NBN Co's daunting construction task

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NBN Co's daunting construction task

Comment: Contracts are in place but schedule slips.

NBN Co has chosen its fibre construction partners but is yet to release its three-year forward program, promised for October. David Havyatt explores whether improved execution reduces the political risk for the project.

A telegram notified me of my first job with Telecom Australia just over thirty years ago. This was in the middle of Telecom's first ten years, when the proportion of households with telephones went from 62 percent to 87 percent.

Increasing penetration at the time included building new telephone infrastructure across Australia, usually long after houses were built. The 100,000-plus Telecom employees accounted for 1.5 percent of the civilian workforce in 1981.

NBN Co has set out on a similar mission but with a twist; they are going from near-zero infrastructure to 100 percent in eight and a half years. As they note in their business plan, that is a full deployment rate of nearly 6000 premises passed per day by 2014.

The difference here is that they are only hauling thin fibre cables, not the monstrous thousand pair cables of the copper era but the task is no less gargantuan.

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Efficiency of the Government enterprise

Just as was the case with Telecom, the NBN task is being undertaken by a Government enterprise.

But there the similarities between the companies end. Where Telecom emerged as an authority from the Post-Master General's Department, NBN Co is a completely new structure with relatively little in the way of hardened culture and work practices.

Telecom Australia directly employed everybody who worked on the network; not only linesmen and techs, but their own logistics operation, automatic data processing (this was pre-IT) and automotive servicing.

In contrast, NBN Co is largely operating through contractors. After a slow start developing the process for selection, these have now been chosen: Silcar for Queensland, New South Wales and the Australian Capital Territory, Transfield for Victoria, and Syntheo for South Australia, the Northern Territory and Western Australia.

Conneq Infrastructure Services is provided the privilege in Tasmania.

Progress in other areas of the network has come along too in just over two years; fixed wireless construction is underway with Ericsson and first sites have been identified. The interim satellite solution has launched and requests for tender have been issued for their own satellites which the company expects to begin paying down from early next year.

The infrastructure agreement with Telstra underpinning the fibre rollout is awaiting ACCC approval.

That really is an impressive catalogue of achievements and all of it looks to be efficiently implemented.

Slippages

All major projects suffer risks from slippages in timing and in cost over-runs. The latter of these NBN Co has well under control; they know they are doing the same tasks repeatedly and the appointment of Mike Kaiser to the quality role reflects the commitment to learn by doing.

But slippages remain a risk; the Telstra agreement, for one, was due to be finished in June.

While the first mainland release sites launched commercially in time in September, the twelve-month program announced that month is modest and the three-year forward program has been set back until next year.

It is unclear whether they are still on target for the roll-out schedule identified in their initial business plan (below).


FTTP brownfields FTTP greenfields build FTTP greenfields BOT Satellite first release Wireless Total
June 2011 13,000 - 45,000 165,000 - 223,000
June 2012 132,000 7000 120,000 - 14,000 273,000
June 2013 805,000 63,000 84,000 - 269,000 1,221,000
Total 950,000 70,000 249,000 165,000 283,000 1,717,000

Is this the right model?

Scepticism about a Government-built network abounds but history is on its side.

The PMG was entirely funded by debt from 1959, later converted to a debt for Telecom Australia ($4.5 billion) in 1975. Until made a corporation in 1988, they paid annual interest and returned $1.5 billion of principle, the remaining $3 billion converted to equity.

They paid dividends on this equity and just before privatisation as Telstra, paid a special dividend of $3 billion. In other words, the asset the Howard Government sold for all those billions had a carrying value of zero.

But other infrastructure builds – both public and private - have had different outcomes.

Australia's Government-owned satellite AUSSAT turned into a black hole with $800 million being written off before it was virtually given away (to Optus) as part of the second carrier licence.

AUSSAT was set up to compete with the incumbent (with Telecom as a shareholder) but lost out to Telecom's Digital Radio Concentrator System (DRCS) for remote telephony and rapidly developing fibre backhaul for large capacity data.

Similarly, when Optus Vision - the joint venture between Optus and others to build their cable network - was collapsed back into the carrier, most of the capital investment was written off.

NBN Co avoids the issues which bedevilled these other investments; it has secured its place as a structurally separated monopoly infrastructure, the way other infrastructure builds have since gone in Australia.

Will it be delivered?

Execution risk is not the only issue confronting NBN delivery; they also face political risk. The two are related.

As noted, NBN Co has ambitious targets that are already slipping. However, there will be many billions of dollars of committed investment already made by the time of the next election.

While generally talking up alternatives like fibre-to-the-node and (now less so) wireless, coalition spokesman Malcolm Turnbull is committed to asking the Productivity Commission to conduct a cost-benefit analysis.

Properly constructed, it is possible (I would think likely) that the cost-benefit analysis would conclude that a monopolistic all-fibre build now is the most efficient over a thirty-year evaluation.

However, Turnbull's leader Tony Abbott has proposed axing the NBN as action on the deficit.

This is actually a piece of nonsense. The coalition has separately criticised the Government for the fact that NBN Co investment is entirely off budget – because it is an investment on which they expect a return, not an expense.

But accounting rules only allow you to capitalise an ongoing project. If the NBN is stopped, even if it is only suspended for the duration of the commission's inquiry, the effect is to bring the NBN investment onto budget as an expense.

While the cancellation might reduce future cash outlays, its effect will be to increase the budget deficit.

The more NBN Co has spent before a change of government, the worse for the budget cancelling or suspending the network will be.

Getting back on track with construction isn't just execution risk, it mitigates political risk as well.

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