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.

1. NBN Options for a Coalition
Government
April, 2013
© Venture Consulting 2013

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
agreements
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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.
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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 Labor's $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 2019
3 Source: AFR, Whitepaper: The Coalition’s Plan for Fast Broadband for an Affordable NBN

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 place
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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 2012
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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
regulation
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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 solution
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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 Coalition's 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 Consulting
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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 reset
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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.
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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 Election
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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 Co
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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
place
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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?
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16. Contact information
Venture Consulting Allen & Overy
Sydney Sydney
Suite 1904, Level 19 Level 25
Chifley Tower 85 Castlereagh Street
2 Chifley Place Sydney NSW, 2000
Sydney NSW, 2000
Telephone: +61 2 9279 0072 Direct: +61 2 9373 7731
Facsimile: +61 2 9279 0551 Mobile: +61 419 223 636
justin.jameson@ventureconsulting.com michael.reede@ventureconsulting.com