The federal government is exposed to a brutal revision of its $49 billion outlay on the National Broadband Network as the project’s commercial return sinks to dangerous lows amid a political storm over slow speeds for millions of customers.
Malcolm Turnbull has rung the alarm on the low returns as he admits there are “real problems” for customers who are not getting the speeds they were promised for services that can cost $80 or more every month.
Official budget advice obtained shows the government must review its treatment of the NBN if the commercial return falls below 2.5 per cent, resulting in bigger federal budget deficits and deepening commonwealth debt.
The dangers include cost increases in the network rollout and revenue shortfalls from new customers, the twin forces that can drive down the rate of return.
“If this were to occur, it would trigger a review of the treatment of equity funding not yet provided, which could result in some or all future equity contributions to NBN being treated as grants rather than equity, with a flow-on negative impact on underlying cash balance and fiscal balance,” the advice to ministers says.
While the Coalition insists the NBN can be privatised after the rollout is finished in 2020, any revision in the project’s value will trigger a drastic writedown in the combined $49bn equity and debt being used to connect millions of households.
A major pressure point for the NBN is the competition from mobile, fixed wireless and new 5G services that are growing quickly, according to telco analyst Ian Martin, of New Street Research. Mr Martin said NBN Co’s underlying assumption, that wireless connections would account for 15 per cent of connections, was wrong and would grow to around 25 per cent of the market.
The value of the NBN would be slashed because it would have fewer than anticipated customers and because it would not be able to substantially lift access fees because of competition.
“The NBN needs eight million customers, each generating revenue of $52 a month,” Mr Martin said.
“In our view, they’re not going to get that number of customers, and if wireless goes to 25 per cent of the market the competition means no one is going to be earning $52 revenue.”
Mr Martin said in its recent corporate plan NBN Co dropped any reference to its forecast that wireless connections would be limited to about 15 per cent of the market, indicating it was aware of the problems on the horizon.
The warning in the budget advice to ministers raised the risk that the government would have to cancel all or some of the value of its loans to build the NBN, adding tens of billions of dollars to the nation’s debt.
“In the event NBN was unable to make principal repayments, budget and financial reporting standards may require a reduction in the carrying value of the loan, which would likely have a negative impact to fiscal balance equivalent to the amount written down and also an increase to net debt by this amount,” says the government advice written last year.
Bill Shorten is exposed to the same risk as he promises voters a “first-class” NBN with higher speeds and more fibre connections, a plan that could put pressure on the commercial return and trigger a similar budget revision.
Former prime minister Kevin Rudd last night blamed Mr Turnbull and the Coalition for overhauling Labor’s NBN plan to appease Rupert Murdoch, the chairman of News Corp, the publisher of The Australian.
“They changed the model completely. And the reason people are not taking it up is because what we find is that people don’t see the advantage in terms of reliable bandwidth and bandspeed on the ground,” Mr Rudd told ABC TV last night.
Mr Turnbull admitted the NBN’s finances were “challenging” as he accused Labor of leaving the nation with a “calamitous train wreck” when the Coalition took government in 2013.
“At the moment, it is estimated to deliver a return of around 3 per cent … it is enough to keep it on the government’s balance sheet, as a government asset, but it certainly is not a commercial return that the stockmarket would expect,” the Prime Minister said.
Mr Turnbull conceded there was “no way” it could reach a benchmark of 6 per cent.
“We were dealt a very, very bad hand of cards by Labor and we are doing the best with it to get it rolled out,” the Prime Minister said.
“But I have to say this is the fastest rollout of any telecom service in the country’s history.”
The government went to the last election with a plan to invest $19.5bn in equity in NBN while allowing it to take on a further $19.5bn in debt from the private sector. Four months after the election, the government said the $19.5bn would be a government loan instead.
The NBN corporate plan assumed a financial return that ranged from 2.7 to 3.5 per cent, justifying decisions to keep the project “off budget” so the equity is treated as an asset rather than an ongoing expense on construction and operations.
The government had contributed $20.3bn in equity to the NBN by June 2016 and added another $7.2bn in the year to June 2017, according to budget papers, which means it is too late for this to be classified as an expense rather than an asset.
“Importantly, funding contributions are classified at the time they are paid and cannot be reclassified at a later point in time,” said the budget advice prepared in May 2016.
Cairns resident Alex Cameron said he had “so many problems” with NBN he bought Telstra’s new Gateway Frontier Modem, which allows him to bypass the NBN.
“If my NBN now fails I don’t care as I will just switch to 4G at no additional costs,” he said.
