The Corporate Plan was modified recently to increase the number of Points of Interconnect (POI) for retail ISPs to the NBN from 14 to 120. This is to maintain the profitability of privately owned backhaul network companies and will reduce the profitability of the NBN. The plan assumes a firm agreement will be reached with Telstra, both to allow for use of their access to homes and to prevent them from competing with the NBN.The government has emphasised the public benefit of ubiquitous high-speed broadband is to productivity, jobs, healthcare and education, but has decided not to provide a cost benefit analysis to check if these benefits outweigh the costs.
However, the major question with the NBN plan remains as to if Australians will want fixed fibre optic broadband, in addition to the wireless broadband they will have through their mobile phones, tablet computers, netbooks, laptops and other portable devices. By the time the NBN is widely deployed, fixed line telephone services will be essential obsolete. The common way to access the web will be hand held wireless devices. The major obvious application for the NBN is to replace the current cable and satellite Pay TV services. It is not clear if it be worth paying for a fibre optic service just for pay TV.
On aspect of the plan which has not receive attention is the use of automation to service the large number of retail users. While NBN is a wholesale provider, and so will have few direct customers, it will have to manage the installation and maintenance of millions of terminations of the fibre and wireless connections. The NBN plan envisions progressive automation of the management of this, from April 2011 with manual processes for the start of the "End-User Trial Capability" to fully automated systems by August 2012 "Ready for Market". Telstra and other telecommunications companies have had ongoing problems with automated systems, despite decades of experience. There is a risk that NBN will concentrate on the engineering problems of installing a fibre network and assume that installing software is simple. Failure of the software would make the entire project unworkable.
Here is the Table of Contents and Summary from the National Broadband Network Corporate Plan 2011 – 2013 (NBN Co., 17 December 2010), converted from the PDF, omitting some tables:
TABLE OF CONTENTS
TABLE OF EXHIBITS 7
- EXECUTIVE SUMMARY 11
- INTRODUCTION AND TIMING OF THE CORPORATE PLAN 11
- OBJECTIVES OF NBN CO 12
- MAJOR ISSUES RELATED TO OBJECTIVES 13
- NBN CO TARGETS FOR JUNE 2013 15
- NBN CO VOLUME ROLLOUT 16
- EXTERNAL BENEFITS 16
- STEPS IN DELIVERING THE NATIONAL BROADBAND NETWORK 17
- PART OF A 30-YEAR VIEW AND 9.5-YEAR DEPLOYMENT 22
- SUMMARY OF FINANCIAL FORECASTS: PLAUSIBLE SCENARIOS 25
- GOVERNMENT POLICY DECISIONS 26
- BUSINESS ENVIRONMENT 29
- THE ROLE OF NBN CO IN TRANSFORMING THE AUSTRALIAN TELECOMMUNICATIONS INDUSTRY .. 29
- CURRENT STATE OF AUSTRALIAN TELECOMMUNICATIONS INDUSTRY . 31
- WIRELESS-ONLY HOMES (RESIDENTIAL MARKET) 32
- AUSTRALIAN BROADBAND MARKET . 33
- KEY INDUSTRY TRENDS . 35
- BANDWIDTH DEMAND AND THE ROLE OF FIBRE . 38
- KEY ASSUMPTIONS 45
