yARN: Why the business case is proof the NBN will probably fail

The National Broadband Network will stutter and die unless Labor can take strong and independent political action - a fact highlighted by NBN Co’s business case. But with so many pitfalls and all-or-nothing moments set to hit a tenuous Government with a feisty Opposition, it may be a bridge too far.

The core of the argument put forward by Communications Minister, Senator Stephen Conroy, and the business case is simple and essentially correct. If the Government can shut down rival copper and Hybrid Fibre Coaxial (HFC) networks, Australians will be faced with a stark Internet choice – the NBN or nothing.

As addicted online citizens, the latter is simply not an option and we will eventually shift across to make the Government’s network a viable one. Investors being offered a relatively safe bet with a 7.04 per cent rate of return will pick the NBN over Government bonds, which have a rate of return of around 5.39 per cent.

But the conditions that must come together are varied and complex – compared to bonds, the NBN’s risk is much higher and more factors must be considered.

Financial

Enforcing a monopolised telco backbone on a free-market economy is fraught with danger and while technology companies are largely salivating at the opportunities the NBN can bring, compensation and political opposition could eventually derail the project.

Plenty of companies such as smaller ISPs have invested millions into providing much-needed services along copper lines and HFC networks. All of them face inevitable destruction under the Government’s plan.

But the market can be tamed – if the deal with Telstra proves anything it is that an ample supply of cash will solve any business problem.

Political

As it stands, the Government will spend the most important years of the NBN herding angry cats in Parliament. It controls neither the House of Representatives nor the Senate and must negotiate at every painful step of the way.

The Opposition is well aware of this and will attack the Government on every front without presenting a viable alternative in an attempt to focus public vitriol on the NBN and convince independent politicians to add damaging amendments to every Bill.

The foundation legislation for NBN Co has not passed Parliament. Key greenfields pits and pipe legislation to force property developers to install fibre-ready infrastructure is being opposed by developers forced to bear the cost.

“Any failure to pass the legislation would add significant costs to the NBN build,” the business case states on page 46 in relation to greenfield build sites.

On page 47, the business case also highlights the dangers of State Governments, with NBN Co requiring Federal “powers and immunities including to allow the Company to maximise aerial deployment coverage and minimise the roll-out timetable.” Without this, detailed negotiations will be needed with the State Governments – three of which are set to be controlled by the Coalition by March 2011.

And finally as a Government-controlled company, NBN Co is forced to obey the whims of Parliamentary inquiries that expose its staff to a higher degree of exposure and scrutiny than private industry. Any slip of the tongue from an overly honest staff member can see a damaging gaffe that hurts Labor.

Technological

Business users are tremendous consumers when it comes to Internet data. On page 49, the plan assumes that there will never be a business in Australia that chooses wireless communications as its only type of access.

But wireless technology is being developed by carriers and vendors around the world, including a recent partnership between Telstra and Huawei that hit 149.4Mbps downstream and 59Mbps upstream. Even if fast and cheap wireless broadband is not viable in rural and regional areas, plenty of mobile city-operators would be keen to give it a go.

However, a bigger problem is the danger of ‘cherry picking’, which could see fibre providers sell services or fibre infrastructure in the most lucrative and densely-packed city spaces.

“If NBN Co were to be ‘cherry picked’ by competitors in the most lucrative regions, and it resulted in a decrease of 50% of Greenfields connections…then the NBN projected returns would reduce to 5.4%,” the business case said on page 13. “New fibre networks built after 1 January 2011 for residential and small business purposes will need to be Layer 2, wholesale only and open access.”

Avoiding such a result will require further Government intervention and more angles of attack by the Opposition. Failing to do so will lead to private investors staying far away with their vital cash.

The bottom line

The big question is whether or not the Government can maintain the strength of will and politics to bring everything together despite the numerous pitfalls and crisis-points to come.

If the extremely bumpy road that lead to the business plan’s eventual release taught us anything, it is that the new political paradigm means much more pragmatism and compromise is needed from Labor.

While Minister Conroy is very good at forming a plan and sticking doggedly to it, the Prime Minister’s intervention was the only thing that stopped Independent Senator, Nick Xenophon, from stalling or killing the Government’s Bill.

2011 will be the year that all is revealed. If Labor can get through it, the foundations of monopoly may be set hard enough to encourage private investors in years to come. But at this stage it’s a very big ‘if’.

Register now for the ARN Security Forum 2013 on June 4 at the Sydney Mint

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