27 October 2020





(Acknowledgements omitted)
The pandemic has thrown a spotlight on connectivity, while the recession has drawn focus to nation building.
Australia’s trillion dollars of debt underscores the importance of investing public funds wisely.
Of course, communications infrastructure is critical to our prosperity.
World-class connectivity isn’t a choice, it is an imperative.
And the growing connectedness of our economy and society demands connected policy to guide and leverage investment.
The original Labor vision for the NBN had a deep logic that joined up its policy architecture, political values, broadband pricing and the economics of a fibre network to make it work.
A connected logic informed by engineering and economics.
By expertise and evidence.
A plan that addressed the expectations of the Australian public on connectivity, fairness and opportunity.
The Australian public expects the Government to act in the national interest – and funds a range of Departments and agencies to advise the Government of the day to that end.
At this time of turmoil and uncertainty, where eye-watering sums of taxpayers’ funds are being committed in every direction, we need better leadership and governance.
Unfortunately, the Minister for Communications’ grip on matters of governance has been found wanting.
You can see that at Australia Post.
You can see it with the $10 million handout to Fox Sports.
And you can see it in the decision to pay $30 million for a parcel of land that the Auditor-General found was only worth $3 million.
Further, in April this year, the Minister stated he had suspended the Australian content quotas, when in fact the independent regulator, the ACMA, had done so.
Not only is it unacceptable – it is troubling that the Minister would falsely claim that he did something that was a matter for the independent statutory authority, particularly where the matters on which the Minister may direct the ACMA are carefully prescribed by law.
Similarly, the Minister’s decision to ignore the ACCC’s recommendation in the Digital Platforms Inquiry that the administration of a grants program for the news media be conducted at arms length from Government shows a fundamental disregard for governance at the very heart of our democracy.
Australia is in recession.
We need to climb out of it and we’ll need smarts at our disposal to do so.
Joined up policy to drive prudent economic management at this extraordinary time in our history demands expertise, not ego-driven posturing.
I now wish to turn to some recent developments on the NBN, because Australians know only too well how costly political posturing can be.
The NBN backflip
On 9 April 2013 Malcolm Turnbull announced the Liberals would abandon fibre, and instead switch to a copper based NBN.
Journalists asked why he didn’t know how long the copper network might last and Mr Turnbull incredulously replied:
“What’s the question? How long will a piece of copper last? It could last thousands of years, you don’t know.”
83 days.
That’s the time period between when the volume rollout was complete, to the declaration of the backflip.
After $51 billion, and ten years of sniping at fibre, this third term Government has stumbled upon the slowest and most expensive pathway towards the original Labor vision.
Peak funding is now forecast to hit $57 billion, and the real cost once accounting for billions in unpaid dividends and delayed repayments on debt is expected to be even higher.
The decision to abandon fibre back in 2013 was never about cost.
It was always about politics.
One side had a long-term plan and a technology to deliver it, and the other side felt they had to oppose it.
To appreciate how just expensive the Coalition’s bet and subsequent backflip on ageing technologies has been consider the following:
The cumulative rollout and upgrade costs to 2024, the year when NBN debt is now understood to peak, will be around $47.8 billion in capital expenditure, $37.6 billion in operating expenditure and contractual payments, and an estimated $4.1 billion in interest.
Add these components up and that is nearly $90 billion worth of underlying costs, and that’s not even for a full-fibre network.
This might explain why the Minister for Communications issued a Statement of Expectations to the ACCC effectively demanding that the independent regulator bend over backwards for NBNCo.
The ACCC is not perfect, and no regulator or agency is, but asking them to become a client of Shareholder Ministers and NBNCo is surely not the remedy.
The industry needs a Minister for Communications and a coherent policy and regulatory framework to guide investment – not a Minister for Monopolies who rattles off angry edicts from his basement.
Cost increases, investment uncertainty and inferior technology:  this is the legacy of a Coalition Government which has amassed $1 trillion in debt with not much to show for it.
This brings me to the economics of the NBN.
The economics of the NBN
In the lead up to the 2019 election, Labor undertook a detailed body of work on the economics of the NBN and the implications this might have for future decision-making.
I want to run through some of that work because, in light of recent developments, it may help better explain Labor’s perspective of what has gone on.
The analysis sought to understand the break down of costs embedded into the cash flow structure of the multi-technology NBN, and then work backwards to estimate how much monthly revenue being generated from each user was needed to cover each of these costs.
Of the $53 in revenue per user per month in 2022, assuming the rollout was in steady state operations, it estimated that roughly:

  • $16.30 per month would go towards operating expenditure;


  • $9.60 per month would be paid to Telstra in the form of ongoing infrastructure lease payments;


  • $10.50 per month would go towards both maintenance capital and the build of new greenfield networks;


  • $3 per month of that capital spend would go towards cross-subsidising losses in the regional fixed wireless footprint; and


  • $8.10 per month would go towards interest payments, based on a total of $21.5 billion in debt and an interest rate of 3.96 per cent.

