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Joint Committee on the National Broadband Network
16/04/2012
Rollout of the National Broadband Network

COONEY, Mr Kieren, Chief Communications Officer, NBN Co.

HALL, Ms Stacie, Acting First Assistant Secretary, Government Business, Special Claims and Land Policy, Department of Finance and Deregulation

HARRIS, Mr Peter, Secretary, Department of Broadband, Communications and the Digital Economy

HEAZLETT, Mr Mark, Acting First Assistant Secretary, NBN Implementation Division, Department of Broadband, Communications and the Digital Economy

QUIGLEY, Mr Mike, Chief Executive Officer, NBN Co.

QUINLIVAN, Mr Daryl, Deputy Secretary, Department of Broadband, Communications and the Digital Economy

SORBELLO, Mr Stephen, Director, National Broadband Network Policy and Shareholder Branch, Department of Finance and Deregulation

[14:16]

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Would you like to make an opening statement to the committee from any angle?

Mr Harris : Mr Quigley will give the opening statement and I will say anything that he misses, which I doubt will be very much at all.

Mr Quigley : Thank you, Chair. It has been quite a few months since I last addressed the committee, so I thought it would be good if I updated you on where we are up to, because we are past a point of transition. We have stood up the company from scratch. It now has all the systems and processes to operate as a fully functioning wholesale telco. As you know, we completed a rather complex agreement with Telstra which will lower our costs, will minimise disruption to local communities and will make sure that we do not duplicate expensive assets.

We have completed the design of the architecture for a fibre-to-the-premise network, a fixed wireless network and a satellite network. We have developed a suite of NBN products that works over fibre, fixed wireless and satellite. And we have established a wholesale pricing construct, which has led to a very competitive retail pricing in the market now. We have signed up 40 service providers to our wholesale broadband agreement and some 26 are already offering services.

We submitted our special access undertaking to the ACCC. We have developed and continue to refine a 30-year business case.

We have put construction contracts in place that cover now the entire country and we have continued to build our operational support systems and business support systems so that we can provide order and activation, network assurance and billing capability to our customers, which will allow them in turn to provide an unprecedented level of responsiveness to their customers. We have carried out a series of fibre-to-the-premise construction, operation or product trials in three Tasmanian and five mainland sites involving almost 3,000 end users.

We have commenced the rollout of the fixed wireless network and we have designed a satellite solution for rural Australia and put in place contracts for two new-generation satellites to be launched in 2015. We also launched an interim satellite service last July which now has more than 5,000 end users; in fact, I think there are about 5,500.

I know the committee has been especially interested in the interim satellite solution so I will give you a quick update on that. We recently completed what was the third of our customer satisfaction surveys and we are seeing that people are very happy with the interim satellite service they are getting. Eighty-one per cent of respondents were either satisfied or very satisfied with the interim satellite service. That compared with just 42 per cent saying they were satisfied or very satisfied with their previous ABG satellite, 3G or dial-up service in rural areas. As you know, this interim satellite service is in fact a 6/1 Mbps service—six megabits per second download, one megabit per second upload—and it is going to be replaced in due course by the 12/1 service after we have launched our satellites in 2015. We expect that to further improve the satisfaction of people in the most remote parts of Australia with their broadband service.

I now turn to the recent announcement we made on the three-year rollout schedule. By mid-2015, the fibre rollout will be underway or completed in one-third of the country; that is, in over 3.5 million homes and businesses in more than 1,500 communities, in every state and territory. There has been some commentary that by referring to 'work underway' NBN Co. has changed the definitions used. I want to assure you that we have not done that. We have not changed our definitions. The terms 'premise past' and 'premises activated' are what we used in our last corporate plan and we will be putting them in the next corporate plan.

The information that we provided in the three-year rollout plan serves a different purpose from that in the corporate plan. It provides communities and our retail telco customers with information on where work will be starting. In fact, this committee in its second report urged NBN Co. to provide more information to communities and noted that the three-year rollout plan would assist in this. We absolutely agree. We want to give people the information that is most relevant to them. People want to know when they will see NBN workers in their streets, so our rollout schedule tells them when work will start in their area. From that, they will also have a very good idea about when work will finish in their area, which is on average 12 months from when work begins.

If I could just repeat that: we are not abandoning 'premises past' and 'premises activated'; they will be in the next corporate plan which we provide to the government. We have simply added another measure, which is 'work underway', so that people know where we are coming to. Perhaps, as we are just talking about informing the public, this is a good point at which to hear from Kieren Cooney, who is the chief marketing officer NBN Co., on other issues around communications.

Mr Cooney : Thank you for the opportunity to speak briefly about the communications and community and stakeholder engagement efforts of NBN Co. As Mike just mentioned, we have now moved past the stage of design and planning and we find ourselves at the point of ramping up to scale build. What that means is that NBN Co. is no longer an abstract notion in the minds of Australians. Over the next three years we are going to be appearing in around one-third of Australia's communities, so is important that we set about informing, and engaging, individuals and communities about what it is we are doing, and explaining what it is the NBN will do for them.

To those ends, all of our efforts in our communications, our community engagement and our stakeholder engagement reach three objectives: the first one being to inform, the second one being to prepare, and the third one being to assist in migration. I will just take a moment to explain each of these.

The first objective is to inform. Over the next three years, trucks, workmen and giant rolls of fibre will begin to appear in around one-third of Australia's cities, towns and suburbs. It is important that we ensure that people are aware, as we will be active in their communities and on their premises and on their properties, of what it is we are, what we are doing and what it will mean for them.

On the second objective, to prepare: it is essential that we ensure communities and institutions are fully prepared to capitalise on the benefits of the NBN. A great example of this is in the Illawarra, where the University of Wollongong and the Kiama Municipal Council have had the foresight and the planning to really embrace the NBN and to build the opportunities of the NBN into their core processes and their core means of servicing their communities and servicing their students. Changes like this take time. They take time to bed-in, especially, and planning for complex and large institutions or organisations is often several years long. It is important that we ensure bodies such as schools, universities, hospitals, councils and businesses across Australia are informed and engaged early so that they can build the opportunities of the NBN into their own strategies and into their own plans.

The third objective is around assisting migration. Our business plan stipulates that over the next decade we will migrate every Australian premise from the old copper infrastructure over to the NBN. That is 12 million homes and businesses—the important point being that for every one of those household owners, for every one of those business people, they need to take an action. They need to take a step. They need to call up their local retail service provider and order a service. To do that they need to understand, they need to be motivated and they need to have the information about what the NBN is, when it will be available for them and what the benefits are that they can hope to achieve from it.

Because of the scale of this project, any one of these is a massive undertaking, but we are doing all three. In fact, it is a condition of our agreement with Telstra that NBN Co., to the maximum extent practicable, ensures every home, business, school, university and hospital in the country understands how and when to migrate to the NB. I should be clear: we have only just begun our communications programs. We launched our first advertising campaign at that end of March to support the announcement of the three-year rollout. Over a four-week period, communities included in the rollout schedule were informed that the NBN was on its way through online, radio and print advertising.

The national element, the first two weeks, is just wrapping up now and we are moving into the local elements of this campaign and so far, it has done its job. In the last two weeks the campaign has generated over one million page visits to our site, where people can see for themselves the rollout maps. There is a 1,000 per cent increase on our site visits and a 900 per cent increase in our page views. Over time we will do more advertising but we need to be clear: advertising is only one element of our communications, our community and our stakeholder engagement.

The work that we do on the ground with communities is just as crucial—working with councils, local businesses, schools and chambers of commerce to ensure that as we start the rollout in their area they are not only informed but also involved. We use several means to do this. We have built demonstration facilities, including our discovery centre in Melbourne, to give people a tangible sense of the equipment in the in-home and the in-business experience of the NBN.

We have also built a mobile demonstration centre on the back of a truck that aims to visit every state and territory. Since November it has visited 49 different communities across Tasmania and Victoria and has hosted more than 5,200 visitors. We hold town hall sessions, we speak at community events and we work closely with local councils. We have directly engaged more than 150 communities, local councils, over the past 12 months. We have also held over 20 different community information schemes. On an average, we receive 200 people turning up to those events from the community and we are just ramping that up. Over the next two months we have scheduled another 18 community information sessions. Last week we announced that we have chosen the Gold Coast as the site for our contact centre and we expect to commence work on that very shortly. In the first 12 months we expect to have over 100 people employed in that centre.

To sum up, we are under no illusion of the scale and the complexity of rolling out a 21st century upgrade to Australia's telecommunications structure. We are also under no illusion as to the complexity and the scale of rolling out our communications challenges. I look forward to updating you further about our strategy for engaging the Australian public in the national infrastructure project. It will touch the lives of every Australian over the next 10 years.

Mr Quigley : Thank you, Kieren. I will return for a couple of moments, if I can, to make some comments on the corporate plan from December 2010 and comparisons of the current rollout with the targets that were in that plan. In the fourth quarter of 2010, when we were finalising the plan, there were a number of assumptions we had to make which were based on the best information that was available to us at the time. Those assumptions were highlighted and bolded and put in a box, in fact, on page 16 of the corporate plan. A number of assumptions we made at that time have changed for reasons which we simply could not control. The most obvious of which was the deal with Telstra, which we assumed would be finalised by June 2011. In fact, it was not finalised until nine months later, in March this year.

The second was that, just weeks before the December 2010 plan was released, we had anticipated that the network would use 14 points of interconnect. You may recall that, at the end of November 2011, the ACCC recommended to government that the network use 121 points of interconnect. The list of these was not finalised until May 2011. While we attempted to include this change in the corporate plan, we could not know the full consequences of that decision and the impact it would have on the rollout.

The third area—in fact, just days before the 2010 corporate plan was released—is that the government announced the greenfields policy. While we did our best to factor the impact of this policy into the plan, it is now clear that our estimates of greenfields demand was far too high. Our plan also did not take into account the large proportion of connections for new housing that were transferred back to Telstra as the policy was finalised. So two fundamental assumptions driving our greenfields numbers changed. The best estimate of project demand of new developments turned out to be way too high and a change in policy saw us move a lot of those numbers that we had assumed in December 2010 back to Telstra. As a result we need to reflect these changes in our new corporate plan targets to be provided to the government in May. Those were probably the three most significant assumptions in the December 2010 plan which had to be modified but there were also others.