- KEY ASSUMPTIONS IN THE CORPORATE PLAN 45
- POLICY SENSITIVITIES 52
- FORMATION AND CORPORATE STRUCTURE 53
- BRIEF HISTORY 53
- MANAGEMENT STRUCTURE AND KEY ROLES 53
- HUMAN RESOURCE AND INDUSTRIAL RELATIONS 55
- FINANCE, PROGRAM MANAGEMENT AND RISK .. 56
- IT SYSTEMS 57
- PROCUREMENT 57
- NETWORK DESIGN AND TESTING 61
- NETWORK DESIGN – KEY OBJECTIVES .. 61
- MAJOR SUPPORT SYSTEMS AND FACILITIES 65
- NETWORK DESIGN TESTING . 67
- FIRST RELEASE SITES 68
- NBN TASMANIA .. 69
- LAST 7% . 69
- TYPE 2 PASSIVE NETWORK DESIGN .. 72
- BATTERY BACKUP . 73
- FUTURE PROOFING THE NBN 75
- NETWORK CONSTRUCTION .. 77
- CONSTRUCTION – KEY OBJECTIVES .. 77
- ACHIEVABILITY OF KEY OBJECTIVES .. 78
- MAIN ASSUMPTIONS OF THE DEPLOYMENT SCHEDULE 78
- MODULAR DEPLOYMENT 79
- GEOGRAPHIC COVERAGE PRINCIPLES 79
- CONSTRUCTION POLICIES 79
- QUALITY CONTROL AND CONTINUOUS IMPROVEMENT 81
- CONSTRUCTION PARTNER SELECTION PROCESS .. 82
- SUPPLY CHAIN MANAGEMENT 82
- WORKFORCE PLANNING – SKILLS AND ASSURANCE .. 83
- SUMMARY OBJECTIVES FOR CONSTRUCTION. 83
- COMMERCIAL OPERATIONS . 85
- ACCESS SEEKER AND END-USER ACQUISITION 85
- NETWORK OPERATIONS AND MAINTENANCE 87
- OPERATIONAL READINESS .. 88
- SUMMARY OBJECTIVES FOR COMMERCIAL OPERATIONS 89
- PRODUCT DEFINITION AND PRICING .. 91
- PRODUCT & PRICING APPROACH 91
- PRODUCT SUMMARY 91
- FIBRE PRODUCT 93
- WIRELESS PRODUCT 95
- SATELLITE PRODUCT 96
- PRODUCT DEVELOPMENT AND PRODUCT ROADMAP 97
- PRICING 100
- COMPARISON WITH EXISTING AUSTRALIAN WHOLESALE MARKET PRICING 104
- COMPARISON WITH INTERNATIONAL PRICING CONSTRUCTS 106
- SPECIAL ACCESS UNDERTAKING WITH THE ACCC .. 106
- SUMMARY OBJECTIVES FOR PRODUCT DEVELOPMENT ROADMAP 107
- REVENUE FORECASTS .. 109
- SUMMARY OUTCOMES 109
- FOUNDATIONS OF NBN CO’S REVENUE MODEL 113
- ADDRESSABLE MARKET 114
- TAKE UP OF BASIC SERVICES 115
- RESIDENTIAL AND BUSINESS MARKETS 118
- BENCHMARKING SPEED AND USAGE GROWTH . 120
- WIRELESS AND SATELLITE REVENUES.. 131
- RISKS OF THE REVENUE FORECASTS 132
- FINANCIAL FORECASTS 133
- SUMMARY FINANCIAL FORECASTS . 134
- DEPLOYMENT PROFILE 134
- TYPE OF DEPLOYMENT FOR THE FIBRE NETWORK: AERIAL VERSUS UNDERGROUND 135
- CAPITAL EXPENDITURE 135
- OPERATING EXPENDITURE 135
- WORKING CAPITAL 136
- FY2011 BUDGET . 136
- TAXATION 137
- FUNDING NBN CO 139
- DETERMINING NBN CO’S FUNDING REQUIREMENT OVER 3 YEARS AND 30 YEARS 139
- FUNDING THE FY2011 TO FY2013 PERIOD 140
- PART OF LONG-TERM FUNDING SCENARIOS 141
- ACHIEVABILITY OF DEBT FUNDING . 142
- COST OF CAPITAL . 143
- RISK MANAGEMENT 145
- RISK MANAGEMENT SYSTEM 145
- CORPORATE PLAN RISKS .. 146
1 EXECUTIVE SUMMARY
1.1 Introduction and Timing of the Corporate Plan
This Corporate Plan (Corporate Plan or the Plan) sets out the key objectives and priorities for NBN Co Limited (NBN Co or the Company) for the three years from 1 July 2010 to 30 June 2013.
The Corporate Plan is a critical part of the process of designing, building and operating the National Broadband Network (NBN) and achieving the Government's objective of providing affordable superfast broadband to all Australians, including through structural reform of the Australian telecommunications industry.
