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Estimates & Committees
Scott Ludlam 28 May 2012

Thursday 24 May 2012 - Budget Estimates - Environment and  Communications Committee

NBN Co. 

Senator LUDLAM: There was some information in there that was new to us. But I want to come back to this issue that was handballed to Mr Harris at the time around change of government risks. You could tell from the tones of the questions opposite-and indeed the whole premise of the letter that was put to you, Mr Quigley, is that you are facing a change of government risk as far as the coalition is concerned. This is an attempt to get a reliable dataset so that when they get into government on the red carpet as though it has been preordained they will be able to presumably break your network up and do it in an entirely different way. Forgive me if this is easily reportable or I can find this out somewhere-the whole point of having a uniform wholesale price is that some of the premises you are connecting will be paying much less than what it costs to provide the service-
Mr Quigley : That is correct.
Senator LUDLAM: and the vast majority will be paying much more than it costs to put them onto the network and thereby we smooth the price out the whole country. Is that a fair way to put that?
Mr Quigley : I will perhaps answer in a slightly more complex way, remembering that we are a wholesale provider. Our customers we are selling to are retail customers who add a margin and do what they need to do to end users. If I can look at it from our customers' point of view-the retail service provider-it is certainly the case that if they were going to provide their own facilities to deliver a service that they can deliver on the NBN network it would cost them considerably more than the price that they are paying us. Now the differential of that-in some areas it would be a huge amount more to try to have their own servers. An example of that is clearly satellite. In some cases it would be not so much more if you were in fibre in places that are easy to get to. If you had your druthers and you could build in only new developments and only those you wanted to build in-you could ignore most of them and pick the most lucrative ones-you could probably run a reasonable business in providing fibre. But with this type of nationwide network in a country such as Australia it would be virtually impossible to get uniform wholesale pricing unless the government was doing it.
Senator LUDLAM: That is the whole premise and that is why we support it-because it is the only way to provide utility scale services, whether it be electricity, water and such. The premise is fairly well understood. What I am trying to get a sense of is this. Do you know what it costs to provide a single user in Jigalong remote Aboriginal community with satellite service, and how does that compare with plugging someone in Vic Park in central Perth?
Mr Quigley : On the fibre?
Senator LUDLAM: Yes. Just for you. Do not worry about the retailer-for company.
Mr Quigley : Yes, we would know what that cost would be. We would have to do some allocation of overhead costs, obviously, across the company.
Senator Conroy: Five times, 10 times, 20 times?
Mr Quigley : We could do that yes. It would be a multiple.
Senator LUDLAM: For the purposes of tonight-I am not trying to create homework for you or different categories of reporting or whatnot but I am trying to work out where the break-even point is. The vast majority of your customers are going to be paying slightly more than it costs you to hook them up, which is how you are going to be able to provide very expensive satellite services at a very cheap wholesale price. What I am interested to know is whether we have a sense of the ratio or the number of people you are subsidising relative to those who are doing the subsidising?
Mr Quigley : I understand the question. I think we would have to go away and do a bit of work on that and think about the end points of that. Clearly in the last 10 per cent it is unprofitable. It would be somewhere further down that curve-
Senator LUDLAM: It approaches infinity and that is why we are not cabling up the whole country.
Mr Quigley : Absolutely. It goes up very rapidly beyond 90 per cent or so-it is where the need starts to take place. So that break-even point is clearly going to be below the 90 per cent. Exactly where it sits we would have to do some modelling.
Senator LUDLAM: I know you are a busy guy so I am not going to ask for something that is down to too many decimal places. I am looking for an order of magnitude estimate. The reason I am asking this is that you have been required partly by the minister and partly by the parliament to go out and do the hard stuff first. So by the end of 2013, say there is election in September or October of next year you are a lot further down the track of providing a very expensive wireless and satellite service and you will have nowhere near the customer base in big cities to support that subsidy. Is that more or less true?
Mr Quigley : Yes. And we will have built a transit network as well.
Senator LUDLAM: We will get to that in a tick. What I am trying to work out-and I know it is not your job to do the change-of-government risks but I guess it is our role as a parliament to understand what the change-of-government risks are-is by September or October next year what is ratio going to be if everything is suddenly brought to a screaming halt? How are you going to be able to pay for the expensive services if you do not have the revenue base in the big cities? What kind of business are you going to look like?
Mr Quigley : You could not-a complete subsidy basis. You could not run a business like that. If you halt the rollout at that point you just cannot run a business. You do not have a business to run.
Senator LUDLAM: What would happen if you tried to sell it, for example?
Mr Quigley : You would not find a buyer.
Senator Conroy: You could give it away for $1.
Senator LUDLAM: It is going to be a colossal liability, isn't it?
Senator Conroy: Essentially it would transfer back onto the budget because by definition it is no longer an investment. So the entire cost would transfer back onto the budget.
Senator LUDLAM: Mr Quigley, could you provide us on the basis of what you know-and I respect that things have been delayed by the issues that you outlined in your opening statement-where we will be by the third quarter of next year with your customers who are above your break-even point as opposed to the customers who are below it. Is that a relatively easily figure to estimate this far out?