We are now in the process of developing a new corporate plan based on current assumptions and we will provide this to government at the end of May. So it is neither reasonable nor valid to compare NBN Co.'s performance with the deployment forecasts that were included in the December 2010 corporate plan. However, it is perfectly legitimate to measure NBN Co.'s performance against the announcements we have made in our 12-month and three-year rollout schedules. We are ready to be measured and held accountable for our performance versus what we have committed to in those rollout schedules, but I would also like to be clear that, if there are any future policy changes, the assumptions in the corporate plan we are about to submit may have to change.

Finally, I will address some comments that appeared in the media recently and I will provide the committee with some facts regarding those issues. Last week news.com.au reported on a social analyst who said that the NBN had missed the boat in building a fibre network since everything is going to be wireless. Once again, is there any substance to this assertion? The recent ABS data relating to internet usage in Australia over 12 months to December 2011 noticed that the number of mobile broadband subscriptions over this period rose by 29 per cent. Fixed broadband subscribers increased by just two per cent over the same 12-month period. So the number of broadband subscribers climbed by nearly 30 per cent and fixed subscribers increased by only two per cent. However, data downloaded, in gigabytes per month per mobile broadband subscriber in the last 12 months, grew a bit under six per cent. That is, up to the end of December 2011. For fixed broadband subscribers the growth was a bit over 80 per cent. So on mobile networks it grew by six per cent and on fixed line networks it grew by over 80 per cent. Fixed broadband now represents more than 92 per cent of total data consumed. In fact, one of the largest mobile vendors in the world predicts that 92 per cent on a worldwide basis is going to go to 99.5 per cent by 2016.

The second issue I would like to address is the story on the front page of the Australian recently. There was a colourful map of inner Brisbane showing where the three-year rollout was scheduled and how it was biased towards ALP seats in that area. The story prompted me for the first time to look at a map of electoral boundaries. There was specific mention of the seats of Lilley, Griffith and Rankin being included in the rollout while neighbouring coalition seats missed out. The article said that this sparked claims that the government is using the NBN rollout to protect these seats. I would like to be very clear with the committee: there has been absolutely no discussion with, or instructions from, the government, either explicitly or implicitly about which areas in inner Brisbane should be included in the first three years. So why did the rollout occur in those three areas? Because the Brisbane suburbs of Aspley, Camp Hill and Slacks Creek are in those three areas and each of them have a point of interconnect. We, quite logically, are building out from points of interconnect around the country. And who chose those three locations in Brisbane as points of interconnect? The ACCC. If the boundary drawn by the Australian had been a little bit to the north, south or west, it would have picked up locations in coalition seats such as Caboolture, the Gold Coast or Toowoomba, but they choose to draw the boundaries where it had the greatest impact. Having addressed those two recent media fictions, I look forward to answering the committee's questions on more serious matters.

Mr Harris : Mine will be way less exciting than Mr Quigley's, I am afraid. The bulk of the regulatory structure for the NBN is now in place, so 2½ or three years worth of work from the department on that is substantially completed. As a consequence of that, we are changing the departmental structure and reducing the number of people committed to this area over the remainder of this year. What is left in the regulatory structure is that TUSMA will need to be set up by 30 June—that is the entity that Telstra referred to earlier, which most of the committee members will probably know and which will pick up the maintenance of the copper in the last seven per cent and a bunch of support non-premises functions in the fibre areas. We will also still be working with NBN Co. and the ACCC on the special access undertaking which is in front of the ACCC and is expected to gain approval some time later this year. There are some additional exemption issues which are still in front of us—quite small exemption issues from particular carriers for maintaining products not unlike the Velocity product that was referred to a little earlier. The low-impact facilities and changes to support the NBN are still within their disallowance period. But pretty much, as you can tell from that, our functional support efforts will now become what I might call highly complementary to the NBN rather than in any sense taking on that primary regulatory development arrangement. So as a consequence of that, as I said, we are changing the departmental structure somewhat to reflect that.

CHAIR: Does Finance and Deregulation want to make any comment?

Ms Hall : No, we have no opening statement, thank you.

CHAIR: Thanks. I will throw it open to questions, because I know there will be a lot. My only comment is in regard to the second report that has been provided through the shareholder ministers. On page 4 of that report is a very valuable table on work underway, premises passed and premises activated. I will just give you all the opportunity to comment on that table in a bit more detail. From a layman's reading it looks like roughly a 10 to 15 per cent strike rate on premises activated in both brownfields and new developments, as compared to premises passed or covered so far. We are in the early stages. We are picking up on your comments in regard to moving from test sites to full rollout. But, for the record, do you want to provide a bit more detail on a strike rate of about 10 or 15 per cent on activations compared to premises passed?

Mr Quigley : I think the activations are running about 14 per cent on average, but in some locations, such as Willunga and Kiama, for example, they are now just touching 30 per cent. I just remind the committee again that, when you do comparisons with international take-up rates of fibre to the premises, these are very high take-up rates at this period of time, this long after a rollout has taken place. So we are in fact pretty happy with the rate at which it is going. The fact is that the copper network is going to be retired. We will be in a different dynamic for activations once that starts to happen.

CHAIR: Any other comments while you have the chance? No? My only other question is the confidence question on the overall time frame of the project on the back of finalisation of definitive agreements. Are you still confident that all key benchmarks will be met over the life of the project? Are we still roughly working on a nine-year time frame?

Mr Quigley : Yes, we are working on that timetable now to take on board all the things—at least three of the things I just mentioned there; there are some others, of course. All of those will be incorporated into the next version of the corporate plan, which we will be submitting to the government in the second quarter. That, I think, will then form quite clearly the benchmark against which we will be measured, including, of course, the 12-month and the three-year announcement we have just gone out with.

CHAIR: Mr Quigley, in your opening statement—and this is actually a question for Mr Harris—you made reference to the fact that we need to be careful of any potential policy changes in doing any comparisons now or in the future. Mr Harris, in this process that is currently underway of corporate plans being rewritten, are you able to give us any assurances that statements of expectations are not going to be changed in any substantial way or in any detail at all?

Mr Harris : I am not aware of any significant changes planned for the statement of expectations. As Mr Quigley said when he was referring particularly to greenfields, the financial heads of agreement and the greenfields arrangements with Telstra, in the middle of 2010 through to the middle of 2011, varied a number of times. That made it quite difficult for any of the parties including Telstra as much as NBN Co. to forecast what the impact on themselves would be. That was driven substantially by the fact that none of the parties had a very good handle on this. There was a lot of claim being made about a residual bow wave—or how many applications had already been lodged over many years prior to this for greenfields. Those numbers varied significantly. Then there were signals from developers that they also had a huge number of applications ready to go and subsequently lodge. As Mr Quigley said, it did not quite pan out in the way we had expected. I think that is the primary factor Mr Quigley was referring to.

I am not aware therefore the greenfields policy is going to change any further. Any of us who have been involved in that would chuck ourselves off the top of a tall building rather than change greenfields policy again. I therefore do not anticipate any changes of that magnitude nor any other significant changes to what is in place. That said, there will potentially be, in the course of the rollout, things which you might call 'operational issues' still to be addressed. I guess the committee is aware of battery backup as an example. Those are the sorts of things that could change but I would not call that—I am trying to answer your question here in a holistic way—quite a statement of expectations type shift, even though if potentially something does shift in battery backup it may well have a significant financial saving option available to it.

CHAIR: I appreciate the submission that came back on the private equity. The committee is doing some work on that in this report alongside some workforce related issues. Are you willing to put on the record why debt financing is a better policy option than equity financing?

Mr Harris : We tried in our submission to the committee to be quite careful in saying we prefer not to give financial advice of a kind that people might want to depend on. Then again, we are not licensed practitioners so maybe ASIC will not come after me.

CHAIR: It seems odd that we are keeping the option open for debt financing but we are shutting the door on equity financing. I am just wondering what the policy perspective on that is?

Mr Harris : As our submission tried to say, at this stage in the NBN, the premium for risk required for an equity investor would naturally be very high. KPMG wrote that very explicitly in the implementation study. That study says if you want to try and draw upon financing at the moment it is going to be much higher priced to get equity than it will be to get debt. That is noting that the Commonwealth can borrow quite cheaply. It is primarily driven by the fact that this is a very large project that will last for a very long time. It will take a significant amount of upfront losses before it starts to cover its costs. As a consequence, the premium for equity will be high. At this stage, the advice and implementation study from KPMG was pretty clear: do not try and draw down equity markets. We have not seen a reason to vary from that. I do not know. I suppose I should be conscious my colleagues from the department of finance are here and might want to say something to supplement or contradict that but that is basically the driver for us.

Mr Quinlivan : There is a non-financial reason at work here as well. For any private equity contribution to the project that was beyond the trivial level, the investor would be looking to have some control or influence over the use of the equity and its return, which inevitably would lead to the risk of policy compromises. The government is doing this primarily for policy reasons so it undermines the logic of using private equity.

CHAIR: I will not take the bait on it. In the interest of time, with debt financing on the radar in 2015, is anyone aware of valuations being done by potential financiers to date—that are starting to consider their options—that the committee should be, could be, aware of and interested in?

Mr Harris : I am sure that some parties will be doing this.

CHAIR: Are you aware of any that are? I am sure they are doing it, but I am wondering at what stage we are at and whether it is too early to start doing detailed committee work on it or whether we should start having conversations in detail with interested parties?

Mr Harris : My estimation would be that it would probably be too early for the committee to be examining parties on this.

CHAIR: Are you aware of anything?

Mr Harris : Even in debt financing, there are conditions on the kinds of bonds that are raised which will be of great interest and will therefore shift the profile required from particular financiers. So they will be thinking that through at the moment. I have done bond raisings on transport projects for governments in the past and this very much comes to the fore. The conditions for change of control, for example, is a matter for people lending money as much as it is a matter for people investing directly in equity. Those sorts of conditions will significantly influence both the appetite of an investor and the price that they too might be interested in. I guess those ultimately will be questions that the committee will be interested in, but my own view is that it is a little too early now to be able to even ask a market participant because that will be their first question: 'Well, what kind of bond raising are we talking about here?'

