April 2017


Network error

By Paddy Manning
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What will be the cost of a patchwork NBN?

A good friend of mine lives in Healesville, in the Yarra Valley, about half an hour from the outer suburbs of Melbourne. Rural enough to be quiet. Close enough to get into the city for a big night out. With two kids and a comfortable home, Adam and his wife have a pretty typical family, internet-wise. The usual collection of phones, tablets, laptops and a smart TV jostle for access to the wi-fi router, pulling down Netflix, YouTube and Foxtel Go. They had an ADSL2+ plan that promised download speeds of “up to” 20 megabits per second (Mbps) at a cost of $65 a month, but never delivered more than 7 Mbps. The usual crap.

In late 2016, after almost eight years of laughable, hyper-partisan politics, Australia’s National Broadband Network (NBN) rolled into town. The young family was excited. A grey-green node, the size of a washing machine, popped up 350 metres away in the next street. Mysteriously, Adam’s internet speeds plunged. No problem: in January, he jumped on the NBN website, plugged in his address and confirmed he could get an NBN connection. He called his internet retailer to ask about their 100 Mbps NBN plan ($80 a month), and here’s where the story gets interesting. They didn’t want to sell him the 100 Mbps plan, recommending a 25 Mbps plan instead, and telling him the NBN had said that, for the coexistence period of 18 months (while ADSL and NBN technologies were running simultaneously), there’d be a slowdown in NBN speeds. Curious, Adam called the NBN and was told that was rubbish, and he should definitely be able to get up to 100 Mbps at his address. He called the retailer back and ordered the 100 Mbps plan. Off-peak he is now getting 25 Mbps, but it fluctuates wildly, and at peak times in the evening he is getting between 2 and 8 Mbps – worse than before. Adam chatted with an IT guy at work and found out broadband retailers were cutting corners … it was all about something called “CVC”.

As it happens, that little acronym now represents one of the biggest problems facing the NBN: it stands for “Connectivity Virtual Circuit” and is the wholesale price per megabit that the NBN charges to retailers, who then on-sell broadband plans to you and me. The CVC charge is so high, retailers say, that they can’t afford to provide the speeds that NBN infrastructure allows and still make a profit. But those wholesale charges are necessary for the NBN to make a profit too, which it is barely on track to do. The NBN expects to make a meagre 3.2% return on the roughly $30 billion equity taxpayers will inject in total – any lower and it would have to be accounted as an expense rather than an investment, blowing out the budget deficit. One solution, often touted by the telco industry, is a huge writedown to the value of the NBN – probably $20 billion – so it can lower its CVC charge and retailers can “unclog the pipes”.

The paradox is that Australians pay high prices for internet access and some consumers appear to be willing – desperate, even – to pay for faster services. Online chat forums explode with frustrated customers swapping charts of download speeds from their brand-new NBN connections that go from 80 Mbps in the morning to 1 Mbps at night. Thousands have complained to the Telecommunications Industry Ombudsman – in fact, the NBN was the fastest-growing source of consumer complaints last year. Like many, Adam would be happy to throw money at the problem: “I spent $1000 on a military-grade wireless network. If they asked me, I’d probably pay another $1000 to get a fibre connection to the NBN.”

Ultra-high definition 8K TV is coming. Virtual and augmented reality is here. The “internet of things” is coming. Australians like to be early adopters, and according to the NBN no other country is spending anything like as much per capita on fast broadband. Yet despite sinking $50 billion into the NBN, with the rollout nearing the halfway mark, Australia is slipping lower on worldwide rankings for internet speeds: as a nation we are getting 10 Mbps on average, placing us 51st. Three years ago we ranked 44th. What on earth is going on?

Let’s get one thing straight: Australia’s NBN was not designed on the back of a beer coaster. In early 2009 when the then communications minister, Stephen Conroy, finally caught up with Prime Minister Kevin Rudd on a plane from Sydney to Melbourne, to hatch their new NBN plan, the venue for the meeting might have been unorthodox – they were literally on the fly – but Conroy was accompanied by the secretary of his department and armed with considered advice from a heavily qualified expert panel, backed up by the competition regulator. It was no thought bubble.

Conroy proposed a new government-owned NBN running super-fast fibre-optic cable all the way from the telephone exchange to the home or business, known as “fibre-to-the-premises” (FTTP). Fibre-optic cable uses light rather than an electrical pulse to carry a signal, and has a well-established upgrade path to gigabit speeds and beyond: 100 Gbps+ is already on the drawing board. Labor had gone into the 2007 federal election with a plan to establish an NBN based on “fibre-to-the-node” (FTTN) technology, in which fibre runs to powered cabinets, installed next to the pillars in neighbourhood streets, from where existing copper wires connecting each home cover the “last mile”. This first version of the NBN would have been a public–private venture, with taxpayers chipping in up to $4.7 billion. Written before the social media explosion, Labor’s policy is old enough in internet years that it talks about “user created content communities” such as MySpace and Flikr [sic], and makes no mention of Facebook or Twitter. Just before the election, Conroy had assembled 400 telecommunications executives at a conference in Sydney to talk through how a Labor government might build the NBN. The industry came back with a better idea, and set up an FTTP special interest group, which produced a 60-page report the following March.

