Strategic Review December 2013 Commercial in Confidence – Final Report Version: 12 December 2013 Uncontrolled when printed. Do not circulate without permission of the originator. Legal Notice General NBN Co Limited (NBN Co) has prepared this confidential Strategic Review Report (Report) for its shareholder ministers, the Hon Malcolm Turnbull MP and Senator the Hon Mathias Cormann (Shareholder Ministers), only. The Report is addressed to and may only be relied upon by the Shareholder Ministers. The Report should not be used or relied upon for any purpose other than as an expression of the opinions, conclusions and recommendations of the NBN Co Board to the Shareholder Ministers as to the matters within the Report’s scope. It is a matter for the Australian Government to respond to this Report and for NBN Co to implement Australian Government broadband policy, as that policy may be informed by the recommendations in this Report. NBN Co and its officers expressly disclaim any liability to any person (other than the Shareholder Ministers) who relies or purports to rely on this Report for any other purpose. NBN Co owes no duty of care to any person other than the Shareholder Ministers. The Report has been prepared by NBN Co with the benefit of expert input as follows: Deloitte Touche Tohmatsu (Deloitte) (ABN 74 490 121 060) provided input into the authoring of the Executive Summary and sections 0, 1 and 6 of the Report, and assisted NBN Co in managing the program of work which resulted in the Report; The Boston Consulting Group Pty Ltd (The Boston Consulting Group) (ABN 70 007 347 131) provided the analysis on which sections 2.5.1, 2.5.5, 3, 4 and 5 of the Report are based; and KordaMentha Pty Ltd (KordaMentha) (ABN 36 220 576 038) provided the analysis upon which section 2 (excluding section 2.5.1 and 2.5.5) of the Report is based. (together the Experts). Given the required time frame for the Report’s completion, NBN Co has relied on the Experts for the matters within their respective scope of work and has not independently verified or audited the information presented in the Report through the work of the Experts. NBN Co has prepared the Report with care and diligence. The opinions, conclusions and recommendations given by NBN Co in the Report are given in good faith and in the reasonable belief that they are correct and not misleading. However, no responsibility is accepted by NBN Co, or its officers (as defined in the Corporations Act) or its employees for errors or omissions however arising in the preparation of the Report. This does not absolve NBN Co from liability arising from an opinion expressed recklessly or in bad faith. Forecasts The Report contains various long-range plans, projections and forecasts and other forward looking information (together, Forecasts). The Forecasts are based on NBN Co’s best considered professional assessment of present economic and operating conditions, present and potential future Australian Government policy, and a number of assumptions regarding future events and actions which, at the date of the Report, are expected to take place. Such Forecasts involve known and unknown risks, uncertainties and other factors outside of NBN Co’s control that may cause NBN Co’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the Forecasts. While Forecasts are based on NBN Co’s best considered professional assessment, NBN Co, its officers and employees do not give any guarantee or assurance to any third party that the results, performance or achievements expressed or implied by the Forecasts will actually occur. As such, the Forecasts should not be relied on or considered to be a representation of what will happen by any third party. Any requests to distribute the Report should be directed in writing to NBN Co’s Head of Strategy and Transformation. Copyright Copyright © NBN Co Limited 2013. Copyright subsists in the Report. NBN Co Limited owns that copyright. Other than as permitted under the Copyright Act 1968 (Cth), this Report (in part or as a whole) cannot be reproduced, published, communicated or adapted without NBN Co Limited’s prior written consent in each case. Any request or inquiry to so use the Report should be addressed to: The Chief Legal Counsel NBN Co Limited Level 11, 100 Arthur Street North Sydney, NSW All rights reserved. Not for general distribution Contents Executive Summary .................................................................................................................................... 9 Objectives of the Strategic Review ......................................................................................................... 9 Approach ............................................................................................................................................... 9 Background to the build of the National Broadband Network ................................................................ 10 NBN Co’s performance to date and Revised Outlook ........................................................................... 11 Comparative evaluation of alternative scenarios .................................................................................. 13 Strategic direction ................................................................................................................................ 18 Next steps ........................................................................................................................................... 19 1 NBN Project: Background to industry and policy developments ................................................... 22 1.1 Original intent of the National Broadband Network project .......................................................... 22 1.2 Chronology of key milestones .................................................................................................... 24 1.2.1 Milestones in establishment of NBN Co ......................................................................... 24 1.2.2 Board and key executive appointments ......................................................................... 25 1.2.3 Key contracts and approvals ......................................................................................... 27 1.2.4 Key operational milestones ........................................................................................... 29 1.3 High-speed broadband status at the inception of the NBN program ............................................ 31 2 NBN Co performance to date and a revised outlook ....................................................................... 35 2.1 Summary of findings .................................................................................................................. 35 2.2 Network deployment performance.............................................................................................. 39 2.2.1 Network deployment definitions ..................................................................................... 39 2.2.2 Network deployment Premises Passed compared to Corporate Plan ............................. 40 2.2.3 Premises Activated compared to Corporate Plan ........................................................... 41 2.2.4 Premises Passed and Activated by technology and state .............................................. 41 2.2.5 Additional reporting of deployment status ...................................................................... 43 2.2.6 Delays in FTTP deployment .......................................................................................... 44 2.2.7 Delays in Fixed Wireless Premises Passed ................................................................... 45 2.3 Network deployment Revised Outlook........................................................................................ 45 2.3.1 Network deployment Revised Outlook – brownfields FTTP ............................................ 45 2.3.2 Network deployment Revised Outlook – greenfields FTTP ............................................ 49 2.3.3 Fixed Wireless deployment Revised Outlook ................................................................. 50 2.3.4 Satellite deployment Revised Outlook ........................................................................... 50 2.4 Financial performance ............................................................................................................... 50 2.4.1 Revenue and Operating Expenditure............................................................................. 50 2.4.2 Capital Expenditure....................................................................................................... 53 2.5 Financial Performance Revised Outlook .................................................................................... 55 2.5.1 Financial performance Revised Outlook – Revenue ...................................................... 56 2.5.2 Financial performance Revised Outlook – Operating Expenditure ................................. 60 2.5.3 Financial performance Revised Outlook – Capital Expenditure ...................................... 60 2.5.4 Sources of Funding ....................................................................................................... 67 2.5.5 Required retail and wholesale pricing to reach specific economic return .......................................................................................................................... 67