CHAIR: My fishing expedition was more an awareness exercise: is anyone aware of anyone who has started to do some work in this capacity?

Mr Harris : I am not aware of anybody.

Ms Hall : Finance is not aware of anyone.

Mr Quigley : In the company, we have not had any discussions on debt financing yet.

Mr MITCHELL: Some comments were made recently about the satellite broadband and the wireless broadband in country areas not being of the same or equivalent quality as what you get in the city areas. Could you chat to us about that?

Mr Quigley : Are you saying the same quality of difference in the satellite and wireless—

Mr MITCHELL: No, in the wireless that the rural and regional areas are getting. Under the NBN, you will not get the same speeds and usability that you would get in the city.

Mr Quigley : As fibre or as wireless in the city?

Mr MITCHELL: As wireless.

Mr Quigley : The service will be identical everywhere in the wireless footprint—as close as you can get with technology. There will be no difference whether a wireless service is delivered in remote Australia or if it is delivered just outside a city. Likewise with satellite—whether it is delivered in the city or in remote parts of Australia, it will be the same service.

Mr MITCHELL: So the fixed wireless you get will be the same no matter where you are?

Mr Quigley : Fixed wireless service will be the same. Chair, if I may answer the question that the good Dr Warren was struggling with a little at the end. If you want to know the difference between a mobile and fixed wireless service, it is fundamentally not related to speeds because at peak speed we are using exactly the same technology as 4G wireless as we are using for our fixed wireless. The difference is that everywhere in the cell we guarantee that speed, whereas in a mobile network the speed varies depending on distances from the tower and also the loading. But the big difference between a fixed wireless service and a mobile service is the capacity that you dimension the network for—in other words, the gigabytes per month that you dimension the network for that you can download, which as you can see from the ABS data is going to become more and more important. We have dimensioned our fixed wireless service to give a very good equivalent of a fixed line. That is not what you do in a mobile network.

CHAIR: For this exercise we might work from the outside in and I ask the early questioners to be aware that we are going to be tight for time towards the end. Senator Macdonald.

Senator IAN MACDONALD: I will be very brief. Hello, Mr Quigley, and a welcome to Mr Cooney. I once had a Senate colleague called Cooney.

Mr Cooney : Sounds like a charming fellow.

Senator IAN MACDONALD: Yes, he was. Mr Quigley, on your revenue to date: is it up to expectation and—perhaps on notice—do you have a figure as to what it is now since you last gave us the figure?

Mr Quigley : The number would be in the last report and the chair referred to it. Is it where we expected it to be given the number of services we have activated? Yes, it is. I would say the trend that we are seeing, which did surprise us a little bit, is that we expected a larger percentage of services to be on the basic service to 12-1 and what we are seeing is a significant number of people on 25-5 and 50-20 services as well as on 100-40. So there is a larger take-up of those higher speeds than, frankly, we had anticipated.

Senator IAN MACDONALD: I am more interested in cash. Perhaps you could just tell me, so I do not have to look at the report, what cash you have received and how that does relate to your operating expenses, not your capital expenses.

Mr Quigley : Obviously, the cash is significantly below our operating expenses. Would you expect anything else at this point?

Senator IAN MACDONALD: I just wonder how much below and how it is compared with your expectations.

Mr Quigley : For the period to 31 December 2011 it is $356,000 I believe.

Senator IAN MACDONALD: And what are your operating expenses in the same time? How does all that compare with your expectations to this point in time?

Mr Quigley : Total operating expenses—and I am referring to the information here with my finance colleague—are $250 million, so clearly we are a start-up in start-up mode.

Senator IAN MACDONALD: How is that compared to your expectations for this time?

Mr Quigley : Given where we are that is about what we expect it to be. That is what you would expect at this point in time. Clearly, it is a function of the rate at which you get customers passed and customers activated.

Senator GALLACHER: We heard earlier from Vodafone about the opportunities with respect to coming home and your mobile device and the NBN being complementary in that you could make calls over the NBN by ringing up by wireless. Do you have a view on all of that? Is that an increasing opportunity that you see?

Mr Quigley : Yes, I think so. We have always said that we believe that mobile wireless is going to be complementary to the fixed line service and that end users will need both. I think almost every telco expert you hear around the world will tell you exactly the same thing. From what I understand Vodafone have said—and what Vodafone have said to us—they see the building of the NBN as an opportunity for them to enter now the market, the fixed line market, which they have not done previously. We expect we are going to see a fair amount of new entrants into fixed line at the retail level as a result of the building of the NBN.

Mr Cooney : The only thing I would add to that is that with the rise of smart phones—especially in Australia, with the huge penetration of smart phones and tablets already—the change has been from what was called a feature phone, which did not really use Wi-Fi and fixed line infrastructure. Each of these smart phones is now another fixed line device. They all seek out Wi-Fi and they all use quite a large amount often on average of fixed line data. So what we are seeing is that an increased level of mobile penetration is actually also driving fixed infrastructure.

Senator GALLACHER: So it is possible the NBN will actually make wireless devices away from the NBN faster?

Mr Quigley : Yes. I think the number is that now about 70 per cent of the downloads on iPads and iPhones are on Wi-Fi networks, which is a fixed line network, and that number is going to keep climbing.

Senator GALLACHER: So essentially we will come in here and log on to the NBN rather than the wireless.

Mr Quigley : Very likely, if you are not already doing so.

Mr TURNBULL: Mr Quigley, when you announced the deal on the satellites recently—the acquisition of the satellites—you said that the service was expected to sign up 200,000 households in the satellite footprint—that is right, is it not?

Mr Quigley : That is quite right, yes.

Mr TURNBULL: But in December 2010 in your corporate plan, you stated that the satellites were only expected or forecast to connect 106,000 households.

Mr Quigley : One hundred and sixty, I think.

Mr TURNBULL: One hundred and six, I think it is. It is at page 134—it is 106,000 premises connected.

Mr Quigley : That is premises connected; I thought you were talking about premises passed.

Mr TURNBULL: No. Obviously, you cover the premises passed literally and instantly as soon the satellite is up. Could you just explain what the change is because it is nearly a doubling?

Mr Quigley : We have seen a couple of things. First of all, doing further analysis on that wireless footprint and the options that are available to people in the part of the country in which we are providing that satellite service, and the performance of the satellite service itself, led us to believe that the take-up rate was going to be considerably higher in that part of the country than we had first thought. We were also looking at the data on the interim satellite—the rate at which customers are growing on that and the reaction we are getting from customers who are getting a good service. We were also looking at the technology changes and enhancements that we see coming down the track a little later which may help in that regard as well. Frankly, we re-evaluated.

Mr TURNBULL: Okay.

Mr Quigley : The pity of it is, of course, even with those much higher take-up rates, the satellite service can never make a profit.

Mr TURNBULL: I just want to run through a couple of international benchmarks regarding satellites. The ViaSat-1 satellite—which is a broadband satellite like a Ka-band satellite, like the ones you are acquiring—which was launched this year has the capacity to deliver a 12-megabit per second service to over one million subscribers in the United States. Hughes Network Systems is shortly going to launch a Jupiter satellite, which will have the capacity of addressing between 1½ million and two million consumer broadband customers, offering average download speeds of five megs with high-end services of up to 20.

The K-A Communications company, which submitted to your request for capability at the outset, proposed a 12-meg download service and four-meg upload service—a better technical performance than you had sought initially—to more than 450,000 households in Australia. That company was proposing to leverage us their capacity to serve other clients in the region—mining companies; even Antarctica and so forth. We have a satellite that is up, the ViaSat-1 satellite; Hughes is about to launch one which will also cover over a million households at 12 megs; K-A Communications and their partner Loral, who is building your satellites, were proposing to do 450,000 households in Australia. Is it not right that you are going to have a lot of spare capacity on these satellites that you are acquiring?

Mr Quigley : No. The difference there—and obviously we had discussions with K-A Communications—is related to the last answer I gave on the fixed wireless. It is a question of what you dimension the capacities of the satellites for. It is not so much speeds; it is a question of the greater the number of subscribers you have. How many gigabytes per month can be delivered reliably to them? Obviously, whether it is ViaSat or it is Jupiter, they are commercial companies who are trying to maximise revenues to the greatest extent possible, which you would expect them to do. But what they do is try to throttle back the capacity that is delivered to the absolute minimum they can—which is why you often find satellite services getting a bad reputation. In fact, we have had that situation in Australia where, when we looked the service being delivered previous to our interim satellite service, the average busy hour throughput was around seven to 10 kilobits per second. That is what it was dimensioned at, and operators were only buying additional capacity when they were hearing complaints from end users. What we have done is taken a different approach, which is to say: given the coverage, given the number of users we expect to be on this and given the satellite capacity, how do you make sure you manage that capacity so that people in the bush will get a good service?

Mr TURNBULL: So when ViaSat with its satellite—which is a similar satellite to the ones you are acquiring—says it will offer one million subscribers a 12 meg download service, it is being a bit disingenuous, is it?

Mr Quigley : They are saying that, if everybody tried to stream or tried to get on with Skype at the same time, the system would fail. You simply have to do the arithmetic; it is relatively straightforward. Given the capacity of those satellites and given the number of subscribers you just do the division; they simply cannot stream. With the advent of video, that is going to become a bigger and bigger issue. We looked very carefully at the data that came from Viacom. To say the least, they were being somewhat optimistic—which is what you would expect when somebody is trying to sell you a service.

Mr TURNBULL: Your position is that you do not expect that you will have much in the way of spare capacity on these satellites, assuming you get your 200,000 subscribers?

Mr Quigley : Absolutely. If you do the dimensioning on that, our fear is that if we get that uptake of 200,000 customers and we have, for example, flying doctor services and remote medical, who will be wanting to stream high-definition video services, that soaks up capacity very fast.

Mr TURNBULL: Thank you. Can I turn to the orbital slots. Have you secured the orbital slots for your two satellites yet?

Mr Quigley : We have lodged four slots, and that process is underway. We do not anticipate any problems with that.

Mr TURNBULL: But you have not secured any slots?

Mr Quigley : That process takes some years to be finalised.

Mr TURNBULL: What slots have you applied for?

Mr Quigley : I think they are from 135 degrees east, four of them at five degree increments. So they are ideally over Australia.

