The Drum: Labor leaps in where the private sector fears to tread

Private sector telecommunications companies think very, very carefully before they build a new network.

In eight years on the senior leadership team at Optus, I saw how much work goes into preparing the business case for a new network.

It is critical to work out how many customers you are going to get - and how much they are going to pay.

From that you can work out the revenue you will earn - and after subtracting your operating costs, work out whether there is enough cash left over to generate a return on the capital you have invested in building the network.

Telecommunications is an unforgiving business. You can lose your capital quickly.

At Optus, this was burned into our collective memories following the Optus Vision disaster. In the mid nineties, the company built a $4 billion HFC network - but it never won enough customers to cover its costs.

New owner SingTel wrote down the network’s value by $1.2 billion when it took over Optus in 2001.

Plenty of other telcos have learned the same harsh lesson. In 2003, NextGen Networks collapsed after building a fibre optic network 8,400 km long at cost of nearly $850 million.

It was bought by one of its shareholders for around $30 million.

That’s a lot of capital vaporised.

Labor’s national broadband network exposes Australian taxpayers to the very same risk.

The April 2009 announcement, by then prime minister Rudd, rang alarm bells.

There had been no business case or cost benefit study done before the Rudd government committed to spend $43 billion on this network.

In a private sector telecommunications company, this would be unthinkable.

After the announcement, the government engaged consultants McKinsey and KPMG to carry out an ‘Implementation Study’.

Their findings were troubling.

The network would generate a paltry return of 6-7 per cent.

Even this, however, depended on a heroic assumption: that 70 to 90 per cent of premises in Australia would take a service over the network.

A private sector board presented with a business case based upon such an assumption would be sceptical in the extreme.

The early indications from NBN Co’s initial rollout in Tasmania should only increase our disquiet.

The network passes 4,000 homes in three locations.

Each home has been offered the chance to connect to the network - at no cost to the homeowner.

This involves NBN Co running a ‘subscriber drop’ from the network to the home, and then installing  an Optical Network Terminal (ONT) on the outside of the house.

Remarkably, only around half the homes passed have agreed to be connected.

In other words, even at zero cost, about half of all households see no value in a connection to the NBN.

This suggests that the prospects of 70 to 90 per cent of households taking a service are remote in the extreme.

The early indications of the numbers actually taking a service (as opposed to agreeing to have the network physically connected) only reinforce the sinking feeling.

One of the companies retailing services on the network in Tasmania is iiNet. 

Speaking on August 16 at the release of his company’s annual results, iiNet chief executive Michael Malone said of the situation in Tasmania, “Demand from our point of view is zero”.

He revealed that there were only 70 customers on the network - across the three companies retailing services.

With 4,000 homes passed, this is less than 2 per cent take up - a very long way from 70-90 per cent.

In question time recently I asked Broadband Minister Conroy’s representative in the lower house, Anthony Albanese, for an update on how many homes were now taking a service.

Rather than answering the question, he fobbed me off with the statement that over 50 per cent of homes were connected.

There are two possible explanations. One is that he does not understand the difference between homes that are connected and homes that are taking a service.

The other is that he understands full well - and does not want to reveal the latter number.

As has been clear for many months, and as is confirmed by the Tasmanian trial, taxpayers should be very concerned.

The Gillard Government proposes to punt $43 billion of taxpayers’ money in a highly risky commercial venture.

The cavalier way they took this decision suggests there is no appreciation of just how risky it is.

The normal precautions which are routinely taken by private sector companies in this industry have been ignored.

Now the early market indications suggest a gulf between Labor’s optimistic expectations and cold commercial reality.

In the early 90s, state Labor governments in Victoria and South Australia found that banking was not as easy a business as it looked.

There is every chance that a federal Labor Government will learn the same painful lesson about telecommunications.

Paul Fletcher is the Federal Liberal Member for Bradfield and previously worked as director of corporate and regulatory affairs at Optus.

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