A close reading of NBN Co’s Strategic Review report published last week shows the former chief executive of the company was overwhelmingly correct: A predominantly Fibre to the Premises National Broadband Network can still be rolled out with only modest cost and timeframe implications. But that’s a truth that nobody currently involved in the process seems to want to hear.
In August 2013 a rather sensational article regarding the National Broadband Network’s finances hit the pages of the Australian Financial Review newspaper.
The gist of the story was relatively simple: As the National Broadband Network rollout process had progressed, and the company’s executive team had learnt more about the details of the effort, a disturbing gulf had arisen between the initial financial projections of the project and its experience of how those projections were playing out in the real world. Or, as the AFR put it at the time, there had been a $5 billion “blowout” in the NBN.
Taken out of context, the cost blowout looked damning. The Australian public is used to seeing blowouts in major government projects — such blowouts are almost expected these days — but not to such a high valuation. $5 billion is a lot of money by anyone’s standards, least of all taxpayers, who are perennially interested in making sure their somewhat democractically elected government isn’t blithely pissing their money up against a wall.
Initially the optics of the situation didn’t look good for NBN Co. The blowout allowed then-Shadow Communications Minister Malcolm Turnbull to claim that Labor’s credibility with respect to the NBN had been “shattered”.
“The lack of transparency, the lack of honesty, on behalf of the Government has been shocking,” Turnbull said at the time. “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 five billion dollar blowout. How can we be sure it’s only five? How do we know it’s not ten 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, taken in context, the cost increase looked much less dramatic.
Firstly, it has always been true that NBN Co has maintained a 10 percent contingency reserve for precisely these kinds of situations. A $5 billion blowout in the company’s construction costs would exhaust that reserve, but not dramatically so. And although the sheer amount of the claimed “blowout” was substantial, in the context of a $45 billion project, proportionally it’s not that high. Most construction firms wouldn’t consider a five to ten percent expansion in a major infrastructure project’s costs to be unusual; again, such a cost blowout is almost expected.
Then too, NBN Co’s growing knowledge of and experience with its rollout was a double-edged sword. This wisdom had caused the company to re-evaluate its costs upwards in some areas. However, it had also cut the other way.
At the time, in a statement responding to the Financial Review’s article, Quigley made it clear the NBN Co management team he led was still committed to delivering the NBN on schedule and at the right price.
“I continue to expect the NBN to be delivered at the capital cost $37.4bn as set out in the Corporate Plan,” the redoubtable Quigley said in a statement. “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.”
Further details revealed by NBN Co at the time included specific steps such as cutting down the number of Telstra pits and ducts that would need to be replaced or expanded to fit NBN Co’s equipment, as well as reducing the number of fibre-optic strands used in cables. As NBN Co spokesperson Andrew Sholl said at the time: “If costs look like rising in one area, we will reduce them in others … NBN Co …is committed to offset any increases in costs with savings.”
I relate this anecdote with respect to the NBN rollout with the intent of setting the stage for an examination of NBN Co’s Strategic Review released last week (PDF).
Much has already been written about the document and its failings. It’s true that it was put together, as Shadow Communications Minister Jason Clare, has said, by “mates” of Communications Minister Malcolm Turnbull, with much of NBN Co’s new senior management team having links to either the MP personally or the Liberal party. Head of transformation and strategy JB Rousselot even owns? owned? a boat with Turnbull — a fact the Minister is continually trying to play down.
Then too, the Strategic Review was primarily put together by consulting firms Boston Consulting Group and Korda Mentha, with oversight by Deloitte. This is not the internally generated, self-reflective look at NBN Co which Turnbull promised the public. It is very much a creation of the consulting industry and reads precisely like one.
And, of course, it’s true that a number of the claims made in the document are, on the face of it, unjustified. The report features redactions a-plenty in critical areas; its technological claims sometimes appear to run contrary to popular industry wisdom and even, at times, to the internal analysis NBN Co conducted on the Coalition’s rival policy before the election, and the whole document has a distinct air of having been put together to satisfy a particular political agenda; rather than having been independently produced and able to stand on its own. Some of its logical leaps are almost undergraduate in their simplicity and naivity. It needs a heap more referencing and a heap more detail to be taken seriously.