Mr TURNBULL: Would the orbital slot and frequency allocation that you eventually acquire, assuming you are successful in your application, affect the design and construction of the satellites?

Mr Quigley : Certainly. You need to tie down the VSAT uplink and downlink frequencies as well as the gateway uplink and downlink frequencies and you need to know where the satellites are going to be located. That absolutely impacts the radio planning.

Mr TURNBULL: So what is the time frame in which you have to get those slots allocated in order for your satellite launch timetable to be met?

Mr Quigley : If I can refer first of all to the frequency issue, actually getting the frequency bands, those uplinks and downlinks, that was the area that we were most concerned about. We have all but one tiny piece locked in now completely. That is all completely solved. In terms of the orbital slots, we are going through a process with the ITU which, frankly, is going very well now. It is not uncommon that people launch satellites without that process being completed.

Mr TURNBULL: They launch satellites without having a slot?

Mr Quigley : Without having the formality completed. What you go through is a process—it is called coordination—and ask, 'Does anybody object?' We have had no objections at this point in time and we frankly do not expect to have, apart I think from Viacom, who do not have a satellite, by the way.

Mr TURNBULL: You are familiar with the satellite company ProtoStar?

Mr Quigley : No. I have heard of them; I am not familiar with them.

Mr TURNBULL: It went bankrupt in 2009, having raised half a billion dollars. It invested in a satellite before it had the slot and frequencies sorted out. Do you acknowledge or do you agree that placing an order for the manufacturing of satellites ahead of securing the orbital slots imposes a level of financial uncertainty on this project?

Mr Quigley : No. In all projects of this sort—and I have been associated with satellite businesses in previous lives—you never have these things completely tied down. That is the formality you go through. At some point in time you say to yourself: okay, we have got these slots, are there any objections or any problems with this? Our assessment is that this is secure. We will be more concerned about the frequencies than we were about the orbital slots.

Mr TURNBULL: You have just said that you have worked in the satellite business so you know a lot more about it than, I guess, any of the rest of us. But are you saying that in the satellite business people put satellites up into slots without actually having a legal right to fly the bird in that slot?

Mr Quigley : It is not unprecedented that they will have a satellite in orbit before the formality of the process is complete. We do not anticipate that, by the way, Mr Turnbull. We expect formalities will completed well before we launch any satellites.

Mr TURNBULL: But there is a risk that they will not be?

Mr Quigley : There is a very, very small risk in our view. The option you have is just to wait for many years to let this formal process end and then start the process. That means that you will not be providing good broadband service to the bush for many years.

Mr TURNBULL: I understand that, but if you put a satellite up—and you are a Commonwealth government owned company—you are saying you are relaxed about launching a satellite into an orbital slot which you have not been allocated by the ITU.

Mr Quigley : I have not said that, Mr Turnbull.

Mr TURNBULL: I think that is what you said.

Mr Quigley : What I have said is that we place an order to begin the design and construction of the satellite. I did not say that we were going to launch the satellite into a slot. We expect that process, the ITU coordination process, to be finished well before a launch date.

Mr Harris : Perhaps I could also supplement the answer here a little bit. There has been a formal risk assessment of this, as you would expect, conducted by NBN Co. and reviewed by the government. This risk was identified but not given the pre-eminence that perhaps it might be being accorded in these hearings. A number of risks exist with this project still, but this perhaps is not the lead risk. I do want to assure the committee that a risk assessment has been done by both NBN Co. and reviewed by the government.

Mr TURNBULL: Mr Harris, the risk that you will build the satellite for a slot that you may actually not get the legal right to use is a risk that you feel is small enough to take on—is that right?

Mr Harris : It has been reviewed in the risk assessment and, as I said, it does not require the same status as perhaps it is being given now here.

CHAIR: Is the lead risk in this regard a satellite being put up and failing?

Mr Harris : The risk that the launch vehicle would fail is a couple of orders of magnitude higher than—

CHAIR: Is that the lead risk?

Mr Harris : That is absolutely the big risk.

CHAIR: Can you explain the process in that regard to date in terms of the launch vehicle and the choice—

Mr Quigley : We are about to enter into a tender for launch services and there are a limited number of companies worldwide who can launch satellites of this sort. You look very carefully at the track record of the companies you deal with, and obviously you also take out launch insurance. There is no way around that. Launching satellites is not a risk-free business. There are from time to time, failures.

Mr TURNBULL: Could you give us some examples of commercial satellites like this that have been launched into slots in respect of which the allocation has not been given? And if you cannot now, you might be able to come back to us.

Mr Quigley : Yes, I am happy to do so.

Mr TURNBULL: That would be good, thank you. I have just one final question. It was reported that Hughes paid $258 million for Jupiter 1 to be used over the USA and is currently negotiating for two more Ka-band satellites. ViaSat paid $240 million for ViaSat 1, the satellite I was talking about a moment ago, to be used over the USA. Again, I do not have your deep experience with satellites, but we would assume that if you bought two satellites in the one order, as you have done, you would normally get a price reduction because of economies of scale in production and so forth. Can you tell us why your two satellites at $660 million appear to cost so much more than the two benchmarks I have just referred to?

Mr Quigley : It depends on the capacity. It depends on a whole range of parameters. What we are doing is covering the whole of Australia with 101 spot beams. That compares, for example, to a satellite, IPSTAR or THAISAT 4, which is up there at the moment and which has a much, much reduced number of spot beams. So you have got to look at the capacity, the technology, the number of spot beams, and also what other services you have bought with that tender. You may for example have bought TT&C—telemetry control and tracking services—in addition. So you really have to look at the entire process of what you have bought and what the relative prices are. What I can tell you is that we went through quite a process over an extended period of time to make sure that taxpayers got a good deal with these two satellites. And by the way, there is not a huge—there is some but it is not huge—volume scale issue. These machines are built basically by hand.

Mr TURNBULL: Just on that final risk point, you have said that it is not uncommon to launch satellites into slots that have not actually been allocated.

Mr Quigley : No, I said that it is not unprecedented. It is not common, but it is not unprecedented.

Mr TURNBULL: So it is not common, but is not without precedent. If you were—and as you may do—to launch these satellites costing $660 million into slots which have not been allocated to you, and they are not allocated to you, what actually happens to the satellites?

Mr Quigley : That is, frankly, not an issue that I think we have to worry too much about.

Mr TURNBULL: Not a lot of money?

Mr Quigley : We are very confident that the slots will be available. What we are much more concerned about is the issue that the Chair has raised, which is: how do we minimise the risks that we will have a problem at launch?

Mr TURNBULL: But isn't this a bit like moving into somebody's house because you are confident he is going to rent it to you?

Mr Quigley : Not at all.

Mr TURNBULL: Not at all?

Mr Quigley : Not at all, no.

Mr TURNBULL: What is the point of the slot allocation process if people can launch satellites into slots when they have not been allocated to them?

Mr Quigley : It is a coordination process. In other words, the bodies who launch satellites want to make sure that when a satellite is launched it will not interfere in any way with the satellites that they already have in orbit and the services they are providing. So you go through a process of coordination, and we already have quite a number of those bodies in South-East Asia who have said there is no problem. They have already notified the ITU there is no problem. But the process itself, the formal process, just takes a while to churn through the ITU.

CHAIR: Before handing to Mr Fletcher, and just to finish on this, who is bearing the risk if it does fail at launch?

Mr Quigley : We will take out launch insurance. That launch insurance is not cheap, but we will take out launch insurance.

CHAIR: And that is NBN Co.?

Mr Quigley : NBN Co. will take that insurance out.

Senator IAN MACDONALD: Can you insure against the sorts of issues that Mr Turnbull is talking about?

Mr Quigley : No.

Mr FLETCHER: If you do not get the slot, what happens under the contract? Are you off the hook? Do you not have to pay the fee?

Mr Quigley : No, of course not. We have entered into a contract to begin to manufacture and produce satellites, but surely you would remember from your days in Optus, Mr Fletcher, that this is not uncommon. I am sure Optus has begun many satellite manufactures without having slots completely through the ITU process, unless I am mistaken.

Mr FLETCHER: The way this process works, Mr Quigley, is that we ask the questions on this side.

Mr Quigley : I understand. But I would be interested to know.

Mr FLETCHER: If you do not have the slot, will Arianespace, or whoever you get to launch it, launch it for you?

Mr Quigley : Yes. I should qualify that: I assume yes. We pay them to launch a satellite. They will launch a satellite.

Mr FLETCHER: So they do not care whether you have got the slot or not—is that what you are putting to the committee?

Mr Quigley : As I have said, I think that is a very unlikely possibility.

Mr FLETCHER: I hear that. We are on the branch of the decision tree in this scenario where the slot is not obtained. Will Arianespace or one of the other well-known launchers launch the satellite in that scenario?

Mr Quigley : I believe so. I have not asked the question, but I believe so.

Mr FLETCHER: Could you take that on notice.

Mr Quigley : I will take that on notice.

Senator CAMERON: On this point, is there any recorded evidence anywhere that people have built these types of satellites and have not been able to launch them?

Mr Quigley : Not that I know of, but we can check.

Senator CAMERON: Can you check?

Mr Quigley : Yes.

Mr FLETCHER: I would like to come back to the question of the decision to launch two satellites. I just want to make sure I am understanding this correctly. Was redundancy the rationale for that, or capacity?

Mr Quigley : It was both. For both reasons, we needed to launch two satellites. With the number of subscribers we expect to be on the satellites, you would not want to be dependent on one satellite alone; and to provide the service, the capacity that is needed, you need two satellites. The implication is that, if one of the satellites were to fail, then obviously the capacity that you have available for that number of subscribers drops, which means the gigabits per month that you could get through would halve. But at least they would still have a reasonable service.

Mr FLETCHER: You mentioned that the arithmetic is fairly straightforward to go from the number of satellites to the number of transponders to the capacity per transponder et cetera. Can you take us through that arithmetic?

Mr Quigley : The mathematics of what I have just said there is not simple. If I am looking at the total capacity and the total number of users, it is relatively simple. But if you are doing the planning per spot thing, with 101, that gets quite complex. There is a very large number of factors that you need to take into account. We have been working with one of the world's leading expert in that frequency planning.

