13.04.09 Coalition NBN Options Comms Day April 2013

© Venture Consulting 2013

April, 2013

NBN Options for a Coalition Government

Objectives and the criteria to be met

1


Policy fit: Will the option deliver against the Coalition’s stated policy goals?

Practicality: How complex to implement and how constructive or obstructive are the key stakeholders likely to be?

Option Objectives

The Coalition’s Policy Objective To build a faster and cheaper NBN using a more efficient mix of technologies, in a manner that delivers a competitive market structure with greater involvement from the private sector

Telstra’s Objective To maximise their shareholder value by maintaining their current NBN contract value, but should be prepared to renegotiate within this envelope.

Detailed Criteria

Solution to mass-market

A clear cost/benefit

analysis

National solution

Trans-parency

Structural Separation

Comp-etitive market

structure

Optimise existing assets

Maintaining the value of the Telstra and Optus

agreements

Carriers are part of the solution

Resolving NBN /mobile

operators

Solving for market failure

Outcomes not

technology

Maintaining the benefits of NBN Co

Solving the ‘off budget’

status

Role of NBN Co

Private sector capital

Mandate technology or outcomes

2


Fast broadband for all Australians

National uniformity of broadband prices

Structural separation of Telstra

Technology proscribed: 93% FTTP, 4% fixed wireless and 3% satellite

Cost benefit analysis

Focus on FTTN over FTTP

Use of existing assets – such as HFC

Re-evaluating the boundary between the fixed-wireless and fibre

Re-evaluating the need for the building of two new satellites

Greater involvement of industry

The central tenets of the Coalition’s views on NBN policy from opposition may be summarised as:

Labor’s Policy Objectives Coalition’s Policy Objectives

Arguably the first three of these principles are no longer at issue between Labor and the Coalition. The fourth principle most certainly is.

AFR, Whitepaper: The Coalition’s Plan for Fast Broadband for an Affordable NBN

Stop Press - Coalition Technology Mix

3


Source:

Policy Comparison Coalition Labor

Primarily Technology

71% FTTN (underserved focus retain initial HFC) + 22% FTTP

(current build, new estates, user pays, co funded and bad copper) + 4% wireless and 3%

satellite

93% FTTP + 4% wireless and 3% satellite

Target Outcome

All to have access to at least 25 mbps by 2016, rising to at least 50 mbps by 2019

93% of homes to get speeds of 100 mbps by 2021

•  The Coalition claims that its NBN requires $20.4bn in capital expenditure and peak funding of $29.5bn, $14.6bn less than the $44.1bn in peak funding needed for Labor's $37.4bn NBN

•  In addition, the Coalition also claims that its version of NBN could save $750 million in interest costs from the budget by 2015-16

•  The Coalition expects most homes could achieve speeds of about 50Mbps through a FTTN rollout, with those farthest away from the node experiencing speeds of about 25Mbps

•  NBN Co will proceed with its existing satellite and fixed wireless networks serving the most remote 7% of premises

$44.1bn$37.4bn

$29.5bn$20.4bn

Funding Requirement CAPEX

-39%

$62 -45%

Estimated 2021 Wholesale Price / Mth

-33%

$38

Coalition’s Broadband Plan vs Labor’s NBN

Coalition Labor

Stop Press: Coalition Policy Announcement – Some of these issues addressed

4

•  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

NBN Co and 2011 Census, Analysis completed by Market Clarity based on NBN Co data as of 1 August 2012

By the 2013 Election, only ~13% of households will be in fibre access areas, implying significant scope for modifying the NBN

5


Source:

•  The Coalition will not undo work that has been contracted or completed.

•  An overlay of Census data with NBN Co’s own figures shows that, by the time of the 2013 Federal Election, approximately 13% of households will be in areas where construction has either completed or commenced

•  This falls well short of the 20% threshold at which Telstra has been promised significant further payments should the FTTP network be wound back.

•  If the Coalition is elected there will still be significant scope for it to scale back or modify the NBN FTTP programme.

