Australia’s FTTN project: something's got to give

The Australian government has launched a tender process to invest up to $4.5 billion of public funds for the construction of an FTTN network to reach 98% of the population. The balance of the funding is to be provided by the winning tenderer. So far, it appears that Telstra, the G9 consortium led by Optus and Australia's Macquarie Bank will enter the race.

In recent months, indications had been that the total cost would be around $8 billion. But Telstra CEO Sol Trujillo has just stated that a $14 billion price tag now seems more likely.

In one of life's little ironies, the new Labor government originally costed its proposal on the basis of Telstra estimates made back in 2005. But Ovum has always been sceptical that 98% of the population could be reached with the proposed level of investment. The Australian population is highly urbanised, but there is a 'long tail' of towns and settlements that will be very expensive to provide with fixed broadband, and it certainly amounts to more than 2% of the population. The proposed level of investment and the project's objectives don't seem to add up. Something has got to give.

The news comes at an awkward time for both the government and tenderers. In the recent Federal Budget, the government rolled the FTTN funding into a larger fund that will also be available for road and rail infrastructure. This will increase the contestability of funding and put additional pressure on FTTN tenderers to minimise their call on public support. To make matters more difficult, the government is looking for a return on its investment, which reduces the appeal of the funding.

Looking at it from the perspective of a tenderer, there are other issues. Extending FTTN into marginal or even unprofitable areas will pull down the overall rate of return. To this must be added the likelihood of regulated wholesale pricing and some form of operational separation. All of these factors make the project less attractive.

We believe that hitting the 98% target with a fixed network would require the government to consider some unpalatable options. It could significantly increase the level of public funding, or offer part of the money as a simple grant, but potential investors in road and rail infrastructure would justifiably cry foul (not to mention the Treasury). It could allow the winner to charge rural customers more than urban customers, but this would be politically unpopular and would reduce connection rates in low-density rural markets.

Alternatively, the government could accept that fixed infrastructure isn't necessarily the best solution everywhere, target a smaller FTTN footprint and consider alternatives such as wireless broadband. We think this will have to be entertained at some point. In another one of life's little ironies, the new government recently cancelled a contract with an Optus-led joint venture to build such a network using WiMAX. However, there is plenty of 3G HSPA capacity being installed in Australia's hinterlands that could be exploited to achieve a similar result, provided that backhaul capacity is made available. Using existing commercial infrastructure would also reduce costs.

The upshot is that new and important questions are being raised about the national benefits of such a large investment of public funds. The government's tender process can accommodate these issues, provided that the 98% FTTN target doesn't become an end in itself. A little pride may need to be swallowed, but the desired result is still achievable with a flexible approach.

*David Kennedy is the research director of Ovum.