NBN Co's time and cost blowouts and who is to blame

NBN Co's admission of a cost blowout up to $15 billion is just the beginning of the bad news expected over the next year and how this is going to slow down the NBN rollout is discussed in Business Spectator including the concern over NBN Co's management approach to providing Australia with a second rate obsolete copper access network.

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The $15 billion cost blowout and further rollout delays highlighted this week by NBN Co are an exercise in allowing the Coalition to get the bad news out of the way and hope for better news before the 2016 federal election. It’s a pre-emptive strike, suitably accompanied with a large dollop of blame shifting and an earnest proclamation that things are only going to get better from here.

After nearly six years only one million of the 12 million premises in Australia have a connection to the network that can provide an active service. A shift to the multi-technology model was always going to cause complications and as expected the projections in the Coalition’s strategic review – of about 2.6 million premises connected by the end of 2016 – are not going to eventuate.

With only a third of that number set to be connected by the middle of 2017, that’s one target missed. Then there’s the cost and just what service the network is going to provide.

It wasn’t that long ago the Coalition asserted that it would deliver the network for no more than $29.5bn and would provide download speeds of between 25 and 100 megabits per second by the end of 2016 and 50 to 100 megabits per second by 2019. 

This week, the company building the network, NBN Co, said that it will now cost up to $56bn for the network, excluding the cost of upgrading the NBN to replace the obsolete Fibre-to-the-Node (FTTN) technology that is currently being rolled out.

The Communications Minister Malcolm Turnbull has insisted that Labor’s NBN would cost about $30bn more than the Coalition’s NBN and he’s not about to change that line. However, it’s important to note that the issues highlighted by Turnbull and NBN Co boss Bill Morrow on Monday were all flagged by industry and academic experts. 

The methodology of the multi-technology NBN meant that the workforce needed to be retrained, new deals with Telstra and Optus had to be struck, and once you take the unknown state of the copper and the HFC networks the cost of building the Coalition’s NBN was always going to nudge close to Labor’s alternative. It will however, be a far inferior network to the one Labor had promised.

The latest numbers from NBN Co, greatly undermine the value of the series of reviews and audits that were carried out in 2013 and 2014 and were carefully crafted to back up the Coalition’s claims through the judicious use of highly questionable underlying assumptions.

In this deluge of numbers, there are some intriguing signs of disconnect between NBN Co and the government.

While Turnbull has doggedly clung to a claim that the average cost for FTTP connections would be $4400 per connection in brownfield regions and $2100 in greenfield regions, documents leaked from NBN Co in 2014 identified that the cost was far lower.

NBN Co has since stated that the cost for FTTN and HFC connections is $2300 and $1800 respectively, making the multi-technology approach appear to be cheaper. But Bill Morrow has failed to clearly explain why the government’s strategic review projected that the NBN rollout would cost about $41 billion while the corporate plan shows a blowout that could be as high as $56 billion.

NBN Co’s government equity funding of $29.5 billion will run out by the 2017 financial year and then it will be forced to seek further funding from the private sector. The additional costs associated with the extra borrowings will be substantial leading to the estimated rate of return dropping from the 5.3 per cent estimated in the Strategic Review to a figure closer to 3 per cent. An increase in customer charges now seems inevitable as NBN Co seeks to increase the rate of return on borrowings.

Discrepancies abound in documentation released by NBN Co as its huge team of spin merchants attempt to hide what is actually happening and why. The number of technical errors and missing information in the most recent Network Design Rules highlights why NBN Co is in the position it finds itself.

It is now nearly two years since NBN Co embarked on the multi-technology NBN and it still does not have a clear picture of the state of the copper and HFC networks. NBN Co has had to agree to Foxtel remaining on the HFC network, reducing the effective capacity of that technology for NBN customers and NBN Co failed to purchase all of the HFC network in the recent agreements with Telstra and Optus and is now required to lease access to the HFC fibre distribution network from Telstra.

It was unsurprising that Morrow took the opportunity to spell out the high level of risk associated with the lack of knowledge about the state of the copper and HFC networks and how much of the copper network will need to be remediated or replaced. Turnbull’s promise that degraded copper will not be replaced with copper are going unheeded as NBN Co is now being forced to replace copper in FTTN areas to ensure the promised minimum connection speeds are achieved.

Australia has approximately 12 million premises and it is arguable that NBN Co’s task in 2010 was to connect all 12 million premises to the NBN by 31 December 2020. The number of active fixed network internet subscribers in December 2014 according to theAustralian Bureau of Statistics was about 6.5 million increasing by about four per cent per annum.

On August 24 NBN Co claimed in a media release that its objective is to ensure that by 2020 eight million premises are connected to the NBN and in another media release NBN Co claimed that it would have 9.1 million homes and businesses ready for service by 2018.

At first glance it might appear that NBN Co is setting a target for 2020 that it is lower than what is promised for 2018 but the key is the use of misleading terminology by NBN Co that the Communications Minister Malcolm Turnbull promised would disappear when he came into office. Premises are either connected to the NBN or they’re not.

No one forced the Coalition to adopt a second-rate solution for the NBN that exponentially increased risk. It’s time for Turnbull to take responsibility for the mess that has occurred during his time as the communications minister. Turnbull cannot continue to blame Labor for mistakes that that government has made. Efforts by the telecommunications industry and leading telecommunications academics to convince Turnbull and the government that the multi-technology approach was going to be more difficult to implement than they believed were dismissed out of hand.

NBN Co has now pushed back projections of any real progress until well after the next election in an effort to ensure that further bad news doesn’t cause a hiccup come polling day.

By setting the bar so low Turnbull has been assured by Morrow that NBN Co will be able to achieve its projected targets in the lead-up to the 2016 election but the damage has already been done.

The attempt to deflect the blame for what is happening onto Labor has run out of steam.  It’s time for Turnbull to take responsibility for a mess this government has created. 

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