Monday, August 11, 2014

NBN, Turnbull and the Questions that aren't being asked

This Van Badham piece on the NBN inspired some comments from me:

  • Why doesn't the ABC report on the NBN?

Is it because it's not a government changing issue, still? No. Then what?

Ever since Media Watch crucified Nick Ross their coverage has been in decline.
Jake Sturmer was doing good work, then suddenly he's covering other things. Bewildering.

There are a good many FTTP issues that the public would respond overwhelming to that were never raised by Labor at the election run by krudd, nor by Conroy while still Comms Minister under Gillard.

There was a 3 month window before the election when there was still a chance in overcoming the Turnbull Plan.

I believe the “NBN Lite” proposition was never sound and deliberately incomplete and misleading.

The arguments are simple, compelling and easily explainable, but like Jess Hill and her recent work on Electricity Distribution, it may take a little work to understand the issues and how everything fits together.

  • The biggest lie ever told by Turnbull, and never refuted by Conroy/ALP, is spectacular and awe inspiring in its size and audacity.

“It’s cheaper to reuse existing assets”, Turnbull claimed, conflating the very different NBN Co project with “all the overseas Telcos are doing FTTN”. That's because they already own the assets and right-of-way, not like NBN Co, starting from scratch and against a massive, and at times, belligerent near-monopoly incumbent.

That seems to be a tautology, but is based in a massive lie:

  • NBN Co have no assets and never had, which is why they signed the Telstra deal.
  • There was NEVER anything to reuse, unless Turnbull nationalised Telstra’s assets.
  The cost of buying or leasing the Telstra assets was prohibitive. FTTN networks have only made sense since 2000, if, like Telstra, you already own the Copper Customer Access Network and especially since 2005 when Sol Trujillo presented a plan to save Telstra with an NBN. The company was in tail-spin because the landline/phone business started to collapse in 2000/1.

Turnbull always deliberately & knowingly pushed this radically incorrect view, The Big Lie:

  • Turnbull was in the Howard ministry that sold Telstra and all its assets, and in the words of the LNP’s Paul Fletcher, now assistant to Turnbull, “created a monster”. This was a very deliberate and calculated action by the Howard Government.
    • So why doesn't Turnbull and the Abbott Government take responsibility for the mess they created, individually and corporately?
  • The parlous outcome for the Australian Telecomms market was predictable and already known at the time. Howard et al were warned, very loudly and very publicly, that to ignore Sol and not fund an NBN would be a disaster for T3. And it was.
We’d had the Cable TV overbuild then $5+B write-offs from that, the G2/3/4 mobile networks overbuild and collapse of carriers and the many-fold ADSL2 ‘DSLAM’ overbuild, plus the RIM’s lock-out and failure to provide good broadband when there were no competitors. All this was known before the T3 sale, plus the Telstra share price was already collapsing, quite deservedly on its financial performance.

T2 shares sold for $7.20, IIRC, before being rescued by the NBN Co deal, Telstra was down to $2.60.

Sol’s presentation to Howard in 2005, saying the company was collapsing and could only be salvaged by rolling out a single National Broadband network has been proven to be absolutely correct.
They’re doubled share value since signing with NBN Co. [and gone on this year to hit decade highs]

  • What is the face value of the contracts NBN Co signed with Telstra to access to ducts, lead-ins and other infrastructure?

  Around $98B, albeit some contracts are over 35-50 years, not the widely quoted “$11 billion”.
The document also points to recent revelations that draft advice prepared by Goldman Sachs for the NBN Co showed it could hand over more than $98bn in nominal pretax payments to Telstra between 2011 and 2067. Source.
This “$11billon" figure is correct, and was published. But it’s “post-tax discounted cash-flow” figure, somewhat misleading.

  • You need to add back the corporate tax rate (~30%).
  • Then use the Telstra discount rate for those services (8%-10%, IIRC. are published somewhere) and you can only guess at the inflation & interest rates they might have used as well as cost of capital forgone.
  • Then roll it forward over the many decades of the contract.

“discounted cash-flow” is about reducing many years of future cash-flows back into a single, current day figure. The keyword is discounted. The raw dollar amounts become very large.

This is why Telstra is already in court with NBN Co arguing about how inflation is calculated on those contracts.

It’s a multi-billion dollar difference for them, and Telstra is an exceptional and very hard negotiator.

  • How much will the NBN cost to build, under the published detailed Business Plan from Mike Quigley?

Nothing, it’s going to first pay back the capital given it (not borrowed) by the Commonwealth, then payback the ~$15B extra in commercial loans/bonds it issues, and then it will return a handsome profit back to the Government, or is that the Taxpayer?