Mr FLETCHER: I am not interested in the complicated bit. You mentioned that the basic arithmetic is fairly simple. I think you said that, didn't you?

Mr Quigley : Yes.

Mr FLETCHER: Can you take us through the simple arithmetic? I think the point you are putting to us is the linkage between the number of customers being served and the aggregate capacity on the satellites. Is that right?

Mr Quigley : Yes, that is correct.

Mr FLETCHER: Can you talk us through that?

Mr Quigley : Yes. If the satellite has 60 gigabits per second total capacity and there are 200,000 subscribers on it, you get the number of gigabits per second per subscriber. But more importantly you then have to do all the arithmetic of 24 hours in a day, 3,600 seconds in an hour, multiplied by the number of days. You then have to make a busy hour assumption. When you do that calculation—and this is what we have dimensioned on the satellite—you find that, in order to provide for that number of customers a guaranteed 300 kilobit per second capacity, the average busy hour throughput, which equates to two gigabytes per month, you need to have that kind of capacity. I can send you the arithmetic if you like.

Mr FLETCHER: Yes please—if you could take that on notice. I just want to clarify one thing: busy hour means the time of the day when the network is the busiest?

Mr Quigley : Yes. It is the hour of the day when network utilisation is at its maximum, which is normal when we are mentioning telephone networks and communications networks.

Mr FLETCHER: I have one other question on this point. I assume that the two satellites will not be at capacity from the moment of launch?

Mr Quigley : Obviously not. Once the satellites are up, you then have to get them into position in orbit. There is a bit of work to be done. Then you have to install VSATs, very small aperture terminals, in locations around Australia as take-up occurs.

Mr FLETCHER: If two satellites are required for capacity reasons, how long does NBN Co. think it will take before the first satellite is at capacity, given the assumptions you have made about how much bandwidth you want to see?

Mr Quigley : The timing between the satellite launches is dependent not so much on the satellite capacity but the number of subscribers you want to have on one satellite, one single point of failure, before you launch the second.

Mr FLETCHER: So the rationale for launching two at roughly the same time, or within a fairly short window, is that you do not want to have only one NBN Co. satellite in the sky at any time?

Mr Quigley : At the very beginning, it is not such an issue. There may be only a small number of subscribers until take-up increases, but at some point you want to make sure that people in the bush who are on satellite service have a backup.

Mr FLETCHER: The question I am interested in is: as you have thought about alternative satellite strategies, did you consider an alternative strategy of launching one satellite and then coming back in three years, five years, two years or however long you thought it might take when capacity directed you to make that decision?

Mr Quigley : Yes, we did think about that, and we have done some modelling on that. By the way, at this point in time we are still open to making decisions about when the second satellite is launched.

Mr FLETCHER: But you are on the hook to pay for it.

Mr Quigley : Yes, we have contracted to build two satellites. As that progresses, of course, you are making more payments.

Mr FLETCHER: Did you think about that satellite issue from a capex perspective as well as from the perspective of the operational considerations you talked about earlier?

Mr Quigley : Yes, we obviously thought about capex and opex, reliability, availability and the job that the government had told us to go and do.

Mr FLETCHER: I will have more later, but I am happy to pass to someone else.

Ms LEY: Mr Quigley, there has been some confusion in Broken Hill about the availability or otherwise of the backhaul fibre network to allow the town to connect to the NBN. Advertisements appeared in the Broken Hill newspapers saying, 'The NBN is coming,' and your spokesperson said the reason the NBN was not coming was that the fibre backhaul had not been sufficiently completed—although while it was completed it was not able to be hooked up too. Nextgen, the builders of the backhaul network, have said this is not the case. This committee has visited Broken Hill and seen for itself that the fibre backhaul is available. Will you undertake to re-evaluate the decision not to connect Broken Hill to the NBN in the first three years?

Mr Quigley : First of all, I think the spokesman made a mistake there in saying that the RBBP—that backhaul link from Broken Hill—was dark fibre. It is in fact lit, providing a service that is somewhat unrelated to our rollout sequencing and planning. We are doing that on the basis of building what we call points of interconnect and FAN sites, of which having backhaul fibre is one component. So the two issues are unrelated. We do apologise for our spokesman making an error in that area. So to answer your question on whether we would go back and look again at Broken Hill, I think we will obviously look in the next 12 months as we update the three-year plan to look at the next 12 months after that.

Ms LEY: Is the fibre backhaul available to connect Broken Hill to the NBN or not?

Mr Quigley : The RBBP fibre does go through Broken Hill. Does it connect to the point of interconnect we will be feeding Broken Hill from? I am not sure of that. That is what we would need to check.

Ms LEY: NBN Co. is already a customer of RBBP in the area.

Mr Quigley : NBN Co. is using some of the RBBP fibre, but that does not necessarily mean that that is the link that takes us back to our point of interconnect. I would have to check on that.

Ms LEY: NBN Co. and two other RSPs, I believe, are already utilising the backhaul network. So are you saying you cannot tell me whether the backhaul network currently would allow Broken Hill to be connected to NBN Co.?

Mr Quigley : I am sure there is fibre that is going from Broken Hill to somewhere—I think it heads south.

Mr Harris : Yes.

Mr Quigley : Yes, it heads south from there. What I would have to check is the agreement that we have with the ACCC as to whether Broken Hill is fed from the fibre that goes down or, in fact, it is coming to a point of interconnect, which we agreed with the ACCC may be in a different location. That is what I would have to check.

Ms LEY: So you are really saying it is a planning consideration, not a feasibility or engineering type consideration.

Mr Quigley : Yes, it is a planning issue.

Ms LEY: And it is a strategic decision that you have made not to connect Broken Hill to NBN.

Mr Quigley : No, it is not a strategic decision; it is a consequence of the process we used to sequence the rollout, which I described.

Ms LEY: Could you just put it in plain English so that I can understand what you are talking about.

Mr Harris : If I could, the basic proposition is not everybody can be first, so some places are not. There is a hierarchy of considerations that the NBN Co. has used to determine which parts of the country get this service first, one of which is where you are located on the rings that are available, which NBN Co. is building—so that is its own transit network. The second is where the points of interconnect are. Those are determined, as Mr Quigley said, by the ACCC, but clearly some points of interconnect are going to be done first and some are going to be done second. There is a series—I cannot remember all of them, Mike, but you might want to list the considerations. But certainly it is not a strategic consideration to exclude one part of the country or another part of the country. It is a collection of that set of choices all adding up. You have to get the complete set of them before you can be in the first part of the rollout.

Ms LEY: Given the exigencies of time, could you come back to me with an actual explanation of what the hierarchy is and why Broken Hill was not included, and why your spokesperson said the reason it was not included was because the backhaul network was not completed?

Mr Quigley : They have made a mistake.

Ms LEY: It is in extraordinary sort of mistake to make, isn't it?

Mr Quigley : It is a mistake. They had assumed that the RBBT was dark fibre. It was in fact lit and I think some services are being provided over it. But we have to figure out which part of the RBBT we can use at what time in the overall sequencing of the plant. One of the issues we are facing right at the moment is that we are being literally deluged with people saying they want to be in the first three years and why haven't they been.

Mr Harris : Can I perhaps just add one other little piece of what I call the commonsense? This works for me—it may not work for the committee, but it works for me. A lot of people commenting on this are doing so from a perspective that sees the NBN as being bolted onto the existing network. That is entirely understandable, because conceptually that is where it started out; it was an add-on. What is structurally happening with the rollout that the NBN Co. has designed now if effectively a replacement for the phone system. In order to do that, you have to be within a network build. I think the thing that I found most convincing with this is when Mike Quigley goes through the ring which must be in place first before you can join the network. We cannot just bolt you onto the end of the existing network, otherwise you would only go as far as where copper starts to interfere. That has been the hardest thing to try and get across, because this project has transitioned that much in the last three years.

Ms LEY: It is town of 20,000 people right next to the backhaul network with points of interconnect there and NBN already has a presence in the area. I will just leave it at that and would ask for a more detailed explanation, please.

CHAIR: If you would take it on notice.

Mr Harris : Sure, happy to do it.

Mr SYMON: Mr Quigley, I would like to ask are all of the sites in the three-year rollout on POIs?

Mr Quigley : No, not all of the sites, but quite a number of them are. One of the factors that goes into the sequencing of the rollout is starting from points of interconnect with what we call aggregation nodes because that does make the job in fact simpler if you build out from those aggregations.

Mr SYMON: That could be one site at a POI and the next site bolted on, as it were, adjoining suburbs.

Mr Quigley : Yes. We spread the work outwards from aggregation nodes. We build out from them and it is logical that if we have to put a point of interconnect—if that is the thing you need to provide a service anywhere—that you build out from there. But I can also just let the committee know that we are going to release an internal document—the FSA or fibre serving area scheduling—which describes the process we use, the factors we used in the rollout and, while it has not been requested of us, it is part of the process we are now doing to make sure that information is proactively available which we think will be of interest.

CHAIR: You are releasing that today?

Mr Quigley : We will be releasing it in the next day or two—putting it on the website.

Mr SYMON: Okay. How many fibre sites are there in the three-year rollout?

Mr Quigley : The total number of fibre serving areas, I do not have that number off the top of my head. I can tell you there are about a thousand all up.

Mr Harris : It is 360.

Mr Quigley : Three hundred and sixty sounds probably about right.

Mr SYMON: The one thousand includes fixed wireless as well?

Mr Quigley : The points of interconnect are also used for wireless and also for satellite.

Mr SYMON: So 360sites.

Mr Quigley : Of the roughly thousand fibre serving areas. If I can distinguish between fibre serving areas and points of interconnect, there are 121 points of interconnect and roughly a thousand fibre serving areas.

Mr SYMON: Okay. Could I just swing across to a couple of network maintenance questions?

Mr Quigley : Chair, I have just noticed that we have had a tweet from Mr Turnbull who says, 'Quigley and the government happy to take risk of building and launching $660 million satellites without having the orbital slots allocated.' I thought that, just five minutes ago, I had made it absolutely and abundantly clear that we did not say we would be launching without the orbital slots.

Mr SYMON: Thank you. That is clear.

CHAIR: And another committee member, I think, has backed you up on Twitter already. So technology is an amazing thing!

Mr SYMON: I was going to get away from satellites to talk about network maintenance.

