Telstra InfraCo, a standalone entity, will house the group’s fixed networks, data centres, non-mobile fibre, the HFC network, international sub-sea cables, exchanges, ducts, pipes, NBN-related revenues and relationships and Telstra Wholesale. Loading Mullen, speaking after the telco’s rambunctious annual meeting on Tuesday, said that, while there had been no discussions with the federal government, Telstra had made it clear that "we are creating an InfraCo within Telstra so that when and if a government decides to privatise NBN, and they have a problem on their hands doing so, Telstra can potentially provide a solution". Telstra is the obvious buyer of NBN Co, given that NBN Co will pay it $1 billion a year for access to its ducts, pits, exchanges, fibre loops and copper until at least 2046. That deal, which sits within InfraCo, is probably worth $12 billion to $15 billion in net present value terms. There would be some very substantial synergies involved, financial and operational, if InfraCo and NBN Co merged.

Telstra is well aware the prospect of a reinstatement of vertical integration would make such a deal impossible. InfraCo would have to be completely separated and separately-owned if it acquired NBN Co. The obstacle to that deal is the economics of the NBN. When Kevin Rudd and Stephen Conroy dreamed up the concept of a national fibre-to-the-premises network they and NBN Co’s then management thought it could be built for $40.9 billion. By the time Malcolm Turnbull shifted the rollout strategy to a multi-technology mix (MTM) it was apparent Labor’s plan was a pipe dream, with Turnbull’s strategic review panel concluding it would cost $72.6 billion. The MTM approach, while delivering an inferior technology, saw a dramatic acceleration in the pace of the rollout and in connections to the network.

While the original estimate of its cost has blown out from $41 billion to $51 billion, the build is on track to be completed in 2020 and NBN Co is budgeting to be marginally ($100 million) free cash flow positive in 2022. The NBN's cost has blown out from $41 billion to $51 billion. Credit:David Allan-Petale NBN Co’s corporate plan envisages average revenues per user (ARPU) rising from $44 to $52 a month by 2022, predicated on users progressively shifting to higher speed plans. Each $1 shift in ARPU represents $100 million of cash flow in 2022. Given that NBN Co has only been able to drive increased penetration of higher-speed products by discounting them, there is a big question mark over its ability to achieve its financial forecasts. Moreover, wireless is already substituting for fixed line broadband in an increasing number of households and the imminent rollout of 5G networks can only amplify that trend.

NBN retailers aren’t making money and there is, with the current NBN settings, an enormous incentive for the wireless networks to position themselves as an alternative to the NBN. Loading Wireless isn’t a perfect substitute for fibre-based broadband but the wireless networks could divert enough customers from NBN Co to make a mess of its projections, which are already sub-economic. A Labor win at next year’s federal election could change everything. While the Coalition has ruled out a writedown of the NBN, Rowland told The Australian this week that Labor was keeping its options open. A writedown would enable NBN Co to lower its charges while generating a more commercial rate of return.

It would allow retailers to make money from selling NBN products and encourage consumers to take up higher-speed products. It might, if it were large enough, encourage NBN Co to incorporate a higher proportion of the more expensive fibre-to-the-curb option into its technology mix. The sticking point for Labor could be the size of the writedown required. Estimates of the hit taxpayers would have to absorb range from $20 billion to $40 billion. Some key industry players (other than Telstra) believe the higher number would be necessary to make higher speeds affordable, give retailers a decent margin and kill off the threat of wireless by-pass. Labor, of course, could blame Turnbull. We’ll never know whether Labor’s gold-plated NBN would have cost $40.9 billion, $72.6 billion or $100 billion even though, almost by definition, it would have been far more expensive and taken longer to build than Turnbull’s model.

If Labor were prepared to take a big writedown of the $29.5 billion of taxpayer equity and $21.4 billion of debt NBN Co will have by 2022, a merger with InfraCo would become a viable option and one that could also see value recovered if Telstra capitalised some of the substantial synergies into the purchase price.