What to look for in NBN’s soon to be released Second Corporate Plan – following its dismal underperformance against its first Corporate Plan

Broadband Minster Conroy is about to release the well flagged new Corporate Plan from the government owned NBN Co – his $50 billion plus venture to build a government owned broadband network all around the country.

The first Corporate Plan was released in December 2010 – and since that time NBN Co has comprehensively failed to achieve the performance milestones set out in the plan.

When Stephen Conroy and Kevin Rudd announced the NBN in April 2009, they promised that it would be “operated on a commercial basis… and involve private sector investment.”  In other words, it was going to make money (so much so that the private sector would want to invest) and taxpayers would not lose money on this investment. 

Those promises have not been kept.  In mid 2010 Conroy released the advice he had obtained from management consultants (the Implementation Study); it found that the private sector was unwilling to invest in this risky project and hence taxpayers would need to provide one hundred per cent of the equity. 

The NBN Corporate Plan released in December 2010 supposedly set out how the promise of a commercial return would be achieved.  For each year through to 2021, it gave the projected “premises passed” by the network (in its three components, fibre, wireless and satellite); the number of “premises with active service”; and the revenue to be generated from the services to those premises.   Based on these projections, NBN said its business plan would deliver an ‘internal rate of return’ of 7 per cent.

So far NBN is hopelessly behind its plan.  By 30 June 2012 the plan projected that there would be 137,500 premises on the fibre network receiving an active service.   While the company has not given full disclosure, it appears from what has been said that only about 7,500 premises were receiving an active service on the fibre network at that date.  (Stephen Conroy said last month that around 15,000 services were in operation across all three networks – fibre, wireless and satellite – and NBN CEO Mike Quigley told Senate Estimates in May that there were 7,300 active services on satellite and 52 on wireless.)

Given the dismal performance against NBN Co’s first plan, the second plan needs very careful scrutiny.   NBN will likely be changing key assumptions in the plan, with a view to giving the impression that everything is under control and on track.

For example, we might see a claim that NBN Co will be able to get debt funding at lower rates than was assumed in the first plan.  (This raises the question about how long it will take before the NBN delivers the sustainable cashflows that would be needed to borrow from private sector debt markets.) 

We might see a claim that NBN can substantially speed up its rollout compared to what has been achieved to date.  (This raises the question of why we should believe them given the chronic underperformance against plan to date.)

We might see the revenue per user (ARPU) assumptions increased on the basis that their revenue mix to date has had a higher weighting to high speed services than first corporate plan assumed.  (This raises the question of whether behaviour you see from early adopters can be validly assumed to be replicated by the market at large.)

There are also some nasties to look out for.  Will the company now need more capital than taxpayers have so far been told is required?  Will there be new levels of compulsion imposed on customers to take up the service (for example, mandating that a customer’s home must be connected to the network except if the customer makes a written request to the contrary)?

Given NBN’s poor performance against its corporate plan to date, it is lucky it is not funded by private sector investors.  If it were, the CEO would probably have been fired by now and the rollout might already have been shut down or seriously scaled back.

Unfortunately for taxpayers NBN is not funded by the private sector, it is funded by all of us.  At the very least, we should be looking for rigorous private sector type governance of an investment of this scale. 

We have not seen it to date.  It is unlikely we will see it in the new Corporate Plan.