Veteran telco consultant Paul Budde, who had watched the emergence of fibre since the 1970s, wrote the report. It argued that FTTN would limit competition by favouring the owner of the copper network, Telstra. Re-engineering the copper would be expensive and a waste of money, because the nodes (those grey-green boxes) would not be needed once the network was upgraded to FTTP. The report called for a network that could be scaled up to 100 Mbps+ with “a simple upgrade, not an overbuild” and went on: “The concern is that FTTN technology has already become outdated … A more appropriate, scalable, long term solution would be to implement a solution that provides an end to end fibre solution ie. FTTP.”

Conroy went ahead and called for tenders to build the NBN, based on Labor’s pre-election policy, and he opened up the option of FTTP. The tender process was sideswiped by the global financial crisis, which peaked in September 2008. When the NBN bids came back two months later, credit markets worldwide had frozen over, and it was unclear whether anyone could raise the money to build it. Disappointingly, the most logical party, Telstra, submitted a risible 13-page tender document that barely addressed the criteria. None of the bids was suitable. A confidential report from a high-powered expert panel – including the then Treasury secretary Ken Henry, and a clutch of heavyweights supported by advice from the Australian Competition and Consumer Commission (ACCC) – warned against FTTN. An extract of the confidential report urged a focus on competition as well as technology goals, before concluding, “The Panel can see a way forward to achieve the outcomes sought by the Government.”

Conroy got this advice in January 2009. Rudd was in full-on crisis mode, bypassing cabinet and running the country through the four-person Strategic Priorities Budget Committee (the PM, deputy Julia Gillard, treasurer Wayne Swan and finance minister Lindsay Tanner). Rudd knew the GFC was an epochal event. He and his staffers penned an essay for the Monthly, on the decisive failure of the great neoliberal experiment that had shaped Western policymaking for the previous 30 years. Rudd called for social democrats to embrace the “activist state”, with a role as regulator and funder and provider of public goods. Rudd flagged that Labor would continue to invest in roads, rail, ports and “other critical infrastructure”. He had already launched the first $10 billion stimulus package in October, including the unprecedented cash splash, and in February followed through with another $42 billion, including the pink batts and “Building the Education Revolution” schemes.

When Conroy received the expert panel’s advice, the only way he could get to brief the PM was to jump on that plane with him. In the end it took two flights to get Rudd, Conroy and the advisers onto the same page. A proposal went to cabinet, and some three months later, on 7 April, Rudd and Conroy jointly announced the “single largest nation-building infrastructure project in Australia’s history”, trumping the Snowy Hydro scheme and the Sydney Harbour Bridge. Decrying the Coalition’s broadband record – “over a 12-year period, there were some 18 failed plans” – Rudd committed Labor to building a $43 billion NBN, running fibre all the way to 93% of homes, delivering 100 Mbps download speeds, while the rest of the country would get a minimum of 12 Mbps via wireless or satellite. The rollout would take eight years, starting in 2010. There were some key design parameters that remain today. The NBN would be majority publicly owned, but intended for privatisation within five years after completion. The network would be wholesale only, with access open to all retailers on equal terms. Wholesale pricing would be uniform, for city and bush.

No one, perhaps, was more stunned than Telstra’s then chief executive, Sol Trujillo, who watched the company’s shares drop in value by $2 billion as the market judged the behemoth to have been outmanoeuvred. Telstra had been slugging it out with the ACCC and the Howard government since Trujillo took over in 2005. That year, it had proposed to build its own FTTN network, covering 55% of the country, at no cost to taxpayers, so long as the ACCC allowed it to dictate terms to rivals wanting to resell broadband over Telstra’s infrastructure. In a loud PR flurry, Telstra dumped the plan in late 2006 after failing to reach an agreement about the price of access. Current ACCC chairman Rod Sims wasn’t there at the time but he defends the position taken back then: “If you think you’ve got concerns now about NBN affordability, imagine if Telstra had been allowed to get the rate of return it was asking for. [Telstra] just wanted to be able to charge whatever they wanted.” Sims says Telstra has fought against competition “every step of the way”. Telstra might have been able to build the NBN more cheaply than the government, he says, “but would that’ve been passed on to consumers? No way. No way.” So in 2009, when a new and potentially even less friendly federal government proposed to bypass Telstra’s infrastructure completely if necessary, Telstra was forced suddenly to contemplate being the owner only of a superseded copper network – even in 2003 the company’s regulatory chief, Tony Warren, had told a parliamentary inquiry it was “five minutes to midnight” for the 100-year-old legacy asset.

If Labor’s NBN was born of a crisis, in many ways that was situation normal in Australia’s telecommunications warzone. As one former adviser to the government puts it, this country has been “fucking up telco policy for 40 years”. The Fraser government’s launch of Aussat in 1979, which the Hawke government backed, blew $700 million in taxpayer funds before it was sold to Optus, seeding a new telco. The Keating government’s 1992 merger of the Overseas Telecommunications Commission and Telecom created the behemoth that became Telstra, and there followed the debacle of Telstra’s and Optus’ dual pay-TV rollout, which utilised thick fibre-and-copper Hybrid Fibre Coaxial (HFC) cables. Many of the wealthiest neighbourhoods in our major capitals are still copping the overhead eyesore, and those HFC cables are the reason most of them won’t ever get FTTP. This fiasco was compounded by Howard’s three-stage privatisation of Telstra, which allowed the company to hold the country’s telecommunications infrastructure to ransom.

