1. The Strategic Review will assert a massive cost blowout in the NBN

The cost blowout will only relate to the FTTP component – not to satellite, IT, transit, greenfields – possibly fixed wireless.

It will be based on two claims (a) that the average cost per premise passed for completed FSAMs is $4200 versus NBN Co claim of $2500 and (b) that costs are going up not down because of need to renegotiate contractor rates. As you know the cost of FTTP build includes the LN/DN – from the FSAM to the pit outside the house – and the customer connect to connect the house.

NBN Co provided to the JCNBN in April detailed how the EAC (Estimate at Completion) for most recent FSAMs was running at 1100-1400 per premise for most recent FSAMs – but it is easy to inflate the cost by (a) agreeing to every claim from contractors for disputes and (b) using the whole project average rather than most recent rates.

(Note: for all work for which final invoices had not been received at 30 June NBN Co undertook a standard accrual exercise to estimate size of future claims including what percentage of contractor claims would be paid – it is easy to increase the cost by accepting the claims.)

There may be other claims of cost increases in customer connect.

The review will not credit any of the savings identified by the previous management team. For your benefit I attach the following extracts from an NBN Co Board paper that Senator Conroy was referring to

As Mike Quigley said at his Tel Soc talk

“We called these changes our 2.x architecture. At the end of September, NBN Co was on track to implement these cost reductions, as any sensible company would.

So, let me be clear. Rates to build the fibre network based on the existing design and architecture were rising. But those rate increases would not have produced a cost increase because we had identified and validated, network and design changes that would have offset those increases.

Which is why I find it incomprehensible to hear the suggestion that the increases in LN/DN rates should be built into the forward projections and cost reductions that have already been identified, should not be.

Unless, of course, your objective is to try to confirm a pre-conceived position.”

2. The Strategic Review will forecast that the NBN Co rollout will take a lot longer to complete.

The review will assume that the 6,000 per day target will never be achieved. As has already been leaked in the Oz this was

If you limit that to 4,000 per day you get to 2025 for completion.

The question here is that the previous executive team was prepared to sign-up to and be held accountable to this target. NBN Co had some very poor experience with contractors (especially Syntheo) but had made some significant changes to the way it was engaging with contractors.

Question is whether the new management team is adopting stretch targets or feather-bed targets here.

The other thing to note is the evidence from the JCNBN that a slower rollout REDUCES peak funding requirement – it does not increase it.

3. The Review may try again to make the Coalition claim that the revenue projections are overoptimistic.

First the Coalition has historically conflated price and ARPU. As was demonstrated in the JCNBN presentation NBN Corporate Plan price assumptions were for decline in real terms for the components. ARPU was growing because customers would move to higher plans and consume more.

They also used a poorly constructed calculation of ARPU to claim we expected ARPU to increase by 9% real. Extract from 2013-16 Plan demonstrates that ARPU CAGR is in fact 2.8% real – less than the 3.5% the Coalition said was reasonable.

The only thing may be a claim that NBN Co underestimates “wireless only” households – but care has to be taken because surveys on “wireless only” are usually about voice – there are also houses with naked DSL that are wireless only for voice.

4. The Strat Review will have no detail on any of the underlying cost elements assumed – especially the cost of copper maintenance, remediation and new IT systems. We know from the Senate Committee that these costs are all based on BCG’s international data – not anything they have from Telstra. We also know they have a lot of work to do to work out the actual architecture. So the alternative to FTTP will be very rough estimates.

5. The bit I can’t predict is how Mr Turnbull proposes to validate the following from the House today:

“The truth is that the Labor Party have misled, spun and deceived on broadband for four years. Tomorrow we will see the truth about the NBN. The Labor Party do not want to hear it. They do not want to know how many billions of dollars they have wasted. They do not want to know how many falsehoods they have told. They do not want to know about how distorted a reality they still live in on this great project. The truth will out, and it will be out tomorrow.”

This is solid stuff – it is not just a claim that a re-baseline will reveal something different, but that Labor was “telling falsehoods” – which will require him to demonstrate that something about his re-baseline was known by us but never revealed.

He might try to spin the Lazard line – that we claimed 7% IRR when we had a report that showed a negative $31B “net equity” – which is really an NPV. Hopefully you all understand discounted cashflow analysis and that the IRR is defined as the discount rate required to get an NPV of zero. So using any higher discount rate – like the 20% Lazard used – will always generate a negative NPV….the two statements are not in conflict.

You also might here some rubbish about the fact the IRR was generated by using a thirty year lifetime and then adding a terminal value. This is all quite normal – for example the Telstra HFC investment was developed using a 25 year term because that is how long the contract with Foxtel ran – and still included a terminal value. Terminal values are a proxy for the realisable sale price of the asset, and are usually calculated as a multiple of EBITDA. As a reference point both the AFR and the Oz reported that TPG just bought AAPT for “6.4 times AAPT’s recurring annualised EBITDA run rate”….and we all know that AAPT is a dog of an asset.

Hopefully you will have a lot of fun asking questions. The first ones really have to be about Mike’s quote. The second ones are all about comparing an actual build to a whole pile of international benchmarks.

You should also ask exactly how many companies BCG has consulted to who are building either FTTN or FTTP who aren’t incumbents and are wholesale only….

The really big one remains exactly how Malcolm will demonstrate that Labor “deceived” on broadband.