NBN FTTN network 'will have paid for itself' by 2023

NBN Co’s fibre-to-the-node footprint “will have paid for itself” by 2023, according to the government and NBN Co, and will continue to be profitable even as some FTTN users switch to full fibre.

The claim was made both by Communications Minister Paul Fletcher and by NBN Co in its new corporate plan, though it was Fletcher who was specific on the timing.

“The first FTTN areas have been in operation for five years and the entire FTTN network will soon have generated more revenue than it cost to build and run,” NBN Co said in its corporate plan.

“That is, the FTTN network will have paid for itself as well as being able to provide very good speeds to millions of Australians over the last five years and well into the future.”

Fletcher told the National Press Club on Wednesday that “by 2023 ... the FTTN network will have generated more revenue than it cost to build and run.” 

“It will have paid for itself,” he said.

The comments appeared aimed at neutralising any potential criticism that NBN Co might have invested in an asset that is already considered partially unfit for purpose - or at least one not sweated nearly enough to justify going down the FTTN path in the first place.

NBN Co this week said it would spend $3 billion on an upgrade path for half of the FTTN network to be able to move to full fibre, should those customers “demand” to do so.

It will do this by running new fibre from the node cabinet into streets, but it won’t build fibre lead-ins to homes unless those residents enter into certain, as yet undetermined contractual commitments. This model was first floated by NBN Co as an option way back in September 2017. 

From 2023, when 2 million FTTN users are meant to be able to “order” a full fibre-based service (though 80 percent won’t actually have it), both the government and NBN Co argue that both the upgraded portion of the FTTN network, and the portion that is still FTTN, will be profitable.

“The FTTN network will operate for many years beyond 2023, giving very good service to those customers who do not want ultrafast broadband, and it will continue to generate financial returns,” Fletcher said.

Separately, NBN Co CEO Stephen Rue said there would be a good return on invested capital (ROIC) from all upgraded portions of the NBN, including FTTN.

“The incremental investments that we are outlining in this [corporate] plan we expect to have a double-digit return on,” Rue said.

“There is a good return to the company over the period for the incremental investments.”

What makes newly upgraded areas profitable is still unclear, insofar as what customers in these areas will be paying in return for end-to-end fibre.

What makes this part of the network profitable might feasibly be longer contractual lock-in to higher tier plans in order to qualify for that fibre connection.

NBN Co said it anticipates upgraders being able to get fibre in return for ordering a service as low as 100Mbps, though this is still speculation and subject to an industry consultation process.

Raising stakes

Financial return on investment is being afforded considerable weight, with the government making clear that one reason for the upgrades is to boost the value of its equity stake in the project.

“These new investments are targeted and demand-driven,” Fletcher said.

“They will make NBN Co more profitable and boost the value of the government’s equity stake in NBN Co. 

“That’s important to NBN as well as to the millions of Australians who use the network, many of whom will now have new options.”

It’s also important to the government, which at some point is likely to try to sell down that equity stake.

NBN Co’s fair value - or saleable value - was estimated to be just $8.7 billion at the end of June 2019, a bit less than one-third of the equity the government put into the project.

There has been speculation throughout the week in certain circles that the $4.5 billion of upgrades to the network - all to be privately financed - are mostly a way to boost NBN Co’s value, by fixing some of the most problematic aspects of the multi-technology mix such as underperforming hybrid fibre coaxial (HFC), fibre-to-the-curb (FTTC) and FTTN connections.

While Fletcher was open about the link between the upgrades and the value of the government’s equity stake, he was considerably less keen to be drawn on what the present and future (post-upgrade) value of the government’s investment might be.

“NBN Co is obviously not a listed entity so we don’t have a market value we can look to every day,” Fletcher said.

“Value is a matter that will be determined at some point in the future if and when there’s a transaction when NBN Co passes into other hands. 

“We’ve obviously put all of this through a test in terms of a return on investment. These are positive ROI investments, and therefore from first principles of corporate finance, we believe these will increase the value of NBN.

“But I’m not going to put a number on it.”

Rue was likewise keen to avoid discussion of future privatisation.

“Privatisation is not something for me,” Rue said.

“It’s not something I’d comment on. It’s a matter for shareholders, not the CEO of the company. 

“But my job is of course to ensure that we drive a business that not just delivers upon government policy and the needs of the community, but also drives increased value and increased cash flows to enable us to deliver upon the [corporate] plan.”

NBN Co did say that its internal rate of return (IRR) would rise from 3.2 percent to 3.7 percent as a result of the upgrades, since they are intended to drive growth in high-speed internet use, which will increase revenue.