Rudd’s NBN was meant to swiftly solve decades of policy dysfunction. On day one, the then Opposition leader, Malcolm Turnbull, was sceptical. Turnbull was no engineer, but he’d had decades of experience advising media and telco clients as a merchant banker, and had made a fortune out of pioneering dotcom OzEmail. In a vintage press conference, Turnbull described the NBN as a “very, very risky venture” and recalled his experience as a director of a Telstra-connected company called Reach, which joined in a headlong rush to invest in undersea cabling in the 1990s. The industry lost billions due to overly bullish demand forecasts, and Turnbull feared the NBN could go the same way. “If we end up building, for $43 or $50 billion, a fibre-to-the-household network that ends up being worth $10 or $20 billion or $5 billion, that is a gigantic loss to the taxpayer,” Turnbull said. Why was no other country building a government-owned broadband network, he asked. Maybe fibre would be superseded by wireless, by the time the NBN was rolled out in 2018? The whole of Telstra was worth only $25 billion, he said, and to make a 15% return on $43 billion the NBN would have to earn $6 billion a year – which was one-and-a-half times Telstra’s latest annual profit. Then Turnbull put his finger on the core problem that is arguably only now, eight years later, staring us in the face: how many households would be prepared to pay a premium for a 100 Mbps+ internet service, as against, say, 25 Mbps? “If, as the industry analysts say, if this would require households who are currently paying, say, between $40 and $50 a month for broadband to pay $150 a month for broadband, where is the evidence that households will do that?” Turnbull had a point, and today even staunch advocates of an all-fibre rollout concede that it is almost impossible for the government to make an immediate commercial return on tens of billions of dollars of investment in brand-new infrastructure, while charging the same prices consumers are used to paying for broadband delivered over a legacy copper network that was fully depreciated decades ago. David Spence, chairman of junior telco Vocus, which sells fibre connections to businesses, goes back a long way with Turnbull, having been a co-investor and operations chief at OzEmail. Spence says Australians’ willingness to pay has hardly changed in 20 years. “The sweet spot is somewhere between $49 and $69 a month.”

So, the philosophical positions were marked out on day one. The debate would play out on traditional party lines: left versus right, big government versus small. Labor would argue the NBN was 21st-century nation-building, a necessary government intervention to correct market failure. The Coalition would argue it was a white elephant – exorbitantly expensive and totally uncommercial. Turnbull was toppled by Tony Abbott, but returned to the frontbench as shadow communications minister after the 2010 election, which the NBN helped tip Labor’s way – both in the poll and in the subsequent negotiations to form a minority government. Tasked with demolishing if not the NBN itself then the arguments for the NBN, Turnbull went at it with relish, and maximum mileage was made of every cost increase and delay the NBN encountered.

Labor was keen to get Telstra to the negotiating table, despite the government’s previous threat of going it alone. An FTTP network would be much quicker and cheaper to build if the NBN had access to Telstra’s network of exchanges, tunnels, manholes, pits and ducts. The government didn’t want to compete with Telstra; it wanted Telstra to vacate the field. Conroy drafted (what Telstra still calls) “gun to the head” legislation, which would bar Telstra from access to the 4G spectrum for its mobile network unless it voluntarily agreed to a “structural separation”, splitting its retail and wholesale businesses. Under the final deal, the NBN would make a series of payments to Telstra totalling $11 billion: first, ongoing payments for access to the exchanges and the duct network over the 30-plus years of the agreement (worth $5 billion); second, one-off disconnection payments per customer transferred over to the NBN from Telstra’s copper and HFC networks, which would be decommissioned ($4 billion); and a sundries payment, including extra funding to meet Telstra’s universal service obligation ($2 billion).

The final Telstra deal, ratified in October 2011, and quickly followed by an $800 million agreement to decommission Optus’ HFC network, saved billions in construction costs, but it had taken a year longer than expected to implement. So the NBN’s first three-year corporate plan, which factored in the deal and included detailed targets, timelines and dollar figures, predicted the whole project would only cost $41 billion and generate a 7% return, but would take until 2020 to finish. Not surprisingly, Turnbull was relentless in holding the NBN to every figure. The government still says that under Labor the NBN missed every target it set itself. That’s true, but not by much. It was like complaining a baby’s first steps are a bit slow. Were the missed targets in a rollout schedule that was not even 5% complete really such a big deal? Meanwhile, substantial work was underway, such as building the 57,000-kilometre fibre-optic transit network, the spine of the NBN that carries long-haul traffic today. Ditto the NBN’s satellite and fixed-wireless programs, now up and running. The NBN company grew quickly, soon employing 3000 people. Turnbull described it as bloated at the time, but the NBN now employs 5000. Two years later, when the NBN produced an updated corporate plan for 2012–15, the changes were incremental, not fundamental. The total cost went back up slightly, to $44 billion. Turnbull screamed blue murder, decrying the “massive revisions” and describing the new forecasts as “not credible”.