The purpose of the Corporate Plan is to identify and address:
- The key objectives set by the Government for NBN Co during the term of the Corporate Plan;
- The key assumptions made by NBN Co in developing the Corporate Plan;
- How NBN Co will measure its achievement of core financial and operational objectives;
- The major challenges expected to be faced by NBN Co in meeting its objectives;
- The critical risks to the Company, and strategies for mitigating those risks;
- The critical Government policy issues that will impact NBN Co's ability to achieve its objectives; and
- The financial forecasts, including funding requirements during the term of the Corporate Plan.
The Corporate Plan is prepared in accordance with the requirements of the Commonwealth Authorities Companies Act 1997 and Governance Arrangements for the Commonwealth Government Business Enterprises (June 1997).
The Corporate Plan was prepared with regard to the timing objectives set by the correspondence from Shareholders Ministers between June and December 2010.
1.2 Objectives of NBN Co
1.2.1 Key Objectives
The Government has stated its broad objectives for the NBN as follows:
“The new superfast network will:
- Connect homes, schools and workplaces with optical fibre (fibre to the premises or 'FTTP'), providing broadband services to Australians in urban and regional towns with speeds of 100 megabits per second - 100 times faster than those currently used by most people extending to towns with a population of around 1,000 or more people;
- Use next generation wireless and satellite technologies that will be able to deliver 12 megabits per second or more to people living in more remote parts of Australia;
- Provide fibre optic transmission links connecting cities, major regional centre and rural towns;
- Be Australia's first national wholesale-only, open access broadband network;
- Be built and operated on a commercial basis by a company established at arm's length from the government and involve private sector investment; and Be expected to be rolled-out, simultaneously, in metropolitan, regional and rural areas."1
To design, build and operate the broadband network required as the foundation of the Government's NBN policy the Government established NBN Co on 9 April 2009 as a Company under Corporations Law and operates under the Commonwealth Authorities Companies Act, 1997.
NBN Co's understanding of its objectives has been enhanced by correspondence from the Government. NBN Co's objectives can be summarized as:
- The network should be designed to provide an open access, wholesale only, national network;
- The technologies utilised should be Fibre to 93% of premises (including Greenfields developments) (defined in this Plan as the Fibre Network), Fixed Wireless to 4% of premises (delivering at least 12Mbps) (defined in this Plan as the Fixed Wireless Network or Wireless Network), and Satellite to 3% of premises (defined in this Plan as the Satellite Network);
- NBN Co should offer uniform national wholesale pricing over the network, from a PoI to a premises, on a non-discriminatory basis; and
- The expected rate of return should, at a minimum, be in excess of current public debt rates.
1.3 Major Issues Related to Objectives
This Corporate Plan is based on the premise that the Government's intention is to build the NBN as the sole fixed line network from premises to PoI, other than fixed line infrastructure already in existence as at 1 January 2011, and on the assumption that Telstra will structurally separate and migrate its customer base to the NBN. This Corporate Plan therefore assumes that appropriate mechanisms will be established by the Government to prevent the NBN from being “cherry-picked" in commercially attractive areas.
1.3.1 Cherry Picking
In building the NBN to meet the objectives set by the Government, NBN Co recognises that there are segments of the market that are not commercially viable. There are also areas of the market where an FTTP rollout would be commercially viable and, hence, attractive to other market participants.
These areas include Greenfields estates and denser suburbs with a high income demographic.
Given NBN Co's initial focus on regional areas and the need to cross-subsidise non-commercially viable market segments, NBN Co will not be able to compete effectively with cherry pickers, who focus on commercially attractive areas only.
The Plan assumes effective regulatory protection to prevent opportunistic cherry picking as set out in the Government's Statement of Expectations. New fibre networks built after 1 January 2011 for residential and small business purposes will need to be Layer 2, wholesale only and open access.
NBN Co will retain the option of overbuilding infrastructure. The Government will consider the introduction of a levy, if necessary, to prevent opportunistic Cherry Picking.
1.3.2 Points of Interconnect (PoIs)
In designing the network, NBN Co has made design trade-offs, some of which have implications for industry structure. The most significant of these network design trade-offs relates to the number and location of Points of Interconnect (PoIs).
In proceeding with a network design based on 14 centralised PoIs, NBN Co placed priority on achieving minimum wholesale input costs for Access Seekers, eliminating any single point of failure above the Fibre Distribution Hub and providing for rapid traffic growth in all backhaul links due to increasing video applications.
