Telstra gets its NBN deal – and Rudd get’s a positive story: Kohler

Telstra can thank Australia’s mining companies and their ferocious campaign against the planned mining tax for getting $11 billion.

We’ll never know that for sure of course, but would Kevin Rudd have signed off on an extra $2 billion from the Government if he didn’t desperately need a win right now? I doubt it.

Nine billion dollars of the $11 billion figure that Telstra was able to announce yesterday as payment for cooperating with the national broadband network came out of a commercial negotiation with NBN Co. The other $2 billion was political.

And the Prime Minister positively gushed when announcing it all yesterday – at last a good story to tell, and one that had corporate leaders standing with him in his courtyard, not against him in TV ads. When it was her turn to speak, Telstra chair Catherine Livingstone, however, was a little less effusive, saying it was an “encouraging milestone” and that they were all “a step closer”, and I imagine the PM was thinking she could at least show a little more gratitude for getting 11 billion smackers.

The crucial $2 billion kicked in directly by the government is partly extra cash for the Universal Service Obligation and partly a subsidy to retrain Telstra’s copper workers to be fibre workers, so they don’t have to be sacked. Without that money, the deal wouldn’t have happened and Telstra and the NBN would have been competitors and Telstra’s share price would have collapsed. In an election year, with more than 1.5 million voters owning Telstra shares, that would have been disastrous, especially after the Penrith by-election. As it is, Telstra’s share price will no doubt soar today.

The $2 billion is real money – the government has agreed to pay up to $100 million a year for staff retraining and an extra $50 million or so for the USO. The net present value of that over 25 years is $2 billion.

But is it commercially justified, as opposed to politically? Well maybe. Telstra has been getting underpaid for the USO and whether $100 million is reasonable for teaching a few thousand staff to deal with fibre instead of copper – who knows?

The other $9 billion comes out of NBN Co’s budget and is split roughly $5 billion for renting access to Telstra’s ducts, pits and conduits and $4 billion in cash payments to Telstra for “migrating” its customers.

It’s not exactly migration, though – more like people smuggling. Telstra will progressively switch its own business from internally supplied network services to the NBN. Telstra’s customers will therefore find their phone calls and internet carried over the NBN whether they like it or not. The NBN Co will pay for their new modems, and it won’t – can’t – cost more, but why is Telstra getting paid about $4 billion to do this? Because it can – it’s a big ugly potential competitor that drove a hard bargain.

So Telstra gets to announce a number that’s closer to what it wanted ($12 billion) than what the government and the NBN Co wanted to pay ($8 billion) and David Thodey and his team can now get on with transforming the company into a structurally separated service company.

That transformation will be incredibly difficult, and may not be successful, but at least Telstra will have one big advantage over its competitors: every time it moves one of its customers from copper to NBN fibre, it will get a cash payment. No one else, presumably, will get that.

It’s clear from my discussions today with those involved in the negotiations that valuing this component of the deal was the most difficult and took the longest.

They call it a “de-commissioning” payment. No one would tell me today how it is calculated – whether it is based on each customer’s monthly spending, or whether it’s a standard bounty per customer, but if it was that complicated it must be the former.

As for the rent to be paid for access to ducts, pits, conduits and space in the exchanges, there is an easy to find out whether it’s really worth $5 billion – simply float the infrastructure as an IPO with an annuity income stream from the NBN.

After all, it will have to be valued by an independent expert before going to shareholders for approval, and there is not much point in the new Telstra owning it, simply to collect rent from a government business enterprise.

So, next step: a $5 billion IPO of Telstra’s ducts and pipes? Only if someone wants to know the true market value of today’s deal. I’m guessing they might not want to know.

This article first appeared on Business Spectator.