But then, none of this is a surprise. Over the past several years — although it pains me to admit it — the Australian telecommunications industry has come to expect this kind of thing from Turnbull.
What is surprising about NBN Co’s Strategic Review is just how positive it is about the existing Fibre to the Premises NBN plan which NBN Co was set up under Labor to deliver.
Under Labor’s original vision, as outlined in April 2009, its predominantly fibre-based NBN would have taken until 2020 to be completed, at a total cost of some $43 billion. It’s true that the Strategic Review finds that if the current model was followed, that cost would baloon to some $73 billion, and the date for completion would be finished by the end of calendar year 2024. Four years and $30 billion extra … that’s a pretty bitter pill to swallow for a population which has been waiting for Australia’s politicians to come to an agreement on the NBN for almost a decade.
But that’s not the only model the Strategic Review contains.
It is the report’s Scenario 2 option which has already caught the attention of quite a few commentators. Under this model, NBN Co would still go ahead with Labor’s all-fibre NBN deployment model. However, it would be radically re-designed to feature much less costs and to save time. It would be completed at the end of 2023, at a cost of $64 billion if some debt funding is used, and just $54 billion if the Government stumps up the whole funding itself, avoiding the need for interest payments.
The model the Coalition seems most fond of is Scenario 6, which features a complete abandonment of the previous FTTP model in the third of Australian premises covered by the HFC cable networks operated by Telstra and Optus. This model would make extensive use of Fibre to the Node and Basement technologies in the rest of the country, with only about a quarter of Australian residences getting FTTP. It would be complete at the end of 2020, at a cost of $39 to $41 billion.
The benefit of this model — which NBN Co dubbed an ‘Optimised Multi-Technology Mix’ is that it’s the cheapest, and it gets acceptable high-speed broadband speeds of at least 50Mbps to over 90 percent of the Australian population by the end of calendar year 2020 — or a year past what we can assume to be the Coalition’s second term in Government. If delivered successfully, it should have the effect of immediately silencing much of the carping which so many Australians have about their entry level broadband services today. There are many people on ADSL services getting speeds of less than 5Mbps, or on wireless broadband services with tiny download quotas. NBN Co’s Scenario 6 option will address many of these problems quickly.
However, taken in the bigger context, and especially as we start to look towards 2030 and beyond, when the nation’s bandwidth needs are Scenario 6 is a little anaemic. In his media statements since the Strategic Review, Turnbull has focused almost exclusively on Scenario 1 included in the report, which shows the costly future if the project goes forward unchanged. This is an approach we’ve seen from Turnbull before — focusing on the worst possible scenario with respect to Labor’s NBN policy. However, this isn’t the only option, it’s merely the worst case.
Consider this. Scenario 2 of NBN Co’s schema — consisting of the radically redesigned FTTP approach — would achieve the same aims as Labor’s original NBN policy but cost just $15 billion more than Scenario 6, if the Government contributes the equity. It will take just three years longer to deliver. But it will deliver massively enhanced services. 100 percent of Australians in what NBN Co describes as the ‘fixed line footprint’ will receive FTTP. There will be no Fibre to the Node or the basement, and the legacy HFC networks will not be reused. Satellite and wireless will still be used to serve remote areas.
This is pretty much Labor’s original FTTP policy, delivered a little late and at a little higher cost; but still viable. Still more than viable, in fact. The closer you examine the options presented in NBN Co’s Strategic Review report, the more attractive it looks.
The issue is that every other option is likely to be at least partially obsolete shortly after they are built. Switkowski acknowledged as much during testimony to the NBN Senate Select Committee this week. The executive said: “In areas where FTTN is rolled out, this review expects that NBN Co. will not need to upgrade to a second access technology—presumably all fibre or fibre to the distribution point—sooner than five years after the construction of the first access technology.”
Five years! But no telecommunications network is planned on a five year timetable. The copper network has lasted decades. The HFC cable networks have already lasted a decade and a half. Australia’s mobile phone networks have been continually upgraded over the past several decades.