NBN Co has now reflected the Government's policy choice of a semi-distributed PoI model in this plan. NBN Co has worked with the ACCC to apply the ACCC “competition criteria" for PoI locations.
The application of the ACCC's criteria has resulted in 120 PoIs,2 and this has been reviewed by the ACCC.
NBN Co has reflected the Government's decision that the Company should implement an internal cross-subsidy to provide uniform national wholesale pricing over the network, from a PoI to a premises.
- NBN Co is proceeding on the assumption that the ACCC will make access determinations for currently regulated transmission routes (with effect from 1 January 2011) and that the ACCC will also monitor pricing on currently exempted routes and, if necessary, will act promptly to re- examine exemptions in the event that pricing on those routes is not aligned with the ACCC's access determinations for regulated routes.
Since NBN Co has been designing and planning on the basis of 14 centralised PoIs since May 2010, there is an impact on deployment timing, costs and End-User take-up of moving to a semi- distributed PoI model, which has now been reflected in this Plan.
1.3.3 Unbundling and Separation
NBN Co has proceeded with its network and system design on the basis that it would provide a layer 2 bitstream service only, using predominantly a GPON architecture. The company is not preparing for the provision of layer one services, layer one unbundling, functional or structural separation.
However, as directed by Government, a trial of 'Home Run' architecture will take place in a Greenfields site in 2012 and NBN Co will establish an asset register and cost allocation methodology for asset and cost, but not revenue accounting.
1.4 NBN Co Targets for June 2013
Within the broader objectives outlined above, NBN Co has identified a number of specific high level deployment targets to be achieved by 30 June 2013.
These targets have been prepared from NBN Co Management's high level assessment of the of the change to 120 PoIs rather than 14 PoIs and the limitations a semi-distributed PoI system places on the sequence in which geographies can be rolled out. The targets and roll-out sequencing are informed by NBN Co's presumption that it will be the sole provider of fixed line network from premises to PoI, in effect roll-out sequencing will be based on engineering and national factors, instead of a need to compete with other carriers pre-emptively cherry-picking attractive markets.
Exhibit 1.1: Premises Passed or Covered (incremental Year-on-Year) ...
|FTTP Brownfields||FTTP Greenfields Build||FTTP Greenfields BOT||Satellite First Release||Wireless||Total|
Source: NBN Co
Note: Premises rounded to the next thousands.
A premise is passed / covered when the shared network and service elements are installed, accepted, commissioned and ready for service which then enables an end user to order and purchase a broadband service from their choice of retail service provider.
Exhibit 1.2: Premises with Active Service (Incremental Year-on-Year)
|FTTP Brownfields||FTTP Greenfields Build||FTTP Greenfields BOT||Satellite First Release||Wireless||Total|
Source: NBN Co
Note: Premises rounded to the next thousands.
A premise is activated when a valid service order is received to install the dedicated optic fibre cable connection to the premises, optical network termination unit and reliable power supply unit with battery backup option (for Fibre premises).
These targets are indicative as the rollout is dependent on:
- The availability of exchange facilities for the location of the semi-distributed PoIs;
- Negotiations yet to finalise on commercially attractive terms the procurement of Greenfields Build-Operate-Transfer (BOT); and
- Securing contracts with suppliers and construction contractors on competitive terms and conditions.
1.5 NBN Co Volume Rollout
Following the ramp-up into volume rollout described in the section above, a full deployment rate of almost 6,000 premises passed per day is planned for FY2014. A significant risk to achieving this planned rate, and hence, the volume deployment plan, is a possible economy-wide shortage of available construction resources at an acceptable cost. In particular, this will be dependent on the overall market demand for labour. NBN Co will work with the training industry to ameliorate the impacts of possible labour shortages.
A second issue which could impact on the number of new Greenfields premises available to be connected is the capacity of the housing construction industry. If new start housing was to be significantly impacted by labour shortages there would be a consequent impact on NBN Co's financials.
1.6 External Benefits
The Government has established NBN Co to design, build and operate a broadband network that satisfies the four objectives laid out in Sub-Section 1.2.1, Key Objectives.
It is NBN Co's understanding that once the NBN is available the Government will want to pursue the achievement of public policy objectives in the areas of healthcare, education, aged care and other areas, as deemed appropriate by Government. These additional services and policy objectives are not part of NBN Co's remit and hence, do not form part of NBN Co's Corporate Plan.