Apart from the delays caused by the Telstra deal, the NBN did suffer two key setbacks. First, its preferred network architecture was kyboshed by the ACCC, which ruled that the NBN had to build 121 “points of interconnect” to the network, rather than its preferred 14, so as to avoid disrupting the existing competitive market for so-called backhaul, carrying aggregated traffic between the exchange and the retailers’ servers. The decision, which Conroy called “a shocker”, imposed higher costs on both the NBN and retailers, who have since embarked on a string of mergers – TPG buying iiNet; Vocus buying Amcom, M2 and Nextgen – to compete at scale.

A second setback came in mid 2013, when an NBN subcontractor working in one of Telstra’s pits in western Sydney upset residents by mishandling some asbestos. Work stopped around the country as Telstra announced a national audit of asbestos-handling on NBN jobs – the definitive agreements put the remediation responsibility squarely on the telco. It took months to sort out, and by the 2013 election contractors in four states had downed tools.

Neither of these setbacks was fatal, and yet the government today insists glibly the NBN was a “failed project” under Labor. By 2013 the middle ground in Australian politics was collapsing, with Opposition leader Tony Abbott attacking the NBN as “school halls on steroids”. The debate turned increasingly nasty. A disgraceful smear campaign implicated the then NBN chief executive Mike Quigley: some years ago while he was worldwide CEO and US president of French giant Alcatel-Lucent, a corruption scandal rocked its Latin American division. Quigley, who had nothing to do with it, was never even interviewed by investigators: he was told he was “not of interest”. Though he denied his involvement publicly over and over again – in the media, in brutal estimates hearings – Quigley could never stop the innuendo, until he finally quit after four years in July 2013, two months out from an election Labor was never going to win. Thereafter, says Quigley now, “I never heard anything more about it”. For Turnbull, it was mission accomplished.

Meanwhile, Turnbull had set to work on an alternative policy, which was launched in April 2013. The Coalition could not abandon the popular NBN altogether. A compromise position was hammered out, and there were winners and losers. Anyone already served by FTTP under Labor’s plan – some 22% of premises – won the lottery. Another 71% of homes and businesses would get the cheaper FTTN connections. That number included use of the Telstra and Optus HFC cables, wherever possible. The final 7% of rural and regional customers, as under Labor’s plan, would be served by fixed wireless or satellite. Turnbull’s “Multi Technology Mix” (MTM) version of the NBN would cost $29.5 billion, and the whole thing would be finished by 2019. This less-inspiring policy was made more palatable by his insistence that Labor’s full-fibre NBN was “likely” to cost a stupendous $94 billion, and not be finished until 2025. The assumptions used to generate these numbers, prepared without access to the NBN’s contractual agreements, were later revealed to be hopelessly flawed – it was pre-election puffery. But the Coalition’s core election promise was crystal clear: everyone in the nation would have access to broadband with download speeds of at least 25 Mbps by late 2016.

That core promise was toast within weeks of the Coalition’s election win. One of Turnbull’s first acts as communications minister was to turn over the whole NBN board. A new chair, former Telstra chief Ziggy Switkowski, was appointed, and one of Turnbull’s mates, former Telstra executive JB Rousselot – who happened to co-own a yacht with the minister – was hired as the NBN’s network operations chief. A strategic review by the NBN reported in December that there was no way the government could deliver its MTM version of the NBN by 2016. It was going to take two years longer, and cost $41 billion, not $29.5 billion. Once again the MTM model was made more palatable with a new, alarming estimate of the cost of Labor’s NBN: up to $73 billion. In hindsight it was a textbook example of election promise breaking: do it quickly, and cleanly, after an arms-length review. Turnbull got away with it.

In April 2014 the NBN got its new chief executive: engineer and former Vodafone Australia boss Bill Morrow. He has been implementing an unloved MTM policy ever since. Morrow is now the nation’s highest-paid public servant, earning $3.6 million last year, and his schtick is to steer clear of the politics. “I don’t care, honestly, about what the policy is,” he tells the Monthly. “Tell me to go left, I’ll go left. Tell me to go right, I’ll go right.” Which is convenient, as the task has proved much more difficult than the government expected.

Morrow’s first problem was renegotiating the definitive agreement with Telstra. This time around, the government had no leverage, no gun to point. In fact, the NBN was over a barrel, needing to use Telstra’s legacy infrastructure, and in a hurry. Under the new deal, Telstra received extra payments for designing the MTM network and for maintenance of the copper lines (which were going to be retired under the old plan). It would also be paid for remediating asbestos in its pits. The new deal was described as being “in line with” the $11 billion deal done three years earlier – but in a moment of candour talking to analysts, the then Telstra chief, David Thodey, admitted the second agreement was “unquestionably better” for shareholders. Soon, the media were reporting estimates that over the maximum life of the deal Telstra would receive a staggering $98 billion from the NBN, mostly in lease payments, assuming Telstra exercised options to extend it out to 2067. Telstra’s Tony Warren, who negotiated the new deal, warns that such 55-year estimates in nominal pre-tax dollar terms are highly problematic. “It’s not a number that’s backed by reality. This idea, that we’ve walked away like bandits, fundamentally misunderstands the economics.” The difference between the first and second agreements is “incremental”, he says. Telstra calculates, and financial analysts accept, that once the NBN is built the telco will be $2–3 billion a year worse off, in annual earnings, forever, even after all the disconnection, leasing and other payments are taken into account. Market commentary around Telstra’s most recent financial results highlighted the negative impact of the NBN on Telstra’s profit margins, and gradual loss of its dominant market share.

