The Optus cable TV and broadband network bought by the National Broadband Network for $800 million is in such poor condition the NBN is considering replacing it entirely.
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Replacing the network would see costs blow out by up to $375 million and 600,000 premises forced to wait until 2019 before connecting to the NBN, according to documents obtained by Fairfax Media.
The NBN's Hybrid Fibre Coaxial (HFC) rollout will use existing pay TV cables to deliver high-speed broadband to Australians.
The leaked briefing presentation, dated November 3, 2015 and marked "confidential", canvasses moving to a "Plan B" for the HFC network, rather than upgrading the Optus network as had originally been planned.
The "Plan A" HFC rollout would see existing Optus infrastructure used for 470,000 premises.
Prime Minister Malcolm Turnbull has spruiked the importance of Telstra and Optus' existing HFC networks to the Coalition's multi-technology mix NBN rollout.
In December, Mr Turnbull hailed the "landmark agreement" to buy the Telstra and Optus cable lines, saying: "The agreement allows NBN Co to take progressive ownership of the Optus HFC cable network and use this infrastructure in the NBN rollout, at no additional cost to taxpayers."
But the internal NBN documents state the Optus network is "not fully fit for purpose" and some equipment is "arriving at the end of life" and will need to be replaced. Other parts of the network are oversubscribed and don't have sufficient capacity to support NBN services.
According to the documents, building over the Optus HFC network with Telstra HFC or a mix of other technologies would deliver better results than upgrading the current network.
But it would require a peak funding increase of between $150 million and $375 million and see NBN miss its rollout targets by approximately 300,000 premises in 2017 and 330,00 in 2018.
It means these premises would not receive the NBN until 2019 at the earliest.
Labor had proposed decommissioning Optus' FTC network and replacing it with fibre-to-the-premise.
Labor communications spokesman Jason Clare said: "This is more evidence of the absolute mess that Malcolm Turnbull has created with his second-rate NBN.
"He designed his second-rate NBN using a network that he didn't know the quality of and now his chickens are coming home to roost.
"It looks like Malcolm Turnbull's second-rate NBN is about to have another cost blowout and will take even longer to build."
An NBN spokesman said: "NBN has met or exceeded all targets over the past 18 months and we remain confident in our long range plan and the various strategies we have in place to manage the risk.
"In order to manage risk nbn regularly prepares for multiple scenarios in the network deployment - the document concerned is part of that ongoing approach of risk mitigation."
NBN said it was currently conducting a trial on Optus's HFC network in Redcliffe, Queensland, that has not had any any unexpected technical issues and had delivered fast speeds.
An Optus spokeswoman said: "Optus and NBNCo have always acknowledged that parts of the HFC network would need an upgrade to support the NBN's product set.
"In advance of handover there has been and continues to be major investment into the HFC network to manage subscriber growth and capacity demand."
Mr Turnbull defended the government's NBN policy on Wednesday, saying Labors approach in government was a "shockingly reckless failure of policy and process".
