If InfraCo were completely separated and distanced from the continuing Telstra, presumably through some form of demerger, and merged into NBN Co there would be very substantial value created, value that isn’t available from any other source. Including the NBN payments, InfraCo has earnings before interest, tax, depreciation and amortisation of about $3 billion a year from Telstra’s fixed networks, international sub-sea cables, exchanges and wholesale operations. Given that it was, from the outset, Labor’s plan to eventually sell the NBN to private investors, a value-adding transaction that created a wholesale-only infrastructure-based company would be a sensible way to maximise taxpayers’ interests. It would also help minimise taxpayer losses. Telstra CEO Andy Penn's T22 strategy could help Labor realise its NBN ambitions. Credit:Peter Rae

While the NBN rollout is progressing steadily, albeit with the delays and cost increases associated with problems with its planned HFC deployment, the economics of its offer aren’t working. NBN has an estimated peak funding requirement of $51 billion. While it has lowered its internal rate of return target to 3.2 per cent (the original Rudd/Conroy version assumed a fanciful 7 per cent IRR) the need to produce a positive IRR to keep that $51 billion off-budget is compromising the usefulness of the network and the take-up of the higher speeds it promises. NBN’s wholesale prices mean higher speeds are expensive for consumers but produce no margin for retailers. Within a model that requires steadily increasing average revenues per user to achieve cashflow break-even – which implies the take-up of higher-speed packages – the only way NBN Co has been able to convince more consumers to take up its 50 Mbps offer is to discount the price to what it was charging for its 25 Mbps option. Given that they can’t make any money from re-selling NBN capacity, it isn’t surprising that the big telcos – Telstra, Optus, Vodafone and TPG – are busily upgrading their wireless networks, with Telstra racing to roll out its 5G network.

Loading Wireless might not be a perfect substitute for fixed line broadband but it could result in a significant number of consumers by-passing the NBN, further damaging its economics. Should Labor win, the economics of the NBN would become even more challenging, given Labor’s commitment to introducing more fibre to the current mix of technologies. While there is no dispute that fibre represents the superior and more future-proofed technology, nor that it would lower future operating and maintenance costs, it would add considerably to the capital cost of the network, which would flow through to the retailers and ultimately consumers. If NBN Co were directed to add a lot more fibre instead of the current multi-technology model that factors the cost and speed of the network build into the decision-making, its appeal to consumers and its ability to generate a positive IRR would be severely challenged.

There would be little point in adding more fibre to the network and if few were prepared to pay to access the higher speeds it could deliver. The obvious solution, and one that Labor hasn’t ruled out, is to have a substantial write-down of the taxpayers’ $29.5 billion of equity in NBN Co. That would enable NBN Co to significantly lower its wholesale prices, enabling retailers to generate positive margins and consumers to access higher speeds at prices they would be prepared to pay. NBN Co chief executive Bill Morrow. Credit:Photo: Sasha Wooley It would be a big write-down. The rough guesstimate in the industry is that it would need to be at least $20 billion but potentially as much as twice that level to get the economics of the network in tune with the original vision of affordable high-speed broadband for all. Adding more fibre would obviously increase the scale of the write-down required. A new government could accept the need for the write-down, blaming its predecessors for the necessity, while planning to recover some of that value with a strategy that dovetails with Telstra’s ambitions.

Telstra’s T22 strategy (which involves a lot more than the separation of its fixed line infrastructure) is designed to be complete in 2022. Coincidentally, or otherwise, NBN Co is targeting a modest initial cashflow surplus in that same year. If InfraCo and NBN Co were to be merged, that year would become a key reference point. There are a number of mechanisms for achieving the bi-partisan objective of eventually selling NBN Co while ensuring, of course, that it remains a wholesale-only business completely distanced from Telstra. The most value-adding and loss-minimising, however, would probably be to use InfraCo as the vehicle for a merger and subsequent stock exchange listing or sale in order to capture the synergies and value that only InfraCo can deliver.