Morrow’s second, bigger, problem was the FTTN technology. Unlike passive fibre-optic cable, the nodes require power, which is expensive to install and operate. Negotiating electricity supply took time. In early 2015 one of the NBN’s directors, Simon Hackett, told a conference that the technology “sucks” and if he could wave a wand he’d replace it. When the first FTTN rollout was finally completed later that year in sleepy Belmont, a retirement haven south of Newcastle, there was uproar. Internet retailers had drastically underestimated how much capacity they would need, rendering the new service in many cases unusable, and much slower than the pre-existing ADSL connections. Complaints spiked as half a million homes in the region went onto FTTN, and the Newcastle Herald had a field day. The NBN scrambled to fix up the mess, and apologised. A year later, the NBN says these were teething troubles and the issues have been ironed out.

But by August 2015, the Coalition’s attacks on Labor’s cost blowouts were backfiring. Announcing its full-year results, the NBN admitted the MTM would now cost $46–56 billion. It would not be finished until 2020, and chairman Switkowski later admitted even that would require a “heroic” effort. This was a crushing blow to Turnbull’s NBN: after all, the only virtue of the technically inferior MTM had been that it would be cheaper and arrive sooner. Labor described it as “Malcolm Turnbull’s Mess”. Turnbull, secretly days away from toppling Abbott, tacitly conceded that the 2013 strategic review had been a rushed exercise and again offered a distraction: at the request of the government, the NBN had prepared yet another “counterfactual” scenario, calculating that Labor’s NBN would have cost up to $84 billion, and taken six to eight years longer to complete. This has become a mantra for the government, repeated ad nauseam. It is thoroughly misleading. As would be revealed in Senate Estimates later, a key qualification was lost in the fine print: the NBN had calculated what it would cost to abandon the MTM part way through and revert to an FTTP rollout. It had not costed the completion of Labor’s original NBN at all. It had not been asked to.

After two years biting his tongue as the NBN wrangled with copper and HFC, former NBN chief Mike Quigley could contain himself no more. In a rigorous written analysis of the NBN’s figures, he showed conclusively that recent cost blowouts were almost entirely attributable to unanticipated problems with the MTM, such as IT expenses relating to integrating legacy networks and powering the nodes. Most importantly, Quigley argued that FTTP costs were falling around the world as more telcos adopted the technology. Earlier that year, American giant AT&T, held up as a model in the Coalition’s original policy, declared that fibre-to-the-node was no longer capable of delivering adequate speeds and it would switch over to fibre-to-the-premises (although cynics have dissed it as an example of “fibre-to-the-press release”). Likewise, New Zealand’s private, wholesale-only telecommunications infrastructure provider Chorus, building most of the country’s publicly owned broadband network, switched from FTTN to FTTP, and has since brought the cost of its rollout down, dramatically. While in some countries such as the United Kingdom and Germany FTTN continues to roll out, surveys show that the fastest growth worldwide by far is in FTTP connections, particularly in Asia. The rest of the world is moving to fibre: at an optical networking conference in Los Angeles last month, University of Melbourne professor Rod Tucker, who was a member of Labor’s original expert panel, heard that the total number of FTTP connections worldwide now exceeds any other technology, including ADSL, with 300 million users on fibre. US telco Verizon, which has abandoned FTTN, reported a 50% reduction in the cost of fibre deployment over the past 10 years.

What would Labor’s NBN have cost? Quigley argued, and insists to this day, that the original NBN would’ve been built for the $44 billion estimated in his last corporate plan, as the NBN would have progressively reduced the cost of installing FTTP as technology improved and the rollout scaled up. In late 2014, leaked results of a trial of an improved “skinny fibre” in the Melbourne suburb of Melton showed the NBN rollout getting much cheaper and faster. Earlier this year Bill Morrow confirmed to Senate Estimates that the NBN had “perfected” the skinny-fibre rollout. Strangely, however, the company’s reported FTTP rollout costs never fell. Morrow told the Monthly that if the existing-premises fibre rollout had continued, costs may have fallen further – but not so far as to be competitive with FTTN. The possibility of a genuine counterfactual is disappearing in the rear-view mirror.

Quigley’s analysis was borne out by a string of devastating NBN leaks in late 2015 that undermined the case for MTM even further, and severely embarrassed the government. They revealed that the NBN was considering abandoning its upgrade of the Optus HFC network, which was so degraded it was not fit for purpose; and that the remediation cost of Telstra’s copper had blown out ten times, from $55 million to $640 million. Leaks continued into April 2016, and by then the country was headed for a July election.

