Credit ratings agency S&P Global Ratings has issued a damning report on the NBN that warns a write-down is "inevitable" and taxpayers, customers and telcos are bearing the costs.
A key warning in the report is that high access costs for the National Broadband Network for telecommunications companies, and therefore end users, are driving both towards mobile internet as a cheaper and increasingly fast alternative.
"Regulatory distortions will exacerbate the nascent trend toward mobile substitution," S&P warned.
"NBN Co's average access charge of $44 per premises per month simply leaves too much money on the table.
"This has spawned an infrastructure arms race among MNOs [mobile network operators] as they seek to bypass the NBN with their own 'wireless fibre' networks."
The report cites international studies showing Australia ranks 50th out of 148 countries for average fixed broadband speeds, while it is 11th out of 74 for mobile internet speeds.
However, S&P is not expecting the NBN, still only 50 per cent rolled-out, to become obsolete overnight.
"To be clear, we do not anticipate mobile networks to completely supplant the NBN anytime soon," the report's authors added.
"The threat posed by mobile networks is more chronic than acute. In the near to medium term, capacity constraints will limit the widespread adoption of mobile broadband."
S&P noted that this trend towards mobile substitution for fixed broadband is not unique to Australia as mobile networks improve rapidly.
"However, many of its problems are uniquely Australian: a retrograde technology mix, political involvement, rollout miscalculations, cross-subsidisation of unprofitable regions, as well as a convoluted pricing structure that puts the onus on RSPs [retail service providers] to adequately provision bandwidth," the report argued.
"It is a contrived market shaped by heavy government intervention. And it is consumers who are expected to underwrite NBN Co's profitability via its favourable regulatory arrangements."
'Enormous cost' to taxpayers, subscribers and telcos
That said, S&P believes the NBN will achieve its two key policy objectives of bridging the digital divide between metropolitan and regional areas and breaking up Telstra's fixed-line monopoly.
However, it argued that this has come "at an enormous cost to taxpayers, subscribers and incumbent telecommunications providers".
The cost to taxpayers may also increase if the NBN fails to meet its targets for a commercial return on the Federal Government's investment — a level of return that allowed both the previous Labor government and the Coalition to keep their NBN investments off the budget balance sheet.
S&P warns this is becoming increasingly likely, as it believes the NBN will either have to reduce its access charges or miss the target take-up rate of between 73-75 per cent.
The ratings agency points out that NBN Co currently forecasts an $8 per household increase in average user charges over the next three years to meet its revenue targets.
"Any shortfall in NBN Co's revenue target raises the prospect of a write-down and additional government funding to support the company, potentially in the form of debt relief or direct subsidies," the report warned.
"We believe it is getting harder for the government to stand behind the presupposition that NBN Co will generate a commercial return on investment.
"In our opinion, there appears to be ample justification for additional financial support on the grounds that the NBN generates social and economic benefits that cannot be captured by a commercial return on investment."
'No basis' for NBN write-down, Government says
However, NBN Co is continuing to stand behind its forecasts.
"We remain very confident in our revenue targets and the strength of our balance sheet," an NBN spokesperson told the ABC.
For its part, the Government says it is NBN's decision as to whether any of its asset values need to be written down.
"The Government is not considering a write-down of its investment in NBN. There is no basis for such a write-down," Finance Minister Mathias Cormann said in a statement.
"In fact, the value of NBN can only be written down where the NBN company itself has assessed that this is required for its assets under Australian Accounting Standards.
"This assessment is made by NBN independently of Government in preparing its financial statements and is subject to independent assessment by the auditor-general."
Senator Cormann said there were strict rules in place, independent from the Government, to determine whether federal funding was classified as an equity investment or a grant.
"To be classified as equity, a federal funding contribution must be able to achieve a sufficient rate of return to the Commonwealth," he said.
"We remain confident that the Federal Government's equity contribution to NBN will continue to be treated as equity and not a grant."
NBN may leave Telstra as 'last telco standing'
While NBN may remain confident about the strength of its Government-backed balance sheet, private telcos are suffering, with Telstra shares, for example, recently trading at seven-year-lows and very close to a record low.
"It's stretched the balance sheets of the rated companies that we look at," said S&P analyst Graeme Ferguson.
"We downgraded Telstra a few weeks ago for the first time in 12 years.
"We've also lowered Optus's standalone credit profile.
"So it's having two effects, pressuring their margins and their profitability but at the same time its requiring them to invest heavily, which is stretching their balance sheets."
Ironically, given that one of the NBN's aims was to break the dominance of Telstra in the Australian telecommunications market, Mr Ferguson said the extreme pressure on telco profit margins means many smaller rivals may fall by the wayside.
"If it comes down to a matter of survival of the fittest, then Telstra's obviously going to be the last telecommunications provider standing," he said.
"We're not there yet, but potentially we have a situation where small to mid-sized telcos are forced out of the market."
With the NBN forcing profit margins near to zero, Mr Ferguson says customers are generally coming out on top for now.
"In the short term its going to be a boon for consumers but, over the longer term, if the Government's industry reform unravels, then we're faced potentially with fewer market participants and a less competitive market," he warned.
"So, potentially over the longer term, if there is market consolidation and NBN Co isn't viable, we might see less competition and higher prices."