A joint media release from NBN Co’s shareholder ministers (Paul Fletcher and Mathias Cormann) on May 12 announced that NBN Co had secured extra funding of $6.1 billion in loans from Australian and international banks. This is $4.1 billion more than the $2.0 billion NBN Co had flagged in its latest Corporate Plan was still required in order to complete the rollout.
The media release went on to advise that $1.5 billion of the extra amount will be ‘reserved for working capital to provide the company with added flexibility’.
In other words, the media statement has flagged that NBN Co’s peak funding requirement has increased from $51 billion as of the last Corporate Plan to $52.5 billion.
This is the third increase in peak funding since the initial Corporate Plan for the Multi Technology Mix (MTM) estimated peak funding at $41 billion in 2014. Other increases were made in 2016 (increase from $41 to $49 billion) and 2019 (increase from $49 to $51 billion).
The total increase in peaking funding of $11.5 billion comes together with the elimination of $6 billion of contingency capex in the original MTM plan in 2014. As a consequence the initial MTM plan (which was the result of the quick fire Strategic Review in late 2013 after the Coalition came to power) has underestimated the costs of getting NBN Co to a self-sustaining position by $17.5 billion.
Interestingly the peak funding amount exactly half way between the lower estimate made in the 2013 Strategic Review for a predominantly FTTP build ($64 billion) and the original estimate for the MTM (ie. $41 billion).
The Coalition’s share of funding that is committed will now grow to 87% of this $52.5 billion.
The options for what NBN Co does with the remaining $2.6 billion ($6.1 billion less $2.0 billion to complete rollout and $1.5 billion of working capital) will depend largely on its free cashflow performance over the next few years. As the rollout phases comes to end, NBN Co’s capital and subscriber payment expenditures ($7.8 billion in FY19) will drop substantially ($1.4 billion of capex forecast in FY23). Free cashflows are forecast to be positive ($0.7 billion) in FY23.
If everything goes to plan then NBN Co should be able to start using the extra private sector funding to pay back its debt to the Commonwealth. This will produce some savings in NBN Co’s interest payments as the current Commonwealth facility is reportedly at an interest rate of 3.96%. The Commonwealth’s loan to NBN Co is due to be paid back in full on 30 June 2024, assuming of course the loan is not extended as it was in 2018.
While the private sector interest rate was not disclosed, it should be significantly less that the current Commonwealth facility given the reduction in global interest rates and also the implicit Commonwealth guarantee that investors would likely see backing up NBN Co’s debt position.
Some have speculated that the extra funding could be used for further investment in network technology upgrades. The business case for such investments would be interesting given that NBN Co’s network has just been completed and hence any replacement of network investment would be occurring well short of its useful life.
The only commercial reason for such upgrades would be the recognition that the choice of technology was wrong because the opex costs are too high (ie. fault rates are higher than forecast) or the risk of loss of customers to fixed wireless services (ie. NBN bypass by Telstra, Optus and Vodafone) is too high. Both of these would be difficult politically given the statements made previously that the technologies deliver sufficient speed and quality for what customers currently require.
A more politically acceptable area for extra investment would be for extra capacity in the transit, fixed wireless and satellite technologies which will require continuing investment as traffic grows, especially in the new Covid-19 normal economy. However, NBN Co has reserved $1.4 billion of annual post-build capex for this in its current forecasts for FY22 and FY23.
Another possible scenario is that NBN falls short of its operational cashflow targets due to lower revenues or higher operational expenditures. Although NBN Co is well short of its original revenue driver targets (ie. ARPU $51 per month and activated customers of 8 million by 2020) it appears likely that its revenue targets will be met by an increase in revenue from its controversial Enterprise segment. Operational expenses also appear to be on target with the corporate plans.
From a purely commercial perspective, NBN Co has created a number of positive benefits from its fund raising. It should be able to lower its overall interest rate, while ensuring it has the flexibility to keep its finances in order as it comes to the end of the rollout and searches for positive free cashflows so that it can escape the need for further funding.
However, do not expect that the extra funding will be used to start investing in more fibre infrastructure post the rollout. That is a bridge too far and would probably involve too many mea culpas to be politically advantageous.