Sub-Section 1.2.1, Key Objectives, notes that the Government, as owner of NBN Co, must achieve a rate of return from its investment in NBN Co in excess of current public debt rates. This means the Government must receive its capital back plus interest.
This Corporate Plan sets out how this will be achieved.
NBN Co, which is the corporate entity charged with designing, building and operating the underlying broadband infrastructure, is an enabler of the Government's broader NBN policy objectives.
The Government has made numerous statements regarding the benefits Australian society can expect as a result of having access to the NBN Co (in addition to the financial return the Government will have as owners of NBN Co).
Numerous community and industry bodies have also made comments regarding the benefits specific communities and industries can expect as a result of having access to the NBN Co network.
It is not part of NBN Co's role to determine the nature, magnitude or prioritisation of these additional benefits, commonly known as 'externalities'.
Nevertheless, NBN Co intends to identify relevant market developments and trends for vertical segments in order to inform its product roadmap prioritisation. This is described in Section 8.6, Product Development & Product Roadmap, of this document. NBN Co anticipates commissioning an external company to undertake an analysis of the commercial impact of these trends.
1.7 Steps in Delivering the National Broadband Network
1.7.1 Achievability of the Programme Plan Timeline and Objectives
The major objectives and timeline described in this section have been informed by the recent policy decisions and announcements from the Shareholder.
Dependencies remain with regards to the execution of Government policies (and other matters external to NBN Co) as well as the progress of the negotiations with Telstra.
Therefore, the timeline and objectives may become impacted and would need to be revisited if these dependencies are not finalised within the timeframe NBN Co has currently assumed (as described in this Plan).
1.7.2 Annual Updates
The assumptions made by the Company, which underpin the Plan, together with the business strategies and development of capabilities of the business, how the Company will measure its achievement of the financial and operational objectives, and the management of risk and mitigation strategies, will be reviewed on a regular basis to take into account ongoing developments.
Accordingly, it is anticipated that the Plan will be updated at least once a year.
1.7.3 ACCC Special Access Undertaking (SAU) Process
NBN Co's announced intention is to lodge a Special Access Undertaking (SAU) for approval by the Australian Competition and Consumer Commission (ACCC). NBN Co's proposed approach to the SAU is further detailed in Section 8.10, Special Access Undertaking with the ACCC, below.
NBN Co has previously indicated its view that the SAU could be finalised and lodged with the ACCC once key policy matters such as the number and location of PoIs and the approach to uniform national wholesale pricing were finalised. Further, while the current regulatory regime provides for SAUs, NBN Co considers that it would be preferable if it did not lodge its SAU until both the Competition and Consumer Safeguards Bill (CCS Bill) and the NBN Companies and Access Arrangements Bills have been passed and have commenced. Together, these Bills contain amendments which affect the way NBN Co will operate and the powers of the ACCC in relation to the SAU.
Now that policy decisions with regards to PoIs and uniform wholesale national pricing have been made, and assuming that the CCS Bill commences in the form that it was passed and that the NBN Companies and Access Arrangements Bills are also passed and commenced in the first quarter of 2011, NBN Co is assuming the following timeline in relation to its SAU:
- Lodgement on or before 31 March 2011 at the earliest (or as soon as feasible after the Bills commence);
- The ACCC is subject to a statutory timeframe of 6 months to accept or reject the SAU, subject to extensions of time and 'stop clocks' (for example while the ACCC is waiting for information it may request from NBN Co); and
- Accordingly, it is unlikely that NBN Co will have an approved SAU in place until the final calendar quarter of 2011.
NBN Co is actively engaging with the ACCC in developing the SAU.
1.7.4 Timeline and Critical Dates
There are five broad areas of work required in the delivery of the National Broadband Network:
- Establishing NBN Co;
- Network Design and Testing;
- Network Construction;
- Commercial Operations; and
- Product Definition and Pricing.
The first area, Establishing NBN Co is now substantially complete, subject to the passing of enabling legislation. The corporate structure and key roles and responsibilities within NBN Co are discussed in Section 4, Formation and Corporate Structure. The period covered by the FY2011-FY2013 Corporate Plan primarily addresses the other areas: Section 5, Network Design and Testing, Section 6, Network Construction, Section 7, Commercial Operations, and Section 8, Product Definition and Pricing.