Mr HUSIC: No, we love smoking launch pads!

Mr SYMON: Yes, I am sure you do. Mr Quigley, could you tell me what the expected life span of the equipment, rather than the fibre itself, that has been installed for the NBN is expected to be?

Mr Quigley : That is rather a difficult question to answer because I have seen telecommunications equipment last a very long time—a very, very long time—but you would not guarantee that. I think the lifetime—

Mr SYMON: But there must be a mean time between failures?

Mr Quigley : Yes, there is normally a mean time between failure that we would have calculated. I would say the expected life, all else being equal, would probably be 15 to 20 years. Would we expect this equipment, the MTDs and the OLTs, to probably be upgraded before the end of life? I think the answer is yes.

Mr SYMON: And that upgrade would come due to a pick-up in usage, a pick-up in speed in years to come?

Mr Quigley : Yes. For example, the GPON, at the moment, is 2½ gigabits per second down, 1.25 gigabits per second up. Within three or four years it will be 10 gigabits per second down, five gigabits per second up, and then it will probably multiply by four again. So at some point in time we will obviously introduce that new capability and, at another point in time, we may find that, if demand increases, we will go and retrofit the equipment—pull out the older stuff, put it the new stuff. But I should emphasise: the fibre will stay right where it is.

Mr SYMON: Just finishing on that: if you upgrade an area, will that be done for all areas or only areas where there is a demand for that higher—

Mr Quigley : No, you do it by demand because, to the end user, they would not see a difference.

Mr HARTSUYKER: Mr Quigley, are you aware of problems with the Bonnyrigg subdivision and the need for substantial remedial works to be done?

Mr Quigley : No, not in detail.

Mr HARTSUYKER: In what degree are you aware of that?

Mr Quigley : I know we have been doing work in Bonnyrigg and I think we launched some services there; it is one of the greenfield sites. And it is certainly the case that I know that, in some of the earlier sites—and I believe Bonnyrigg was one of those—we have been working with developers to get the standards set and to make sure they understand what is required, of the specifications that we have given, and that is obviously being worked through, as you would expect, in some of the very early sites.

Mr HARTSUYKER: In the case of the subdivision at Bonnyrigg and remedial work having to be done, was that being met by the taxpayer?

Mr Quigley : Well, it depends. I cannot answer that one either. It depends on whose error it was. If it was an error in our specifications, then clearly NBN Co. would have to pay for the remediation. If it was an error on the part of the developer in the way they implemented those specifications, then we would expect them to repair that at their cost. Likewise if any contractor or equipment supplier made an error we would expect them to make it good.

Mr HARTSUYKER: Are you aware of any instances where NBN's specifications were deficient and that resulted in the need for remedial work at a cost to the taxpayer?

Mr Quigley : Not that I am aware of, but I would say that that is quite likely. I would not imagine that, in something of this complexity, we would get every single specification correct. I am sure we have got a few of them wrong and we are going to have to correct those.

Mr HARTSUYKER: So would you be able to get back to the committee with those occurrences and the cost to the taxpayer of those occurrences?

Mr Quigley : Yes, as best we can.

Mr HARTSUYKER: How many different versions of the wiring guider or installation guider have there been?

Mr Quigley : I do not know. I will have to get back to you on that one.

Mr HARTSUYKER: I understand there have been quite a number and, if so, why have there been so many? I think there have been four or so.

Mr Quigley : Yes, that would not surprise me.

Mr HARTSUYKER: In a very short period of time.

Mr Quigley : That would not surprise me. We are trying to do this rollout obviously very quickly, and we will be taking input from developers, contractors and our subcontractors, and looking at it ourselves, and, where we see a need to update a specification, we will try and do that very quickly.

Mr HARTSUYKER: Have there been instances where developers have suffered a financial loss due to errors contained within the wiring guide? Could you check that for us and provide advice in writing?

Mr Quigley : We can check that, yes.

Mr HARTSUYKER: You talked about the notion of premises passed. Can you confirm my understanding that, in each and every case where you have listed a premises as a premises passed, it can effectively be connected to the network without further work needing to be done—that is, it able to be connected?

Mr Quigley : Yes, that is the case. I should say that, if you are referring to greenfields developments, there is a slight distinction between premises passed and lots passed. Clearly we have an obligation as part of the policy, in a greenfields area of more than 100 premises, to provide services over a three-year period in all of those lots. Some of those lots may not have a premises built on them for some years. Clearly they are empty lots, but we have passed them. Also when a new greenfield estate comes in we have to put a FAN site down and we have to connect that back to a point of interconnect. We have made a decision that we may not provision that last bit of the link, which is a managed service that we may purchase from somebody before we build it, because we do not want to spend that money until we need to.

Mr HARTSUYKER: Between the FAN and the POI or—

Mr Quigley : Between the FAN and the POI—actually, between the FAN and the point at which we can pick up the existing network. On average we are having to put about 5½ to six kilometres of new fibre in so that we can pick up the existing network where we can get a managed service. So we will put that in but we will not turn on the managed service until we need to; otherwise, we would be wasting taxpayers' money.

Mr HARTSUYKER: But in relation to the distance that you travel to pick up the network, you are not including those premises in the premises passed calculation?

Mr Quigley : Yes. If it is greenfields it will be lots passed, and we would count that as 'passed' because we will have arrangements in place to turn that service on very rapidly—an arrangement with a commercial provider of backhaul capacity. But we do not spend the money until we need to spend the money.

Mr HARTSUYKER: In relation to your servicing of greenfields sites, in relation to the targets that you had listed in the business plan on your progress reports, what proportion is being delivered by Fujitsu and what proportion is being delivered by other providers, if any?

Mr Quigley : We partnered with Fujitsu; in fact, when we went through that process we picked the largest, and what we viewed as the most capable, greenfields supplier and worked with them. We are now supplementing that obviously with our own contractors. I cannot give you the numbers, but up until now the majority of services have been provided by us, working with Fujitsu.

Mr HARTSUYKER: What do you mean when you say you supplemented that with some other contractors?

Mr Quigley : I mean it is now making increasing sense to also use in greenfields areas the people who we are getting to build in brownfields areas.

Mr HARTSUYKER: What about, for instance, Telstra as an installer of fibre? Has there been any use of Telstra?

Mr Quigley : We went through a tender process to pick our construction contract partners and we have announced who they are. They are Visionstream, Syntheo, Silcar—companies you know about.

Mr HARTSUYKER: In the new greenfield sites where there are houses built—not lots passed, but houses passed and able to be connected—what has been the take-up rate in those estates?

Mr Quigley : This is in fact quite difficult to estimate. One of the reasons is that in a new area it is not a trivial matter to find out whether a home actually has somebody living there or not unless you go around doorknocking. What I can tell you is that the two sites where we can get good numbers are Elinya and Waters Edge, which are both at Rhodes. They are MDUs. One complex has 100 living units and the other has 110. The take-up, as I understand it, for each of those apartment complexes is about 70 services. So that is around 70 per cent. Clearly it is lower in the greenfields SDUs, but it is very difficult to know the exact numbers.

Mr HARTSUYKER: Your retailer should have people signed up for those services, though, and I imagine it would not be difficult to provide those take-up rates to the committee.

Mr Quigley : It is not that easy to determine. Here you are talking about the difference between past and an active service. Clearly, we know how many active services there are—that is, we know how many lots have been passed—but what we do not know is how many of those lots have somebody living in them. We do know it in MDUs but we do not know it in SDUs.

Mr HARTSUYKER: What is the number of active services that you have got in those places where there are houses built? For example, if there are 10 houses built on a 100-lot subdivision, what proportion of those are you picking up as customers with an active service?

Mr Quigley : I can give you the numbers for the two MDUs which I have referred to, but all I can tell you is that we have in total around 280 services at this point in time and that we have passed something like 1,100 lots. What I cannot tell you is, of those 1,100 lots, exactly how many have people living in them.

Mr HARTSUYKER: I would like to look at Tasmania for a moment and the first release sites. Mr Cooney mentioned the large number of hits being received in relation to the marketing promotion that has occurred, and the amount of interest in and awareness of the NBN. Why is it that we have got scarcely more than 50 new connections in those early release sites in the six months leading up to your last report, which was 31 December last year? Why is that take-up rate so feeble? Have you done any research as to why that is?

Mr Quigley : Yes, we have. There are certainly demographic issues associated with that and there is also the issue of PC ownership. There is quite a difference. For example, if you look at Midway Point, which is just outside Hobart, it is running at about double the take-up rate of the other two locations, which are Smithton and Scottsdale. As I said, at this point in time that is not unexpected and, with the copper network being retired, the take-up will happen.

Mr HARTSUYKER: I have one last question with regard to your statement earlier. Can you clarify: you seemed to indicate that you are classifying devices such as iPads, iPhones and those going back from other locations to some sort of fixed base, as using fixed line. Are you counting them as fixed line traffic or are you counting them as mobile traffic in any numbers that you quote?

Mr Quigley : If it is on a Wi-Fi network, it is fixed line traffic, which is the same as the way the Australian Bureau of Statistics classifies it.

Mr HARTSUYKER: So it is possible for large amounts of growth in mobile devices to be, for all intents and purposes, misclassified—and that is an argument of classification by the ABS. I think most people would have thought that a tablet or an iPhone is mobile traffic rather than fixed line traffic, from a common-sense point of view.

Mr Quigley : No. These days, when, as I do whenever I am giving a talk, I ask people to raise their hands if they have got an iPad. A very large number do, of course; these are normally business groups. I then ask how many of those iPads are 3G-enabled or 4G-enabled, and it is surprising how many are not. People buy iPads and use them just on Wi-Fi networks. The reason is that the cost of a gigabyte of download on a mobile network is very expensive compared to a fixed line network.

Mr Cooney : There are also some services that do not work, and there are certain downloads and certain applications you cannot upgrade over a mobile network.; you need to be on a Wi-Fi. They seek out a fixed line Wi-Fi network rather than a mobile network.

Mr Quigley : I think that trend is going to continue. Obviously, as we have said for many years now, we need both networks. We are going to see mobile networks giving us what we want, which is mobility, but when it comes to downloading, it will be on fixed line networks. A lot of that will be via Wi-Fi, but it will be on a fixed line network.

