Monday, September 23, 2013

Australia NBN Making Course Correction to Save $56 Billion

Australia appears to be making a switch of access topology for its planned National Broadband Network from “fiber to the home” to “fiber to the neighborhood.”

It appears most of the Australian National Broadband Network company's board members have tendered their resignations, at the request of the Communications Ministry.  NBN Company chairwoman Siobhan McKenna and all but one of her board colleagues have offered their resignations to the Communications Ministry.

The reason is that the new national government campaigned, in part, on a promise to get the network built faster, at far lower cost.

The change to a less fiber-intensive network is said to represent a final cost of A$20.4 billion (US$18.4 billion), well below the A$38 billion ($33.8 billion) originally stimated for the fiber to home plan, and far less than the $94 billion critics now say the former network would cost.

Some critics estimate that the Australian National Broadband Network (NBN) will cost A$94 billion dollars, not the A$44 billion its supporters have claimed. At least in part, that is because
of delays of several types and overly-optimistic assumptions.

The original business plan assumes wholesale revenue will start at $22 per month and then climb to $62 by 2020 or 2021 when the NBN is finished. That is growth of nine percent a year beyond inflation. Other major ISPs might say average prices for Internet access do not climb more than nine percent a year.

So critics say revenue projections are wildly overestimated.

Another assumption is that construction costs will average about $2400 per location. Critics say the actual cost will be closer to $3600. The cost and revenue assumptions also are contingent on completing the project on time, and so far the project has encountered significant delays.

The NBN Co. claims it already is connecting locations for $2200 to $2500. Critics say those are costs for the easiest builds, and will not reflect average cost as the more difficult locations are tackled.

Some supporters argue there will be a learning effect, driving costs down over time. But several contractors have pulled out of their deals with NBN Co. because they cannot do the installs for the prices NBN says it is paying.

NBN Co had expected to have 566,000 active users by June 2013. It managed to sign up just 33,600.

Some have argued the operating risk is high as well. Among the key assumptions of the fiber to home plan are that 30 year incremental rate of return will be seven percent (7.1 percent) on a capital investment of $35.9 billion through 2020, based on wholesale access rates between $20 and $27 a month.

The current forecast calls for about 44 percent take rates in 2015.

Revenues to 2021 are forecast at $23.1 billion, with operating expense expected to be
$26.4 billion.

The latest version of the original business plan does suggest that the actual direct financial return from a fiber to home access network, built on a continental scale, is relatively small, despite its societal and economic importance.

With a seven percent incremental rate of return, over a 30 year period, a reasonable observer might simply note that there is little room for error where it comes to the base assumptions.

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