Ministers for the Department of Communications and the Arts

CommsDay Summit 2014

9 March 2014


I appreciate the opportunity to speak here this morning. Thanks as always to Grahame Lynch and Commsday for inviting me, and for organising one of the industry's best-attended events.

This is my seventh speech to a Commsday event as shadow minister or Minister for Communications.

In contrast to the six previous occasions, I can genuinely say to you this morning that I am increasingly, if given the history a little cautiously, confident about the NBN.

I am confident that we are assembling the right team to successfully run the company.

I am confident that a more pragmatic and cost effective high speed network can be deployed.

And I am cautiously confident that we have begun to reset unrealistic expectations in the community and in doing so begun to correct a considerable amount of misinformation.

I am becoming confident (this may sound idealistic) that some-time in the near future we may be able to talk less about plumbing, and focus more on how the communications sector and broader economy need to adapt and change to make the most of ubiquitous high speed broadband.

I don't want to overstate our progress since September. There's an immense amount of work yet to be done. NBN Co's board and management need to transform the company's culture and capabilities, settle new deals with Telstra and Optus, and resolve the many unhelpful surprises we've found inside NBN Co.

The Government has to settle important industry questions while picking our way through a minefield of interlocking policies, laws and commercial obligations, where everything is connected and nothing is quite as it appears. It's a rum legacy. I sometimes wonder what Senator Conroy could have been thinking when he put this mess together - and then remind myself some questions are better left unanswered.

I'll come back to those industry questions in a moment.

Progress at NBN

Yesterday Ziggy Switkowski highlighted some of the milestones NBN Co has achieved over the past six months, so I don't need to go over that ground again. What I do want to do is to thank Ziggy for the exceptional job he's done as executive chairman of NBN Co.

Ziggy's ascent from the executive chair role to chairman of NBN Co marks an important change.

It means Ziggy may occasionally have a few weeks without being summonsed to Lieutenant Onoda's jungle fortress to give evidence about recent developments about the outside world.

It also means, of course, that Bill Morrow has begun in his new role as CEO of NBN Co. Having Bill at the helm will help the company in many ways. He has turned around telecom companies in the US, Japan, Europe, and most recently in Australia at VHA. We're fortunate to have him.

Bill's appointment takes one, at least, of the many uncertainties currently facing the NBN off the table.

Several other uncertainties will also become less so in the relatively near future. NBN Co will shortly finalise the second phase of its Strategic Review, this time focused on the so-called ‘last 7 per cent’ – the 1 million Australian premises where it is most costly to provide broadband, which in most cases will be served by satellite or fixed wireless.

By the middle of the year audits of NBN Co's governance by Korda Mentha and the NBN policy process by Bill Scales will also be nearing completion. Likewise, the Vertigan cost-benefit analysis and review of regulation will provide its final report – although we expect some interim guidance from Vertigan prior to then on several regulatory issues.

Another major area of uncertainty at the moment – one where the Vertigan panel will have something to say – is obviously TPG's announced intention of rolling out fibre to the building in inner city areas using an exemption from the so-called level playing field provisions of the Telecommunications Act.

I appreciate there is strong industry interest in the Government's response to TPG's plan. And I should note that had the previous Government allowed NBN Co to deploy VDSL in apartment buildings and office buildings, many if not most of the buildings targeted by TPG would have been serviced already by NBN Co.

But I'm not going to pre-empt the findings of the Vertigan panel on that matter.

Statement of Expectations

Yet another area of uncertainty for NBN Co, albeit only mild uncertainty, has been the company's approach to its network in the wake of the first part of the Strategic Review, which in December recommended to the Government that the primarily fibre rollout switch to what was termed an ‘optimized multi-technology mix’ NBN.

The multi-technology mix NBN, as the name suggests, will make use of existing infrastructure where this is economically beneficial and consistent with its broadband quality and speed objectives. In other words the approach, which depends of course on the completion of the negotiations with Telstra, is designed to give NBN Co the same flexibility in terms of technologies that would be available to an incumbent.

NBN Co will determine which technologies are most cost-effective and should be utilised on an area-by-area basis, taking into account factors such as existing infrastructure, geotype, population density and demand for high speed services. Of course this will take place within NBN Co's other rollout parameters, such as achieving minimum download and upload rates, serving under-served areas with priority, and generating near term revenue.

The Government has approved NBN Co's new strategy, and to allow the company to commence implementing it, the Minister for Finance and I are today announcing a new Statement of Expectations to NBN Co from Shareholder Ministers, which is the document that gives the company its revised riding instructions.

The Statement is consistent with the Government's view that rather than imposing technological constraints on NBN Co, politicians are better placed telling the company what objectives it should pursue, and how much Government money they have to achieve them.

Communications in the bush

But today, I wanted to focus on a specific area of the NBN project, which is its delivery outside the fixed line footprint – or what I will simply refer to as the ‘final 7 per cent’.

