S&P says a write-down of the NBN is now inevitable

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  • S&P Global Ratings says a write-down of the NBN is now appears inevitable and prices for internet access will fall.
  • And the market upheaval caused by the NBN isn’t over yet with mobile operators are likely to be pushed into investing heavily in their own network infrastructure
  • This prolonged infrastructure arms race would stretch balance sheets and ultimately force industry consolidation.

A write-down of the NBN now appears inevitable after successive Australian governments have underestimated the complexity of the national broadband rollout, says S&P Global Ratings.

The ratings agency, in a report, Australia’s National Broadband Network: Disruptor And Disrupted, says slower price rises, and consumer expectations of price cuts for their internet access, raises the prospect of writedowns.

“We believe it is getting harder for the government to stand behind the presupposition that NBNCo will generate a commercial return on investment,” says S&P Global Ratings credit analyst Graeme Ferguson.

“NBNCo’s unusually complex pricing model is part of the problem. Moreover, NBNCo operates in an industry where consumers have become accustomed to a long-run price deflation.”

The Federal Government has previously rejected suggestions a write-down on its $29.5 billion investment is needed.

The Turnbull government also loaned the business $20 billion to complete the project after NBNCo was unable to raise the capital on the open market.

“There is no basis for such a write-down,” said Finance Minister Mathias Cormann late last year.

S&P says NBN will need to substantially hit its revenue forecasts to generate a positive internal rate of return.

This includes an aggressive target of an average revenue per user growing to $52 in the year ending June 2021 from $44 now despite several years of stagnation.

Here’s how telecommunication costs have been falling:

S&P Global Ratings

S&P says the value of the NBN won’t be known until it is privatised post-completion.

“We will know NBNCo’s true enterprise value when it is privatised, most likely post-completion,” says Ferguson.

“Ultimately, the network is only worth what buyers are willing to pay.

“The perceived security of cash flows will play a major role in its valuation. A key uncertainty is whether the government will tighten regulatory protections in order to shore up NBN’s value before privatisation.

“This would have wide-ranging consequence for the broader telecommunications industry.”

A weakened teleco industry credit quality

S&P Global Ratings says the growing presence of NBN has unleased disruptive forces that have weakened the telecommunications industry’s credit quality.

The ratings agency says the competitive landscape is being reshaped in a way that can no longer be confined to the fixed broadband market.

And the end result could be added competitive pressure creating a more efficient mobile network, competiting against the NBN.

“We believe there could be a silver lining for mobile network operators amid the shake-up caused by the NBN,” says credit analyst Graeme Ferguson.

“NBN Co’s high access charges, opaque service offerings, and inferior technology mix provide key ingredients for mobile substitution.

“This is in addition to rapid advancements in wireless technologies that are narrowing the cost advantage of fixed networks.”

The agency says mobile network operators are likely to be pushed into investing heavily in their own mobile network infrastructure.

And a prolonged arms race in building telecommunications infrastructure would stretch balance sheets and ultimately force industry consolidation.

“The full impact of the NBN is yet to unfold,” says Ferguson.

“The rollout that began in 2011 has only recently passed its halfway point, but is accelerating fast.

“The market upheaval over the past few years is set to continue as the rollout nears completion.”

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