Just when you think Australian politics can’t sink any lower, it does. The NBN had referred the leaks to the Australian Federal Police back in December. Suddenly, on 19 May, in the first week of the election campaign, the AFP raided the Melbourne offices of Stephen Conroy and the home of one of his staffers, seizing files, computers and phones. All hell broke loose: Opposition leader Bill Shorten effectively accused the government of orchestrating the raids. The AFP denied the government had any prior warning of the raids, or that any political pressure had been brought to bear. Conroy claimed parliamentary privilege over the material seized, which was duly placed into “audit bags”, for consideration by the clerk of the Senate. However, the AFP was accompanied by an NBN officer, who took photographs of key documents and transmitted them back to the company. The NBN subsequently promised to destroy the documents, but it had what it wanted and within days of the raids two of its employees were dismissed, apparently because they had been fingered as the source of the leaks. The saga continued after the election, with the AFP storming Parliament House to raid Labor’s offices. The Senate Privileges Committee is still to produce a final report.

Out in the real world, up to the last election, the NBN rollout had only covered some 20% of Australian homes, mostly served by fibre, fixed wireless or satellite under Labor’s original plan. But apart from the furore over the AFP raids, the NBN barely figured as a campaign issue, and what has since sunk in is that the election was the last chance to fix Turnbull’s MTM version of the NBN and switch back to a predominantly fibre rollout. By the time the next election comes around, the NBN will be 75% built and the remaining 25% will be under design or construction. Labor now is in an invidious position, with an ever-sharper critique of the government’s NBN, but no real ability to propose an alternative.

The NBN, simply, is cooked.

For a time, much hope rested on the emerging compromise known as “fibre-to-the-distribution-point” or “fibre-to-the-curb” (FTTC), which all sides of the debate acknowledge has real potential. FTTC brings fibre all the way to the pit outside the home, leaving only a short length of copper to cross, meaning speeds of more than 100 Mbps should be possible using new technologies – with the potential for upgrades, including to FTTP. FTTC should be much cheaper to roll out and operate than FTTN because it uses reverse power, from the home itself, as telephones once did. As with FTTN, installers do not need to access people’s homes or dig up driveways. Bill Morrow put the option of an accelerated FTTC rollout to the NBN board in 2015, but the directors opted for further trials. While Morrow remains excited about its potential, FTTC will not arrive in time for the vast bulk of suburbs slated to receive FTTN. Internet Australia, a not-for-profit organisation that represents a broad cross-section of internet users (that is, everyone), has been calling for FTTN to be replaced by FTTC. Laurie Patton, until very recently the organisation’s chief executive, says that “nearly half the population will be stuck with inferior technology” unless the switch is made soon. To make matters worse, “as they move closer to completion, they’re likely to find the copper unserviceable”. What’s more, “all those cabinets [nodes] and the expensive electronics inside them, with their bespoke power supplies, will be redundant”.

Doubts also surround the HFC rollout, which has been left until last because the NBN was required to prioritise under-served areas, with inadequate broadband. HFC is the predominant fast broadband technology in the US, for example, and enormous investment is going into improving its capacity. Once upgraded by Telstra, which has the $1.6 billion upgrade contract from the NBN, the HFC cables should have gigabit-plus capability. Last November, however, the NBN finally confirmed what previous management had concluded years earlier, and what the controversial leaks had already flagged: the Optus HFC network was not fit for purpose. The NBN, which had wasted many months and millions of dollars planning to upgrade it, announced some 700,000 homes would get FTTC instead. Last month Fairfax Media reported that Optus was using heavy-handed tactics, cutting off customers or coercing them into new NBN contracts, as it rushed to shut down its dilapidated HFC network.

In round numbers, by the end of the rollout of 12 million premises to be connected, 2 million will be on FTTP, 3 million will be on Telstra’s HFC, 1 million will be on wireless or satellite, leaving the remaining 6 million split between FTTN (about 4 million), fibre to the basement of apartment buildings and fibre to the curb (ballpark, a million each). Morrow says that will put Australia in a leadership position globally, shooting back up the rankings, with almost half the country (FTTP, HFC and FTTC) on gigabit-plus services. But what about the other half? As Morrow confirmed in Senate Estimates in February, the NBN has no plans, and no budget, to upgrade those 4 million-odd homes on FTTN, between now and 2040. Any upgrade for them depends on a business case emerging (based on higher willingness to pay) that will justify further investment.

It is hard to see where that money might come from, given the government last year had to lend the NBN $19.5 billion to complete the project after a plan to borrow the money privately was shelved. (Industry sources say the NBN was not bankable but the government will not confirm whether soundings were taken with potential lenders. Strong indicative credit ratings were received.) Unless, Morrow says, the government decides to put more money in: “Maybe the government says, ‘You know, maybe I want to put together a digital stimulus package and I want to be able to make broadband more affordable … to generate secondary and tertiary benefits to the economy and to the social welfare of Australians.’ That’s possible.”

