Telco analysts praise more competition in NBN plan, but business continues call for cost-benefit analysis

The Government’s National Broadband Network business plan has been met with a mixed reception with telco analysts praising the increased number of points-of-interconnect, while business groups have continued their call for a cost-benefits analysis.

While some experts say the estimate for having 1.7 million homes connected by 2013 provides a good starting point for the network, others, such as competition expert Frank Zumbo from the University of New South Wales, say there are much larger risks.

“The NBN Business Plan reveals that the NBN is financially on a knife-edge and any mistake or miscalculation in the business plan will mean that NBN will be a financial disaster for taxpayers,” he says.

Yesterday, the Australian Information Industry Association was the first to come out in support of the plan, with chief executive Ian Birks saying the estimates for positive earnings by 2018 and net income by 2021 were ultimately conservative, and would turn out to be much more profitable.

“This forecast does not take into account the broader productivity and social benefits of ubiquitous broadband. We need to be clear: economic growth is the rationale that supports building this network.”

“It’s about making more money for business. An effective digital economy in Australia will depend on our ability to innovate and create new opportunities through new business models, applications and technologies.”

Ovum research director David Kennedy says the decision of the Government to accept the advice of the Australian Competition and Consumer Commission and increase the number of points-of-interconnect to 120 will ensure a greater range of competition among telecommunications providers.

“I think the effect of the larger points of interconnect will mean that we see a two-tiered market. There will be a handful of larger players who will dominate at layer three, and then they will take layer-two services and turn them into wholesale services.”

“So that second tier will be the smaller ISPs and other resale based providers buying those wholesale services. Had it gone the other way, we would have seen a much less structured market.”

The previous plan would have seen only 14 POIs constructed, which telcos such as AAPT and Optus said would have stranded currently available infrastructure – possibly leaving the NBN open to costly compensation claims.

Now, Kennedy says that is less likely to occur.

“This is much less likely to occur now. What it means is that in this middle layer, you will see more competition and it’s clear the ACCC has set down criteria to preserve competition and this plan is the result of that criteria.”

The key aspects detailed in the long-awaited business plan include:

• The NBN Co. is forecasting a 7.04% rate of return over 30 years.
• Wholesale prices will start at $24 per month for a basic 12Mpbs service, with 1 Gpbs services costing $150 per month. A 50GB plan with a 12Mpbs connection is expected to cost between $53-58 per month, but the NBN Co. expects these prices to drop.
• The Government expects 1.7 million premises to be connected by 2013, with 10 million premises connected after 9.5 years.
• Total expenditure will come to $35.9 million, plus $21.8 billion in operating expenditure.
• The Government will require $13.7 billion in funding to be gathered from investors between 2015-2021.
• The Government predicts a 70% take-up rate.
• Annual revenue is forecast to be at $5.8 billion by 2021.
• Satellite roll-out will begin 2015, when the NBN Co. will also start to gather funding from investors.

The Australian Industry Group also welcomed the plan, saying that “the potential gains from improving business productivity through very fast broadband were not included in the business case today and offer considerable opportunity to extend the national gains from this investment”.

Prime Minister Julia Gillard said yesterday that the NBN could deliver substantial economic benefits, including the possibility of adding 1.3 percentage points to GDP.

But already the Opposition and some business experts have said the business plan doesn’t go far enough. Frank Zumbo says the plan “raises many questions and concerns”, and that the assumptions regarding take-up rates and the impact of high-speed wireless are left unanswered.

“A key potential mistake or miscalculation in the NBN business plan relates to under-estimating the potential impact of high speed wireless broadband as a competitor to the NBN. High speed wireless broadband poses a serious threat to the financial viability to the NBN and needs to be careful investigated.”

Zumbo highlights three concerns: that the take-up rate of 70% is “very optimistic” compared to the growth of high-speed wireless, that the wholesale pricing of fixed broadband is questionable given there is no legislative guarantee, and that the peak production point of 6,000 homes per day is entirely dependent on the availability of skilled workers.

“In turn, this would have a substantial impact on projected revenues and the internal rate of return for the NBN.”

There is also the question of risk. Experts such as Zumbo point out that if the take-up of fixed broadband wanes because of wireless internet, the financial viability of the network could be in jeopardy.

The Business Council of Australia yesterday welcomed the release of the business plan, but also said that “only a rigorous and transparent cost-benefit analysis” would decide whether the project is financially viable.

The Australian Chamber of Commerce of Industry also released a similar statement to News.com.au, questioning whether, “is it prudent for the Government to be taking on this risk and associated spending without an independent cost-benefit analysis?”

Opposition communications spokesman Malcolm Turnbull has also slammed the business plan, saying the wholesale pricing is too expensive – more than users pay now – and highlighting figures showing that expenditure will peak at $27.5 billion instead of the previously forecast $26 billion.

“The roll-out of the NBN was promised to be completed in eight years. We now learn that it will not be complete until 2021 – three years later and 14 years after Labor’s original failed NBN tender.”

“Many Australians with inadequate broadband services today, whether they are in the country or the city, will have to wait much longer to get adequate broadband under the NBN than they would under the more practical approach outlined by the Coalition.”

Turnbull has also called on the Government to conduct a cost benefit analysis through the Productivity Commission, saying it should be open and transparent with all of its financial records.

“Despite this being the largest infrastructure investment in our nation’s history, the Government is not publishing a complete set of financial statements.”