Switkowski added on the following caveat to his statement: “We have modelled and concluded that it is economically more efficient to upgrade over time rather than attempt to build a future proof network in a field where fast-changing technology is the norm.” However, to any outside examination, NBN Co’s stipulation that it must be allowed to upgrade Telstra’s copper network only partially and not fully, when a full upgrade would cost only a few billion dollars more, appears nonsensical.
Informa senior analyst Tony Brown highlighted the surprising conclusions included in NBN Co’s Startegic Review in an article for the Sydney Morning Herald this week, writing:
“However, the Strategic Review concludes that NBN Co could actually build the all-FTTP NBN by mid-2024 – just three years behind its original schedule and only four years after the completion of Turnbull’s hybrid model … it is very unlikely that Turnbull himself actually agrees with the all-FTTP completion date accepted by the Strategic Review and it is actually pretty awkward for him that they have arrived at such a conclusion.
From a political perspective it now gives his opponents the chance to ask, “Why are you delivering a second-class network when we could have a world-class FTTP network with just a couple more years’ work?”. An argument that is far from unreasonable.”
Fellow telecommunications analyst Paul Budde believes FTTP may be re-examined again as a possibility as Turnbull’s version of the NBN picks up a full head of steam. The analyst makes the point that the initial FTTP portion of the NBN is already being deployed and may have pushed past early rollout difficulties which may come to bedevil FTTN/FTTB and HFC cable deployments. The consequence, wrote Budde in a blog post this week, is that FTTP may be re-examined as an option down the track:
“The good thing is that the FttH rollout will continue into 2015, which will give the government some breathing space to get its house in order. As mentioned, for the next two years the FttH will remain the major technology to be rolled out. If we get, let’s say, 20% penetration of Australian premises by 2016 it will be interesting to see what the media reports will be at that time compared with the developments surrounding FttN and HFC connections, which by that time will only have just started to ramp up. There could well be a similar outcry by the Opposition at that time, lamenting delays and cost blowouts.
For the entire duration of this project it will remain ‘under construction’ and so it should be. There will always be new technological developments, innovations and lessons learned. Based on the experiences of the plan that is now in front of us a review around 2016 could well be the next step. I would not be surprised if by that time the decision is made to roll out more FttH if the cost of upgrading the copper and HFC networks is going to be revealed as greater than projected.”
Much has been made of the fact that the NBN Co Strategic Review backs the view of the world which Communications Minister Malcolm Turnbull has consistently espoused over the past three years since he’s been leading the portfolio for the Coalition: In short, winding back Labor’s FTTP excesses, re-using the existing HFC cable networks, deploying fibre only partially into the copper network to speed up the rollout and cut costs. And there is no doubt that the review does show this. It’s hard to see how it could not have, given how it was steered by Rousselot and Switkowski, who, above all else, would have been conscious of the Coalition’s policy objectives.
In this sense, NBN Co’s Strategic Review confirms the Coalition’s view of the world, when it comes to the NBN.
However, what is also true is that the review also confirms Labor’s view of the world, when it comes to the NBN. It also shows that an almost universal FTTP network is viable, and at only a little increased cost and only a few years’ increased time, compared with Labor’s original vision.
Going back to the comments which were made by former NBN Co chief executive Mike Quigley in August this year, what we see is that, unsurprisingly, the executive who had the greatest knowledge of the NBN rollout at that time, was on the right track when it came to his evaluation of Labor’s FTTP vision. Quigley never backed down from his commitment to deliver the NBN on time and on budget, and if the NBN Co Strategic Review can be believed, Quigley might not have been too far away from being correct.
Over time, as Quigley and his senior lieutenants such as departed chief operating officer Ralph Steffens, were given the latitude to improve on the NBN project based on their ongoing learnings, it appear entirely possible that the combination of strong technical, engineering and construction know-how from NBN Co, linked with political support from the Government, would have resulted in the all-fibre NBN project being completed. It would have been late, it would have been over budget, but the job would have gotten done proportionally within its original vision; and Australia would have been reaping the rewards for the next 50 to 100 years.