If there is an idea that unites all sides of politics when it comes to the National Broadband Network, it is that regional Australia deserves a ‘fair go’ when it comes to telecoms infrastructure and that one way or other there is an important role for Government in ensuring that it gets that fair go.

Almost all the regional seats in the House of Representatives are filled by Coalition members – mostly Liberals I might note. We have farmers, bush pilots, rural doctors, lawyers and journalists. We even have an undertaker from regional Australia!

Our focus on the bush is well illustrated by this point: in the six years of Labor Government not one penny of Commonwealth money went to subsidise the elimination of mobile blackspots in regional areas. We, like the Howard Government, are committing substantial funds ($100 million in this term) to do just that.

Australia is a vast land and one of the great challenges of the National Broadband Network is getting to remote and isolated communities. Interestingly, we are much more densely settled than many people realise. Around 74 per cent of Australians live in areas with a population density of more than 1,000 people per square kilometre, compared to only around 48 per cent of residents in the United Kingdom.

That being said, this project by its very nature is going to result in huge subsidies being delivered to the bush, in amounts that are much greater than the previous universal service obligation delivered to Telstra1. This subsidy is being delivered in a number of ways:

  • First of all, a part of the cross-subsidy involved in serving regional areas is captured in the cost of NBN Co's transit network (which bears a staggering $7 billion price tag once NBN Co's capex and the capitalised value of dark fibre leased from Telstra are both taken into account).
  • Separately Telstra is being paid around $230 million a year, under contracts administered by TUSMA, to maintain the copper network for a further 20 years outside of the NBN's fixed-line footprint.
  • The deployment of the fixed wireless and permanent satellite networks involves large upfront capital investment. The NBN Co 2012–2015 Corporate Plan, published in August 2012, estimated capex on the two networks would be $3.1 billion from 2011 to 2021.
  • Uniform national wholesale prices (and identical entry level products) and constrained take-up mean the fixed wireless and satellite networks may not even recover operating costs. In the 2012–2015 Corporate Plan, opex for the two was estimated to be $1 billion from 2011 to 2021, while revenues were estimated to be around $400 million to $500 million. The operating loss of $500 million and capex of $3.1 billion combine to be a net cost of $3.6 billion.

But rather than being dragged into the old argument about cross subsidies versus direct, one of the key priorities for the Government is ensuring that the subsidies that are being provided are working as efficiently as possible – and that users in rural and regional Australia will get a service that actually reflects the huge amounts of money being spent.

NBN Co's Coverage Gap in the Last 7 Per Cent

We are not in a position quite yet to release the Strategic Review into the fixed wireless and satellite programs. That review involves important recommendations to the Government about the strategic direction of the company, which are currently in the final stages of being finalised by the Board.

However, I can outline here some of the findings of fact that there are material problems with previous corporate plans and the provisioning of services in the final 7 per cent.

The key challenges are:

  1. a material underestimation of likely demand
  2. the inability of the NBN Co to date to secure spectrum for the fixed wireless network in the urban fringes of our main cities
  3. a revision of the fixed line footprint boundary resulting in an increase of the serviceable addresses outside the fixed line footprint.

Put together, these problems mean that without any policy changes, the project as planned would not be able to service an estimated 200,000 to 300,000 premises outside of the fixed line footprint.

Previous corporate plans materially understated likely demand. One of the issues is that those plans understated the growth in the number of houses outside the fixed line footprint – they forecast that there would be 975,000 premises outside of the fixed line footprint in 2021 whereas the work done by the Strategic Review team found that that number would be closer to 1.02 million.

Additionally, the 2012 corporate plan made static assumptions about competition and broadband availability in the bush. At the time the plan was published only 65 per cent of houses had access to broadband whereas two years later penetration is up to 70 per cent. The demand models also greatly overestimated likely competition from mobile, alternative satellite providers and DSL. And yet, the popularity of the Interim Satellite Solution and the promotion of NBN Co fixed wireless plans by Telstra shows that demand is likely to be much more robust. So instead of the assumed take-up rate of between 22 and 25 per cent, the work done so far by the Strategic Review team has modelled demand in the satellite footprint to be between 50–63 per cent in the satellite footprint and between 38–51 per cent in the fixed wireless footprint. Even those assumptions seem conservative.

Taken together, the company's modelling shows that demand in the non-fixed line footprint was underestimated by two to three times. In other words, instead of the forecast 230,000 connections, actual take-up will result in 440,000 to 620,000 connections.

A second major issue is that the company simply does not own the spectrum to be able to deliver services to the fixed wireless footprint. This affects approximately 320 fixed wireless towers, covering 80,000 premises, typically on the outskirts of major metropolitan centres like Sydney and Melbourne. In short, the NBN Co does hold 2.3 GHz and 3.4 GHz spectrum in regional areas, but in those metropolitan regions, spectrum in that band is held by Optus.

