The NBN is now an acquisition

The negotiations between the government and Telstra about the national broadband network have become, in effect, a wrangle over the price for the re-nationalisation of Telstra’s core assets.

Oh, the irony. The Labor government decided to build the fibre-to-the-home NBN only after Telstra’s then chief executive, Sol Trujillo, refused to bid for the right to build a fibre-to-the-node network, which was Labor’s original plan.

Telstra’s recalcitrance meant the FTTN plan collapsed. Rather than give up, communications minister Stephen Conroy decided to double down and go the whole hog -- FTTH -- instead.

Now we’re back to FTTN under a new communications minister, and this time Telstra, under a new chief executive, is selling. The company has accepted structural separation and the reality that it will no longer be in the infrastructure business.

NBN Co will thus effectively be the re-nationalised Telstra Wholesale, although it’s unlikely the government will simply buy Telstra’s existing wholesale operation and start running it.

The Coalition remains committed to a national FTTN broadband network, which will involve progressively buying the copper network and upgrading it by installing neighbourhood nodes that bring fibre closer to the homes (but not all the way).

The few hundred thousand people who have managed to get fibre all the way to the homes in the past couple of years are just lucky -- they will forever remain the beneficiaries of Australia’s bipolar politics.

Critically, the new NBN also means the government will buy Telstra’s hybrid fibre-coaxial cable network (the one that delivers Foxtel Pay TV as well as cable internet) and probably the one owned by Optus, that Telstra so devastatingly overbuilt in the early 1990s.

According to the NBN Co strategic review published last December, there are 2.5 million premises that are passed by either of the two HFC networks that already have a coax 'lead-in' (a coaxial cable from the street to the house).

There are another 200,000 homes passed with no lead-in and another 700,000 in the area but not passed. That means the two HFC networks have the potential to make up about a third of the NBN, specifically the part of it in cities.

The capital spending required to upgrade the HFC networks has been redacted from the strategic review, but the NBN Co planners have worked it out.

In any case, the first step is to buy them. In addition to that, the government and the NBN Co are also negotiating to buy Telstra’s copper.

So the NBN is now, at heart, an acquisition … of a previously privatised asset. But also in the mix is the extent to which Telstra will be involved in building the NBN, now that it has been engaged to build a big pilot FTTN network in NSW and Queensland.

The starting price for negotiations has already been set at $11 billion. That’s the net present value of the set of agreements between Telstra and the NBN and the government that were announced on June 23, 2011, following two years of negotiations.

Telstra’s aim in the negotiations will be to get more for selling them the two networks, HFC and copper.

The government’s aim will be to make sure the negotiations don’t go for two years again and it ends up with a cheaper NBN that delivers on its election promises.

The existing agreements consist of a subscriber agreement that delivers cash to Telstra over 10 years for an approximate NPV of $4bn, an infrastructure services agreement that delivers payments over 30 years for an approximate NPV of $5bn, another billion in NPV for the universal services and housing estates, and another $1bn NPV for “other government commitments over 10 years”.

The actual cash that Telstra receives over 30 years is a closely guarded secret because it’s much, much more than $11bn.

The government will argue that it could be less since the cash will arrive earlier under an FTTN network. Telstra will argue that that’s all very well, as long as the announcement says $11bn or more.

NBN Co has a new budget of $41bn on which it is expected to make a return of 3-4 per cent per annum (a bit more than the current bond rate). A large amount of that money could up with Telstra.

That’s because NBN Co has engaged Telstra to build a pilot fibre to the node network in parts of regional NSW and Queensland, covering more than 200,000 homes for $150 million. Apparently that will involve NBN Co renting access to the copper, with Telstra supplying 1000 nodes.

Assuming that works, Telstra is the obvious partner for NBN Co to use to help build the full national FTTN broadband network.

Ownership of the copper could progressively move to NBN Co as it is progressively connected to nodes that Telstra installs, apart from in the city areas covered by HFC.

And when this new set of negotiations is concluded, Telstra’s David Thodey should send a bunch of flowers to Sol Trujillo, wherever he is now.

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