The initial targets for the project’s rollout were optimistic. However, as Quigley said in a speech earlier this month to the Telecommunications Society of Australia, not only did the executive not have much choice about NBN Co’s approach to those target, but pursuing them aggressively gave NBN Co motivation to continually push through and fix its mistakes, as it learnt along the way.
“I am sometimes asked why was I not more conservative, why didn’t I give myself more time,” said Quigley this month. “Well, there were several reasons. The first being that there were already public commitments made before NBN Co got going. The management teams of publicly funded infrastructure projects are not in control of the delivery timetable they are held to – something, it seems, NBN Co will continue to grapple with.”
“But a more important reason was that this wasn’t a project where hedging your bets, sandbagging and conservatism was going to work. This was a big ambitious project that required setting of aggressive targets. And a management team that were prepared to drive the company, to hit those targets. The NBN Co management team was not naively optimistic. They collectively had a good deal of experience in building Telco networks.”
“Was it likely that we were going to hit all of the targets we set ourselves, given the complexity and scale of the project, and the number of issues that were outside our control? Of course not, but the NBN Co management team decided it was not going to play the game of setting low targets. The best way to ensure progress, was to set ambitious goals and drive forward aggressively, uncovering and fixing issues every day.”
In a statement last week, Turnbull made a big deal out of the fact that by the 2016 and 2019 milestones which the Coalition had set for itself, as well as financial measures, Labor’s version of the NBN project would have been a failure.
“If Labor’s plan were continued with the project would have a peak funding requirement of $73 billion, not $44 billion and would generate, on the most optimistic revenue assumptions, a 2.5 percent internal rate of return, not 7.1 percent, as claimed by Labor,” the Minister said. “By 2016 only 22 percent of Australians would have 25Mbps broadband, by 2019 only 57 percent would have 50Mbps. It would be complete in 2024.”
However, what Turnbull ignored in his statement was the fact that under Labor’s plan, by 2024, ninety percent of Australians would have access to the NBN’s true underlying speeds — 1Gbps. This is something just not achievable under any of the Coalition’s plans. HFC is not FTTP. FTTN and FTTB are not FTTP. In the telecommunications world, FTTP is ultimately king, and, assuming no new discoveries about the fundamental nature of light, will be for the forseeable future.
There is also the fact that it’s actually not very important for the NBN to make a financial return. This is a government project, after all, representing fundamental infrastructure. It can afford to make a loss — even a sizable loss — because it delivers benefits to the whole economy and to all Australians. And with its AAA credit rating, the Federal Government can still, despite its current situation, easily afford to build the network. Debt comes cheap if you own your own military and control your own borders.
The definition of government projects is that they are projects which the private sector would not undertake, because they do not project-making profits. The NBN is the perfect example of such a project. There is also the fact that the Government could privatise NBN Co down the track, as it did with Telstra — meaning that ultimately, billions upon billions of dollars would be poured into public coffers. The NBN is an investment, under any light, not an expense — and it would be incredibly valuable even as a loss-making investment.
Turnbull also said this week about the NBN: “We have a brutally independent and honest appraisal of where the project is now and what its realistic options are for the future. None of it makes for pretty reading. But the days of spin are over, the days of clear thinking, truth telling and hard work have begun.”
However, from my point of view, this is untrue. The days of spin have just begun. NBN Co’s Strategic Review can be read however you want to read it. In this article, I’ve put a positive spin on the revitalised FTTP approach detailed in the document. NBN Co itself has taken a negative spin on that approach and focused on its preferred ‘Multi-Technology Mix’ method, as has Turnbull. Both might be viable, although I have severe doubts about the ability of anyone to transform the HFC cable networks as NBN Co envisages in its report.
However, when you set spin aside, only one path will deliver sustainable telecommunications infrastructure to Australia over the next 50 to 100 years. And that approach is Fibre to the Premises. It’s a fact everyone knows, and that’s the fact we should be focusing on. NBN Co’s Strategic Report once again shows that it is a viable path. So let’s walk down it and stop wasting our time on lesser alternatives.