13.04.09 Coalition NBN Options Comms Day April 2013


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Justin Jameson, CEO of Venture Consulting, and Michael Reede, Partner at Allen & Overy, discuss the Coalition's NBN policy options should they win the 2013 Australian Federal election at the April 2013 Comms Day conference in Sydney.

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13.04.09 Coalition NBN Options Comms Day April 2013

  1. 1. NBN Options for a CoalitionGovernment April, 2013 © Venture Consulting 2013
  2. 2. NBN Options for a Coalition Government Objectives and the criteria to be met Option The Coalition’s Policy Objective Telstra’s Objective Objectives To build a faster and cheaper NBN using a To maximise their shareholder value by more efficient mix of technologies, in a maintaining their current NBN contract manner that delivers a competitive market value, but should be prepared to renegotiate structure with greater involvement from the within this envelope. private sector Practicality: How complex to implement Policy fit: Will the option deliver against and how constructive or obstructive are the Coalition’s stated policy goals? the key stakeholders likely to be? Detailed Criteria Solution to Optimise Carriers are Solving for Maintaining Solving the National Structural mass- existing part of the market the benefits ‘off budget’ solution Separation market assets solution failure of NBN Co status Maintaining Comp- Resolving A clear the value of Outcomes Private Trans- etitive NBN / Role of cost/benefit the Telstra not sector parency market mobile NBN Co analysis and Optus technology capital structure operators agreements1
  3. 3. NBN Options for a Coalition Government Mandate technology or outcomes Labor’s Policy Objectives Coalition’s Policy Objectives The central tenets of the Coalition’s views on NBN policy Fast broadband for all from opposition may be summarised as: Australians Re-evaluating the need for Cost benefit analysis the building of two new National uniformity of satellites broadband prices Re-evaluating the boundary Structural separation of Focus on FTTN over FTTP between the fixed-wireless Telstra and fibre Technology proscribed: 93% FTTP, 4% fixed wireless and Use of existing assets – such Greater involvement of 3% satellite as HFC industry Arguably the first three of these principles are no longer at issue between Labor and the Coalition. The fourth principle most certainly is.2
  4. 4. NBN Options for a Coalition Government Stop Press - Coalition Technology Mix Coalition’s Broadband Plan vs Labor’s NBN •  The Coalition claims that its NBN Labor Coalition requires $20.4bn in capital -39% expenditure and peak funding of -33% $62 $29.5bn, $14.6bn less than the -45% $44.1bn in peak funding needed for $44.1bn Labors $37.4bn NBN $37.4bn $38 $29.5bn $20.4bn •  In addition, the Coalition also claims that its version of NBN could save $750 million in interest costs from the budget by 2015-16 CAPEX Funding Requirement Estimated 2021 Wholesale Price / Mth •  The Coalition expects most homes could achieve speeds of about Policy 50Mbps through a FTTN rollout, Coalition Labor Comparison with those farthest away from the 71% FTTN (underserved focus node experiencing speeds of about retain initial HFC) + 22% FTTP 25Mbps Primarily (current build, new estates, 93% FTTP + 4% wireless and Technology user pays, co funded and bad 3% satellite •  NBN Co will proceed with its copper) + 4% wireless and 3% existing satellite and fixed wireless satellite networks serving the most remote 7% of premises All to have access to at least Target 93% of homes to get speeds of 25 mbps by 2016, rising to at Outcome 100 mbps by 2021 least 50 mbps by 20193 Source: AFR, Whitepaper: The Coalition’s Plan for Fast Broadband for an Affordable NBN
  5. 5. Stop Press: Coalition Policy Announcement – Some of these issues addressed •  Coalition focus this morning was almost 100% on technology choices and on costs •  Big focus on the unsustainability of NBNCo’s economics, first raised by us and others three years ago •  The policy has been purposely kept simple – the reality will be more complex •  60 Day Strategy Review leaves all options open •  All costings ‘prepared in good faith but conditional on a full disclosure of NBNCo’s contractual obligations and finances…’ – so the door is left open here as well •  Huge Telstra dependency remains, despite clear efforts to downplay it •  Industry players have been invited to propose ways they can participate in the wireless and satellite deployments – we think this will lead to transactions / deals •  Coalition wants HFC opened up to competition – but Telstra and Optus positions on this unclear. The Optus deal is expected to remain in place4
  6. 6. NBN Options for a Coalition Government By the 2013 Election, only ~13% of households will be in fibre access areas, implying significant scope for modifying the NBN •  The Coalition will not undo work that Households in areas where fibre build will be has been contracted or completed. completed or commenced (August 2012) •  An overlay of Census data with NBN 6,338,594 Active FSAMs Co’s own figures shows that, by the FSAMs Under Construction time of the 2013 Federal Election, FSAMs on One Year Schedule approximately 13% of households FSAMs on Three Year Schedule will be in areas where construction Cumulative (ncluding Overlap of Areas) has either completed or commenced 3,673,025 •  This falls well short of the 20% 2,330,899 2,168,352 threshold at which Telstra has been promised significant further 1,349,288 payments should the FTTP network be wound back. 791,808 471,573 180,204 25,644 •  If the Coalition is elected there will 9,599 still be significant scope for it to Households in NBN Footprint Persons in NBN Footprint scale back or modify the NBN FTTP programme. Source: NBN Co and 2011 Census, Analysis completed by Market Clarity based on NBN Co data as of 1 August 20125