2,33

0,89

9

1,34

9,28

8

Persons in NBN Footprint

3,67

3,02

5

25,6

44

2,16

8,35

2

471,

573

Households in NBN Footprint

6,33

8,59

4

9,59

9

180,

204

791,

808

FSAMs Under Construction

Cumulative (ncluding Overlap of Areas)

FSAMs on One Year Schedule

Active FSAMs

FSAMs on Three Year Schedule

Households in areas where fibre build will be completed or commenced (August 2012)

Stop Press - Coalition Timeline

6


Announce Formal NBN Policy

•  A policy announcement today – 9 April

The timeline for an incoming Coalition Government

Determine Optimal NBN Response •  Telstra engaged

•  Industry engaged

•  Electorate engaged

Conduct independent Reviews •  60 day strategy

review

•  Independent audit into broadband policy and NBNCo’s governance

•  6 month independent cost benefit analysis and review of regulation

The first 6 months

Before the Federal Election Now Next

2 1 3 4

Implementation of the New NBN policy

•  Determine the optimal NBN technology mix to be implemented

•  Options for private sector investment

The Coalition could attract private sector participation to reduce the strain on public sector financing

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Carrier as Investor

Private Sector

Participation

An eventual IPO •  There are other models that could be

pursued to use private sector financing for a metropolitan NBN model.

•  However, these options would require even greater stability and project maturity and would not be sensible in the short term

Network build and management contracts •  The Government could consider

tendering NBN Co responsibilities out to third parties. These management contracts could be issued on a Build Operate Transfer (BOT) basis

•  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

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

Venture Consulting

Three potential phases to restructure the NBN

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: Source:

Summary of Options


1. Renewed NBN Co

2. Metro and Regional NBN Cos

3. Listed New Net Co

•  The existing NBN Co model is largely retained initially. NBN Co is redirected to deploy a ‘technology efficient’ outcome employing a mix of FTTx, HFC, wireless and satellite based solutions

•  This option is available immediately and may be used as a means of preserving the best aspects of the current NBN Co while policy and direction are reset

•  NBN Co could be split into a Metro Co and a Regional Co recognising the metropolitan and regional NBN solutions will operate under fundamentally different economics and technologies

•  This model could be designed to optimise private sector participation that could be put to tender later in the Coalition's first term

•  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 the Telstra customer access network assets

•  This is unlikely to be an option until shortly before or after a 2016 Federal

Election. A Telstra demerger would depend on its shareholders and may never occur

Commonwealth

NBN Co National NBN

Vehicle

NBN Co

Regional NBN Co

Metro NBN Co

New Net Co

Telstra Retail

NBN Co

Macro Option 1 – Renewed NBN Co

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Renewed NBN Co Structure (illustrative)

Commonwealth Financial Sponsors Telstra/Optus

NBN Co

National NBN Vehicle

Equity Interest

Equity unlikely

Equity unlikely Potential

subsidy for deficit network

Transfer or lease of copper and HFC networks

Metro FTTN, FTTP and HFC broadband

Remote satellite coverage

Regional wireless and FTTN networks

•  The existing Commonwealth owned NBN Co model is largely retained initially

•  NBN Co is redirected to deploy a ‘technology efficient’ outcome employing a mix of FTTx, HFC, wireless and satellite based solutions by renegotiating the existing agreements with Telstra and Optus to include long-term access to the existing copper sub-loop and HFC networks

•  Telstra and/or Optus could hold equity in NBN Co to the extent they contribute their copper and HFC assets

•  This option is available immediately and may be used as a means of preserving the best aspects of the current NBN Co while policy and direction are reset

Macro Option 2 – Metro and Regional NBN Co

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Commonwealth

Telstra Financial Sponsor

NBN Co •  GBE holding entity for

Commonwealth interests in NBN

Equity Interests?

Transparent subsidy for deficit network

Transfer or lease of copper and HFC networks

Regional NBN Co •  Wireless network •  Satellite interests •  Regional town FTTN •  Backhaul

Metro NBN Co •  Metropolitan FTTN, FTTP

and HFC

Equity interest

Equity interest

100% Equity

Optus

Equity Interests?

