Friday, August 29, 2014
Monday, August 25, 2014
Part of the problem here is that there really isn't a lot of detail here on what the payments actually are and what the $11 billion actually represents. This can lead to the kinds of scary claims made in CommsDay that the actual payments to Telstra could amount to $98 billion by 2067. This was based on pre-tax cashflows at the time of the original agreement. Optus has even included this number in a submission to the Competition Review in a section claiming that the NBN reforms aren't sufficient to address Telstra's dominance.
Way back in March 2010 it was actually Alan Kohler who wrote "A 'significant gap' remains, thought to be $4 billion (the difference between $8 billion and $12 billion)." When the deal was announced in June 2010 it was reported that:
The two parties have signed a financial heads of agreement, announced Sunday, that will provide NBN Co with access to Telstra's passive infrastructure (pits, ducts and backhaul fibre) and eliminate Telstra as a fixed-line wholesale competitor to the Government-owned entity.
The assets to be transferred as part of the deal were valued at $9 billion, whilst Telstra values the financial gain from "public policy reforms" signed as part of the agreement at $2 billion.
The $9 billion will be paid progressively as Telstra's copper network service is decommissioned and cable broadband network service deactivated. NBN Co will pay Telstra a fee for every customer migrated from these networks onto NBN Co's fibre network (upon which the figure of $9 billion was assumed).
So to summarise Telstra was after $12 billion in Net Present Value after-tax, and settled for $11 billion, of which $9 billion comes from NBN Co and $2 billion comes from "public policy".
Telstra broke that down in its Explanatory Memorandum on the deal in the graphic below (taken from the CEO presentation).
A quick calculation shows that talking about $11 billion today is wrong - because at that discount rate it would be $16 billion in June 2014 value.
However, that is also not an accurate reflection because the cashflow profile has changed as a consequence of both the delayed commencement (getting the ACCC to approve the separation plan) and the additional delay from the (Telstra caused) asbestos remediation suspension.
The Telstra explanatory statement
Let's see if we can reconcile this data with the Goldman Sachs report. Goldman Sachs (according to CommsDay) says of the $98B:
From 2042 to 2067 there will be no additional ducts or fibres used, so that increase can be used to deduce the inflation rate (2.4%) used. The early years assume a rate of uptake from 2010 to 2021 which for simplicity we will assume to be linear. That set of assumed cashflows results in a sum of payments of $89.4B -so overstated a bit. The NPV at disciount rate of 10% is $9.58 billion. But that is pre-tax. Post tax (assuming 30%) it is $6.7B - so we are getting to the same ball-park as Telstra's $5B (which can be explained by the profile being wrong upfront and the overall overestimation).
The disconnection payments are about half the $9 billion in NPV that Telstra gets from NBN Co. They are however received over first decade. If they are re-profiled to the same as the duct payments the effective cash-flow is simply about the same as the cash-flow for ducts. That means that the total effective compensation that Tesltra receives in 2021 is somewhere in the range of $2-$2.5 billion.
Let's now consider what these payments look like compared to what Telstra is surrendering. At June 30 2013 Telstra had 6,543 retail voice lines, 1,239 wholesale voice lines and 1,322 ULL lines in operation. The wholesale price for a ULL is $16.21 per month, and for a Wholesale Line Rental is $22.84. Assuming that it is reasonable to allocate the WLR price as the retail revenue that should be allocated for line rental, these two items add up to $2.390 billion.
In brief, the cash payments Telstra is set to receive is consistent with the cash flow they are forgoing by switching off the copper network.
Now this is a very rough calculation, and hasn't foreshadowed what the copper network revenue losses to Telstra would have been had it chose to compete with NBN Co. But what it does demonstrate is that there is not now some huge additional cashflow coming to Telstra.
Finally a note on the ACCC access pricing question. As Telstra switches off an element of its network it receives disconnection payments and duct rentals, at the same time its asset base shrinks. If the ACCC were to conclude that the payment Telstra receives is higher than the return the ACCC regulatory framework "permits" for the asset, the ACCC may decide to discount the prices for copper access products to compensate. To see how this is the wrong outcome consider the following. Assume that the amount NBN Co receives is exactly twice what the ACCC thinks it is worth. Then the discounting approach would result in an access price of zero once Telstra had switched off half its network.
Put simply the only consideration for the ACCC should be the asset still in operation. To avoid continually re-jigging this depending upon whether it is dearer or cheaper parts of the network, the ACCC should simply draw a line under the current RAB and price determination and determine an appropriate future price path - a combination of increasing inflation and ongoing asset depreciation. Not particularly hard.
Note: Calculations used in this article can be found here.
Sunday, August 24, 2014
For example, in answer to a question without notice on 20 November 2013 he tried to connect the calculation by Lazard's of a negative $31 billion NPV with the Corporate Plan detail of a 7% IRR saying "No wonder Australians lost faith in Labor. No wonder they are sick of their spin."
