news The Financial Review newspaper has published a story claiming that the Federal Government’s National Broadband Network project won’t recover its costs by the year 2040, despite the fact that NBN Co explicitly stated in the same document reported by the AFR that there were several potential scenarios where it would recover the costs by that date.

The story, published on the AFR’s website tonight, is entitled “NBN Co won’t recover costs by 2040, defends pricing”. The article is based on a letter sent by the government broadband company to the Australian Competition and Consumer Commission this week, in response to the regulator’s request for greater transparency with respect to NBN Co’s price controls and planned revenues.

In the letter (available online in PDF format), NBN Co discusses in detail the timeline over which it expects to recoup what is termed the company’s Initial Cost Recovery Account (ICRA) — in other words, the figure which will be required to build and operate the NBN over its life until it can start to deliver a positive return on the government’s investment in the project. NBN Co is currently projecting that it will require about $30 billion worth of government investment over its life, with another $14 billion to be funded through debt arrangements.

According to the letter NBN Co sent the ACCC, there are a number of scenarios regarding pricing of NBN Co’s services, and demand and uptake of those services over the two and a half decades until 2040, which will influence whether it will be able to reach its ICRA figure by that date.

Under the first scenario, listed by NBN Co as the “base case assumptions” for its revenue model listed in its most recent Corporate Plan released in August 2012 (PDF), the company noted that the ICRA “would not be extinguished by 2039-40”.

Similarly, under a scenario where NBN Co increased the prices to the maximum extent allowed by its operating agreement with the ACCC (generally by around the consumer price index to 1.5 percent per year), fewer people would be expected to subscribe to the NBN’s broadband services, and they would be expected to take up lower speeds and use less data, meaning that NBN Co would also not expect to meet its ICRA by 2040.

However, in its article, the AFR only listed the first negative scenario. In fact, NBN Co’s letter to the ACCC contains two further positive scenarios under which NBN Co would expect to meet its ICRA by 2040.

“If no demand response is factored into the maximum price scenario,” NBN Co wrote, “then a very different outcome emerges; that is, assuming that quantities demanded are the same as in the Corporate Plan, forecast revenue is much higher and this leads to the ICRA being extinguished some years before end of [NBN Co’s Special Access Undertaking or SAU] in 2039-40.”

“Under a scenario in which prices are held flat in nominal terms (and again assuming that quantities are the same as in the Corporate Plan; that is, there is no adverse demand response from higher prices than those projected in the Corporate Plan), the ICRA is also forecast to be extinguished before 2039-40,” NBN Co added.

The AFR mentioned neither of these two positive scenarios in its article.

NBN Co noted that it was difficult to plan for either one of the four scenarios outlined in its letter to the ACCC; due to the long time frames (up to 30 years) involved in the forecasting process. “All that is described here are the implications for the ICRA should they occur,” the company said.

However, there is currently significant reason to believe that NBN Co’s projections with respect to its revenue model and uptake of its network have been conservative, rather than optimistic, and that the company may recoup its costs sooner than initially expected.

In May 2012, for example, in a Senate Estimates hearing, NBN Co chief executive Mike Quigley noted that NBN Co had prior to that point been predicting that in the early years of its fibre rollout, the majority (52%) of customers who signed up for its fibre services would have picked the entry level speed tier it’s offering — a 12Mbps service which is slower even than current theoretical ADSL2+ speeds. The remainder would be split largely between the next speed tranches of 25Mbps (17%) ad 50Mbps (23%), with only a small number (8%) taking the highest speed 100Mbps plans.

However, Quigley told the Senate Committee at the time, when it came to the actual uptake experienced by NBN Co in the real world so far, this scheme had been somewhat inverted. “Overall, 38 percent of active services on our fibre network have been on the fastest speed tier, which is 100Mbps down,” he said. “Only 16 percent of the active services on our fibre network are for the entry-level speed tier of 12Mbps.” For the month of April, Quigley said, the trend was “even stronger”, with almost half of new customers signing up for the highest speed tier of 100Mbps. This trend, Quigley said, could lead to NBN Co eventually cutting its prices as it expected to recoup off its costs earlier than expected.

