POLITICAL infighting about the government's proposed national broadband network is continuing, but behind it the fact remains that Telstra and NBN Co are still far apart on the question of how much Telstra should be paid to co-operate with the network's construction.
The commercial equation is unchanged: there is a maximum price that NBN Co can commercially justify paying Telstra in return for access to Telstra ducts and pipes down which the new broadband fibre will run, and for the progressive adoption of Telstra customers as Telstra's existing network is overrun. That price is, in turn, significantly less than Telstra says it can accept.
NBN Co is believed to have placed a value of about $8 billion on Telstra's
co-operation. Telstra's latest offer is higher by multiple billions of dollars, and significantly exceeds NBN Co's estimate of how much it would cost to build the NBN without Telstra's help. On NBN Co's analysis, Telstra's price is therefore value-destroying, and the NBN Co board cannot sign off on it.
Telstra's higher price is obviously derived from different assumptions, but its position is essentially the same as NBN Co's. If it cannot extract a price that on its numbers reflects fair compensation for what it is giving up (the existing high-margin copper wire network and that network's high profit-margin customer base, in effect) the deal is value-destroying, and the telco's board also cannot sign off on it. In both cases directors would be exposed to legal action if they accepted terms they believed or knew to be value-destroying.
A second line of pressure on Telstra is that there is significant shareholder opposition to the telco agreeing to and co-operating with an NBN rollout that ends Telstra's monopoly ownership of the nation's terrestrial communications backbone.
With influential institutions such as the JBWere-founded Australian Foundation Investment Company coming out publicly against a deal on the NBN, there is a real prospect that a price deemed by Telstra to be commercially acceptable will still be voted down by shareholders at a meeting Telstra has promised to convene to consider any deal.
Telstra is believed to now accept that NBN Co's capacity to substantially raise its offer is limited by the fact that it cannot pay more than it calculates the network will cost to develop without Telstra's help.
It is therefore reaffirming that it cannot lower its asking price without running into the same problem, and suggesting that the government act as circuit-breaker, by paying Telstra a separate amount alongside NBN Co.
This would be a difficult political course. Telstra's competitors would complain that Telstra was receiving too much, and creating a war chest that will be deployed in the telecommunications market, in the form of price discounts, for example. And the opposition would also attack a government payment as a subsidy aimed at shoring up an otherwise uncommercial NBN project.
The NBN implementation report by McKinsey & Co and KPMG that the government is considering finds that the NBN is commercially viable in the long term, but its economics in the short and medium term will be transformed if Telstra co-operates in its construction and agrees to migrate its fixed-line customers across, driving an ambitious customer uptake of about 40 per cent in eight years, half of it from the business sector. A business plan that NBN Co must produce by May is believed to reach similar conclusions.
The situation is complicated by the fact that Telstra, NBN Co and the government have different time horizons for a deal.
NBN Co is in no rush. It has begun its network rollout, and sees its bargaining strength increasing as that continues. The converse is that Telstra's negotiating leverage is greatest now, before the project gathers pace, and before legislation that could result in Telstra being broken up is put to a vote in a closely divided Senate.
But the profits Telstra has been extracting from its existing network will not be replicated when it is a
wholesale user of the new broadband network, giving it some incentive to dawdle.
The Rudd government, on the other hand, wants an NBN project it can market in this year's election campaign, and it needs Telstra on board to do that most effectively.
That is the wellspring of the threats it has made in the Telstra legislation that is stalled in the Senate, to functionally separate a
non-co-operative Telstra into wholesale and retail businesses, deny it new wireless spectrum, and force it to sell its half-share of Australia's dominant pay television operator, Foxtel.
The Telstra legislation was pulled on Monday in the face of a vote that hangs on the attitude of independent senator Steve Fielding, and did not return yesterday.
It is unlikely to be resubmitted before the Senate breaks at the end of the week, unless the government sees that move bringing pressure for a quick deal. And the response to Telstra's proposal about a parallel government payment is likely to be viewed through the same prism.
The Maiden family owns Telstra shares.
mmaiden@theage.com.au
