Monday, June 01, 2009

NBN Co Capital structure and commerciality

Also from estimates (P ECA 93) we have;

Senator Conroy—Let me reassure you that we will not re-create the old problem. If we have our network competing with any of the incumbent networks, by definition, there is still competition. If one company, let us call it XYZ Proprietary Limited, decide they want to vend in their assets, the maximum stake that we have indicated that a collective of companies can take is 49 per cent. If the company was a vertically integrated supplier there would be a cap on the amount of shares that they would be entitled to if they vended their assets in. There have been figures quoted, though there is no final decision and the implementation study is examining these very issues. Let us say the sort of figure that is being kicked around is 15 to 20 per cent. If XYZ company was a vertically integrated monopoly or former monopoly and it wanted to vend in, in its current structure, then it would be allowed 15 to 20 per cent. If, in the future, any company changed its structure then it is possible that we could consider a changed set of circumstances—possible. All of this is subject to ongoing discussion and an implementation study. What would not be allowed to happen in the future is that a retail arm would be allowed to buy into the company when we sold the other 51 per cent.

I and others are seriously concerned about all this discussion of "vending in assets". Firstly because it has led people who really only own "transmission" assets (like AAPT) to speculate about vending in assets. Most of us hope that NBNCo will be tightly limited as a layer 1 and a bit of layer 2 wholesale access company, and that it won't be offering end-to-end services. Secondly it would be stupid for the Government to be investing in further "competitive" backhaul if NBNCo wound up being in the backhaul business.

But the biggest concern is the idea that someone who vends in assets winds up with an equity stake in their name. Let's not pussy-foot around the only assets worth talking about are Telstra's CAN assets. It doesn't matter whether Telstra can be effectively constrained from obtaining full control, there are real governance issues created if Telstra has a stake of somewhere between 20% and 49% and the Government is conflicted as shareholder and regulator. In particular if the Board is seen to pursue a public policy as opposed to a company objective there could be a claim of suppression of minority rights.

If any Telstra assets are to be "vended in" that vending in needs to occur as the endpoint of a "One Steel" process. That is the clean divide of Telstra into two companies with each shareholder in the old company getting a matching number of shares in each of the new companies (well, only one new one needs to be created), and once that split occurs the shareholders of the new company merge their company with NBN Co on a script basis (or that company becomes NBN Co by the Commonwealth investing sufficient funds to get to a 51% shareholding). My earlier comments about the possibility of two classes of shares could still apply.

The estimates hearing also explored the issue of the commercial returns of the company (ECA 98);

Senator MINCHIN—I just wanted to touch on the commercial issues surrounding the NBN company. I presume it will be required to operate commercially.
Ms Scott—That is correct.
Senator MINCHIN—Can you tell me whether the department has collected evidence as to whether this government owned NBN company will be able to operate commercially?
Ms Scott—We have done some preliminary analysis on that issue. The implementation study will look at all of those issues. As you know, we have already gone out for the lead adviser for the implementation study.
Senator MINCHIN—I have in front of me the issues to be examined by the implementation study. Perhaps you could point it out to me, but I cannot see any of these dot points on page 43. I am sorry, I am using the Select Committee on the National Broadband Network as my source. It refers to the issues to be examined in the implementation study and then lists them. I am using this for convenience. It does not list anywhere, on the basis of the document in front of me, the issue of commercial viability. I stand to be corrected. There is mention of the legislation, the regulatory regime, ownership restrictions, funding requirements, developments to maximise private ownership, and capital structure. Which one of those would be the head that would go to the commercial viability of the company?
Ms Scott—It does refer to government objectives. The government has made it clear that it is required to be commercial. Also, in clause 34.3 it states ‘development of strategies to maximise the scope for private sector investment in the network company’. We anticipate that, in order to attract private investment, it would need to be commercial.
Senator MINCHIN—You think it is implicit in that, do you?
Senator Conroy—All of those go implicitly to it. Also, in the next clause, it states that the list outlined in clause 36.3 is not exhaustive, but indicative. Is it 36.3? Is that a typo? I am assuming that is a typo.
Ms Scott—It is 34.3.
Senator Conroy—Yes, that should be 34.3; that it is not exhaustive, but indicative of the breadth. I think there is a typo there that may have added to your confusion.
Ms Scott—I will just see if I can find you another part of the paper. There is a section that refers to the government’s statements in the public domain. Certainly the government has been clear from the outset about its desire for the project to be commercial and for the project ultimately to be privatised.
Senator MINCHIN—I will believe that when I see it. You are satisfied that at least implicitly in the elements of the implementation study is the issue of commercial viability?
Ms Scott—Yes.
Senator MINCHIN—Does that mean the implementation study will be the one that, rather than the department itself, will do work on what prices to consumers will be required to ensure this is viable?
Ms Scott—That is correct.
Senator MINCHIN—I am not going to the prices, but someone has to examine whether it is going to be viable.

These are all references to the REOI for the lead adviser (in Part 5 statement of requirements). Once again the discussion may need to turn to the idea of a two class share structure where the external shareholders get a guaranteed return but limited upside, while the Commonwealth gets a second slice. That is, the Commonwealth absorbs the volatility.

And a final aside on one of my other favourite topics (Henry Ergas P. ECA 100);
Senator Conroy— ....Can I say I am pleased that you have terminated Mr Ergas from doing your tax review. That is such a sensible decision.
Senator MINCHIN—I am not sure that is correct. But I would not use this to cast slurs upon one of Australia’s most eminent economists over your differences of opinion.
Senator Conroy—Mr Hockey has indicated that the project is not going ahead that he was hired for. I am just congratulating you on that wise decision.
Senator MINCHIN—I would cast aspersions upon Mr Ergas in that way.
Senator Conroy—Mr Ergas made a string of completely questionable assumptions. He assumed a 15 per cent rate of return. Neither Telstra nor the G9 proposal was shooting in that ballpark. He then made an assumption about the—

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