Mr HARTSUYKER: Okay, thank you.

Mr HUSIC: There has been some questioning about fixed line versus wireless. Have you soon the article that Phil Dobbie posted on his website, 'Australia—slow to download', where he picks up on this point—I may be verballing him and I will be happy to be corrected. Effectively, the reason why there is such a growth in iPad and mobile broadband usage is that people do not have, from their perspective, an equivalent quality in fixed line. They are using what is basically available, what is best, because we do not have fixed line options that can provide the speed and the volume. Have you seen that article at all?

Mr Quigley : I personally have not seen it.

Mr Cooney : No, but the only thing I would mention—

Mr HUSIC: Would you agree effectively with the logic, though?

Mr Cooney : Only that the earlier data that Mike was referencing, that ABS data, contradicts that. So rather than an opinion it is based straight off usage. What we are seeing is that actually there is a modest increase in average downloads in the mobile environment, but there is a dramatic increase in fixed line. A large part of that will be from the rise of tablets and smartphones—one of the many factors, but one of the factors. I do not know that piece, but that is an opinion. It probably runs in the face of the ABS facts, which would suggest that actually, although there is some growth in mobile downloads, the real growth is happening in fixed line infrastructure.

Mr Quigley : And that is six per cent versus 80 per cent.

Mr HUSIC: But that is the data consumption versus, for example, the number of broadband customers. A lot of people read into the mobile broadband customer growth, suggesting that this is the future rather than recognising the fact that people have limitations at the moment in terms of fixed line.

Mr Quigley : Yes, but I think the mobile growth is going to be there anyway for some time, simply because people like mobile devices—understandably.

Mr HUSIC: I understand that as at 31 March, on a completely issue, there were about 39 RSPs who had signed wholesale broadband agreements. We picked up in the previous report of the committee, if I can frame it, some concern around the interim WBAs, because until the ACCC had ticked off on it companies felt they had been locked into those WBAs. Have those concerns been resolved? Are you able to estimate how many customers from those 39 WBAs that you have got in place at the moment would now be covered by those agreements?

Mr Quigley : All of the customers we have now are covered by those agreements. I cannot think of anybody who is getting service now—

Mr HUSIC: In terms of retail customers, is there some sort of indication of the reach of those agreements from a retail perspective?

Mr Quigley : We have had 40 people who have signed the WBA and, of those, 29 are providing services. I do not think there is anybody providing services that is not on a WBA—in fact, I am sure of that now. As you would expect, this is a negotiation where service providers see an opportunity to make sure they get the best possible deal. We try to look after the taxpayers' interests in that transactions. So we will obviously be guided by the ACCC as we proceed in the discussions on both the SAU and the WBA.

Mr HUSIC: So there are 39 WBAs in place—

Mr Quigley : 40.

Mr HUSIC: 40 now. What about the end customer numbers though, the retail customer numbers—for example, some of the companies that have been covered and the numbers of customers they would then be servicing? I am just trying to get an inkling.

Mr Quigley : We now have close to 8,000 end users on the network, of various sorts.

Mr HUSIC: Just finally, Telstra were here earlier. I do not know if you heard the end part of their evidence, where they were talking about Velocity.

Mr Quigley : Yes.

Mr HUSIC: They are saying now that they are effectively shutting that down as an offering and that if any developer in a greenfields environment where there are less than 100 lots seeks to put in a—dare I say it—Velocity equivalent, which is fibre, that will flick instantly to NBN Co. Is that your understanding?

Mr Quigley : We have responsibility for any greenfields sites where there are 100 or more lots to be developed over a three-year period. If it is below 100, it is the responsibility of Telstra. I think that is correct, Peter, is it not?

Mr Harris : Yes. But I think this question is a regulatory one, in fact, rather than an NBN Co. one. The legislation that has been passed by the parliament basically prevents anybody who does not want to run a wholesale open access network—which is not the Velocity product—from doing so without getting an exemption from the minister. I mentioned earlier in my opening statement exemptions from the minister. Telstra has exemptions for a number of Velocity rollouts that have been planned. The question of future use of the product will obviously be subject to that. In other words, this comes down to a practical question of how far you can go to provide exemptions for potentially forecast developments sometime in the future which have yet to come to fruition, which drags us straight to the greenfields problem I alluded to earlier, where large numbers of the states are apparently ready for development and then apparently not. The current problem here is if Telstra has in mind a velocity product to do a roll out for a developer or indeed any other party does for a similar non-wholesale open access neutral network then they will have to get an exemption to do so.

Mr Harris : I will clarify Mr Turnbull's earlier question to Mr Quigley about the satellite slots. I had our ITU people do a check. The advice to me is we have a high degree of assurance that the slots will be available on launch. The ITU process is a coordination process for people to register objections and no objections have been received. The advice to me is that if there is any suggestion that another party has an interest in this then negotiations will occur but the satellite development process will not be stopped. That is not just a matter affecting Australian satellites; it is a matter affecting everybody's satellites. I think possibly the difference of judgment being made here is a question that seems to imply that there is some kind of property right to this which you can obtain from the ITU and force an acquisition over. That is not the concept by which these slots are allocated. This is an administrative coordination process designed to ensure you do not end up with conflicting outcomes rather than one in which you can obtain an approval and sell it to another party.

CHAIR: Mr Turnbull was out of the room when the tweet was clarified by Mr Quigley.

Mr TURNBULL: I would be delighted if you have been able to clarify this. I am trying to get to where the risk lies. I will go through, point by point, and you tell me where I am wrong. The slots have not been allocated yet but they have been applied for, correct?

Mr Quigley : They have been sought, yes.

Mr TURNBULL: The orbital slot is an important input as is the frequency in the design of the satellite. So in the absence of formal allocation, an assumption is made as to the slots and frequencies expected to be allocated. Is that correct?

Mr Quigley : Yes. We have already solved the frequency issue so we are only talking about the slots.

Mr TURNBULL: Is that point correct? I will read it again. The slot is an important input in the design of the satellite so in the absence of formal allocation, an assumption is made as to the slot expected to be allocated.

Mr Quigley : Yes.

Mr Harris : This is a design issue.

Mr TURNBULL: I am genuinely simply trying to get to where the risk lies. The third point is you expect the slots to be allocated.

Mr Harris : We have a high degree of assurance they will have the necessary slots by launch.

Mr TURNBULL: Mr Quigley, you did say at one point it is not without precedent to launch a satellite into a slot without a formal allocation.

Mr Quigley : That is what I said about the process being completed formally, I believe so. I will check on that.

Mr TURNBULL: But—and this is the next point—you are saying that you will not launch a satellite unless and until the orbital slot has been formally allocated.

Mr Quigley : I do not expect we will need to launch a satellite.

Mr TURNBULL: Let us be quite clear about this. I know you do not expect to but are you saying categorically that NBN Co. will not launch these satellites into slots unless and until they have been formally allocated?

Mr Quigley : No, I will not say that because I think the probability—

Mr TURNBULL: Then my tweet was correct.

Mr Quigley : Let us read your tweet again if we can.

Mr TURNBULL: Forget about the tweet. Let us be quite clear. I was out of the room when you clarified it which is why I am trying to clear it up. I had written down here 'the NBN Co. does not propose to launch a satellite unless the slot orbital slot has been—

Mr Quigley : That is quite correct.

Mr TURNBULL: Hang on. Let me quite clear. Are you prepared to say the NBN Co. will not launch a satellite unless the orbital slot has in fact been formally allocated?

Mr Quigley : No, I am not prepared to say that. But that is very different from saying that Quigley and the government are happy to take the risk of building and launching a satellite without having the orbital slot allocated. I think the probability is very, very small that that will happen.

Mr TURNBULL: But there is—

Mr Harris : And the bridge, if I could—

Mr Quigley : The bridge is quite clear.

Mr TURNBULL: Hang on. Please, I am just trying to nail this down. You are leaving open the possibility, albeit small, of launching a satellite into a slot prior to it being formally allocated.

Mr Quigley : For example, if we had discussions—

Mr TURNBULL: Is the answer to that question yes?

Mr Quigley : If we had discussions—

Mr TURNBULL: Is the answer to that question yes?

Mr Quigley : I am not answering, 'Have you stopped beating your wife?' questions, Mr Turnbull.

Mr TURNBULL: I am not asking you that. I am sure you and your wife get on very well.

Mr Quigley : We do indeed. If we came to the position where the formalities were not completely finalised, we would probably have a discussion with the ITU about the possibility of launching.

Mr Harris : Which is exactly, I might say, Mr Turnbull, what I said in my earlier comments. There is a process of negotiation inside the ITU. So, while you are asking and insisting that Mr Quigley answer questions, I had answered it and I was about to answer it again.

Mr TURNBULL: Okay.

Mr Harris : You can apply; if an objection is received, a negotiation will occur. That is what happens. This issue has run a long way on the strength of two quite explicit statements made in questions which were not actually the way the question was then answered. There is a process at the ITU and it is designed to avoid these conflicts.

CHAIR: So the high degree of assurance that you have got is from ITU?

Mr Harris : It is our ITU people—but they are conscious of the process and have been involved in putting the applications forward, and they have a pretty fair understanding of this.

Mr Quigley : It is exactly the same advice we have got from experts around the world who have been through this process numerous times.

CHAIR: Okay. Look, we are not going to get—

Mr TURNBULL: No, please—I just want to—

CHAIR: You can have one last go, but we are not going to get much further.

Mr TURNBULL: This is $660 million, Mr Chairman, and I am just trying to nail it down. We did have a discussion about this. You will not say that you will not launch the satellite unless the orbital slot has in fact been formally allocated—you will not say that. But, Mr Harris, can I take it that the risk that you talked about earlier in this context is contracting to build and pay for a satellite without the slot being formally allocated?

Unidentified speaker: That is different to what your tweet said.

Mr TURNBULL: No, no. It is two risks.

Mr Harris : So you are asking a question about the risk assessment and you are saying, 'What was the risk identified?'

Mr TURNBULL: What was the risk you identified?

