Writedown of NBN “inevitable”: S&P

In a damning assessment of the National Broadband Network’s long term commercial viability, global credit ratings agency S&P Global Ratings has warned that a politically damaging write-down of the NBN now appears “inevitable”.

This would also see additional government funding, potentially in the form of debt relief or direct subsidies.

The report Australia’s National Broadband Network: Disruptor And Disrupted shows how successive Australian governments have underestimated the complexity of the national broadband rollout.

It says that slower price rises, and consumer expectations of price cuts for their internet access, raises the likelihood of writedowns.

“We believe it is getting harder for the government to stand behind the presupposition that NBNCo will generate a commercial return on investment,” says S&P Global Ratings credit analyst Graeme Ferguson.

“NBNCo’s unusually complex pricing model is part of the problem. Moreover, NBNCo operates in an industry where consumers have become accustomed to a long-run price deflation.”

“Slower price escalation, let alone price cuts, raises the prospect of writedowns. So, too, does more generous bandwidth inclusions intended to support NBN Co.’s competitiveness and activation targets.”

The report says NBN subscribers are not as “sticky” as once thought and regulatory mechanisms would risk becoming obsolete should enough subscribers switch to mobile substitutes like 5G.

“The worst case scenario is that the NBN will be relegated to the network of last resort,” Mr Ferguson said.

The report cited an international study showing Australia ranks 50thout of 148 countries for average fixed broadband speed and for average mobile speed it ranked 11th out of 74 countries.

The report did not anticipate mobile networks replacing the NBN overnight but said it was a long term trend.

“To be clear, we do not anticipate mobile networks to completely supplant the NBN anytime soon,” Mr Ferguson said. “The threat posed by mobile networks is more chronic than acute. In the near to medium term, capacity constraints will limit the widespread adoption of mobile broadband.

“However, we expect technological advances, regulatory distortions, and elevated mobile network investment to slowly tilt the balance.”

S&P noted that the trend toward mobile networks substituting for fixed broad was a trend seen around the world.

“However, many of its problems are uniquely Australian: a retrograde technology mix, political involvement, rollout miscalculations, cross-subsidization of unprofitable regions, as well as a convoluted pricing structure that puts the onus on RSPs (retail service providers) to adequately provision bandwidth,” Mr Ferguson said. “It is a contrived market shaped by heavy government intervention. And it is consumers who are expected to underwrite NBN Co.’s profitability via its favourable regulatory arrangements.”

The Turnbull government had rejected suggestions of a write-down on its $29.5 billion investment and had loaned the business $20 billion to complete the project after NBNCo could not raise the capital on the open market.

An award winning author and journalist, commentator, lecturer, and speaker, Leon is a freelance business journalist who covers a range of areas including politics, strategy, globalization, leadership and all the big trends ahead. His main skill is summing up all the news that’s around. For the last 30 years, his main focus has been on management issues. He also produces two podcasts for RMIT University, Talking Business and Talking Technology. Leon has worked for Fairfax, News Limited, AAP and the Herald and Weekly Times.

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