Telstra must immediately forget any idea of competing against the NBN. The board and management would find less risky rewards in warming their heads in a lit oven, or BASE-jumping from the top of 242 Exhibition Street.
They would be competing against an operator whose owners are perfectly happy with a 6% return on investment. That, on its own should be enough to have Telstra’s NBN negotiators run screaming from the conference room, after signing a deed of surrender.
But in addition to being completely uninterested in a commercial return, the owners are able to pass laws specifically aimed at Telstra, can fine, ban or incarcerate the directors if they don’t comply, has an almost infinite access to capital and can be more ferociously vindictive than even the toughest nuts in Telstra can imagine.
It is a listed company’s worst nightmare. Telstra’s only viable option is to take whatever it can get for renting its underground ducts and backhaul fibre to the NBN, and get on with a new corporate strategy based on using a third party fibre access network and gradually shutting down its copper.
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Forget about holding out for $12 billion, including compensation for closing the copper network earlier than envisaged in the Telstra sale documents. Just take whatever they’re offering and run.
Let’s focus on the return on investment angle. The NBN is a very large, high risk, venture capital deal, which would normally only get the nod if the business plan showed returns of at least 25 per cent, preferably more, and even then dozens of venture capital equity investors and banks would have to be herded together to come up with $43 billion.
In short, the implementation study by McKinsey and KPMG makes it clear that a fibre to the home broadband roll-out in Australia is entirely impossible as a private project. Remember that no private consortium could get the much cheaper fibre to the node project to work, even with government support.
And by the way, even the incredibly lavish implementation study itself, at $25 million, would have been impossible to justify and finance privately – especially as it’s quite separate to the NBN Company’s own business plan, which is due to be handed to the government on May 31.
Anyway, McKinsey and KPMG firmly conclude that only the government will put money into the NBN, and that the investment will need to be at least $26 billion not $4.7 billion as originally thought.
“No problem,” is, in effect, the reply from the NBN’s only two shareholders, Stephen Conroy and Lindsay Tanner, “we’ll just issue bonds, as needed – cost of capital 5.7%, with government guarantee.”
McKinsey and KPMG further told the two shareholders that they could expect a return on this investment of 6-7 per cent per annum – a thin sliver above cost of capital, no margin for error, and only after 14 years, and only after selling it.
Bewdy, said Conroy and Tanner, sounds great.
All they care about is that the thing gets built and the money can be classified as an investment and therefore doesn’t have to go on the budget as a grant.
Nobody looks at a government balance sheet (except in Greece) – only the P&L is watched. And as a bonus Lindsay Tanner gets to call Tony Abbott an idiot because he thinks he can cancel the NBN and spend the $43 billion on election promises.
That 6-7% return is based on the government digging its own trenches for 45% of the fibre rollout (which covers 93%of the population) and stringing the cable on power poles for the other 55%. The cost of that is estimated at $26.6 billion.
Building “community backhaul” – that is, duplicating Telstra’s existing fibre backhaul – is costed at $3.3 billion.
The projected return on that investment is based on matching Telstra’s current wholesale pricing and achieving 70% market share.
In other words, there is no room in the McKinsey/KPMG business plan for a price war, but then again Telstra couldn’t launch one anyway.
The only reason to stick with a copper access network with a limited life would be to milk it for cash; the purpose of a price war is exactly the opposite – to build market share at a loss for future returns. But there is no future for copper in a nation that has 93 per cent fibre to the home.
So Telstra is cornered, a cooked goose. It might be bitterly unfair, and might be worth a few million votes for anyone but the ALP at the next election, but it’s the reality.
This article first appeared on Business Spectator.