These are obviously estimates and are not based on the latest figures which have higher costs, higher interest payments, and higher revenues.
But the gist of it was that to keep the lights on, and to ensure the regional networks were in reasonable shape, you probably need around $44 a month from each active user, leaving a margin of around $9 per month.
There is, however, an important caveat.
This margin assumed no cost recovery, no dividends being paid to the commonwealth, no principal repayments on debt, no copper upgrade, and no impact from 5G competition on NBN revenue.
To give you one example, if 5G reduced the NBN take-up rate to 70 per cent, the breakeven ARPU for remaining customers could rise to nearly $50 per month.
Once you start incorporating those assumptions you realise the cash flow position and the economics of the NBN were in a very difficult state.
In a most curious form of self-sedating, the Minister has been claiming the NBN has “strong cash flows” and this is why the upgrades are occurring.
NBN under the Liberals has not generated one cent of free cash flows.
Not one cent.
That is why the entity is still having to borrow money.
That is why the NBN company is now forecast to carry $27.5 billion in debt.
The original Fibre to the Node rollout was supposed to deliver a cash flow positive rollout by 2020-2021.
We now appear to be looking at 2024 or 2025 at best.
The key question, at the time of this analysis in 2019, was what relevance did these findings, and the nuances of the analysis, have for future policy?
The first insight was it could be quite difficult for the Liberals to run off and sell the NBN to institutional investors, unless they wanted to closely involve Telstra in any future sale.
Telstra is unique in that it’s the only potential owner that could provide the Liberals with provide cash flow relief because of its infrastructure synergies and its singular ability to restructure contractual payments between itself and NBNCo.
This might explain why Minister Fletcher performed another backflip in May, telling the Australian Financial Review the Morrison Government was again open to the possibility of selling the NBN to Telstra[1] if the bankers could figure a structure out, despite telling the Sydney Morning Herald the opposite a year earlier[2].
But it was the second insight about the weak cash flow position, and its consequences, that was arguably more relevant to where we are today.
NBNCo management do not have the same incentives as their private sector counterparts to manage costs or allocate capital efficiently.
This is not a criticism of management, and I want to acknowledge their accomplishments and professionalism with the volume rollout and their rapid response during the bushfire season and COVID-19.
But the reality is that since 2014 the Abbott-Turnbull-Morrison Governments have tolerated an $11 billion cost blowout, then a new $8 billion blowout, then a further $2 billion blowout, and the latest $6 billion increase.
If your shareholder is willing to tolerate never-ending cost blowouts, and you are financially rewarded for meeting fake revenue targets, then clearly your incentive is to keep spending money.
It appeared likely, irrespective of which side of politics formed government following the 2019 election, that senior executives would have strong incentives to recommend wide-scale fibre upgrades, given the 5G risk and what this meant for an already weak cash flow position.
The NBN backflip was not an epiphany about market demand, or a surprise response to the need for fast broadband arising from COVID-19.
It was a pre-determined surrender to seven years of Liberal incompetence.
This brings me to one of the specifics of what has been announced.
A month ago the Government announced NBN would use $2.9 billion to provide 2 million households, who are currently on Fibre to the Node, with access to fibre.
A modest figure given the rhetoric associated with the announcement.
However, the fine print published after the media announcement appears to provide some additional context.
First, the cost of the NBN had increased a further $6 billion to $57 billion.
Second, this revised $57 billion cost currently assumes only 400,000 households — that is 1 out of every 10 premises in the copper footprint — are budgeted to actually get a fibre connection to their homes between now and 2024. This is based on the size of the Fibre to the Node footprint being around 4.2 million premises.
If these 1 in 10 figures do in fact play out, and even I’m sceptical this Government could be that hopeless, that will be nothing short of a farce.
This means the copper network will be operated and maintained in full, while the fibre network being constructed in parallel goes under-utilised.
You would, in all sincerity, be hard pressed to think up a more illogical and costly way to deploy a National Broadband Network with public money.
You will, over coming months, hear all sorts of spin and revisionism from Minister Fletcher trying to explain the anti-logic of what has gone on.
Just remember this is the same Minister who used to rail in opposition about NBN connecting enterprises, and now he has backflipped.
This is the same Minister who would deliver Labor lectures about the market power of NBNCo, and now he writes letters to the ACCC saying he effectively expects them to grant NBN more market power.
This is the same Minister who in 2019 said he wanted infrastructure-based competition and the market to drive fixed-line investment – and what big idea did he bring forward?
A broadband tax.
But not any ordinary broadband tax.
A tax specifically designed to deter competition against the NBN — the precise opposite of what he said he wanted to do.