Transfer of HFC network?

Equity Interests? Satellite Wireless

Potential Private Sector Ownership or Management

Contract

Potential Private Sector

BOT or Management

Contract

•  This option recognises that the metropolitan and regional NBN solutions will operate under fundamentally different economics and technologies

•  The intention would be for the metropolitan based business to be attractive to private investors at an earlier stage, while the regional business would require Government investment or a subsidy for a longer period

•  Alternatively the fixed wireless and/ or satellite networks may present investment or management and operation opportunities for specific carriers at an earlier date

•  This option could be pursued after the Coalition’s review and confirmation of the regulatory environment.

Metro and Regional NBN Cos Structure (illustrative)

Macro Option 3 – Listed New Net Co

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•  Create a new national wholesale access entity (Net Co) that is listed on the ASX

•  This could be implemented on a standalone basis or through the demerger of the Telstra customer access network assets and pooling them with NBN Co assets in a newly ASX listed entity in which Telstra shareholders and the Commonwealth hold shares

•  Private capital (debt or equity) could also be sought (including through a public capital raising or institutional placement)

•  This is unlikely to be a model that would be considered until shortly before or after a 2016 Federal Election

Listed New Net Co Structure (illustrative)

Commonwealth

New Shareholders (Capital Raising)

Telstra Shareholders

Equity Interest

New Net Co (ASX Listed)

•  Telstra customer access networks (copper and HFC) and Commonwealth NBN assets

Telstra Retail (ASX Listed)

•  All other Telstra assets

NBN Co •  To be merged into Net

Co

Telstra Shareholders

Equity Interest

Equity Interest

Equity Interest

Equity Interest

Demerger

Logically sequential options

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•  Option 1 is a good transition model. It allows the momentum of the existing NBN project to be retained while it redirects and restructures

Option 3 Listed New Net Co

Option 2 Metro and Regional NBN Cos

Option 1 Renewed NBN Co

2 1 3

NBN Options Sequential Relationship

•  Option 2 could be implemented after that period of restructure as the base model for the new NBN policy and initial private sector participation

•  Option 3 may be attractive in the future when the capital market conditions are right and the NBN business model is stable

The first 12 months after the election are likely to be spent undertaking a cost/benefit review

Potential Coalition first term 2016 election

The next 12 months the newly determined structure could be implemented within NBN Co

In the final 12 months or start of a second term tenders could be held for private sector participation

Option 3 would be unlikely to occur until close to or after a 2016 election

Indicative Timeline

A successfully negotiated relationship with Telstra is integral to the success of any new Coalition NBN policy

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Coalition needs to bring Telstra back to the table if it wishes to make any substantive changes to the current NBN arrangements Conceptually, Telstra will not lose the current $11 billion dollar benefit as Coalition will simply change the form of that arrangement to enable the adoption of alternative fibre solutions

Sub-loop Access

HFC Networks

•  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 countenanced.

•  Instead of Telstra granting access to its ducts from node to customer premises, it must grant access to its sub loop in order for the switch to FTTN happen

•  The current payments for the HFC networks are to restrict their use to pay television transmission

•  The Coalition wants them used for broadband

•  Coalition preference is to leave this to facilities based competition, but intervention may be required

•  NBN Co could acquire the Optus HFC network and upgrade it to provide broadband in its coverage areas and leave the Telstra HFC arrangements in place

…a shift to FTTN and optimising use of the existing HFC network does require change to the Telstra arrangements

The current agreement is designed for FTTP only…

Stop Press: Issues facing the Coalition following its policy release

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•  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?

Contact information

Venture Consulting Sydney Suite 1904, Level 19 Chifley Tower 2 Chifley Place Sydney NSW, 2000 Telephone: +61 2 9279 0072 Facsimile: +61 2 9279 0551 [email protected]

Allen & Overy Sydney Level 25 85 Castlereagh Street Sydney NSW, 2000 Direct: +61 2 9373 7731 Mobile: +61 419 223 636 [email protected]

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13.04.09 Coalition NBN Options Comms Day April 2013