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Request for audit
Independent assessment of NBN Corporate Plan
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Responded: Tuesday 21 August 2018
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The Auditor-General responded on 21 August 2018 to correspondence from Dr Jim Chalmers MP and Ms Michelle Rowland MP dated 26 July 2018, requesting that the Auditor-General conduct an assurance review of the financial assumptions underpinning the long-term economics of the NBN.
Auditor-General's response
21 August 2018
Dr Jim Chalmers MP
Ms Michelle Rowland MP
Parliament House
CANBERRA ACT 2600
Dear Dr Chalmers and Ms Rowland
I am writing in response to your letter of 26 July 2018 requesting that the ANAO undertake an assurance review of the financial assumptions under-pinning the long-term economics of the NBN. In that request you list a number of matters contained in NBN Co Limited’s (NBN) Corporate Plan.
As you would be aware, ANAO conducts an annual audit of NBN’s financial report. In preparing its financial report, NBN undertakes an annual impairment assessment (including a technical and economic obsolescence test) over its assets. As part of its annual audit ANAO reviews NBN’s annual impairment assessment, including its obsolescence test.
Auditor’s reports are made public through their inclusion in Commonwealth entities’ annual reports which are tabled in Parliament. Auditor’s reports from time to time include key audit matters – which are designed to draw the reader’s attention to those matters, which in our professional judgement, were of the most significance in the audit of the financial report of the current period. Key audit matters do not of themselves provide a separate opinion on items in the financial report. The auditor’s report does however include a summary of how the key audit matter was addressed.
The auditor’s report on NBN’s 2016–17 financial report (see page 142 of NBN’s 2016–17 Annual Report) included a key audit matter describing work on the “test for impairment of property, plant and equipment and intangible assets” as undertaken by NBN.
In providing the auditor’s report, if any matters were identified that are material to the financial report, this would result in a modification to audit opinion. Further, if moderate or significant issues were identified with NBN’s processes, these matters would be included in my separate report to Parliament on the results of financial statements audits. The auditor’s report on NBN’s 2016–17 financial report was unmodified and I did not subsequently report any issues in relation to NBN in my report to Parliament on the results of 2016–17 financial statements audits (see Report No. 24 of 2017–2018).
The auditor’s report on NBN’s 2017–18 financial report was issued on 9 August 2018 and will be included in NBN’s 2017–18 annual report, which will be presented to Parliament in due course. The 2017–18 auditor’s report includes a similar key audit matter to 2016–17 (“valuation of property, plant and equipment and intangible assets - impairment”).
I have considered the items raised in your letter and can confirm that the procedures conducted as part of the audit of NBN’s 2017–18 financial report included:
- reviewing the reasonableness of the significant assumptions underpinning NBN’s projected revenue, expected take-up rates and operating cost forecasts;
- assessing the sensitivity of the above assumptions and how that may impact the estimated value of NBN’s assets; and
- considering the appropriateness of the process undertaken by NBN to develop the significant assumptions.
Your letter references the July 2018 Standard & Poor’s assessment. This assessment became available during the period of the audit and was considered as part of the audit process.
I do not propose to conduct a separate assurance review on these assumptions and the process to develop them, due to these matters being considered as part of the audit of NBN’s 2017–18 financial report.
Yours sincerely
Grant Hehir
Auditor-General
Correspondence from Dr Jim Chalmers MP and Ms Michelle Rowland MP
26 July 2018
Independent assessment of NBN Corporate Plan
Dear Mr Hehir
We write to request an assurance review of the financial assumptions underpinning the long-term economics of the NBN.
The NBN Corporate Plan contains various plans, projections and other forward-looking estimates which, among other things, help the Australian people, Parliament, Government, markets and stakeholders assess the state of the business case and, by extension, the potential exposure of the Federal Budget and impact on consumers.
As you would be aware, in 2013 the Coalition promised to deliver the NBN for $29.5 billion and by the end of 2016.
The most recent 2018 Corporate Plan indicates the Government expects to provide between $47 and $49 billion in equity and debt funding to complete the rollout of its multi-technology mix by July 2020. This is a cost increase of $8 billion from the November 2014 Corporate Plan and $20 billion more than was promised in 2013.
Given the scale of public investment, it is important that the Parliament and public have confidence that the medium and long-term assumptions in the Government’s Corporate Plan have been subject to independent scrutiny, particularly given the 2018 NBN Corporate Plan explicitly states in a footnoted disclaimer:
“Management and the Board do not give any guarantee or assurance that the results, performance or achievements expressed or implied by the outlook will actually occur. Management and the Board have not taken a view on assumptions beyond FY22.”
On 25 July 2018 Standard & Poor’s issued a critical assessment of the long-term economics of the NBN, and questioned the appropriateness of the long-term Corporate Plan assumptions, specifically revenue and take-up.
S&P’s assessment highlights the potential and significant risk to taxpayers as a consequence of a potential write-down, an outcome that regrettably looks increasingly likely.
There has been a mix of commentary over the past year about the competitive risks posed by wireless networks to the multi-technology mix NBN.
For example, the CEO of Telstra recently indicated the company estimates that with the evolution of 5G more than one million more homes and businesses in Australia could choose to go mobile only than are now.
The NBN Company also recently took steps to increase entry-level wholesale pricing by forcing the same wholesale price for 12, 25 and 50 mbps speed tiers.
These pricing changes risk undermining affordability for low-income Australians on the NBN, but may also increase the competitive exposure of NBN to 5G offerings from operators who will compete aggressively on entry-level pricing. These competitive risks are likely to materialise by late 2019, which would fall into the next term of Parliament.
Whilst we are not passing judgement on this commentary, the diversity of views does highlight the importance of having independent assurance that the assumptions underpinning the long-term economics of the NBN are fit for purpose.
This is pertinent, given the potential impact assumptions adopted by NBNCo have on the Internal Rate of Return (IRR), and its potential interaction with the value of equity held by the Commonwealth in the NBN.
We consider an urgent review of the long-term assumptions underpinning the latest Corporate Plan by the ANAO is the best mechanism to provide robust independent scrutiny of these matters to the Parliament. This was also a key recommendation of the NBN Joint Parliamentary Standing Committee, which handed down its report on 29 September 2017.
For this reason, we request the ANAO undertake an assurance review that could consider, but not be limited to, the following matters:
- Whether the internal NBN processes for reviewing and updating assumptions that impact the long-term economics of the NBN Corporate Plan are appropriate.
- Whether the key financial assumptions underpinning the long-term forecasts in the latest Corporate Plan reflect the best information available, including the internal market insights, risk assessments, and analysis available to NBNCo and informed market analysts. This includes:
- projected revenue growth forecasts out to 2040;
- implicit and explicit assumptions about NBN take-up rates out to 2040 in light of expected competition from wireless operators;
- operating cost assumptions out to 2040; and
- a comparison of how key assumptions impacting the long-term financial forecasts have changed from the 2016 Corporate Plan and onwards, and the reasons for the changes.
- The sensitivity of the long-term economics of the NBN to variations in these assumptions.
Thank you for your consideration of this request and we look forward to your response.
Yours sincerely,
Dr Jim Chalmers MP
Shadow Minister for Finance
Member for Rankin
Michelle Rowland MP
Shadow Minister for Communications
Member for Greenway