To be fair to NBN Co's previous management, a provision had been reserved to address the missing spectrum issue – although that provision is likely to fall well short of what is needed to secure the necessary spectrum.

Taken together, if the NBN were to take steps to eliminate the ‘coverage gap’, the company faces a deterioration of operating cash flows of its satellite and fixed wireless networks of up to $1.2 billion by 2021.

Implications for NBN Co's Future Direction

To the extent that there is a silver lining in this latest iteration of the NBN's Strategic Review, it is that the company was aware of the upward pressure on costs in its initial Strategic Review report, released in December, and had included a contingency (across all six scenarios) accordingly. In other words, the funding requirement announced in December is unlikely to change.

But there are some key lessons as the company learns from these early challenges.

First is that the NBN Co – and by extension, the Government – cannot solve every problem simply by throwing more money at it. That has driven our considerations with the Interim Satellite Service, for instance, and will continue to animate our response to issues raised in the Strategic Review.

As you know the previous Government told 250,000 households they were eligible for the ISS but only bought enough capacity for 48,000. This expansion of eligibility meant many people living very close to the city got on the service and others in genuinely remote areas could not. Added to that was an inept management of a fair use policy which combined meant that for $351 million of investment 44,000 customers are, at peak times, getting dial up speeds – at a net subsidy cost to the NBN Co and hence the taxpayer of $7,300 per customer.

We have addressed this problem by buying some more capacity, introducing a rigorous fair use policy and making another 9,000 services available with a subsidy similar to that for the old Australian Broadband Guarantee. It is $34 million to mitigate, not eliminate, a mess left by Labor.

The implications for the Long Term Satellite Service are wide-ranging. The economics of the satellite industry are by their very nature different to economics of fixed line. As users require more bits and bytes on fixed technologies, there is a small incremental cost for operators to meet that demand – usually in the form of a backhaul upgrade or using a new last mile technology. Satellites have a finite capacity and once that is exhausted, you need to put a new satellite up in the air.

This is not to say that the broad promise of a national wholesale platform is dead – or even that we can't deliver loosely termed, ‘metropolitan equivalent’ services via the Long Term Satellite Service. But we cannot repeat the mistakes of the past and the NBN Co team is working very hard to ensure the product specifications on its service will deliver the services that have been promised.

The second important lesson is that the satellite and fixed wireless networks will likely be drags on the operating budget of the NBN Co, even after the initial capital expenditure period, Although the NBN Co is exploring the possible feasibility of joint ventures – if, for instance, there are third-party assets which can assist in the build or management of the networks – there is virtually no possibility that the company will be able to offload any underperforming assets to the private sector.

I have always said that I think the privatisation of the National Broadband Network will be a key priority for Wyatt Roy in his second term as Prime Minister even that may be too soon for the services to the 7%.

And finally, as we have said right from the start, the NBN Co needs to be flexible and pragmatic about which technology to use in each geographic location. More detailed advice on this subject will still be provided by the company, but it is suffice to say that there are a number of opportunities for the company to make its rollout more efficient, including a greater use of fixed line solutions – such as fibre to the node, distribution point and home – wherever that makes sense.

My Broadband

Before I close, one more announcement: the Government's ‘MyBroadband’ website will, from today, add a speed test to so that the Government will be able to collect more granular detail about users' specific line speeds, which will feed into the distribution area -level data that has been gathered from telcos and Government sources.

I encourage all Australians to visit the site, take the speed test and find out what speed you are getting right now. Those speed test results are going to be captured by the Department and we will look to map broadband speeds across the country.


I want to close by making one final observation. Last week, the ACMA released a report into the mobile broadband sector, showing that productivity gains had increased our national GDP in the six years to 2013 by $33.8 billion.

It's not hard to understand why – mobile broadband is an input into every other sector in our economy, whether it be agriculture or finance or the public service.

But of the $33 billion of economic gains, more than a fifth was due to productivity gains within the sector itself. In other words, the efficiency of the mobile operators – continually competing to figure out ways to deliver more bits and bytes for less and less money – has delivered around $7 billion of benefits to consumers.

And so when we talk about the NBN project, we can't separate the means from the end. Yes, the NBN will absolutely be an important input into the way that every sector in the economy operates. But that doesn't mean that the benefits will be so vast, we don't have to worry about the efficiency of the way the company manages that investment.

Thankyou again for your time and I look forward to speaking to you throughout the conference.

1Although the actual size of the USO levy was the source of great debate within the industry, and varied from year-to-year, for the most part the subsidy was between $150 to $300 million a year. The Parliamentary Library, for instance, report shows that in 1993–94, the various carriers and the regulator negotiated a levy of $230 million. In 1999–2000, the amount was capped at $280 million. Source: Parliamentary Library, 2000, available online here.

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