At its present rate, the NBN will struggle to generate much excess revenue itself. The profitability of the NBN is far from assured, and the numbers are hair-raising. As you’d expect, halfway through the rollout, the NBN still is heavily cashflow-negative. The second half of last year, for example, saw another $1 billion in net cash outflow, on top of $2.8 billion in fresh capital spending. The NBN predicts it can lift annual revenues roughly fivefold by 2020, to $5 billion. Which brings us back to the NBN’s dreaded “Connectivity Virtual Circuit” (CVC) charge, the wholesale price per megabit that the NBN charges to retailers, currently $15.25 per megabit and falling. The volume-based CVC is accompanied by a fixed monthly “Access Virtual Circuit” (AVC) charge to connect to the NBN, which is between $24 per month for a 12 Mbps connection and $38 a month for 100 Mbps. Created under Labor, the pricing structure was designed to ensure that a basic, low-cost service could be provided for pensioners, whose landlines were going to be disconnected, and who would be subsidised by higher-volume users. But the socially equitable policy put more pressure on the NBN to raise revenue through CVC charges. The CVC plus AVC charges add up to the NBN’s average revenue per user, now at $43 a month and set to rise to $52 by 2020. That revenue jump will be difficult to achieve if consumers continue to choose lower-speed plans – and currently 80% are on 12–25 Mbps tiers. Crucially, a gap is opening up: homes with FTTP connections are proving more willing to take up higher-speed plans than homes with FTTN, and if the trend continues it could translate into a significant and growing revenue shortfall. NBN has tweaked its pricing model, trying to reduce CVC costs to below $10 per megabit, banking on a big increase in traffic volumes, but given that it is also forecasting rising average revenues per user, it has little room to move. Retailers are getting squeezed, and the most recent spate of financial results showed that the NBN is starting to erode telco earnings across the board, and that will continue, with the stage set for more competition as players such as Vodafone, Amaysim and MyRepublic move into the broadband market. The response of retailers with legacy margins to protect has been to cut costs and order as little CVC as they can get away with. This practice, known as “under-dimensioning”, effectively pits users against each other and nobbles speeds at peak times. Vocus chief Geoff Horth argues that Australia should shift from volume-based wholesale pricing to more fixed pricing, like New Zealand, which he says is “a decade ahead” of us. “The vast majority of the network costs are fixed, so why isn’t it that the vast majority of the costs to [retailers] are fixed? Unless there is a fundamental change to the pricing model where CVC is a small part of the total cost, there is a risk that resellers will not ‘open up the pipes’.”

ACCC chairman Rod Sims tells the Monthly the retailers have a vested interest in talking down wholesale prices, the NBN is moving in the right direction on pricing, and it is too early to tell what is driving consumer complaints about the network. The ACCC has flagged a crackdown on retailers’ broadband speed claims, and is seeking government support for a performance and monitoring program. “If we’re going to spend $50 billion or whatever it is on this thing,” says Sims, “then it’s vital that consumers know whether it’s working as expected, or whether it’s the [retailers] who aren’t provisioning enough. We don’t know that now.”

Part of what the NBN is up against here, according to former chief Mike Quigley, is the idea that everything on the internet should be free. Just as consumers expect information for nothing, he says, “likewise there is an expectation that transmission capacity should be always getting cheaper”. He adds, “Turnbull fostered that view by constantly saying, ‘This should be cheaper, because prices always go down in telecoms.’ Well, prices have been going down because we have been riding on the back of investments that were made decades ago, when the copper network was first built, and that original investment wasn’t cheap. If you want to build a piece of new infrastructure, that will last for the next five, six, ten decades – which is at least how long a fibre network would last – somehow it has to be paid for. If the NBN is never allowed to increase the average revenue per user, even when delivering progressively faster speeds and more capacity, then they’re going to have to write it off.

“What we came up with was a scheme that would provide a much better service for the same price as ADSL2+ … The government was only trying to get a relatively low return on the taxpayers’ investment, not trying to maximise profits as a commercial entity should rightly try to do.”

With the NBN’s earnings prospects so uncertain, putting a value on the network is a problematic exercise: in a report for Infrastructure Australia last year, accountants PwC used a generally accepted multiple of six times forecast earnings ($5 billion a year), and concluded that the NBN was worth roughly $27 billion, or half its total cost to the taxpayer. This was not a valuation, the NBN responded sniffily.

At the end of last year, business commentator Alan Kohler did some back-of-the-envelope calculations to arrive at a figure in the order of $20 billion, or two thirds of the $30 billion of equity taxpayers have stuck into the NBN, on top of the $20 billion in government loans that will be repaid. Once a passionate NBN supporter, Kohler issued a stunning mea culpa, declaring the NBN was a dud and urging the government to book a writedown fast, in the next few years: “The sooner the Turnbull government does this, the better to blame Labor; the more they wait, the more the Coalition owns the debacle.”

A writedown is obviously an issue for the NBN board, subject to the public sector accounting rules, and would not be taken at the discretion of the government. Communications minister Mitch Fifield declined to speak with the Monthly for this story, but NBN chief executive Bill Morrow cautioned that as the NBN’s earnings are forecast to increase, and as it pays back its debt, the value of the company is expected to go up, not down. The NBN’s directors would have to take the view there was no future value in the assets, says Morrow, and “right now I don’t see how the board of directors would agree to a writedown”. In any case, he says, a writedown may not solve the CVC problem anyway, because the return to the government is based on cashflows, not book values. “The simplicity of saying, ‘Yeah, let’s try to write it down, so we can lower the cost or the price that we charge the retailers,’ just isn’t there.”

