Sunday, January 24, 2016

FTTN vs FTTP (5): cheaper now or faster later; a value clash of assumptions

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This is likely the last post in this series, and adds another element to the value assessment.
So far, I compared FTTN and FTTP based on CAPEX, OPEX and Revenue. I aggregated those costs to get a GDP impact. I applied an interest rate to compare cashflows over time. In this post, I add an external GDP impact (an externality) to a household with NBN. The Prime Minister argues for FTTN now, rather than the delay of FTTP. He sees a benefit now, rather than waiting. The analysis so far shows over the longer term, except in an extreme delay (eg 8 years), FTTP is preferred.
Source: wikimedia

However, if an extra boost to GDP comes from getting FTTN early, how much does that change the picture? I modelled a 1% and 2% increase in household GDP for the years between FTTN and FTTP.
That is, if a $70k household generates $700 extra benefit (1%) from using FTTN does that justify FTTN over FTTP? I updated the model to add a household (HH) GDP impact, then tried to find what HH GDP impact makes the GDP impact of FTTN the same as for FTTP. I used both 0% and 10% discount rates. An update to the model  (v4) is now provided which included a GDP boost (variable) for FTTN in the years pending FTTP delay.

Where you end up with is a clash of assumptions. One set of assumptions favour FTTN. Another set of assumptions favour FTTP. I tried to find the line, where the assumptions balance out. Therefore, increasing or decreasing an assumption will point to either FTTN or FTTP. Then the argument becomes which assumptions (or set of assumptions) do I believe/trust/support.

In short, FTTN vs FTTP is a marshmallow test. The marshmallow test is a classic child test. Do you want one marshmallow now, or wait to get two marshmallows? Do you want FTTN now, or wait to get FTTP?

Figure 1: Children wrestle with the Marshmallow test. Some (FTTN) now or more (FTTP) later.

Let's see how the numbers change, when you add some household boost to GDP, on top of revenue paid to NBN Co for FTTN.

I use two interest rates for the assessment of extra HH GDP; 0% and 10%. Later I will add in 3% and 5% in a summary. The first two Tables show interest at 0%. FTTP  figures do not change, since the HH GDP is increased only for the time until FTTP is available. I assume no extra benefit for FTTP, since I have no basis for those figures. The GDP impact benefits come from earlier NBN Cost benefit analysis I have done. They showed a 0.5-1% increase in GDP was needed to make NBN cost benefit analysis positive (DCF basis). See links to Whirlpool NBN Costs Benefit summary.

GDPDelay = 0yrs2 468
Yr 10FTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTP
$'000$'000$'000$'000$'000$'000$'000$'000$'000$'000
0%101810151012109106
1%1018131515.512189216
2%101815.5152112279326
Table 1: Year 10: GDP: with GDP boost to FTTN: 0% Un-discounted cash generated by one FTTN or FTTP household at Yr 10, given delay of installing FTTP. Shaded column indicates better outcome.


GDPDelay = 0yrs2 468
Yr 20FTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTP
$'000$'000$'000$'000$'000$'000$'000$'000$'000$'000
0%20322029202620232020
1%20322329252628233120
2%20322529312637234220
Table 2: Year 20: GDP: with GDP boost to FTTN: 0% Un-discounted cash generated by one FTTN or FTTP household at Yr 20, given delay of installing FTTP. Shaded column indicates better outcome.

What these tables show is that extra GDP significantly improves the FTTN proposition.
The 0% is the base case, and the 1% and 2% show major financial gains, the greater the longer the delay in FTTP. Where previously at Yr 20, FTTP was always better except where the delay was 8 years then FTTP and FTTN were the same. With extra GDP, even a four year delay can be enough at high extra GDP for FTTN to be more attractive.

Let's look at how the numbers change if we charge a high interest rate of 10% on each years cashflows. Now all the GDP figures are lower, since later cashflows are worth a lot less. High extra GDP will make a large difference, since the cashflows are early. The longer the FTTP delay, the less GDP (discounted at 10%) generated by FTTP.

GDPDelay = 0yrs2 468
Yr 10FTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTP
$'000$'000$'000$'000$'000$'000$'000$'000$'000$'000
0%71379.5777472.5
1%71399.5117134142.5
2%713129.5167194222.5
Table 3: Year 10: GDP: with GDP boost to FTTN: 10% Discounted cash generated by one FTTN or FTTP household at Yr 10, given delay of installing FTTP. Shaded column indicates better outcome.


