NBN Buzz: NBN Co's wake-up call

NBN Buzz is a weekly wrap up of everything that's going on with Australia's largest infrastructure project. For previous editions and the latest news visit our NBN Buzz page.

Construction speculation and rollout dramas

The latest report card on the NBN had plenty of red ink, an indication that there is plenty of room for improvement on the rollout front, but it was the assertion that NBN contractors were losing faith in the project that really got NBN Co riled up this week.

NBN Co has already copped plenty of grief this week with regards to the state of the rollout, but it was the report in The Australian Financial Review, that said that NBN contractors were losing faith with the rollout that proved to be the last straw.

According to the report, Transfield and Silcar, who were both big winners in the first round of rollout contracts, were not interested in taking part in the second round of the tender process.

Their reticence was reportedly fuelled by their continued frustration over how NBN Co is running the show and they would much rather look for more stable work in the resource and construction sectors.

According to the AFR, the two companies have decided to steer clear of the next round because of the delayed rollout, which has dug into their profits and prevented their workers from taking on other jobs.

The main import of this supposed revelation was that as the pool of parties interested in the second round of tenders dwindles the cost of building the NBN will push up. If companies that have already won contracts weren't seeing the value in the deal then why would other parties bother to engage with NBN Co.

Both Silcar and Transfield have since rubbished the report and the NBN Co came out all guns blazing labelling the report "patently untrue". Although a prompter repudiation of the allegations was probably warranted here.

The reality is that the NBN contracts are the biggest game in town and the construction firms would dearly love to get a piece of the NBN pie. NBN Co is hopping to leverage this to its advantage to keep the costs down.

As far as the second round of construction contracts, worth some $1.6 billion, is concerned Silcar and Transfield are still in the game. However, there is a good chance that both won't be involved in building the NBN in areas where they are already involved.  Silcar is rolling out the network in NSW and Queensland, while Transfield has the job in Victoria and there is some indication that NBN Co is interested in handing out contracts to companies that aren't already building in the areas.

We did get some evidence of this modus operandi last week when NBN Co decided to hand the latest greenfields contracts to Visionstream and Service Stream instead of Fujitsu, which has already scored a one-year contract worth $100 million during 2011 to roll out the fibre network to new homes.

The AFR report might not have been true but it should be seen as a wakeup call for NBN Co. The rollout has been hampered by a lengthy regulatory process and there have been problems with getting the right data on which houses need to be connected, however, at some point those considerations will start to look like poor excuses.

A sobering report

Which leads us to the rather sobering assessment of the NBN rollout from the parliamentary joint committee, which had plenty of criticism in store. Independent senator Rob Oakeshott said he hasn't been too impressed by the speed of the rollout nor the way NBN Co was communicating with the public. The message is pretty clear when it comes to the rollout targets and assumptions NBN Co is going to find it increasingly harder to shift the horizons.

Since the first corporate plan was hatched in 2010 NBN Co has been consistently behind the ball and while a revised plan was handed down in May the jury is still out on whether it can meet the new targets. As mentioned earlier there is a litany of valid arguments that explain why the rollout is behind schedule but the committee has indicated that it is seeking greater clarity. The committee has called for details of the network's business plan to be compared against figures of actual homes passed, homes connected and services in operation.

 “The committee does not find it meaningful to be provided with data on how many premises have been passed or premises made active between periods or years without any kind of target or benchmark on which to compare this data.

 The committee also understands that there is now a new KPI of ‘work under way' used to describe a new NBN rollout statistic, but does not understand how this KPI adds any real meaning to the status of the progress of the NBN rollout.

 The committee finds this approach by the NBN Co disappointing and contrary to the principles of transparency and accountability required of public agencies, especially one responsible for the largest public infrastructure project ever funded by an Australian Government.

 The committee disagrees that current KPIs such as ‘cost per premises passed or activated and take up rates broken down into levels of service is not meaningful at this point in time.'

 The committee requests the Government provide KPI information in the performance report against targets in the Business Plan for the performance report on homes passed, homes connected, and services in operation.”

 There are additional recommendations for NBN Co to provide the costs of extending the planned fibre rollout and its processes for communities in fixed wireless and satellite service areas. There's also a push to get NBN Co to name the major skills and workers needed for the rollout, to aid future planning for jobs in the sector.

Private equity investment and the need for speed

Amid the numerous recommendations put forward by the parliamentary committee, there was another that made interesting reading: the NBN Co's need to make debt financing "a matter of priority."

Of course the thought of private equity investment in the network this early in the piece is beyond the realms of possibility, however, the committee has told NBN Co that perhaps it needs to get its skates on with regards to gauging investor interest in the NBN or in exploring the cost/benefit of different capital structures for the NBN.

For now NBN Co is going to be tied to government funding until 2015 and its only once the NBN is somewhere close to being the real thing that private money starts flowing in. Of course by then we will have a lot better idea of what the service uptake will be like.

The good news for NBN Co is that so far the numbers would seem to suggest that take up figures for higher tier NBN plans are healthy. While NBN Co's early expectation was to see most consumers jumping on the 12mbps NBN plan, NBN Co boss Mike Quigley recently said that most of the uptake so far has been on the fastest tier. This need for speed has been further borne by the latest research from analyst firm Telsyte, which highlights that 85 per cent of the respondents in its survey wanted  to connect to the internet at 50 mbps and higher. 

Quigley lays down the law

Speaking of Quigley, the man running the NBN show has delivered on his promise to leave those rural areas opposed to the wireless broadband tower with satellite services.  After seeing its development applications knocked back by the Golden Plains Shire, NBN Co has informed the residents of the town on Napoleon that they are going to end up with a satellite service.

What should be especially galling for the residents of Napoleon is that they were actually in line to be among the first to get the NBN fixed wireless service. Quigley had said earlier this year that those councils opposed to the towers will end up seeing their residents provided with satellite services and that's certainly what is happening in Napoleon.