A major writedown would certainly make it easier to privatise the NBN, via a full or partial sell-down to institutional or trade buyers, but would be a big hit to taxpayers. Paul Budde argues it is inevitable, and says this is not an indictment of the MTM, because exactly the same problem would “absolutely” have emerged under Labor’s original plan. Spending $50 billion on new infrastructure and expecting it to cover its own costs was always going to collide with consumers’ unwillingness to pay a premium for faster broadband.

Budde thinks even writing off $20 billion may be justifiable given the well-documented economic dividend from faster broadband in terms of innovation, jobs and productivity growth. The problem, though, is that “what you now get for the write-off is a dud. If you had fibre-to-the-home [FTTP] you would’ve had … a first class network.”

Budde argues consumers would be prepared to pay more for the “killer apps” that superfast broadband enables, such as the oft-touted eHealth, highlighting that the NBN is about much more than speed. Providers of eHealth will not deliver services such as telemonitoring, remote diagnostics and consultancy over the poor-quality, mixed-technology network we are building, Budde says – they would be worried about getting sued, for a start. “That’s why you need fibre. Not to watch five Netflixes every night, but for a robust high-speed network, with low latency, with security and privacy.”

Another threat to the NBN, some say the biggest, is 5G wireless, capable of gigabit-plus speeds, which Telstra CEO Andrew Penn spruiked at this year’s Mobile World Congress in Barcelona. Wireless is more expensive to deliver than fixed broadband, but Telstra is careful to stress the two technologies are complements, not substitutes. “Even though 4G and 5G are wonderful technologies for mobility,” Telstra’s Tony Warren says, “they simply can’t compete with the availability of spectrum that sits inside fibre or inside copper or the HFC.” It’s a different story, however, if the MTM network fails to deliver fast enough broadband, or a flawed pricing model means services are artificially restricted.

Although it is supported by both the Coalition and Labor, an eventual NBN privatisation will also be contentious, to say the least, and any buyer will want much higher returns than the government is making now. The ACCC’s Rod Sims fully supports an eventual sale in principle, and even a break-up of it will help competition. Pundits like Kohler and Budde expect Telstra will wind up buying the network. But in case anyone is silly enough to believe, given the fraught history of telco regulation in this country, that the ACCC will wave a sale through, Sims puts a stake in the ground: “We, of course, are required to look at every merger on its merits, and we’ll do that. But as I sit here now, I can’t see the circumstances that would occur that would see us allowing any of Telstra, Optus, Vocus or TPG to buy NBN, were it to be sold … I’m being emphatic in saying I don’t see how we’d let any of the four buy it, much less Telstra, which of course would be the hardest one to get out. Once the thing is built, I’d be very happy for NBN to be privatised. But you’ve got to do it with appropriate regulation and with appropriate reference to competition. It would be a tragedy for the nation if NBN was sold with government wanting to maximise the proceeds and damaging competition or with inadequate regulation.”           

For now, and until the rollout is finished at the end of the decade, the NBN, and the government of the day, and Telstra, and the retailers, may just have to muddle through under the current plan until someone, somehow, comes up with more money to upgrade it. The Greens’ communications spokesman and co-deputy leader, Scott Ludlam, has followed the NBN saga from the beginning, through every interminable estimates and select committee hearing. Asked to sum up the state of the NBN, he is blunt. “It’s a clusterfuck.” Ludlam says that, while Bill Morrow is putting a brave face on the rollout, the MTM is a mess, and well-informed industry experts and economists are questioning not only what the network would be worth but also at what point it will be necessary to start overbuilding it. “They’re building a network that isn’t scalable,” says Ludlam. “They’re building bottlenecks into it, which they’re going to hit much sooner – I suspect a lot of their engineers know it. They’re certainly going to hit these bottlenecks much sooner than the politicians directing it are aware of.” In Senate Estimates at the end of February, Morrow appeared ashen-faced when Ludlam, who lives in North Fremantle and was dubbed the “senator for the internet”, flagged that he was slated for FTTN. “So I am in the 50% of people who you are going to be hearing a fair bit more from.”

After weeks of frustration, Adam in Healesville spoke to a neighbour, who was with Telstra on a 25 Mbps plan. They compared speeds often, texting at night, and worked out that when Adam was getting 3 Mbps his neighbour was getting 25 Mbps. Increasingly angry, Adam emailed his internet retailer again and again, demanding tobe let out of his 18-month contract. At first they wanted tocharge him a $330 break fee. When he threatened to go to the ombudsman they cut him loose, and Adam ordered a 50 Mbps plan from Telstra, costing $90 a month, which he is now waiting for. It’s been a saga. “I’d read a bit about NBN and I expected a difficult transition. I never thought it’d be this bad, and I don’t think I’m out of the woods yet.” Adam doesn’t care whether he gets fibre to the node or fibre all the way to his home. “They can put the fibre up my arse for all I care. I just want fast internet.”

Paddy Manning

Paddy Manning is contributing editor at The Monthly and the author of Inside the Greens and Body Count.

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