Exhibit 1.3: High Level FTTP timeline to 30 June 2013
Source: NBN Co
Note: The dates stated above do not include the timing delays as a result of legislative timing and the requirement to hold an 8-week consultation process regarding Points of Interconnect.
NBN Co has identified five critical dates in the overall programme plan for FTTP:
Exhibit 1.4: Critical Dates for the Programme Plan
|April 2011||Start End-User Trial||Capability to connect at least one mainland based Retail Service Provider (RSP) with up to 400 trial End-Users offering a free subset of products to test preparedness. All NBN Co support with manual processes.|
|June 2011||Completion of Telstra Definitive Agreements||All Conditions Precedent satisfied, including enabling legislation, and required approvals.|
|September 2011||Ready for First Commercial Service||Capability to fulfil, activate and assure a limited number of products with multiple RSPs. Supported with a combination of basic semi-automated and manual processes.|
|February 2012||Ready for Business as Usual Roll-out||Capability to fulfil, activate and assure an increased number of products with multiple RSPs. Supported with a combination of advanced semi-automated and manual processes.|
|August 2012||Ready for Market||Fully automated systems, no limitation in activating as a percentage of premises passed. Multiple RSPs certified; critical volume available and predictable. Operations capability can fulfil and assure the NBN Co suite of products at scale.|
Source: NBN Co
The period to August 2012 will be focussed on the establishment of key systems required to support the roll-out of the NBN. This includes detailed testing of NBN Co's network design and construction methodologies through the establishment of a test lab, the early roll-out of FTTP in twelve First Release Sites (see Section 5.4, First Release Sites) (five mainland First Release Sites and seven sites in Tasmania). It also encompasses completion of essential support systems - including OSS/BSS and ERP - that need to be in place before full scale Access Seeker activations can commence.
NBN Co is currently scaling up the FTTP deployment from the First Release Sites (FRS) to full-scale network construction. It is anticipated that, following evaluation of the lessons learned from the First Release Sites, a series of 'Release 2 Sites' already announced (14 new sites on mainland in addition to 5 first release sites), will be used to refine construction methodologies and systems once the OSS/BSS and other critical support systems are in place and operational. Detailed design of the Release 2 Sites (FRS augmentation) has commenced in November 2010. The planning of the Tasmanian First Release Sites and for the mainland Second Release Sites is currently being reviewed in light of the move to a semi-distributed PoI model. The availability of the 120 semi-distributed PoIs will impact the current planning for First Release and Release 2 Sites; NBN Co is currently investigating how best to mitigate this impact.
During FY2011, NBN Co will also be designing and constructing the wireless solution and preparing for the satellite procurement for the 'Last 7%'. NBN Co is currently progressing with negotiations for wireless spectrum acquisition. After an expedited procurement process, the Company expects construction of the main wireless network to start in December 2011, following a series of proof of concept and First Release sites aimed at finalising key decisions around spectrum and wireless network build options.
The long lead times in satellite construction and launch mean that NBN Co does not expect to have its own satellites in orbit until FY2015. However, the Company expects to be able to offer an interim satellite solution, called Satellite First Release Sites, from June 2011 using spare capacity on existing satellites in order to provide continuity following on from the existing Government Australian Broadband Guarantee (ABG) program expected to cease on 30 June 2011.
Exhibit 1.5: High Level Wireless & Satellite Timeline to 30 June 2013
Source: NBN Co
Note: The dates stated above have not included any provision for timing delays.
1.8 Part of a 30-year View and 9.5-Year Deployment
The construction of the NBN is estimated to take 9.5 years to complete in a Telstra deal scenario (see Section 3, Key Assumptions), since NBN Co has access to existing underground infrastructure, exchange space and transit backhaul. The economic viability of NBN Co requires a long-term view extending well beyond this period, typical of any major infrastructure project. It is therefore important that the 3-year Corporate Plan is viewed in the context of the long-term business model for NBN Co.