Later on 11 December he finished an answer with "Tomorrow we will see the truth about the NBN. The Labor Party do not want to hear it. They do not want to know how many billions of dollars they have wasted. They do not want to know how many falsehoods they have told." None of the reviews conducted by Mr Turnbull has found any evidence of falsehoods.
Rod, I and Tony Shaw each individually told Bill Scales that the ACCC ‘bombshell’ as it has been termed was NOT a major influence (let alone a ‘bombshell)’ on our conclusion re FTTN transition to FTTP. Tony Mitchell who was unable to meet Mr Scales also shares this recollection. I cannot usefully speculate on what John Wiley and Patricia Scott would recall as influencing their decision to concur with the conclusion made by the panel. Hopefully the history of NBN will be written from objective analysis of the evidence (both written and oral) and after reflection of outcomes for Australia!
The extract is so riddled with errors I am reproducing it in full here with my commentary. The original text is in bold - my commentary in italics.
In periods of technology evolution it is profoundly dangerous for governments to act as a proxy for normal commercial processes. Anointing winners never works. That is not and should never be the game of government.
"Normal commercial processes" in fact do not apply to the construction of infrastructure with natural monopoly characteristics. Government is forever picking "winners" - be that for tenders for road construction or even in making the decision which road to build. The NBN policy consisted of both - an attempt by tender then a decision to self construct.
The simple fact is there were two contending views of the "complex set of circumstances" that were creating the broadband challenge. Telstra's view was that it had no incentive to invest in an environment of cost-based regulation, its competitors view was that Telstra had the incentive and opportunity to favour itself through being vertically integrated.
Both challenges were attempted to be addressed through the NBN Mark I tender, through the contribution of Government capital to ease the investment hurdle, and the requirement for a separated open-access network. I will agree that the use a standard procurement process tender resulted in a poorly managed outcome, but the ANAO does not share that criticism.
This was simply not the case because the player with access to the network refused to bid on the basis that structural separation was not something they were prepared to agree to.
Tuesday, August 19, 2014
Monday, August 18, 2014
Writing under the heading Tony Abbott, Australia's Most Powerful Sycophant (paywall) Rundle confesses that up until last year's election the PM presented as a complex character, that he was "a man with, it seemed, a sense of vocation coming from the Catholic Right of politics, with an idea of how politics fitted into the wider question of civilisation and of personal character."
Rundle goes through a list of latest gaffes - the effusive praise for Murdoch, the Scotland statements, the "unsettled" remark, latching onto the US in Iraq (and even asking to be asked to help) - to support his proposition that "he’s a sycophant by nature who seeks out opportunities to please those more powerful than he by being more ardent in pursuit of their interests than they ever asked him to be in the first place."
This is a better - and more complete analysis - than I'd thus far been able to achieve myself.
All I could see was that PM Abbott was very similar to SRC President Abbott; having won the job he had no idea what he wanted to do with it. He had a list of things he was against (as PM the carbon tax and boats, as SRC Pres compulsory student unionism and funding for gays and feminists). In both cases he didn't understand that winning the election was only a step on the journey - you needed a plan after it, and some skills in managing.
The question then emerges of what motivates Tony Abbott. It is not like the position of Kevin Rudd, who also lost his way in Government. Rudd has been described as a former Minister as a "psychopath", and it fits. He was only motivated by the power of the job. This isn't the current PM.
Tony Abbott's modus operandi, according to Rundle, is "pleasing the nearest big power or audience." This explains his University behaviour in relation to Santamaria, his support of the monarchy and his relationship with John Howard.
I don't buy into Rundle's theories about the origins of this behaviour; and ultimately it is not the cause but the behaviour that affects us. It is Rundle's conclusion about political action that matters:
What matters, for those of us who would like to see the Abbott government rendered a one-term proposition, is whether it helps to predict a behaviour that Abbott himself would have less than complete control over -- and thus to create opportunities to demonstrate to the Australian people that Tony Abbott is more interested in serving higher powers, whether it be God, Crown or Mammon, than he is in simply and effectively representing the best interests of all Australians.
UPDATE: The original Rundle story reminded me of one of Tony Abbott's earlier comments (pre-election) on Syria (thanks to Simon Banks for digging it out for me). The SMH story began (emphasis added):
Would-be prime minister Tony Abbott has signalled that if he wins Saturday's poll, Australia will take a cautious approach to international affairs, saying that as a middle power Australia should not "be getting ideas above our station" in considering involvement with a possible US strike on Syria.
Appearing on ABC's 7.30, Mr Abbott said "we have to be very careful, because if we break something, we own it".
"I don't think we should be getting ideas above our station, " he said.
"I don't think we should be getting above ourselves here. We are a significant middle power but no more."
It is not now that he thinks we are any greater a power or should be less servile, just that he thinks being more robust on the situation is what is called for. After all, despite crowing about what Australia did on the Security Council, he still thinks we shouldn't be there.