While it’s doing that, it’s also paying a whole lot in taxes (payroll, FBT, GST and company tax).

The positive impact on the Federal Budget of NBN Co is very large, but neither side has talked about it.

  • How much money would the FTTP NBN Co make, under both the Quigley Business Plan and the Turnbull “Strategic Review”?

Nobody has bothered to translate the 7.1% IRR (Internal Rate of Return) or ~2% IRR of the “review” into dollar amounts.

The total profit paid back to the taxpayer, under both regimes, is roughly the same, $50-$70 billion. What's not to like? It's not just Good Business, but very good business for the Taxpayer.

Conroy never published this simple, understandable figure.
Why? I’ve no idea, although I have asked.

The major manipulation in the ‘NBN review’ was to assume a radical reduction in ARPU, or total revenue, to be made from Fibre. This is counter-factual.

There is no data to support this, the real results from NBN Co demonstrate the opposite, the forecast ARPU’s are actually quite conservative and NBN Co’s financial performance was running years ahead of plan. You'll notice since Turnbull has assumed control that NO ARPU or other financial performance figures for NBN Co have been released.

What are they hiding? The business was going gang-busters and exceeding all important targets pre-Turnbull.

You’d expect nothing less from the best & brightest Telecomms management team Australia has ever seen. Quigley got to head one of the largest Telecomms companies in the world, that wasn't an accident. He’s got enormous experience and talent.

Quigley did a superlative job in NBN Co, against very still opposition, and all his forecasts were both achievable and shown to be conservative.

 Ziggy got fired as head of a Telco, not once, but twice. Both from Optus and Telstra. Ziggy didn’t serve out his full Telstra contract, they’d made such massive losses that he went and Sol Trujillo was hired in to pull Telstra out of the fire. Did Ziggy not know what to do, or was he simply incapable of managing Telstra properly? Neither is a good option.

Who should you believe, a long-term LNP “insider” who’s only accomplishment was to run the local branch of Kodak, the dominant market player who later collapsed from systemic poor management, or someone who’s spent their life working in Telecomms, rolling out major projects and eventually heading up globally one of the major players in the field?

I find Mike Quigley intensely credible, while Ziggy isn’t at all credible, not as a CEO nor as a Telecomms expert.

  • What is the actual “on-budget” cost to the taxpayer of building the NBN under both plans?

 If you think it’s $29 billion, $35-$37B of $44.4 billion, you’re completely wrong, and Conroy and the ALP failed to make this case.

Until it hits break-even and paid back the Commonwealth capital injection (by 2025-7), the absolute most will be the interest incurred on the extra bonds issued by the Commonwealth and subsumed into the general loan account. This is a relatively modest amount and easily calculated.

At 2.5%- 3% p.a., the rate the government pays on bonds, not what Telstra, NBN Co or iiNet etc can borrow at, the ~$30B CapEx of both sides, the yearly interest bill is under $1B/year over 12-15 years.

The real cost to the taxpayer, before getting their money back plus an extra $50B in profit, is ~$12 billion.

Why didn’t Conroy & the ALP make that case and destroy the B/S from Turnbull pre-election? I can't think why.
Why didn't expert financial commentators like Alan Kohler discuss that as well? I've no idea, it's such a basic mistake as to beggar belief.

There’s another issue here: why didn’t the Parliamentary Budget Office review the Turnbull NBN plan?

The PBO only required a spreadsheet of costs, revenues and capital/interest out to 2030 to compare the two proposals, in fact one (LNP) proposal and one fully-costed, detailed and believable Business Plan from Quigley's NBN Co.

I contacted the PBO twice and they claimed to not have the expertise to evaluate the Turnbull NBN plan.

That’s an incredible proposition. They never needed to do a technology audit/review of the Turnbull plan, only look at the numbers.

If they’d felt a need to look into the technology, they had ample time and access to multiple resources to check the assumptions, yet they didn’t.

  • What’s a proper Cost Benefit Analysis (CBA) of NBN Co going to show? [I asked Henry Ergas this & he refused to answer].
NOTHING, because the actual Cost/Benefit ratio is infinite, because there is NO cost to the public purse...

The NBN project is effectively a Public Private Partnership, it is NOT a government expenditure programme. To compare it to other expenditures, like Roads, is both disingenuous and misleading.

 Even under the bogus & pessimistic assumption of the ‘NBN review’, a full FTTP rollout will make a profit, the “Cost” part of the CBA is not just zero, but negative.

NBN Co pays back everything, under both ALP & LNP plans, and then some…

Which is the meaning of a positive IRR, even as low as 2%.
This is really basic Maths, nothing complex or inside the Economics bubble.
It’s so basic as to be incredible that the Big Brains like Henry Ergas overlooked it.