The façade of Paul Fletcher as some mildly competent policy maker is over.
In this Minister, we are dealing with a weathervane in search of a policy principle.
Spectrum Reform
Another area in which this Government has failed to do what it said it was going to do is spectrum reform.
Upon the introduction of the Radiocommunications bills into Parliament this year, CommsDay reported that a Departmental insider had described the spectrum reform process as: “the Canberra version of Hollywood development hell”.
An apt description when you consider the length of time in development, the redrafts, the jargon, the change in crew, the creative disagreements, the period of limbo and, even, the premature death of one of the lead actors.
Ultimately, the project wasn’t abandoned but it certainly hasn’t been fully realised either.
The spectrum review was announced over six years ago, in May 2014.
In August 2015, Malcolm Turnbull and Paul Fletcher announced that the Government would implement the recommendations of the spectrum review and scheduled the passage of the legislative package for early to mid-2016, well over four years ago.
But it stalled.
There’s no doubt that spectrum reform was a significant and complex undertaking.
Labor acknowledges the efforts that have gone into spectrum review and reform, by industry, the Department and ACMA and others.
But the delay means the ACMA has conducted four spectrum auctions without the benefit of the streamlined approach that was identified as a key area in need of reform.
After so many years, what do we get?
Well, we don’t get everything that the government said it would implement.
We don’t get a single licensing system.
We don’t get the integration of the management of broadcasting spectrum.
And we don’t get any clarity or forward plan as to when these things may be addressed in future, beyond a general ‘business as usual’ commitment to continuous reform.
We do get a simplified object but of course this doesn’t alter the complexity of spectrum management, an area that is gathering pace with the speed of evolution, and the simplification gives rise to some uncertainty for public services such as the ABC and SBS.
We do get a requirement that the ACMA publish an annual work program covering a minimum five-year period – but this is merely playing catch up given the ACMA has been publishing the FYSO for over a decade already, since 2009.
We do get updated equipment rules, but similarly there is a degree of catch up with the regulator here too, which the Department and industry acknowledge.
We do get benefits from reduced regulatory barriers and more efficient spectrum management processes and more proportionate compliance and enforcement options.
But the regulator does not get the ability to defrag the spectrum to ensure the most efficient use and to avoid costly and disruptive refarming exercises – something now foreseen as a need and regarded as useful to have, but which has not been pursued as part of this years-long reform saga.
At the heart of this exercise is the efficient management of a public resource: the radiofrequency spectrum.
For all the high-minded rhetoric about efficient use of the spectrum, and the benefits of reform, we see this Government is unable to walk the talk.
Earlier this year the Minister’s chiropractor was once again called in for his backflip over community television.
After saying he was going to boot the remaining community television stations off air, despite having no alternative use for the spectrum, the Minister announced at the eleventh hour, only the night before the licences were due to expire, that he would extend them for 12 months.
The licensees found out about their reprieve at the same time the rest of Australia did, when they watched the Minister announce it on the ABC Q+A program.
This is no way to manage a valuable public resource or to treat the sector – the sponsors, staff and volunteers of these services – or the citizens, consumers and communities they serve.
The Minister’s mishandling of Community Television demonstrates a worrying inability to govern with predictability in the public interest.
A failure to manage the simplest of matters, when the level of complexity in the communications portfolio is only set to increase.
In closing, what the communications portfolio needs is coherence and a plan.
It needs values, policy and theory, joined up, and translated into practice.
This year the Nobel Prize in Economic Sciences went to Paul R. Milgrom and Robert B. Wilson for “improvements to auction theory and inventions of new auction formats”.
The chair of the Prize Committee said:
“This year’s Laureates in Economic Sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society”.
Of course, the CommsDay community is deeply familiar with their work.
As the scientific background on the prize published by The Royal Swedish Academy of Sciences attests, Australia adopted the Combinatorial Clock Auction for selling radio-spectrum licences.
The Australian telco sector is capable of leading and adopting cutting-edge work to benefit sellers, buyers, taxpayers and society.
As I said at the outset, the growing connectedness of society demands connected policy to ensure Australia can realise the potential of the digital century.
In formulating policy for the coming election Labor will be honest about its thinking and we won’t disrespect the intelligence of industry or the public.
We’ll explain our principles, our objectives, and our priorities. If our decisions entail trade-offs we will explain what they are and why we judge they are in the public interest.
I look forward to joining CommsDay in April, hopefully in person, to begin laying the foundations for what our plan will be.