NBN Co will stay off federal budget books

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NBN Co will stay off federal budget books

Profit warnings won't trigger a review.

NBN Co’s prized status as a public non-financial corporation is not under review despite warnings it may never be profitable, ensuring it will remain off the federal budget.

The network builder was granted public non-financial corporation (PNFC) status by the Australian Bureau of Statistics (ABS) in 2009.

“As a result [NBN Co] is considered to act independently of government for budget accounting purposes,” the ABS told the Department of Finance at the time.

“Funding may be provided to NBN Co as equity injections (in exchange for shares) which do not have a budget impact.

“If NBN Co loses its PNFC status, any funding provided to NBN Co for building the NBN will have a negative budget impact.”

Questions over whether NBN Co still qualifies for PNFC status have been raised over the past week after both NBN CEO Bill Morrow and the ACCC warned that the project may never be profitable.

The admission puts NBN Co in danger of violating several “tests” used by the ABS to determine PNFC status.

A partially redacted Finance document [pdf] released under freedom of information lays out three tests that govern whether an entity qualifies for PNFC status.

Those tests are that the company has an IRR at or above the bond rate; that its prices are “determined by the market” and that it “is able to recover the majority of its operating costs through ongoing revenue”; and that its IRR “will support an eventual sale of the company”.

NBN Co’s most recent corporate plan maintains guidance of an internal rate of return (IRR) of between 3.2 percent and 3.7 percent. The bottom end of the range is marginally above current Australian government bond yields.

But Bill Morrow’s comments that the company may never be profitable raise significant doubts over the accuracy of the IRR forecasts and NBN Co’s ability to pull in enough revenue to fund its ongoing operating costs.

iTnews has confirmed that the profit warning alone is not considered to be a trigger for a review of NBN Co’s PNFC status.

The ABS is relying on NBN Co still satisfying one test to avoid having to reclassify the company, and in turn avoid significant embarrassment for the government.

“Government units are classified using the principles outlined in the ABS government finance statistics concepts sources and methods, which are based on the relevant international standards maintained by the International Monetary Fund,” an ABS spokesperson told iTnews.

“Government units are considered public corporations if all or most of their output is provided to consumers at economically significant prices.

“NBN Co was classified as a public non-financial corporation when it was established as it meets this criteria.

“The classification of NBN Co is not under review.”

It is not clear what it would take for NBN Co’s protected status to be reviewed or overturned.

While the three tests exist, they are not seen as a definitive guide for PNFC qualification, and it appears there are no specific triggers for reviewing NBN Co's compliance status.

That lack of clarity has been a long-term issue.

An April 2013 background paper [pdf] released by Malcolm Turnbull cast doubt over whether NBN Co could stay off the budget in the long-term.

He believed the Coalition’s NBN policy at the time was “the only way to ensure NBN Co can continue to have a legitimate claim to remaining off budget”.

However, he noted the difficulty in challenging the PNFC status.

“There is no definitive set of rules which determine whether an entity is a PNFC or not,” Turnbull wrote.

This was largely confirmed by the ABS spokesperson.

“The ABS has not published guidance on what triggers a classification review,” the spokesperson said.

“In the past, these have occurred infrequently in response to events such as privatisation transactions and machinery of government changes.”

No new IRR guidance

NBN Co has confirmed to iTnews that it will not revise its IRR guidance downwards following Morrow's profit warnings.

“NBN has no plans to revise the IRR guidance published in our 2018 corporate plan," a spokesperson for the network builder said.

While it maintains IRR guidance, it continues to satisfy another test for PNFC status.

That - together with the opaqueness of the PNFC classification process - should ensure NBN Co is able to avoid reclassification permanently.

Broken model

Both NBN Co and the government are under enormous pressure to fix the NBN’s economic model.

A range of options have been floated over the past week, including an off-budget bailout, a writedown of the value of the NBN assets, or additional regulation to protect the NBN from any form of competition.

Most of those options have been summarily dismissed by the government, which largely wants to stick out the current business model as long as possible.

NBN Co is attempting to change its pricing model through a long-running consultation with retail service providers (RSPs).

However, it is somewhat hamstrung on how much change it can achieve through this process, owing to existing regulations.

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