NBN’s new leader may be in a takeover mood

Updated Wed 30 Oct 2013, 2:18pm AEDT

NBN head honcho Ziggy Switkowski will have to negotiate with the company he used to run for the use of its copper network – and the evidence suggests might be looking to buy it outright, writes Alan Kohler.

The NBN has the potential to significantly transform not only the Australian telecommunications industry, but the social and economic landscape of our country.

Together, we are delivering a nation-building project and we should all be very proud of that.

– Ziggy Switkowski, NBN executive chairman, in a memo to staff yesterday.

Ziggy Switkowski was an interesting choice to take over the NBN. Telstra basically sacked him nine years ago for having too ambitious a growth strategy; his troop-rallying words in the staff memo yesterday suggest that he’s not short of ambition for the new telecommunications company that he’s now in charge of either.

Specifically, he is not a simply a project manager or builder and it’s hard to imagine him handing the project over to Telstra. Under the new “technology-agnostic philosophy”, as he put it in the memo, he will have to work with Telstra to get access to its copper access network, but that’s probably as far as it will go.

The annual report tabled yesterday makes it clear that NBN Co is in the process of becoming Australia’s new Telstra, and nothing has happened since the election to change that.

In her chair’s message, the former chair Siobhan McKenna described NBN Co as “an established telecommunications company“. It now has shareholder equity of $5.2 billion, assets of $5.5 billion and made a bit of revenue – $17 million. A total of 70,100 premises have been “activated” – about half with fibre and half with satellite and wireless.

Ziggy Switkowski is executive chairman, so he is CEO as well. He reports to himself, and thence to the shareholder ministers, Malcolm Turnbull and Mathias Cormann.

He has commissioned a strategic review from the NBN Co’s head of “strategy and transformation”, JB Rousselot, with no “no go” areas and a demanding deadline – the first week of December. It will form the basis of the NBN’s 2014-17 corporate plan.

Presumably Rousselot’s review will set out the basis for the relationship that Ziggy Switkowski’s NBN will have with Telstra.

The current relationship, worked out over nearly two years of backbreaking negotiations, involves NBN Co renting access to Telstra’s ducts and pipes to lay its fibre, and paying Telstra compensation as copper is switched off.

The new “technology-agnostic” plan is to use some of that copper for access rather than switch it off.

By the way, it’s possible that technology agnosticism will mean only a small amount of copper. It could mean as little as from the street to the side of the building.

Now it’s possible that the new negotiation will be quite simple: for the same money NBN can buy each bit of the copper rather than switch it off. Why would Telstra care? It won’t be using it any more. Maybe it was going to be sold for scrap, so it will charge NBN the scrap value.

Maintenance will be the issue: someone has to do it. I might be wrong, but I’d say Ziggy Switkowski will want NBN Co to do it, not Telstra, either on contract or as part of a joint venture. Too messy. More likely the review will recommend, and he will accept, that NBN Co operates and maintains the entire network – fibre and copper.

So then the question will be: how and when to do it? The current plan is for cash payments with a net present value of $11 billion to dribble out to Telstra over about ten years as ducts are rented and copper switched off.

Ownership of the copper could also transfer gradually, in sections, but the maintenance operation might be more complicated. The advantages of scale probably mean the whole thing needs to be treated as a whole.

It might be better, in fact, for the NBN Co to simply acquire Telstra’s entire copper network and wholesale division immediately, rather than gradually. That way the NBN Co could organise the copper and fibre rollout as it saw fit.

After all, Telstra is being structurally separated as part of this project, something that Malcolm Turnbull reaffirmed in his pre-election broadband policy. The wholesale division must move to separate ownership, and that might best be done by selling the whole thing to the bloke who used to run it – Ziggy Switkowski.

And he certainly showed during his time at Telstra that he was up for big, ambitious acquisitions.

And finally the Government appears to be in the mood for big capital injections to Government-owned enterprises, having just handed over $8.8 billion to the Reserve Bank, blaming the previous Government for the need for it. That would just about do it.

Alan Kohler is Editor in Chief of Business Spectator and Eureka Report, as well as host of Inside