  7. 7. NBN Options for a Coalition Government Stop Press - Coalition Timeline The timeline for an incoming Coalition Government 1 2 3 4 Before the The first 6 Now Next Federal Election months Announce Formal Determine Optimal Conduct independent Implementation of NBN Policy NBN Response Reviews the New NBN policy •  A policy •  Telstra engaged •  60 day strategy •  Determine the announcement review optimal NBN today – 9 April •  Industry engaged technology mix to be •  Independent audit implemented into broadband policy •  Electorate engaged and NBNCo’s •  Options for private governance sector investment •  6 month independent cost benefit analysis and review of regulation6
  8. 8. NBN Options for a Coalition Government The Coalition could attract private sector participation to reduce the strain on public sector financing Infrastructure Investors •  Significant capital available globally for infrastructure assets with a stable long term yield that matches the return profile •  The relevant investors are sovereign wealth funds, specialist infrastructure funds and pension funds •  Carriers unlikely to object to financial investors under the right regulatory conditions Network build and management An eventual IPO contracts •  There are other models that could be Private pursued to use private sector financing Carrier as •  The Government could consider for a metropolitan NBN model. tendering NBN Co responsibilities out to Sector Investor •  However, these options would require third parties. These management Participation even greater stability and project contracts could be issued on a Build maturity and would not be sensible in Operate Transfer (BOT) basis the short term •  This would reduce the size of NBN Co, hopefully allowing for greater efficiency Carriers as investors •  Not great “equity only appetite” and it would be problematic if any domestic carrier held a controlling position in any NBN entity •  Equity combined with an operating position may be different •  Potential for specific involvement in a regional wireless solution7
  9. 9. NBN Options for a Coalition Government Three potential phases to restructure the NBN Summary of Options 1. Renewed •  The existing NBN Co model is largely retained initially. NBN Co is Commonwealth NBN Co redirected to deploy a ‘technology efficient’ outcome employing a mix of FTTx, HFC, wireless and satellite based solutions NBN Co •  This option is available immediately and may be used as a means of National NBN preserving the best aspects of the current NBN Co while policy and Vehicle direction are reset 2. Metro and •  NBN Co could be split into a Metro Co and a Regional Co recognising the NBN Regional NBN metropolitan and regional NBN solutions will operate under fundamentally Co different economics and technologies Cos •  This model could be designed to optimise private sector participation that Metro Regional could be put to tender later in the Coalitions first term NBN Co NBN Co 3. Listed New •  A new national wholesale access entity could be listed on the ASX. This could be implemented on a standalone basis or through the demerger of NBN Co Net Co the Telstra customer access network assets •  This is unlikely to be an option until shortly before or after a 2016 Federal Telstra New Net Election. A Telstra demerger would depend on its shareholders and may Retail Co never occur : Source: Venture Consulting8
  10. 10. NBN Options for a Coalition Government Macro Option 1 – Renewed NBN Co Renewed NBN Co Structure (illustrative) •  The existing Commonwealth owned NBN Co model is largely retained initially Financial •  NBN Co is redirected to deploy Commonwealth Telstra/Optus a ‘technology efficient’ outcome Sponsors employing a mix of FTTx, HFC, wireless and satellite based solutions by renegotiating the Equity Equity Equity existing agreements with Potential Interest unlikely unlikely Telstra and Optus to include subsidy for long-term access to the deficit NBN Co existing copper sub-loop and network HFC networks National NBN Transfer or lease of Vehicle •  Telstra and/or Optus could hold copper and HFC networks equity in NBN Co to the extent they contribute their copper and HFC assets Metro FTTN, Regional Remote •  This option is available FTTP and HFC wireless and satellite immediately and may be used broadband FTTN networks coverage as a means of preserving the best aspects of the current NBN Co while policy and direction are reset9