Exhibit 1.6: Long-Term Timeline
Source: NBN Co</>
The Corporate Plan is an integral part of NBN Co's 30-year business model, which has been developed to assess the long-term viability of the Company, to articulate clear long-term objectives for the Company and to determine the long-term funding needs of NBN Co.
Whilst the Corporate Plan focuses on the 3 years from 1 July 2010 to 30 June 2013, Section 10, Financial Forecasts and Section 11, Funding NBN Co, specifically address the Corporate Plan in the context of the 30-Year business model. High level assumptions underlying the Corporate Plan are included in Section 3, Key Assumptions.
1.8.1 The Corporate Plan Projections and the NBN Full Deployment
The Corporate Plan targets are developed to achieve full deployment by December 2020, which would be nine and a half years from the Telstra agreements becoming unconditional by end June 2011. The major outcomes of the full deployment objectives are illustrated in Exhibit 1.7.
The forecasts include a substantial element of replacement and maintenance capital expenditure to achieve technological robustness of the three platforms (fibre, wireless and satellite).
Exhibit 1.7: Selected Targets and Projections of the Full Deployment Period (FY2011-FY2021)
- $21.8 billion total forecast operating expenditure; of which $13.7 billion are related to decommissioning and infrastructure payments.3
|Targets & Projections||Full Deployment Key Metrics (Rounded) (Nominal Dollars)|
|FTTP Network Characteristics|
|Capital Expenditure (to Dec 2020)|
|Revenues (to Dec 2020)|
|Operating Expenditure (to Dec 2020)|
|Cumulative EBITDA (to Dec 2020)|
|Levered Funding (to FY2021)|
|Internal Rate of Return (IRR)|
Source: NBN Co
The financial targets of the Plan can be summarised in the following simplified profit and loss accounts and applications and sources of funds for the period to FY2013 and to December 2020, respectively.
Exhibit 1.8: Profit and Loss (Cumulative, $ Billion) (Nominal Dollars)
Exhibit 1.9: Funding Summary (Cumulative, $ Billion) (Nominal Dollars)
Source: NBN Co
Note: Distributions to Equity: the Corporate Plan embeds an assumption of debt raising, which if successful will provide a mechanism to distribute surplus cash and repay equity over time after the end of the Construction period.
Debt Funding: it has been assumed that Debt Funding equivalent to 33% of total funding required over the period FY2011-FY2021 would be raised; if actual debt raised at the time was lower than projected, then Equity Funding by Government would need to be increased.
1.9 Summary of Financial Forecasts: Plausible Scenarios
Detailed financial forecasts are provided in Section 10, Financial Forecasts. Based on the assumptions set out in this Plan, NBN Co expects to generate a financial return in excess of current public debt rates under most plausible scenarios (see Exhibit 1.10).
All plausible scenarios assume NBN Co is the sole provider of fixed line network from premises to PoIs and variations are built on:
- Construction scenarios based on high, medium and low assumptions of distances, labour and material productivity rates as well as civil costs; and
- Demand and Average Revenue Per User (ARPU) scenarios based on high, medium and low revenue per user and residential wireless substitution. In particular, plausible scenarios vary around revenue variables such as wireless substitution for the residential market, initial pricing of the Fibre products (speeds and usage) and growth of demand over time compounded with price decreases.
Further analysis of Internal Rate of Return (IRR) and other sensitivities is included in Section 3, Key Assumptions, for policy dependencies, Section 9, Revenue Forecasts, and Section 10, Financial Forecasts.
Exhibit 1.10: Sensitivity Analysis Impact on IRR (%)
|Scenarios||High Construction Costs||Mid Construction Costs||Low Construction Costs|
|Mid Demand - high ARPU||7.6%||8.3%||8.8%|
|Mid Demand - mid ARPU||6.3%||7.0%||7.6%|
|Low Demand - low ARPU||5.3%||6.1%||6.7%|
Source: NBN Co
Note: Internal Rate of Return (IRR) rounded to 1 decimal point.