  • The Turnbull NBN Plan always had a ticking financial time-bomb included, not just a ‘landmine’ that go off later:
    • Turnbull very clearly states that he expects to deliberately waste half the capital invested in an FTTN.

 The nodes aren’t reusable for FTTP, they are 50% wasted.
That’s around $4B thrown away, deliberately, but never included in any calculations. How can that be?

The full-cost of the Turnbull NBN Plan always needed to state an Apples and Apples figure, and its one that he's deliberately and very consciously shied away from:

  • the final cost of delivering FTTP to 93% of premises, with a detour via FTTN.
    • We can guess that it's going to cost us, the taxpayer and Telecomms subscribers, a large rather premium.
    • This is why Turnbull always insisted there was some mythical "New Technology" that would magically reduce costs of future networks to an incredibly small amount. Which is rather at odds with his own statements that the major cost of new networks is the civic works, digging holes & installing hardware, and that its cost don't reduce with Technology improvements.
      • It's one of the other: expensive holes dug now, or much more expensive holes dug in the future, versus "magic technology" will cut the main cost - digging holes.

If you include the full costs of the FTTN detour and use Turnbull’s own discounted cash-flow forecasting, the value of postponing Fibre to the Premise, using all those cheaper technologies in the future, is negative.

 Spelling that out: Turnbull’s plan has never been cheaper or a better way to get us to full FTTP, its designed to be less able and more expensive. We can suspect that Turnbull's own modelling showed that, which is why those spreadsheets were woefully incomplete and so jealously guarded.

Since 2005-6, the cheapest way for to get to FTTP by anyone but Telstra, non-owners of the Copper CAN (Customer Access Network), has been to go directly to Fibre and skip all Copper.

Waiting for any future technologies to reduce prices isn’t justified as the major price component is civic works and associated labour costs, that aren't affected by new technologies.

There is NO silver bullet that can or will convert the 1925 technology of thin, low-quality copper into anything better than ADSL2. It's not an assertion, it's the Laws of Physics. Transmission Line theory and Shannon's Limit tells us exactly the limits of what can be squeezed down these completely outmoded and inappropriate 'pipes', for a set power level. If you crank up the power, and cost, you can increase the bandwidth, but your light-bulbs will glow all by themselves.

All the B/S about 1Gbps wireless never discusses price, because we know from mobile phones how that scales, the higher power needed for the chips and the complexity of the designs. This is a deliberate omission, based on knowledge of the underlying technologies, not ignorance. "Gigabit Wireless" and "G5 Mobile" as simply distractions by the ignorant or those pushing an ideology.

Fibre can already deliver 96 x 100Gbps (9.6Tbps/fibre) over the NBN Co network: in fact they’re using exactly that now. What the Turnbull and the LNP don't want you to find out, is that the same specification Fibre is used everywhere with the NBN Co network: the fibre to your house, in the transit network back to exchanges, the network to the Points of Interconnect and the trunks that ISP's will use: they are all the same spec cable, capable of supporting the same data rates.

Right now, it's possible, if you can pay, to upgrade any retail service well past 100Gbps, and symmetrical. This will only get cheaper and faster as the developments already proven to work, move into production. This is versus the very limited "feasibility demonstrations" being built for 1Gbps wireless and fast DSL services. Fact versus Fiction.

This is not vapourware or speculative, it’s real production gear.
High-end and expensive, but Here, Right Now, vs the smoke and mirrors deception of "VDSL2 Upgrades".

  • Which raises a point about a massive failing in the 2013 Turnbull NBN Plan: it’s entirely incomplete!

Conroy and the ALP didn’t raise this point, nor did the mainstream media, despite the like of Alan Kohler grilling Turnbull in person.

How could they all miss that? It's very, very basic: an Apples and Apples comparison.

The Turnbull NBN Plan never revealed the most important, single figure: IRR (Internal Rate of Return) or an ROI.

The whole point of the NBN Co business structure was:

  1. to separate the business from the Public Service so it could be sold eventually, and
  2. make a profit.

Turnbull’s published spreadsheets finish very early, he never released his projections out to the same end years as the public, detailed & fully-costed Business Plan of NBN Co.

The only reason that politicians will hide figures, is when they don’t support their position. Turnbull was deliberately hiding massive problems, or he would've been trumpeting them from the roof-tops.

We can infer that the original Turnbull NBN Plan is deeply flawed and always commercially unviable.

Ask to see a full copy of the spreadsheets of the “most comprehensive policy ever released by an Opposition”: You’ll never get it because it was always a financial disaster.

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