news NBN Co chief executive has flatly rejected as “wrong” a report by the Financial Review newspaper last week which claimed that the company was facing a $5 billion blowout in its construction costs, stating that he expected the NBN project to deliver within its existing cost structure.
Last week the Financial Review reported that NBN Co chief operating officer Ralph Steffens had told senior executives at the company about a “$5 billion hold in construction costs” at the company. The news had come after NBN Co has suffered repeated issues with its construction workforce over the past several years, ranging from contractual difficulties with contractors to issues with training to deal with dangerous asbestos material in the Telstra ducts it is using. It has also lost several senior construction executives along the way.
The AFR’s article led to immediate claims by the Coalition that Labor’s credibility, when it came to the NBN rollout, was in pieces.
“Well today Anthony Albanese and Kevin Rudd’s credibility on the NBN has been completely shattered, said Shadow Communications Minister Malcolm Turnbull in a press conference in Sydney on Friday, referring to the Communications Minister and Prime Minister. “As David Ramli has revealed in the Australian Financial Review just a few minutes ago the NBN Co’s chief operating officer has told his top executives that their construction costs have blown out by $5 billion. Now we didn’t find that out because Anthony Albanese has told us the truth. He’s been telling us for weeks that the NBN Co is on time and budget.”
“We didn’t find out about that because the NBN Co published the latest version of its business plan because he’s been sitting on that and won’t release it before the election. He wants people to vote on the NBN without actually knowing what’s going on. We found out about it because someone at the NBN Co had to ‘fess up to the facts about the bad shape this project is in to their colleagues.”
“The fact of the matter is this,” added Turnbull. “The NBN Co is not managing this project well. It is way behind schedule, it is running well over budget. Right now they have managed in four years to connect 33,000 premises to their fibre network. They have basically completed in four years, two per cent of the project, And they want us to believe they will be all completed by 2021. The NBN’s business plan, its corporate plan, as is currently published, has no credibility at all. And the revelations in the AFR today have blown it asunder. The AFR have blown it asunder.
“The lack of transparency, the lack of honesty, on behalf of the Government has been shocking. I mean, the NBN Co revises its business plan every year. They have given a revised business plan to the Government and the Government refuses to release it. And now little facts, little bits of it are starting to leak out about it already. You’ve seen already an acknowledgement of a $5 billion blowout. How can we be sure it’s only $5? How do we know it’s not $10 or more? What confidence can you have in this Government and this project when we have been told so many falsehoods about its progress?”
However, in his own statement, NBN Co chief executive Mike Quigley denied there were problems with the NBN’s finances. “Claims that there is a $5 billion “hole in construction costs” are wrong,” Quigley said. “I continue to expect the NBN to be delivered at the capital cost $37.4bn as set out in the Corporate Plan.”
“The management of NBN Co are well aware of their responsibilities to taxpayers and so are committed to offset any increases in costs with savings. We have managed to do this very effectively since the project started and we will continue to do so.”
The business model and finances of the NBN have already seen a number of major changes since the project was first set up back in April 2009. NBN Co was forced, for example, to factor in additional obligations for rolling out fibre to greenfields (new housing development) areas, as well as its $800 million deal with Optus that will see the telco shut down its existing HFC cable network.
In addition to these changes in scope, it is believed that the company has also had some areas where it is aware internally that costs have increased and others where they have fallen. This kind of ‘give and take’ scenario is not unusual for major infrastructure projects such as the NBN, which rarely remain completely on track to meet their target budget, usually coming in above budget in the long run.
However, Turnbull is also accurate that NBN Co has made little progress on its network rollout, compared to similar major infrastructure projects internationally. The company’s rollout in Australia has been delayed repeatedly over the past four years. In July it revealed it had only successfully deployed its fibre to the premises network to some 207,500 premises, and it is believed that a number of those premises (such as those in apartment blocks) cannot actually connect to the faster infrastructure yet.
In comparison, British incumbent telco BT revealed last month that its fibre to the node network has passed more than 16 million premises since the network rollout was commenced in 2009, with more than 1.7 million customers having signed up for active connections to the infrastructure.
The slow speed of the NBN rollout, and issues around the perceived cost of FTTP rollouts, has led the Coalition to propose a FTTN model similar to BT’s in the UK. FTTN has also been deployed in the United States by AT&T, France by France Telecom, and in Germany by Deutsche Telekom, although other countries, such as Singapore, Korea and Japan have preferred to deploy all-fibre networks similar to the Government’s NBN project.
However, there are also key differences between the two countries when it comes to broadband. The UK has a much higher population density than Australia, concentrated in a much smaller area, easing some of the broadband rollout challenges found in Australia. In addition, it is currently unclear to what extent Telstra’s copper network is maintained at a similar level to the copper network operated by BT, with some claiming that Telstra’s network is inferior and not as capable of supporting high broadband speeds under a fibre to the node-style rollout. The Coalition has pledged to remediate Telstra’s copper or extend fibre all the way to premises where necessary.
Who’s telling the truth here? Well, I think it’s a mixed bag. I believe the AFR’s report that Steffens held a meeting to warn NBN Co executives about cost blow-outs. However, I also believe Quigley that NBN Co is able to manage these blow-outs, and the fact is that the AFR’s own article contains a number of measures designed at mediating the issues, such as changing the equipment and number of cables NBN Co is using in its rollout. Quigley didn’t explicitly deny that Steffens had held the meeting or that there were cost blow-outs in the NBN project internally, after all — he merely denied that the issues would affect NBN Co’s overall cost profile for its rollout. Both the AFR’s article and Quigley’s answer are broadly credible.
It looks like what we’re seeing here is precisely what happens when you deploy a massive national infrastructure project like the NBN. You start off with a very detailed plan, but as you go on you learn many important lessons which change the nature of that plan. The art of dealing with these lessons and incorporating them into your overall plan, cutting costs in some areas where you realise it’s possible to fund others, is called “project governance”, and a very difficult, demanding and precise art it is indeed.
Of course, the larger point to be made here, as I recently wrote in a Delimiter 2.0 article (paywalled) is that if the NBN project had been handed to Australia’s incumbent telco Telstra back eight years ago or more, many of these lessons and project governance hiccups would have been irrelevant. We’ve seen pretty conclusive evidence from countries such as the US, UK, France and Germany that incumbent telcos are pretty good at upgrading their existing copper networks to variants of fibre to the node or fibre to the premise (albeit, coupled with a general loss of competition in the retail broadband environment).
One has to wonder to what extent Telstra executives are looking at the lessons being learnt by NBN Co right now about its network rollout and comparing the company’s progress unfavourably to what could have been. After all, the amount of corporate knowledge about telecommunications infrastructure rollouts in Australia resident in Telstra dwarfs that within NBN Co. One suspects that Telstra would not have had to learn many of the lessons that NBN Co is right now.
As Turnbull has said, NBN Co exists now and we can’t go back and just hand the rollout of the NBN to Telstra. We’ve likely gone too far down the track of rolling out the NBN. However, the more NBN Co continues to struggle with its rollout and learn lessons about how its network will be deployed, the more some among us, myself included, wonder if it wouldn’t have simply been better to hand the incumbent the responsibility for the upgrade eight years ago — as virtually every other first-world country did. We would have lost some competition in the retail broadband market — but we might have had the NBN rollout completed years ago — instead of just limping over the (revised) target of a few hundred thousand premises in June.