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1Macquarie telecom

NBN business case- the Adult discussion we have to have123How did we get here?

Oh, what a muddle!

Will the sky fall in?

4Coda NBN Co rollout and the ACCC Fixed line decision - why they are not related.https://www.youtube.com/watch?v=S-IkWpm7TS0

Matt Healy, National Executive - Industry & Policy

To establish the theme for the next 15 or 20mins, who better to learn from but the Godfather. No, not Grahame Lynch or James Brown, the real godfather:Roll cameras

https://www.youtube.com/watch?v=S-IkWpm7TS0

Every time I try to get away, I keep getting dragged back in. Michael Coroleone cant break from his gangster past. Dragged back in.

I fear we have got ourselves back into a mess I the telco sector over NBN too.

I was warned off this topic on account of it evoking our own telco culture wars which any right thinking communications industry observer should think were dead and buried. I mean NBN co is years old now. 3 or 4 Governments have come and gone but each new one has committed to a national BB build. I mean, arent the big debates around NBN not just dead buried but also cremated?

Unfortunately not.

We seem to be trapped in remaking the mistakes of the past and so we are trapped in a groundhog day. We are not able to move ahead. Every time we try to, we get dragged back in. But as Al Pacinos character learnt in the film classic The Godfather, we too need to return to our roots not the mafia islands of the Mediterranean, but to the more recent contested past to understand how to break this cycle of failure, gain some clear air and chart the competitive, efficient and innovative communications future for Australia. But to get there, well have to go to Canberra first and just like Michael Coreolone did in the God Father, make peace with the past.

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NBN - How did we get here?Successive Federal Governments had a dream a better, more competitive Australian telecommunications market! Could the market deliver on this dream? just look at the bids for FTTN take 1&2maybe not.Into this void of Private Sector Failure steps the public interest voice.

As always, a bit of history to get us in the groove.

Its largely settled territory that back in early 2000, our Telco market was a basket case especially so in that we failed to deliver internationally competitive , future looking broad band and related telephony services. The market was strangled by Telstras dominance. We had no commercial/competitive pathway to real BB. We had some 100plus access disputes between Telstra and the rest of the industry over the still partly Govt owned telco on the price and terms for access to all the copper services. And we were looking sicker and sicker as against our international country peers the OECD Tables that have us generally grouped with Poland and Spain. Both sides of Govt knew this Coonan & then Conroy in particular.

In this sense, by around 2007 the policy makers were ahead of the private sector. That is, the free market would not deliver what was desperately needed: a network upgrade and overhaul. At that time the only real offer for an upgrade had been famously put by Sol Truilo when he rode into town and said: Give me $15B of tax payer money and no ACCC regulation and Ill FTTN the city and the suburbs. You (Govt) can deal with the rest ie the high cost/lower margin country areas. Its also the case that the Wholesale service that they were going to commit to under this nasty compact was 1.5megbit per second. 3

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NBN - How did we get here?Successive Federal Governments had a dream a better, more competitive Australian telecommunications market! Could the market deliver on this dream? just look at the bids for FTTN take 1&2maybe not.Into this void of Private Sector Failure steps the public interest voice.

In the face of that corporate blackmail, there was one other notable and noble attempt when the then Government called for tenders to respond to an RFQ for FTTN: the ambitious Terria Alternate FTTN. It gallantly rose to the Govts challenge of some one other than Telstra please come forward! so Optus, iiNet, MT, AAPT all banded together to upgrade the copper network and so Terria lodged their FTTN bid of some 200 odd pages, with expert reports and financial projections that was never really going to fly given not least because of the Constitutional problems posed. Telstra also responded to the Govt tender (the only existing entity that could really do the build) dropped a mere-15 page submission. That was the effort they put to it. Again, this merely underscores the inability of the market to deliver on this national infrastructure investment imperative. That was about as good as the market was going to deliver a Telstras blackmail or a constitutionally suspect investment theory. And to give the cut down version, in light of that shemozzle, the then Govt, under Conroy, said stuff it. If thats as good as the market will offer, then well build it ourselves. Thus was borne the NBN Company and the Federal Govt opened its cheque book!

So the summary of this History lesson is that the grand plan for FTTP to deliver a ubiquitous National, 21st century broad band service has its origin in market failure. All our trading partners showed that there was no problem on the demand side - every indicator showed consumers wanted faster, always on, always available broadband. It was the supply side that could not respond to that demand. 4

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NBN - How did we get here?Fundamentally, an acknowledgement that the market was not going to deliver :Social equity means broadband as a right, just like gas, electricityRecast the structure of market after the failures of T1/T2/T3 to deliver a competitive environment.Turbo charge a fragile economy buffeted by GFC through large scale infrastructure investments.

So we can see that that NBN Co, established as a Government owned entity in this context of market failure, meant that it need not be entirely constrained by commercial constructs. What I mean is, that whilst it needed to act commercial in a general sense, it could also be charged with delivering more aspirational public policy goals. In fact, this was a requirement: (some of those are listed)

If public money is going to go into this venture, then public good ought to flow. So NBN Co could deliver the objectives above in a way that the private sector could not. It could take the CSG, USO broadband black-spots ideas and roll them into a single entity to delver. This 21st Century network could also link to the then GFC dilemma of stimulating the economy via massive infrastructure builds of a kind that economists were calling for. Thus a wholesale only, national network of affordable fibre to the premise seemed to tick all the boxes.

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NBN - How did we get here?

So given all that possibility and the timing of events, how come we still have a set of numbers like this?

Theyve had a run of late in The Aust Durie, David Epi from Optus yesterday.

