Australia - Criticism of the NBN as a "pork barrel" with questions about the cash flows from its exclusively wholesale business

[the australian] THE agreement with the two rural independents that secures Julia Gillard a second term has confirmed the reality that underlies the $43 billion National Broadband Network. It is not a visionary nation-building project but little more than a pork barrel the government can dip into whenever it has a problem, in this case the need to cling to power.

Tuesday's deal demonstrates that the fragile economics of building a national fibre-to-the-home network can be prejudiced if it suits the government because in assuring the independents that rural and regional areas will get priority for the fibre rollout the government has turned the business case for the NBN on its head.

Big telecommunications investments and certainly the copper network are built on a simple formula. The network is first rolled out in low-cost, high-income urban areas, which generates the cashflow to subsidise the rollout to high-cost, low-return rural areas.

The need to generate immediate cashflow and minimise costs is critical to the NBN because it will operate as a wholesale-only network with far smaller margins than vertically integrated operators such as Verizon in the US, KPN in The Netherlands and Japan's NTT, which are still struggling to earn a return on their fibre-to-the-home investments despite offering retail services.

In those markets the rollout has been targeted at urban areas where consumers have the ability to pay. Nevertheless, even in these lower-cost, higher-income market segments, demand for fibre-to-the-home is levelling off; six years into its US rollout, Verizon has found only 30 per cent of households are taking up service. The Dutch experience is similar.

Despite this, the government has rewritten the telecommunications economics handbook; the NBN will start in rural areas, which are not just high cost but have the least ability to pay for the high-speed services consumers must buy if the NBN is to succeed.

The Australian Bureau of Statistics has found non-metropolitan households have 25 per cent less disposable income than capital city households and when many lower-income households can't afford even basic broadband services it must be asked how they will pay for high-speed fibre services. At present, 40 per cent of low-income households, those with incomes below $40,000, do not have broadband.

And if the demand side of the equation for an initial rural rollout looks shaky, so do the costs. Even though the most expensive to reach 7 per cent of households will be served by wireless and satellite, that still leaves two million rural and regional households to be connected to fibre. In the absence of a publicly available business plan or cost-benefit analysis of the NBN, the costs of connecting them with fibre is unknown, but studies from Britain suggest the cost of connecting homes in rural areas could be $15,000 to $22,000 each, with the costs in regional centres exceeding $8000.

This commitment to a rural first rollout will mean the government will have to put more equity into the NBN or raise more debt on its behalf in its initial years, meaning the NBN cannot be considered a commercial investment but will have to come on budget.

This may be of little concern to the Prime Minister. Her agreement with the independents notes: "For the first time the government will put in place a cross-subsidy to achieve a uniform national wholesale price so that regional areas can pay the same price as people in the city." Later, at the news conference she said: "What a transformation, to equalise the cost of telecommunications across this country."

However, cross-subsidy and uniform national prices have underpinned the delivery of telecommunications services in Australia for a century. There is nothing new in this. Consumers enjoy uniform retail prices and even Telstra's wholesale price for broadband is uniform nationally.

But to Gillard, a uniform NBN tariff was a new commitment despite the fact Communications Minister Stephen Conroy had told Senate estimates in May: "Let me be really clear. We have stated repeatedly that there will be uniform pricing across the country."

The agreement also implies the wholesale tariff has been set, as it notes: "High-speed broadband services in Tasmania are available for around $60 a month based on wholesale prices, which will now be applied on a national basis."

Before Gillard gave that undertaking someone should have told her that no wholesale tariff has been set for Tasmania and wholesale access is free because the Tasmanian NBN is being run as a trial and service providers are merely paying a $300 one-off connection fee. At the May estimates hearing NBN chief executive Mike Quigley confirmed retailers would not be paying for monthly access. The wholesale tariff won't be known until the NBN company lodges its pricing undertaking with the Australian Competition and Consumer Commission.

Nevertheless, promising a uniform national wholesale tariff, even when it's known, will not ensure uniform retail prices. The retail price is up to service providers and it's likely they will want to cherry-pick lucrative urban markets with discounted offers that won't be available in high-cost rural areas.

Indeed, under the NBN policy there is not even a guarantee that retail service providers will go into the bush. Telstra is to be freed of its legal obligation to serve the bush as part of the $11bn deal that persuaded it to get on board the NBN and it's not clear how the government could compel other service providers to go into rural areas.

Providing retail services in the bush ultimately may be the responsibility of the government's yet to be formed universal service company, meaning the transition of the NBN from a $43bn public-private partnership into an arm of government will be complete. Welcome to the Postmaster-General's Department mark 2.

Deal turns NBN into shameless pork barrel