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Government tips last dollars into NBN

Shortfall: at least $16.5 billion. Cancellation price: $9.4 billion. Place your bets

Australia's National Broadband Network (NBN) won't get anywhere near completion before direct government funding for the project dries up, the 2016 Budget reveals.

It's even feasible that the government could throw its hands in the air and terminate the rollout, if the cost of doing so is less than the total cost of funding the build.

After the current government took office in 2013, it revised not only the technology model, but the funding model. As well as changing the balance-sheet position of the network, it issued a diktat that the build would get no more than AU$29.5 billion in government equity.

The feds' 2016 budget drips the last $8.8 billion of that government equity into the NBN's pot. After that's spent, nbnTM will need to raise its own debt on commercial markets to continue deploying nodes, upgrading the HFC networks it bought from Telstra and Optus, and finishing off the last of its fibre-to-the-premises rollout.

In the current NBN corporate plan, released in August 2015, the company predicted that by 2018 it would spend $9.6 billion more than the government's committed funding. That was based on a build cost of $49 billion, but the same plan had large error bars: the maximum forecast build cost was $56 billion.

In its most recent half-year results, nbnTM stated it has an annual revenue target of $4 billion by 2020 – but in calendar year 2015 it had only reached $164 million.

The ramp-up in users (nearly 950,000 premises activated at 21 April 2016) could put financial year 2016 revenue into the billions.

That might not be enough to get private investors excited, and the budget papers concede the government may have to tip in more money.

Cancelling the project? Surely not!

The budget papers include cancellation of the project as a “significant but remote” contingency, one that would cost the government $9.4 billion in termination payments.

The capital gap nbnTM faces is, however, between $16.5 and $26.5 billion.

That, in turn, suggests to Vulture South that Morrow will have to raise between $7 and $17 billion to avoid the government yanking the project.

The project termination payments take the form of financial guarantees to Telstra and Optus, who agreed to tip their network infrastructure into the NBN when the government created the multi-technology model (MTM).

In both cases, payments for the asset transfers are progressive – nbnTM reaches into its pocket for a Telstra twisted-pair customer, or an Optus/Telstra HFC customer, once the premises is connected to the NBN.

At 29 February 2016, the government's estimated liability to Optus was $50 million, and to Telstra, $4.3 billion. The other $5.1 billion of termination liabilities aren't set out.

The budget paper also shows the hardball expertise of Telstra's negotiators. The agreement terminates when the NBN is complete – but only on two additional conditions, that nbnTM has achieved “specified credit ratings for a period of two continuous years”, and “the company is capitalised by the Commonwealth to the agreed amount”. ®

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