In October, NBN Co’s then head of product development and industry relations Jim Hassell revealed that the proportion of NBN customers signing up for 100Mbps speeds had grown even higher over the past several months. “What we have seen is that the top tier – the 100Mbps service – has attracted 44 percent of services,” said Hassell.

In Quigley’s most recent appearance in a Senate Estimates hearing last week, the NBN Co chief executive again emphasised that take-up of the NBN’s fibre, in the early stage zones where it has been rolled out, was higher than similar deployments internationally.

“For those [fibre-serving area modules] where we have now been in service for more than 12 months or more, take-up is about 25 per cent, and in some locations it is above 50 per cent,” Quigley said. “The average overall across brownfields is currently about 17 per cent. As we add more footprint over the coming months, that percentage will obviously drop until we activate more customers. This is a very high take-up rate on any international comparison.”

Communications Minister Stephen Conroy — the minister responsible for the NBN project — has repeatedly criticised the AFR over the past year for what he has claimed to be inaccuracies in the newspaper’s reporting of the project. And in a doorstop press conference last week, the Senator continued his attack on the AFR, referring to an article the newspaper had written regarding delays in NBN Co’s fibre rollout caused by contractor Syntheo.

“… hysterical headlines like you wrote about how we were suddenly missing our targets, frankly the reporting of it was a joke,” Conroy told an AFR reporter at the press conference. “What you’ve got was a reduction from the cutover number back to the corporate plan. We are on target to meet the corporate plan. And just writing down the bottom one line after all the rest of the paragraphs is frankly poor journalism. We are on track to meet the corporate plan, no matter how much heavy breathing you or the Financial Review wants to do.”

Delimiter will publish any response the AFR issues to this article as a right of reply.

opinion/analysis

Look, I’m not sure why the AFR excluded several positive NBN cost recovery scenarios from its article tonight, but the fact is that it did. NBN Co’s letter to the ACCC about its cost recovery out to 2040 contains four scenarios; two where it doesn’t recoup its costs by 2040 and two where it does. It’s there in black and white. The AFR’s article about the letter only contains one scenario.

When you also consider that most of the evidence so far is that uptake of the NBN is better than the company has been predicting, the argument that the company won’t make its cost recovery targets on time starts to look very weak indeed.

There’s also this unusual statement in the AFR’s article: “NBN Co must recover its costs and deliver a financial return to the government so that Federal funding for the massive project is treated as an investment, rather than an expense on the budget.”

I’m not an accountant, but I suspect this statement to be inaccurate. If the Government’s investment in NBN Co is fully recouped and NBN Co returns that investment plus a little more, I suspect that extra money on top will be treated as a capital gain — like stock market shares whose value has increased. If the Government’s investment in NBN Co is not fully recouped (and it’s hard to imagine a scenario where this would occur over the long term), then the amount by which NBN Co falls short will be treated as a capital loss — like stock market shares whose value has decreased.

But there should be no case in which the entirety of the Government’s investment in NBN Co will be treated as an expense. The Government’s investment in NBN Co is akin to the Government lending NBN Co money, and as that money will not be written off (even in the worst case it will mostly be paid back), the whole amount cannot be added to the Government’s profit and loss statement as an expense. It’s just not possible. To do so would be an accounting nonsense.

I suspect that what will eventually be added to the Government’s balance statement (not its profit and loss statement — there is a huge difference!) is the book value of NBN Co as a company, of which the Government will remain the 100 percent owner. How do the maths here add up? As Communications Minister Stephen Conroy has repeatedly pointed out, it is not the Government which will ultimately pay for the NBN, but Australian consumers and business — the actual users of the network. In this sense, the construction of the NBN represents a situation in which the Government essentially ends up with a huge extra asset on its books — but paid for by the Australian consumer, not out of the taxpayers’ coffers.