And feel free to tweak the numbers by accounting for the recent mergers and consolidations. It wont change the fundamental picture.

But I dont think that the delay and the failed competitive outcomes can all be sheeted home to NBN itself. But lets not ruin the film and lets return to my script. 6

7Tensions escalate: maximise shorter term capital gains Vsdeliver social public policy objectives

increase rates of return Vsoptimise economy-wide efficiency & benefits

Oh, what a muddle!

So off we went on the NBN journey. With Rudd and co giving us the post-Howard era of future proofed, pro-competition, universal, affordable BB and the economy would be saved!

But where does the money actually come from?

In the Conrovian paradigm (as the PM later was want to call it), wihere was NEW Govt owned telco monopoly rolling out a high cost network to replace the one it only just fully-privatised in Telstra. To gain funding, the Minister for Communications goes to the Cabinet and asks for money. $37B, $40B, $50, 60, it doesnt really seem to matter much, but just take it that its a very large number that is being commited too. But even if you dont subscribe to the mantra of debt and deficit disasters, Federal Government funds are not infinite. NBN Co has always needed a budget. It needs constraints. It must not move into competitive markets and flex its significant fiscal muscles. It needs ways to balance and navigate these tensions.

To achieve this, we do a couple of things, we have Dept of Finance as shareholder representing prudence and the Dept of Comms Minister representing public BB policy objectives. We have a statement of expectations to set the rules of activity the field of play as it were, that is expected from the Shareholders perspective and we have a corporate plan or business case that sets out the costs and revenue requirements in line with delivering on the Statement of Expectations. A pretty standard approach, dare I say common sense. Easy.

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8A critical error the foundation stone of the Business Case that was to support the building of this 21st century hydro scheme is itself leaky. Ownership of the public policy and its implementation (as ever) does not just reside with the Dept of Comms. When $ is involved, its also a Dept of Finance issue.Statement of Expectations & Business Case success imperative collide as costs blow out, delays ensure and equity gets another call out.

Oh, what a muddle!

But there is a problem. Well a few actually but Ill focus on one key one: the balance between public policy and fiscal prudency interests has tipped.

Over time, the Dept of Finance has got the whip hand. And what do they say? They say the budget position is looking creaky, so we want to keep the investment off the budget. Finance wants to ensure that the value of the shareholders investment does not diminish ie tha the money pumped in can be returned over time through profits or a sale. If we presume that its a commercial activity and as such, it will, over time cover its costs, then equity funding is avaiable. And if its going to be given to you on this basis then well need a regular business case update to support the investment amount.

The original driver, to build something fundamentally different from what the market would deliver is slipping away. And so NBN Co starts to become and unwanted child because it cant deliver on its financial plans. 8

9What went wrong?Multiple re-writes as circumstance change and facts changeInitial delays and connections not met, management distractions as Quigley replaced by Ziggy and then Morrow, review after review, MTM, re-cutting of the Telstra and Optus deals, new product developments, impact of CVC pricing/Netflix effect, 121 PoI headwinds, TPG spoiling tactics! Cheery picking review, .Yet at every stage, the one constant? The business case must still stack up!

Oh, what a muddle!

So how did the business case get so shacky? Well I think it was always something of an aspirational approach with assumptions and underpinnings that were, lets say, ambitious.

And look at the twists and turns and mental and mathematical contortions weve had to go through to maintain the Business Case Charade! It keeps getting updated Vertigan, MTMlook at al the cchanges that impact thte business case:

(read: Initial delays and connections targets not met (we moved from Houses connected to passed to areas ready for service), management distractions as Quigley replaced by Ziggy and then Morrow, expert review after review, MTM kicks in, re-cutting of the Telstra and Optus deals and all the assumptions flowing from using HFC, new product developments, impact of CVC pricing/Netflix effect as usage spikes, 121 PoI headwinds, TPG spoiling tactics! Cheery picking review, cross subsidy factors no woder its difficult to hit the numbers.

And now we hear about NBN needing to move into new areas to chase revenue tto again support the business case. Scope creep to deliver backhaul to mobile towers, compete with private investment out to the POIS even pitch for in-flight satellite connectivity to the airline industry. These kids of activities are not found in the statement of expectations. They arise as antidotes to the otherwise failing business case that the Dept Finance in particular holds steadfast to. In fact the tail is now wagging the dog. The effect is clear just see another COO depart.

And its time to stop and have that adult conversation. In Canberra, we hope that the adults are back in charge and that good Government can start today.Where is the circuit breaker from the ground hog day replays. How to stop us continually being dragged back in to the old ways, unable to break free to a more prosperous market for all.

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10Lets go back and remember why we had the Govt intervene and build this NBN in the first place.Its uncompetitive. Book value = real value??? NEVER.Write it down, sell it off and finish the build all within the confines of wholesale only, open access, non-discrimination and structural separation.https://www.youtube.com/watch?v=SeldwfOwuL8

Matt Healy, National Executive - Industry & Policy

Will the sky fall in?

So hears the suggestion. Lets right off some of the equity investment. Perhaps $10B over a couple of years maybe more. Lets ease the pain traped in the business case thats driving the bad behavior and tipping the balance. It might help NBN Co to access debt markets quicker and trade profitably before most of us retire. But it should also be required to stop seeking further public funding. Its original mandate and statement of expectations need to be affirmed. For at least until it completes the rollout, it must stop the follies of exploring alternate revenue streams, sniffing out competitive markets or proposing new product constructs before it delivers the current ones. Walk before you run, stick to your knitting.

Thats an offer you cant refuse.10

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