The NBN’s use of existing copper and cable networks created so many “unanticipated costs” that there are “poor prospects” for the company to ever pay its debts, the Productivity Commission has concluded as NBN Co proposes major changes to its pricing structure.

Those costs, the Productivity Commission’s newly released NBN Co Competitive Neutrality Investigation Report found, emerged in the wake of the former Coalition government’s 2013 decision to switch the NBN rollout from building a completely new fibre network to building a multi-technology mix (MTM) integrating ageing copper and hybrid fibre coax (HFC) networks that proved difficult to integrate and manage.

The report, authored by the Productivity Commission’s Australian Government Competitive Neutrality Complaints Office (AGCNCO), was occasioned by a complaint from network operator Opticomm that favourable government regulations had given NBN Co financial advantages over its competitors.

AGCNCO examined the administration of NBN Co against the competitive neutrality policy established by the government in 2016, which was designed to ensure that government business activities “should not enjoy net competitive advantages over their private sector competitors simply by virtue of public sector ownership.”

These goals had been violated when NBN Co failed to account for more than $300m in savings on its more than $19 billion of private-market debt, which were made possible “simply by virtue of its government ownership”.

Those savings should have been returned to the government’s consolidated revenue “to enable private sector competitors to compete on an even playing field”, the AGCNCO found, but were not.

The omission would have made NBN Co seem more profitable than it was – bolstering the then-Government’s case that the company should be sold to private buyers.

“The absence of any payments is a breach of NBN Co’s debt neutrality policy,” the report found, arguing that NBN Co “should make debt neutrality payments to consolidated revenue equal in value to those savings.”

While the report rejected most of Opticomm’s allegations of competitive neutrality violations, its examination of debt, tax, regulatory neutrality and potential competitive disadvantages did identify a range of issues “where guidance on how to deal with competitive neutrality (CN) concerns was lacking or absent”.

This included “seriously deficient” reporting against competitive neutrality obligations – which had not been mentioned in the annual reports of NBN Co or its stakeholder departments – and the 2018 omission of “critical aspects of [NBN Co’s] compliance” related to favourable exemptions granted to NBN Co on its $19.5 billion government loan.

Such issues are supposed to be published in the regular Heads of Treasuries Competitive Neutrality Matrix report tracking the performance of government businesses – and their omission, AGCNCO found, “erode the worth of the Matrix” as the only way of tracking business enterprises’ compliance with competitive neutrality policy.

NBN has not been earning commercial returns

Compliance issues aside, the report outlines a range of issues that have compromised NBN Co’s commercial viability – including “unanticipated costs” related to the “degraded” copper and HFC networks, and the losses it incurred by prioritising the regional broadband rollout.

Early obligations to prioritise its regional rollout “came at a cost of revenue foregone from delaying the serving of revenue rich metropolitan areas,” the report noted, “until much later than a genuine commercially-oriented business would have done.”

Although it noted “some positive signs for NBN Co’s cashflows” including a forecasted taxable profit by 2023/24, calculations of the internal rate of return (IRR) on the government’s investments in NBN Co, suggested that NBN Co had failed to earn a large enough internal rate of return (IRR) to make it commercially appealing for potential buyers.

“There is no evidence that, on an all-of-company basis, NBN Co has earned a commercial rate of return on its assets,” the report found, “[and] a modest return is too vague to substantiate whether its investments have been (or will be) commercially satisfactory.”

The observations of the AGCNCO report will shape the response to NBN Co’s new proposed special access undertaking (SAU), which will significantly change the pricing structure by which the company charges Internet providers for its services.

The revised SAU, whose major changes were telegraphed in September, would see elimination of the contentious connectivity virtual circuit (CVC) charges that have challenged the profitability of internet providers offering unlimited usage plans.

NBN Co has also proposed reducing the wholesale price of higher-speed plans and new, entry-level 25Mbps services within three months of the SAU being accepted by the ACCC.

The SAU would also introduce a pricing cap to ensure that NBN Co prices don’t increase any more than CPI – a contentious issue that led to the government’s rejection of an earlier NBN Co proposal in August.

The new SAU marks “a significant step forward in this process,” Minister for Communications Michelle Rowland said as the new SAU was released before being opened for consultation.

“The NBN supports much of Australia’s economy and many families, and it is important that we get the policy settings right.”