NBN Co has already teamed up with Telstra to conduct small trials in the NSW central coast town of Umina Beach and the northern Melbourne suburb of Epping of ''neighbourhood nodes'' that will replace about a third of Labor's fibre-to-the-premises rollout. Morrow will quickly conclude talks with Telstra to conduct a larger rollout of about 200 nodes later this year, and will use it as the launching pad for a full-scale ''industrialised'' FTTN rollout next year. Re-engineering NBN Co itself is trickier. Finance Minister Mathias Cormann has told Morrow the government will contribute $29.5 billion of equity to the national broadband project, and not one cent more. NBN Co's strategic review in December, on the other hand, put a $41 billion price tag on a patchwork network comprising 24 per cent fibre to the home, 41 per cent fibre to the node, 28 per cent existing urban hybrid fibre owned by Telstra and Optus, and 7 per cent wireless and satellite in rural and remote areas. Morrow has to close that funding gap, and he needs to improve NBN's profitability to maximise his options.

He will make NBN smaller and cut its 3000-strong workforce, pushing parts of its business into the private sector, where jobs will be created. Key NBN Co network assets will be sold and leased back; the development of housing estates and other so-called ''greenfields'' fibre networks will be handed back to the private sector; and the Telstra and Optus hybrid fibre cable (HFC) networks that Labor's plan quarantined from competition with the NBN will be acquired and operated to accelerate revenue growth. Last December's NBN Co review looked at various redesign options using two revenue assumptions that significantly downgraded Labor's revenue forecasts, in part to reflect delays in the project. It concluded that the Coalition's hybrid network would generate an internal rate of return on funds invested of 5.3 per cent a year between 2010 and 2040 if access prices did not change significantly, and return 3.1 per cent a year if the wholesale revenue per network user declined at an annual rate of 2.5 per cent a year. The higher revenue assumption is considered more likely, but even the lower return beats inflation and allows the government to maintain Labor's classification of the project as an investment in its May budget. In opposition, of course, it criticised Labor for excluding the cost of the rollout from budget estimates. In government, it will argue that its decision to do the same thing is based on more reliable rate-of-return numbers. The returns on either scenario are thin, however, particularly given the project's chequered history, and the project execution risk it highlights. If loan finance is hard to secure, Morrow will ask major suppliers to provide vendor finance, but whatever he does, his negotiating position will be strengthened if he gets the project's internal rate of return up.

He will try to make NBN Co less capital-intensive by selling its two satellites to satellite operators such as Optus and Intelsat, and then leasing capacity. He will look for a similar deal on NBN wireless towers, and shrink the company's cost base by privatising greenfields developments. He does not have a lot of room to move, however. About 75 per cent of the capital cost of the project is locked. NBN Co also estimated in December that about 90 per cent of its operating costs of $19 billion between 2011 and 2021 was related to payments to Telstra under its NBN co-operation deal, and payments to Optus in return to quarantine its HFC cable. Telstra will get about 90 per cent of the 90 per cent, and while both deals will be redesigned to reflect the broadband network's redesign, their value will be preserved. Morrow will be keen to close negotiations with Telstra and Optus quickly, nevertheless. He will import their HFC networks as part of the new deal, and selling wholesale broadband access on the HFC network is his short cut to boosting NBN Co's revenue and borrowing enough to top up the government's $29.5 billion equity contribution. mmaiden@fairfaxmedia.com.au