast majority of heavy lifting.
“Our focus is on meeting that ever-increasing demand. One way we can do that is by getting our network built, operational and providing a service that gives people the reliable service they need and can afford.”