Labor communications spokeswoman Michelle Rowland called on the government to take fibre cable “as deep as possible”.
Malcolm Turnbull has rung the alarm on the low returns as he admits there are “real problems” for customers who are not getting the speeds they were promised for services that can cost $80 or more every month.
Official budget advice obtained shows the government must review its treatment of the NBN if the commercial return falls below 2.5 per cent, resulting in bigger federal budget deficits and deepening commonwealth debt.
The dangers include cost increases in the network rollout and revenue shortfalls from new customers, the twin forces that can drive down the rate of return.
“If this were to occur, it would trigger a review of the treatment of equity funding not yet provided, which could result in some or all future equity contributions to NBN being treated as grants rather than equity, with a flow-on negative impact on underlying cash balance and fiscal balance,” the advice to ministers says.
While the Coalition insists the NBN can be privatised after the rollout is finished in 2020, any revision in the project’s value will trigger a drastic writedown in the combined $49bn equity and debt being used to connect millions of households.
A major pressure point for the NBN is the competition from mobile, fixed wireless and new 5G services that are growing quickly, according to telco analyst Ian Martin, of New Street Research. Mr Martin said NBN Co’s underlying assumption, that wireless connections would account for 15 per cent of connections, was wrong and would grow to around 25 per cent of the market.
The value of the NBN would be slashed because it would have fewer than anticipated customers and because it would not be able to substantially lift access fees because of competition.
“The NBN needs eight million customers, each generating revenue of $52 a month,” Mr Martin said.
“In our view, they’re not going to get that number of customers, and if wireless goes to 25 per cent of the market the competition means no one is going to be earning $52 revenue.”
Mr Martin said in its recent corporate plan NBN Co dropped any reference to its forecast that wireless connections would be limited to about 15 per cent of the market, indicating it was aware of the problems on the horizon.
The warning in the budget advice to ministers raised the risk that the government would have to cancel all or some of the value of its loans to build the NBN, adding tens of billions of dollars to the nation’s debt.
“In the event NBN was unable to make principal repayments, budget and financial reporting standards may require a reduction in the carrying value of the loan, which would likely have a negative impact to fiscal balance equivalent to the amount written down and also an increase to net debt by this amount,” says the government advice written last year.
Bill Shorten is exposed to the same risk as he promises voters a “first-class” NBN with higher speeds and more fibre connections, a plan that could put pressure on the commercial return and trigger a similar budget revision.
Former prime minister Kevin Rudd last night blamed Mr Turnbull and the Coalition for overhauling Labor’s NBN plan to appease Rupert Murdoch, the chairman of News Corp, the publisher of The Australian.
“They changed the model completely. And the reason people are not taking it up is because what we find is that people don’t see the advantage in terms of reliable bandwidth and bandspeed on the ground,” Mr Rudd told ABC TV last night.
Mr Turnbull admitted the NBN’s finances were “challenging” as he accused Labor of leaving the nation with a “calamitous train wreck” when the Coalition took government in 2013.
“At the moment, it is estimated to deliver a return of around 3 per cent … it is enough to keep it on the government’s balance sheet, as a government asset, but it certainly is not a commercial return that the stockmarket would expect,” the Prime Minister said.
Mr Turnbull conceded there was “no way” it could reach a benchmark of 6 per cent.
“We were dealt a very, very bad hand of cards by Labor and we are doing the best with it to get it rolled out,” the Prime Minister said.
“But I have to say this is the fastest rollout of any telecom service in the country’s history.”
The government went to the last election with a plan to invest $19.5bn in equity in NBN while allowing it to take on a further $19.5bn in debt from the private sector. Four months after the election, the government said the $19.5bn would be a government loan instead.
The NBN corporate plan assumed a financial return that ranged from 2.7 to 3.5 per cent, justifying decisions to keep the project “off budget” so the equity is treated as an asset rather than an ongoing expense on construction and operations.
The government had contributed $20.3bn in equity to the NBN by June 2016 and added another $7.2bn in the year to June 2017, according to budget papers, which means it is too late for this to be classified as an expense rather than an asset.
“Importantly, funding contributions are classified at the time they are paid and cannot be reclassified at a later point in time,” said the budget advice prepared in May 2016.
Cairns resident Alex Cameron said he had “so many problems” with NBN he bought Telstra’s new Gateway Frontier Modem, which allows him to bypass the NBN.
“If my NBN now fails I don’t care as I will just switch to 4G at no additional costs,” he said.
Labor communications spokeswoman Michelle Rowland called on the government to take fibre cable “as deep as possible”.
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