Mumbo-jumbo accounting clouds NBN rollout cost

Jut to prove a point the government's hand picked team at NBN Co has changed the accounting method used in the Half Yearly Report released recently so that the figures coincide with the government's copius NBN related reviews and audits carried out in the year following the 2013 election. In Business Spectator the dubious nature of the accounting used is analysed and what is missing has been identified. The outcome of the exercise has been to make it appear that all is on track for a spectacular turn-around by NBN Co, but what becomes evident early on is the very carefully scripted outcome has more holes than a kitchen sieve.

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In the space of 48 hours last week, NBN Co’s management redefined decades, if not centuries, of project accounting practice by taking a radical, yet convenient, approach to match the rollout costs reported in the NBN Co Half Yearly Report released on February 26 to the figures provided in the government’s NBN-related reviews and audits, completed over the year following the 2013 election.

The point of the exercise, described by NBN Co as the “fully allocated costings” model, was to show that the cost of a brownfields fibre-to-the-premises (FTTP) connection was now $4,316 per connection and that this figure was an increase over previously reported cost per connection.

NBN Co did not disclose the increase in costs over the past year due to contractors demanding more due to intermittent contracts, changes in the rollout technologies, increased risk and the cost of a plan that’s now not to be used for a FTTP rollout.

If the figures provided by NBN Co are to be accepted, then the total cost of the anticipated 11 million premises NBN rollout, with 93 per cent FTTP (at $4,316 per connection) and 7 per cent fixed wireless or satellite at $3,637, would be about $47 billion, about 10 per cent more than the $43 billion budgeted by the previous government.

The increase was achieved by taking costs from what was previously identified as opex and adding the costs to capex in an effort to bury the increased costs associated with the renegotiated Telstra and Optus agreements, while aligning the reported costs to the government’s NBN-related reviews and audits.

Mumbo-jumbo accounting

Good news in NBN Co’s half-yearly report has been lost as the NBN debate absorbs the mumbo-jumbo accounting and this is a pity because there has been positive outcomes achieved over the past year, including a steady -- albeit unspectacular -- rollout, successful HFC and FTTN/B trials. As NBN Co CEO Bill Morrow stated during the presentation, “we have people, innovation and heart and minds to deal with whatever obstacle gets thrown in our way. We are changing the digital face of the country and we believe the technology we are deploying will do just that.”

A key to the cost accounting changes has been the need to absorb the extra costs taken on by NBN Co under the renegotiated agreements with Telstra and Optus while maintaining the fiction that Telstra and Optus have not received “$1 extra”.

This can only be described as yet another attempt by the government’s hand-picked team to light a broadband bonfire upon which the “economic zealots” can throw hypothetical logs of macro-economic theory in an effort to justify the claims made by Communications Minister Malcolm Turnbull.

Speaking to ABC’s AM program on December 15, 2014, Turnbull stated “And so what we've, without paying Telstra $1 extra, we have been able to secure the right to own those assets [HFC and copper access network], those parts of those networks which we can use then to complete the NBN much sooner and much cheaper for at least $30 billion less. So that's good news for taxpayers and also very good news for consumers.”

We now know that under the new agreements finalised in the weeks before Christmas, NBN Co took on the cost of pits, pipes, ducts and trap remediation that had previously been Telstra’s responsibility, signed several contracts with Telstra for Fibre-to-the-Node (FTTN) trials and assistance with the FTTN rollout planning and agreed to “reimburse Telstra for costs incurred as a result of the shift from the FTTP rollout to the MTM rollout, where those costs are direct, reasonable, substantiated and incremental, subject to certain exemptions.”

We also know that NBN Co agreed to purchase the HFC networks minus the fibre used by Telstra and Optus to connect to business customers or for backhaul from mobile towers. Exactly how much of the fibre component of the HFC network is to be retained by Telstra and Optus has not been made public.

Figures from NBN Co’s half-yearly report indicates the cost of Labor’s NBN rollout would have been about $47 billion and in Turnbull’s own words the MTM NBN would be achieved for “$30 billion less”.

In the lead-up to the 2013 election, Turnbull claimed that Labor’s NBN rollout would cost about $94 billion, a claim that was rejected during a showdown on the NBN between the former Communications Minister Anthony Albanese and Turnbull when Albanese said that the $94 billion costs for Labor’s NBN quoted by Turnbull was “pulled out of a Coco Pops packet.”

And on March 1, Turnbull stated on his blog that the Labor NBN rollout was calculated in 2014 as costing $73 billion and that per premises connection costs were “$3,600 with an additional $700 for the cost of leasing Telstra’s ducts.”

Confused? You have a right to be because the mumbo-jumbo accounting presented in NBN Co’s half-yearly report has included a masterful exercise in how to bury the new costs that have accrued as a result of the renegotiated Telstra and Optus agreement. At the same time it's also provided the headline news that the cost of Labor’s NBN FTTP rollout was now $4,317 per premises connection, indicating that the costs are actually increasing per connection.

Morrow stated “These are fully allocated costings and represent the cost of building a connection from the transit network to the customer or RSP equipment. We think it essential that these costs and their definitions are fully explained to assist us in our own future planning and to be transparent with the Australian public on the full cost per premises."

Shadow Communications Minister Jason Clare subsequently dismissed the costings as politically motivated when he said “Surprise, surprise, Malcolm Turnbull releases yet another set of figures from his hand-picked team that support his second-rate NBN. Malcolm Turnbull should spend less time trying to fight the broadband wars and get on with the job Tony Abbott gave him -- getting the NBN built by the end of 2016.”

NBN Co’s 'Bermuda Triangle'

Missing from the NBN Co half-yearly report are the equivalent costings for the HFC and FTTN/B rollouts. Make no mistake; this information is available within NBN Co, especially for FTTN/B with NBN Co having completed numerous rollout “trials”. We can rest assured that this information will be released in due course, timed to coincide with headline news around migration of existing HFC and ADSL2+ customers onto the NBN.

But the fact remains that the MTM NBN rollout will not be completed by 2016 as Turnbull claimed it would be in the lead-up to the 2013 election and what Turnbull is now providing can reasonably be described as “bare minimum broadband.”

A key problem for NBN Co over the past five years has been financial reporting, as demonstrated by the recent half-yearly report. Failure to release the Cost-Benefit Analysis model including all of the cost inputs and a failure to carry out and publicly release a 30 to 50 year life cycle and performance analysis has meant that a true understanding of what the NBN will cost and provide from a performance viewpoint has been lost in NBN Co’s 'Bermuda Triangle.'

Fantasy economics and flawed premises

What is the point of telling Australians how much it would cost per premises to rollout FTTP without providing the equivalent cost for HFC and FTTN/B? And what about the cost to operate, maintain and upgrade over the next 30 to 50 years?

Turnbull has form of course, when he instructed the Department of Communications to redefine long-standing industry definitions for access, availability and quality on the dubious MyBroadband website, that was launched to “to assist with the prioritisation of under-served areas".

Using the new US Federal Communications Commission (FCC) definition of broadband as 25/3 Mbps most Australians currently have sub-standard connections to the network. Under the FCC's definition we don’t have broadband any more, yet the MyBroadband website continues to tell us that most Australians have an ‘A’ rated broadband connection to the network.

When is the government, Department of Communications and NBN Co going to update their terminology to align with the FCC’s new definition of broadband? Not likely in the near future as this would not benefit the government one little bit.

In his blog, Minister Turnbull targets Labor's 'fantasy economics' and accuses the opposition leader Bill Shorten of being a whinger unprepared to “engage in a serious policy debate.” Is this the pot calling the kettle black?

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University.