GDPDelay = 0yrs2 468
Yr 20FTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTPFTTNFTTP
$'000$'000$'000$'000$'000$'000$'000$'000$'000$'000
0%9169139109896
1%91612131410158176
2%91614131810218246
Table 4: Year 20: GDP: with GDP boost to FTTN: 10% Discounted cash generated by one FTTN or FTTP household at Yr 20, given delay of installing FTTP. Shaded column indicates better outcome.

What Tables 3 and 4 show is a much improved FTTN proposition at 10% interest rate. FTTN is now preferred at Delay of 4, 6, and 8 years, and even a two year delay if the GDP boost of FTTN is high.

This raises the question - where to draw the line between FTTN and FTTP? On reflection and through playing with the model I can show the assumptions where the GDP (discounted) for FTTN becomes the same for FTTP.


GDPDelay = 0yrs2 468
              





Yr 10i=10%i=5%i=3%i=0%
Yr 20i=10%i=5%i=3%i=0%
Table 5: When does GDP (FTTN = FTTP)? What interest rate (discount) equates to years delay to FTTP?

What I tried to show in this table is what interest rate charged on cashflows make the GDP impact  of FTTN = FTTP.  Thus at Yr 20, with no interest FTTN and FTTP have the same GDP impact, when FTTP is delayed eight years. When a high interest rate is used on the cashflows (10%), then FTTN is the same GDP effect as FTTP, when the delay is only four years.

In the next table, I compare how much extra GDP boost would FTTN require for the GDP impact to be the same as FTTP.

GDPDelay = 0yrs2 468
FTTN=FTTP



















Yr 10i=10%FTTP > FTTN1-2% (High)0%(Low)
FTTN > FTTP
FTTN > FTTP
i=0%FTTP >2-3%(High)0-1%(Med)
FTTN >
FTTN >
Yr 20i=10%FTTP >1-2%(High)0-1%(Med)
FTTN >
FTTN >
i=0%FTTP >3-4% (High)1-2%(High)0-1%(Med)0%(Low)
Table 6: When does GDP (FTTN = FTTP)? What GDP boost to FTTN equates to years delay to FTTP?

What Table 6 shows is that FTTP and FTTN are favourable based on different assumptions.
FTTP is favoured when there is no delay and when interest rates are low. When only a two year delay to FTTP, then FTTN needs high GDP boost to be equivalent. When delay is four years, GDP is roughly equivalent at high interest rate, but requires medium GDP boost at low interest after ten years. After 20 years, FTTN needs medium or high boosts to be equivalent to FTTP.

FTTN is favoured when delay is six or eight years, when interest rates are high (10%), or when boosts to GDP are high.  Previous cost benefit analysis showed a 0.5-1% boost in GDP was needed for NBN to be successful (ie DCF positive).

Conclusion:
FTTN as an alternative to FTTP is significantly boosted by including a 1 or 2% GDP boost from FTTN now up until a delayed FTTP rollout. A high interest rate (10%) also makes FTTN more attractive if delays to FTTP reach four years.

So, cheaper now(FTTN) or faster later (FTTP), is complex. The model now accounts for:
  1. OPEX, CAPEX and Revenue
  2. Delay in FTTP install
  3. Life of assets (but not replacement of FTTN)
  4. Interest rate (ie DCF discounted cashflows_)
  5. Impact on GDP based on OPEX, CAPEX and Revenue
  6. a GDP boost from NBN
Like the marshmallow test, less now (FTTN) and more later (FTTP) is a value tradeoff, which is personal, subjective and complex. Accounting for a short term GDP boost from FTTN makes a significant difference.

What is not yet counted? More factors can be taken into account. Some hard. Some very hard to assess or estimate.

Hard: what cost to replace FTTN with FTTP and when? eg $4k FTTP CAPEX inflated at 1,3,5%pa, discounted at 0,1,3,5,10%, at Yr 10, 15, 20.
Too Hard: how much more GDP impact will FTTP have over FTTN?
Too Hard: how much customer satisfaction will FTTP and FTTN create?
Too Hard: how to compare customer satisfaction with $$?

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