Tuesday, November 30, 2010

Australia - CEO says NBN will have capital costs of 10 to 11 per cent

[the australian] NBN Co chief executive Mike Quigley is staring down claims that the high speed internet project will involve a "destruction of capital".

The business case for the government-owned NBN Co, released last week, shows the weighted average capital costs for the project are likely to exceed its internal rate of return.

NBN Co's capital costs are expected to average 10 per cent to 11 per cent over 30 years.

Although NBN Co has not released its forecast returns, it has indicated they are likely to be above the long-term bond rate of about 5.4 per cent.

Mr Quigley acknowledged it was a "fair statement" to assume the rate of return would be lower than the capital costs.

But in an interview on ABC TV yesterday, Mr Quigley defended the situation, saying he would not characterise it as a destruction of capital.

"I would say that the project will . . . have a return above the government bond rate and in addition is going to generate a bunch of external benefits," Mr Quigley said.

Until about 2013, the capital costs are expected to be about 25 per cent before falling as the project becomes more mature and the risks involved decline.

NBN Co issued the summary last week to secure the support of independent senator Nick Xenophon for legislation to split Telstra.

Although the summary showed the project would require $35.7 billion in capital expenditure to 2020 and a further $13.8bn in payments to Telstra for decommissioning its copper network and making its infrastructure available for the rollout, Mr Quigley said the two figures should not be added together.

"It's not a reasonable thing to do," he said.

"They are two different buckets."

Mr Quigley maintained the payments to Telstra were an operating expenditure.

He said the operating costs were predicted to be higher because of the deal with Telstra, but argued this was offset by the higher revenues on NBN Co associated with the proposed deal.

He is maintaining his position despite the Coalition's communications and broadband spokesman Malcolm Turnbull saying the costs of the project had taken a "significant hike" to total $49.5bn.

The Alliance for Affordable Broadband, members of which include the chief executives of AAPT, Pipe Networks and BigAir, argues the total cost could reach $55.2bn when interest costs are added in.

Mr Quigley said yesterday that the deal with Telstra had significantly boosted the returns from the project, but he refused to reveal further detail.

"I know, but I can't reveal that number," he said. "What I can tell you is that it's substantially better, otherwise we wouldn't have done the deal."

He said the deal was "absolutely positive" because it would lift NBN Co's returns, while benefiting Telstra.

Telstra, NBN Co and the government announced a non-binding heads of agreement in late June. The agreements are expected to be finalised by the end of the year, meaning the deal could go to an extraordinary general meeting of Telstra shareholders around the middle of next year.

Quigley defends cost of National Broadband Network

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