Exhibit 1.11: Sensitivity Analysis Impact on Peak Funding ($ Billion, Nominal Dollars, Levered Funding including FundingCosts)
|Scenarios||High Construction Costs||Mid Construction Costs||Low Construction Costs|
|Mid Demand - high ARPU||43.1||39.5||36.5|
|Mid Demand - mid ARPU||44.6||40.9||37.9|
|Low Demand - low ARPU||44.3||40.6||37.5|
Source: NBN Co
Note: Peak Funding corresponds to peak total funding requirement over the period FY2011-FY2021. It includes assumed interest costs for debt funding, and therefore refers to levered funding. It is expressed in nominal terms, i.e. funding at the time it is forecast to be incurred.
These returns would not attract investors from the start but may be acceptable to the Government.
The NBN Co Executive team is expected to manage the dynamics of the business to converge to the central case over time.
1.10 Government Policy Decisions
The policy decisions made by the Government in relation to the NBN to date have been communicated to NBN Co and are reflected in the CCS Bill and NBN Companies and Access Arrangements Bills. Recently, the Government has communicated to NBN Co a number of decisions in relation to outstanding policy matters.
The most recent decisions have been integrated into this Plan and they relate to:
- All 'broadacre' developments (new housing developments);
- 'Infill' developments (housing development sites within existing urban areas) in areas where it has rolled out its fibre network in a region; and
- 'Infill' developments in which 100 or more premises are built within a 36-month period in areas where NBN Co has not yet rolled out its network;
Home Run Greenfields Fibre Trial - to be conducted in a new development, by early 2012. The Government has confirmed that there will be no requirement to conduct a trial in a Brownfields site.
The plan assumes it will conduct a Greenfield's trial and any decision on any home run architecture would be made following this trial. The Plan assumes there will be no need to provide for Layer 1 unbundling and Home Run architecture following the Greenfields trial. The Plan would require substantial additional Capex adjustment and significant network and OSS/BSS redesign should NBN Co subsequently be directed to deploy Home Run architecture or provide for Layer 1 unbundling;
- Accounting Separation and Preparing for Future Structural Separation -Government has requested NBN Co to prepare for possible future structural separation by implementing accounting separation in consultation with the ACCC, covering assets and costs, but not revenues;
- Facilities Access and Carrier Powers and Immunities - The Government has agreed, subject to the outcome of public consultation progress other practical measures to facilitate the rollout to be developed in consultation with NBN Co and other stakeholders.
- Battery Backup -the provision of a battery backup for all Fibre Network Termination Units (NTUs) in which battery backup is installed for free at the time of the NTU install;
- Definition of Premises and Coverage - the Government has agreed to the definition of premises that NBN Co is required to connect (and count towards the coverage target) as described in Section 3, Key Assumptions.
- This means there will be no requirement to provide backhaul to third party mobile base stations outside NBN Co's optimal FTTP/transit backhaul footprint, although NBN Co may choose to do so on commercial terms.
- NBN Co notes that the Government requires NBN Co to connect payphones that are activated in compliance with the Universal Service Obligation. NBN Co has not conducted any costing of this requirement in this Plan as further information will be required from the Government for that analysis;
- Interim Satellite Solution - NBN Co will submit to the Government an interim satellite (First Release Satellite) solution for commercial services starting from 1 July 2011; and
- Cherry Picking - The Government will provide effective regulatory protection to prevent market participants entering the FTTP market and cherry picking the most commercially attractive areas ahead of the NBN build. The viability of the project is dependent upon this protection; and
- Trade Practices Act (TPA) Protection - The Government will provide any required legislative (or regulatory as appropriate) protection to NBN Co in order for the Company to implement the semi-distributed PoI model (including the cross-subsidy required by the Government to achieve universal national wholesale pricing by NBN Co).
To prepare this Corporate Plan, it has been necessary for NBN Co to utilise assumptions in relation to Government policy decisions; these assumptions are further detailed in Section 3, Key Assumptions.
1 Senator the Hon. Stephen Conroy, 7 April 2009, Joint Media Release - Prime Minister, Treasurer, Minister for Finance, Minister for Broadband, http://www.minister.dbcde.gov.au/media/media_releases/2009/022.
2 If additional PoIs are required to be established over time, the implications to the Business Model of an increase in PoIs will need to be considered.
3 Based on Telstra Financial Heads of Agreement (FHOA), signed 20 June 2010. Nominal Dollars in year when incurred.
From: National Broadband Network Corporate Plan 2011 – 2013, NBN Co.,
17 December 2010 (converted from the PDF, omitting some tables)