Mr Harris : I do not have the document with me, so it will be difficult for me to answer that, but I know that this issue itself was rated and it was not rated a high risk. That is not just because we have a reasonable assurance that we will get the slots—those are words that I have told you, of course—but because the process then moves on to a negotiation if someone has a legitimate objection. If another country or party says, 'I am going to use that slot too,' then the ITU, I presume, will broker some kind of exchange. I think, Mr Turnbull, right at the start of the second session on this you were probably closer to the mark of the serious issue. It is ultimately a design question, rather than a regulatory question.

Mr TURNBULL: Okay.

Mr Harris : I do not think the regulatory question is as much a risk as is being made out.

Mr TURNBULL: I am not trying to make—

Mr Harris : But design—it is a different matter.

Mr TURNBULL: If I misunderstood what you were saying, this is the opportunity to clarify it. What I understand is that there is a risk; you have agreed that you have to make an assumption about the slot in the design of the satellite—that is correct. There is a risk that you do not ultimately get that slot and you have designed a satellite around a slot you have not got—that is a risk that you have taken on board.

Mr Harris : I cannot answer that question, technologically speaking, but when I heard you ask the question about design, I understood that you were asking that question rather than a regulatory one. The previous discussion was about regulatory issues, and I think the regulatory issues are not the risk that you are making out. The design issue may or may not be a risk. I do not know. That is more a question for the NBN Co.'s designers.

Mr Quigley : We are a reasonable way down this process. We have had no objections other than from bodies who want to sell us some things, who have applied for orbital slots and who do not have any intention to ever put a satellite up—they just want to sell us their ITU slot. So, if we put those aside, we have been through the process with serious satellite players and we have had no objections. We are a fair way down the process. Even if it turned out that we had an issue, which we do not expect, it is a matter of adapting the satellite at some point in time to adjust to a slightly different orbital slot. It is not a question of scrapping the satellite and starting again. The further you go in that process, clearly, the further down the design and manufacture you are. But, in terms of risks, Mr Turnbull, we rate this one way down on the list. The risk we are focused on, which I think the committee should be focused on, is the risk at launch. That is a legitimate, reasonable risk.

Mr TURNBULL: Okay. I will just ask you this final question: given that you said the formal allocation can sometimes take years and you do not want to delay people in the bush getting broadband, is there a risk that, if the formal slot allocation is a prerequisite to launching, the launch will be delayed or the satellite may need to be reconfigured if the slot that is negotiated and then allocated is not the one assumed in the satellite's design?

Mr Quigley : I did not say that formal orbital slot allocation is a prerequisite. In fact, we just said—

Mr TURNBULL: Okay. So it is not. So, because you regard it as a low risk, you are relaxed, happy, whatever. You are prepared—to use a neutral term—to launch the satellite without the formal allocation, although that is not something you expect to do.

Mr Quigley : Yes. If I can put it in plain, layman's terms, this is not a risk that keeps me awake at night. There are a lot of other risks in the NBN project. This is not one we worry about.

Mr TURNBULL: No. The proposition I just put to you is correct, though? I will say it again: although you do not expect to do this, you are prepared to launch the satellite into a slot prior to that slot being formally allocated?

Mr Quigley : What I would be prepared to do is have a discussion with the ITU to see what would be the right course of action should that unlikely eventuality come to pass.

CHAIR: I think that is a good way to finish that topic today. Just to conclude, I have a question about on-budget and off-budget, and it is probably an opportunity to bring in our friends from Finance and Deregulation. I want to clarify some of the mythology around this point, if I can. Am I right in saying this is an administered investment in public sector terms as to what is going on in regards to the relationship between the government and NBN Co.?

Ms Hall : That is correct, Chair.

CHAIR: Would I therefore be right in saying that valuations are done in terms of being 'available for sale', probably by Finance and Deregulation—or, if not you, then someone else?

Ms Hall : The issue of valuation and the methodology used to value administered investments depends on a range of other things, including whether a reliable valuation can be calculated using future cash flows. So it varies across GBEs. Each portfolio is required to include the value of their administered investments in the annual portfolio accounts. The value of NBN Co., for example, which sits in the DBCDE portfolio, is included in the DBCDE's annual accounts. Entities like the ASC, which is a sole shareholder, or Medibank are included in the Finance annual accounts. The valuation approaches vary, depending on the reliance that can be placed on different approaches.

CHAIR: So, as an administered investment, has an evaluation being done; and, if so, what is the latest figure?

Mr Harris : I am pretty sure the Auditor-General does our valuations and—

Ms Hall : They tick off on them, yes.

Mr Harris : Yes, and it is in our accounts and regularly reviewed. They review all of our assets. This is probably not the most sensitive one.

CHAIR: No, no; I just want to clarify whether there have been any changes. You did have a valution figure at 30 June, and I wanted to know whether, now that we are starting to see some equity injections, that valuation has changed at all.

Mr Harris : Mr Heazlett would probably know better than me.

CHAIR: And do you want to clarify just what that 30 June figure was.

Mr Heazlett : I do not have it in front of me at the moment, but the approach that we adopt in terms of the carrying value of the asset administered by NBN Co. is the amount of equity invested in it minus the operating loss that has occurred in the period up to that time. So it is fairly straightforward. Because of the nature of its operation in that it is still in the start-up phase, it is simply the equity minus operating loss.

CHAIR: The figure I have at 30 June is $958 million.

Ms Hall : That would be roughly right.

Mr Heazlett : For 30 June last year, I think that would be the amount of equity we have put in minus the operating loss to that time.

CHAIR: But I would imagine that that would have changed.

Mr Heazlett : This year there is further equity being injected and there will be further operating losses.

CHAIR: Can you come back to me with the latest figure available if 30 June is not the latest figure available.

Ms Hall : In terms of valuation, the figure for 30 June last year will be updated in the 30 June 2012 figures.

CHAIR: I thought you might say that.

Ms Hall : Yes. It is done on a net asset basis, so that will be done when Broadband prepares its annual financial statements and annual report.

CHAIR: Okay.

Mr Heazlett : It has just been pointed out to me that on page 24 of the report that we have provided there is an unaudited figure of $1,858 million as at 31 December. The next update will be 30 June this year.

CHAIR: Of all the GBEs, that is roughly around the five per cent figure of value?

Ms Hall : Sorry—five per cent? I am not quite following your maths.

CHAIR: As far as equity that has gone from government into GBEs is concerned, am I right to say it is roughly five per cent of all moneys into all GBEs?

Ms Hall : I would have to take that one on notice. We can come back to you on that.

CHAIR: All right. Again, for a layman, when May comes around and a budget is released, where, if anywhere, are the points of interest for the NBN project for people to look at as to activities that may be of interest?

Ms Hall : The obvious line item in the budget is in the DBCDE portfolio budget statements, which will have the forward equity profile to be invested in NBN Co. over the current year.

CHAIR: And the four-year forward estimates?

Ms Hall : And the four-year forward estimates—that is right. There are a number of other provisions in the budget as well.

Mr Harris : They can be difficult to find in the portfolio budget statements.

CHAIR: That is right.

Mr Harris : We have come to this committee to—

CHAIR: This is consumer advocacy going on right here! But where should people look?

Mr Harris : To speak directly, I find it difficult myself and have to have it explained to me on a regular basis, because we have some quite substantial assets, some of which vary much more significantly than the NBN. Australia Post and its retirement scheme are responsible for a significant amount of variation every year in our numbers. They appear as aggregates, and therefore you have to try to ask the question at estimates. I can assure you that at every estimates I have the answer, so for somebody asking me I will be able to tell them, but the accounts are not derived on the basis of individual line items. I guess that is probably more because of some other portfolios that have a plethora of small entities; you would probably end up with a whole bunch of line items if they did. But it is in our numbers. What I can do for the committee if someone can take a note is make sure you get the valuation when we put the numbers out.

CHAIR: That would be great.

Mr Harris : I will send it directly to the committee.

CHAIR: So it is not the rate of return on investment that keeps it off budget at all, is it? That is mythology that has grown over time, even amongst members of parliament—that there had to be this six or seven per cent figure to keep it off budget. It is more accrual accounting and international accounting standards, as dry as that might be, that keep it off budget.

Ms Hall : Some of my colleagues in Finance find that quite exciting! I will not say that I am one of them. It is a combination of that and the fact that the government expects to get its money back plus interest over time.

CHAIR: So there is a rate of return angle on keeping it off budget—or not? I just want to put this to bed one way or the other.

Mr Heazlett : If you want a clearer explanation, there is a section in the implementation study report that we released almost two years ago now which quite succinctly sets out the criteria that are used for classifying NBN Co. as a public non-financial corporation.

CHAIR: Yes.

Mr Heazlett : That does not specifically relate to rate of return. It relates more to the operation being governed by market being responsive to market pressures rather than a rate of return per se.

CHAIR: So it is a rate of return and it has nothing to do with whether it is included in the budget papers or not. Am I right to say that or not?

Mr Heazlett : No.

Mr Quigley : In fact, there is an excellent paper written by the Parliamentary Library, I believe, some months ago.

CHAIR: That was in January. That is actually what I am referring to, just to clarify.

Mr Quigley : Exactly right.

CHAIR: To demystify some of this. I am glad you accessed the Parliamentary Library.

Mr Quigley : Absolutely.

CHAIR: I do not have any other questions.

Mr TURNBULL: This is to the Department of Finance and Deregulation. If at a later date the department or the Audit Office were to conclude that the value of the NBN was less than its cost and less than its book value, how would that write-down be treated in the budget?

Ms Hall : It would be an adjustment on the balance sheet. It would appear in the budget papers as a change in the valuation of an administered investment and would impact through the area of the budget that deals with other economic flows.

Mr TURNBULL: But it would not add to the headline cash balance?

Ms Hall : It would not impact fiscal or underlying cash.

Mr TURNBULL: Right.

Mr FLETCHER: Mr Quigley, with the CPE which is in the first release sites in Tasmania, who was that manufactured by? Will that be staying or does that need to be replaced?

Mr Quigley : It was manufactured by NEC and we will probably be replacing about 800 of those network-terminating devices over time.

CHAIR: Thanks for your time again and I look forward to seeing you next time. There were several questions on notice. It would be greatly appreciated for our reporting requirements if you could have those questions back to us by Friday, 27 April. That will allow us to consider it in the upcoming report. Thank you again for your time. It certainly is appreciated. Good luck.

Proceedings suspended from 16:13 to 16 : 24