  11. 11. NBN Options for a Coalition Government Macro Option 2 – Metro and Regional NBN Co Metro and Regional NBN Cos Structure (illustrative) •  This option recognises that the metropolitan and regional NBN solutions will operate under Commonwealth fundamentally different Transparent economics and technologies subsidy for 100% Equity deficit network •  The intention would be for the NBN Co metropolitan based business to •  GBE holding entity for Equity be attractive to private Equity Commonwealth interests in interest interest investors at an earlier stage, NBN while the regional business would require Government Transfer or lease of Regional NBN Co investment or a subsidy for a Metro NBN Co copper and HFC networks •  Wireless network longer period •  Metropolitan FTTN, FTTP •  Satellite interests and HFC •  Regional town FTTN •  Backhaul •  Alternatively the fixed wireless and/ or satellite networks may Equity Equity Interests? Interests? present investment or Equity Transfer of HFC management and operation Interests? Satellite Wireless opportunities for specific network? carriers at an earlier date Financial Potential Potential Optus Telstra Private Sector Private Sector •  This option could be pursued Sponsor BOT or after the Coalition’s review and Ownership or Management Management confirmation of the regulatory Contract Contract environment.10
  12. 12. NBN Options for a Coalition Government Macro Option 3 – Listed New Net Co Listed New Net Co Structure (illustrative) •  Create a new national wholesale access entity (Net Equity Commonwealth Co) that is listed on the ASX Interest Telstra Telstra Equity •  This could be implemented on Shareholders Shareholders Interest a standalone basis or through the demerger of the Telstra Equity Equity Interest Interest customer access network NBN Co assets and pooling them with •  To be merged into Net NBN Co assets in a newly ASX New Net Co Co listed entity in which Telstra Telstra Retail (ASX Listed) shareholders and the •  Telstra customer access (ASX Listed) networks (copper and Commonwealth hold shares •  All other Telstra assets Demerger HFC) and Commonwealth NBN assets •  Private capital (debt or equity) could also be sought (including Equity through a public capital raising Interest or institutional placement) New Shareholders •  This is unlikely to be a model that would be considered until (Capital Raising) shortly before or after a 2016 Federal Election11
  13. 13. NBN Options for a Coalition Government Logically sequential options NBN Options Sequential Relationship 1 2 3 Option 1 Option 2 Option 3 Renewed NBN Co Metro and Regional Listed New Net Co NBN Cos •  Option 1 is a good transition •  Option 2 could be implemented •  Option 3 may be attractive in model. It allows the momentum after that period of restructure the future when the capital of the existing NBN project to as the base model for the new market conditions are right and be retained while it redirects NBN policy and initial private the NBN business model is and restructures sector participation stable Indicative Timeline Potential Coalition first term 2016 election The first 12 months The next 12 months In the final 12 months or start of a second Option 3 would be after the election are the newly determined term tenders could be held for private sector unlikely to occur likely to be spent structure could be participation until close to or after undertaking a cost/ implemented within a 2016 election benefit review NBN Co12
  14. 14. NBN Options for a Coalition Government A successfully negotiated relationship with Telstra is integral to the success of any new Coalition NBN policy The current agreement is …a shift to FTTN and optimising use of the existing HFC designed for FTTP only… network does require change to the Telstra arrangements •  The existing agreements are focused on duct access in the local loop to lay fibre to premises, and access to Telstra’s copper sub loop below the node is not Coalition needs to bring Sub-loop countenanced. Telstra back to the table Access if it wishes to make any •  Instead of Telstra granting access to its ducts from substantive changes to node to customer premises, it must grant access to the current NBN its sub loop in order for the switch to FTTN happen arrangements Conceptually, Telstra will •  The current payments for the HFC networks are to not lose the current $11 restrict their use to pay television transmission billion dollar benefit as •  The Coalition wants them used for broadband Coalition will simply HFC change the form of that •  Coalition preference is to leave this to facilities Networks arrangement to enable based competition, but intervention may be required the adoption of •  NBN Co could acquire the Optus HFC network and alternative fibre upgrade it to provide broadband in its coverage solutions areas and leave the Telstra HFC arrangements in place13
  15. 15. Stop Press: Issues facing the Coalition following its policy release •  Substantiating its own figures •  Whether HFC based facilities based competition is feasible? •  How to engage with NBN Co ahead of the election? •  When to negotiate with Telstra and how to manage the process to a speedy conclusion without being seen to negotiate with Telstra and its shareholders? •  Timeline and structures for future private sector involvement?14
  16. 16. Contact informationVenture Consulting Allen & OverySydney SydneySuite 1904, Level 19 Level 25Chifley Tower 85 Castlereagh Street2 Chifley Place Sydney NSW, 2000Sydney NSW, 2000Telephone: +61 2 9279 0072 Direct: +61 2 9373 7731Facsimile: +61 2 9279 0551 Mobile: +61 419 223 636justin.jameson@ventureconsulting.com michael.reede@ventureconsulting.com