Turnbull got us the NBN faster and cheaper

Far from worsening the blowout and increasing the burden on taxpayers, Malcolm Turnbull’s decision to add copper-based services to NBN’s technology mix materially reduced it.

Writing on these pages, Dennis Shanahan recently repeated the widely made assertion that “a deal (Malcolm) Turnbull organised for NBN to take over Telstra’s copper network” is to blame for the rise in NBN’s costs “from $5bn to $15bn, and (then to) a final estimate of more than $50bn”.

He went on to say that “experts claim Australia is lagging behind the world on broadband”.

While Australia’s broadband deployment does raise issues – notably about the low take-up of high-speed services – it is important to set the record straight on the complex question of the NBN’s costs.

The reality is that the $5bn and $15bn figures do not refer to the NBN; they refer to mooted federal contributions to the cost of privately built, owned and operated high-speed broadband networks that were proposed before the Rudd government’s deci­sion to construct a government-owned network instead.

That network’s costs were projected to be in the order of $40bn. As we said when that number was announced, the estimate was certain to be exceeded. But far from worsening the blowout and increasing the burden on taxpayers, Turnbull’s decision to add copper-based services to NBN’s technology mix materially reduced it.

By the time the Coalition came to office in September 2013, the NBN’s situation was dire. According to its 2010 corporate plan, it should have had 566,000 connections; it had 70,000. Although half the outlays the plan projected to that date had been incurred, revenues were one-tenth those forecast. Meanwhile, unit costs were set to escalate further as relations with contractors – which had completely broken down – were put on a sustainable basis.

As a result, losses were accumulating at a rate that compromised the government’s debt reduction strategy and undermined whatever chance the project had of being viable. Clearly, the priority was to stem the haemorrhage and get the project back on track.

Turnbull’s decision was crucial in that respect. That was not solely because of its effects on costs; it was also because using the existing copper network greatly accelerated the NBN’s deployment, ensuring it could begin to earn revenues. Adding to the gains, the fact Telstra took on the task of deploying the fibre-to-the-node component let NBN concentrate on rolling out fibre-optic connections in those areas where FTTN was not an option, so they too were connected sooner than the all-fibre strategy would have allowed.

The project’s flawed conception and inception meant the losses would inevitably remain staggering, but the revenue boost, combined with the cost savings, made them somewhat more manageable. And as things turned out, faster deployment helped ensure that by the time of the Covid-19 lockdowns, our telecommunications networks could cope with the surge in broadband traffic, greatly reducing the lockdown’s economic and social costs.

Chorus, which rolled out the bulk of New Zealand’s Ultra-Fast Broadband fibre network, strikingly illustrates the benefits of the multi-technology strategy Turnbull adopted.

Unlike NBN, Chorus sensibly relied on that strategy from the start, making extensive use of high-speed copper-based ser­vices. It was therefore able to draw on the cashflow from those services to help fund the fibre rollout, avoiding the huge losses a fibre-only strategy entails. That limited its accumulated fibre losses to less than 30 per cent of the total cost of its part of New Zealand’s UFB fibre rollout – an amount fully consistent with commercial benchmarks for projects of its kind. In contrast, by June this year, NBN is expected to have lost $44bn, which is nearly 60 per cent of its total investment to date.

Chorus’s unit costs are not only one-quarter to one-third lower than NBN’s, taking account of differences in local conditions; by adopting a more rational strategy than that initi­ally imposed on the NBN, Chorus has been able to achieve far better outcomes for end users.

Unlike NBN, it has not had to artificially boost its performance by forcing customers to migrate from copper, eliminating cable competition and obliging its largest retailer to use its fibre (as Telstra is required to do). And even more important, Chorus’s stronger finances have allowed it to adopt a pricing strategy that encourages consumers to choose the very high-speed services that put its network’s capabilities to good use, meeting the government’s policy objectives and reducing Chorus’s vulnerability to competition from wireless services.

Thus, 68 per cent of Chorus’s residential connections use its 300Mbps service and one-third of all new connections opt for speeds of 1Gbps or higher. In contrast, although large parts of the NBN are fully capable of providing those speeds, the high prices NBN charges for its top-tier services mean only 21 per cent of residential connections are on speeds of 100Mbps or higher, while 23 per cent are on its entry-level 25Mbps service, which Chorus no longer even offers.

Those speeds cannot justify the enormous investment taxpayers have already made in the NBN – much less the additional outlays that the government, without undertaking any analysis of costs and benefits, recently announced. And they mean the NBN is at high risk of losing customers to 5G and to services such as Elon Musk’s Starlink, which can supply them at much lower cost.

Finally, it is worth returning to the $5bn figure. As some readers will remember, that is the amount Telstra chief executive Sol Trujillo and chairman Don­ald McGauchie sought from the federal government in exchange for Telstra committing to deploy a network that (like Chorus) would begin with high-speed copper-based services and then be upgraded. Telstra was willing to accept a stringent price cap on those services; and other than the $5bn, it would have borne the entirety of the costs.

The condition Trujillo and McGauchie posed, and that was rejected, was that if demand for the new network’s services proved sufficiently strong, Telstra could (within the constraints of the cap) fully recoup its costs, including incurred losses.

That required a guarantee that regulators would not retrospectively resile from the initial agreement, placing Telstra’s shareholders in a position where they had borne the losses but would be deprived of the profits.

With the competition regulator now forcing NBN Co to write off $31.5bn of the $75bn that taxpayers have invested in the NBN so far, and forgo recovery of a further $8bn to $10bn in losses that taxpayers will have to fund in future, Trujillo and McGauchie must be enjoying the last laugh.

Henry Ergas was a member of the independent review panel, chaired by Michael Vertigan, that reported in 2014 on the regulation of the NBN, including its choice of technologies. New Street Research senior telecommunications analyst Ian Martin has written extensively on the NBN investment.