Mr Quigley : The difficulty you have is that there are no customers who are above break-even point because you have to look at the company as a whole and the company is invested in building a transit network in launching two satellites. This project only make sense on a nationwide basis. You just cannot slice it up into pieces and run a business and get a return that is above the government bond rate unless you do it all.
Senator LUDLAM: I guess that is the point I'm trying to make. You are quoted in a piece in the AFRtoday which goes to where I think you were taking us before around the transit network. You are building that and that is going to be useful infrastructure whether somebody comes along and bowls this all over or not. You will have fibre out to Newman, for example, that does not exist at the moment. Can you give us an idea of how much of your current expenditure is based on doing that backbone work on the transit network and how much is the kind of street to street work in metropolitan areas? I think when we spoke in February you still had your hands tied behind your back on the street to street work because we did not have a deal with Telstra.
Mr Quigley : Once again that would be something that I would have to go back and work on. As you would understand, the work is just starting, or has been starting now for some time. We are building up the investment in the access part and the transit network has been under way. As I said, we turned on the first ring in Berkeley Vale. We have quite a number now coming on stream relatively shortly. So that obviously ratio changes on a week by week and month by month basis. I would have to go back and look at that.
Senator LUDLAM: Maybe I should have submitted my own log of claims before we came to this session. You mentioned at the outset that some of the address data you have been given was wrong as high as 30 per cent of the time. Is that right?
Mr Quigley : In MDUs. It is not so much that people are supplying us with data they know to be wrong. It is just that this data is very difficult to gather. PSMA does the very best possible job they can of collating and what they call washing data sources from lots of places. But until you really get out on the street and walk it and check is this database correct-
Senator LUDLAM: Thirty per cent?
Mr Quigley : In MDUs yes, it is possible. It is lower-in fact it is more up around 95 per cent accuracy in SDUs-but in MDUs it is quite a difficulty for us.
Senator LUDLAM: What were your projections in your original business plan? Did you have a guess as to how accurate that data would be?
Mr Quigley : We had assumed that the address database we could get would be considerably more accurate.
Senator LUDLAM: Before I send you off on a wild goose chase, my question before when I asked you about the cost of providing the services as opposed to the revenue that you are getting per customer and you put to me that you have cost allocation issues and overheads right across the whole company-what I am asking for is an estimate of what proportion of customers will cover the marginal cost by the third quarter of next year. Does that help?
Mr Quigley : Not much. But let us take it on board and see what we can do. It could be quite a difficult question to answer.
Senator LUDLAM: I am only looking for an order of magnitude estimate as well. Anything with decimal places need not apply. The other thing that I think was very interesting in your opening statement was the rather surprising uptake on the fastest speeds here. Your revenue projections and your average revenue per user, which underpins the entire model of your company, is highly sensitive to that ratio-the people sitting on the 12:1 package as opposed to those who have shot for the moon. This is a sample of what-11,000 people or so?
Mr Quigley : If you look at the fibre it is closer to 3¬Ĺ thousand or 4,000. We are talking about those ratios on speeds because on the interim satellites it is 6 Mb down and 1 Mb ups. So the speed tiers we are seeing on the fibre.
Senator LUDLAM: Let us just stick to that for the moment. So there is a 38 to 50 per cent uptake on the fastest tier and that is completely at odds with what you were estimating in the business plan, from memory.
Mr Quigley : We did not have such a high ratio. But you also need to take into account that we have early adopters on this. Perhaps Mr Hassel would like to add something to this. It is his area and he has looked at this in some detail.
Mr Hassel : We have been very greatly encouraged by the take-up at the high end of the speeds-
Senator LUDLAM: I would imagine so.
Mr Hassel : and also greatly encouraged that that has continued as well. It was the case very early on and we thought that that would be very much around early adopters but it has continued over the months, as I think Mr Quigley went through in his explanation.
Senator LUDLAM: How far at odds are those early numbers from a very small sample with the projections that you put your business plan for once the network is fully built up?
Mr Hassel : In the 2010 corporate plan our assumptions were that the 12:1 service would be something like about 53 or 54 per cent.
Senator LUDLAM: And that ended up being 18 per cent?
Mr Hassel : Yes. And our assumption was that the 100:40-the top one-would be about 8 per cent.
Senator LUDLAM: And that ended up being about 34 or 35 per cent?
Mr Hassel : About 38 per cent.
Senator LUDLAM: So it is upside down?
Mr Hassel : Yes.
Senator LUDLAM: What you think is going to happen to those numbers over time? As I said, the whole premise of the business is based on the fact that nothing like those numbers of people will end up taking up your fastest package. If they do you are running a much more lucrative business than the minister was hoping you would.
Mr Quigley : Because we have a fixed return, we lower prices faster.
Senator LUDLAM: You lower prices, or you hand money back to the government, or that just pushes your wholesale price down?
Mr Quigley : It is the subject of ACCC discussion-this is the SAU. If the SAU is accepted, we can only earn 350 basis points above the long-term running average government bond rate. Once we get above that we will just decrease prices. But I also should say, just to put a word of caution in here, when we get into the main migration of the copper onto the fibre network we expected that ratio to start shifting around a bit. What I think it would be fair to say is that we are very comfortable with the assumptions we made in our corporate plan. In other words this data is de-risking the corporate plan.
Senator LUDLAM: It is de-risking it in that you pitched a worst-case scenario that people would mostly use the slower service?
Mr Quigley : As in all corporate plans of this sort-I have never done one quite this big-I try to make sure that the company is conservative. But time will tell. We simply do not know yet.
Senator LUDLAM: I hope you are given the opportunity to find out. I really do.

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