NBN swims up the Service Stream without a paddle

With NBN contractor Service Stream's Syntheo JV purportedly on its last legs, the uncertain fate of the company poses a serious headache for NBN Co and the network.

Listed contracting company Service Stream’s foray into the NBN has evidently not turned out as planned. The telecoms construction firm’s full-year profit is going to take a hit and the only thing left too ascertain is just how bad a beating it’s going to be.

Presumably, the extent of the injury will be revealed when the trading halt is lifted on July 8. However, as Syntheo takes its time to “clarify a number of issues” the fate of its Syntheo joint venture with Lend Lease hangs in the balance.

With almost $1 billion in contracts with NBN Co for the fibre rollout, Syntheo’s problems are another blow to the rollout of the network, and perhaps another example of the contract mess NBN Co has managed to get itself into.

There is growing concern that Syntheo is on the verge of collapse and that leaves the completion of the NBN’s West Australian and South Australian segments in serious doubt.

Earlier this year, Syntheo handed the Northern Territory segment of their contract back to NBN Co after encountering labour problems. Abandoning those works cost the joint venture nearly $3 million in refunds. Handing back either the South Australian or WA contracts would be expected to incur similar costs that would wipe out all the profits booked and jeopardise the $2.5 million in receivables Service Stream claimed from the joint venture in their 2012 annual report.

It would also mean Syntheo abandoning contracts worth an expected $800 million.

The "different route” in tatters

All of this bodes ill for Syntheo and its joint venture owners. However, it’s an equally embarrassing indictment of NBN Co’s management, which rejected the original fourteen construction tenders in April 2011.

When announcing the failure of the initial tender process, the company’s Head of Corporate, Kevin Brown, said, “NBN Co is confident it can secure better value for money by going a different route”.

That ‘different route’ involved negotiating directly with Service Stream and other major contractors rather than an open competitive tender and NBN Co’s management hoped this strategy would result in lower construction costs.

Yesterday’s announcement, along with the Northern Territory contract debacle and Fujitsu being stripped of the greenfields installation contract early last year, shows how that ‘different route’ plan is now in tatters.

Exacerbating the problem for NBN Co are the reports indicating that subcontractors are struggling with low rates across the country, which in turn is causing high rates of defects and dissuading qualified workers from taking on NBN work. This is exactly the malaise that crippled Syntheo in the Northern Territory.

For NBN Co, which is no doubt bracing for a post-election impact, the challenge now is to get the struggling contracts under control and manage them back onto schedule. This is going to be a challenge given the sparse construction experience on the company’s board and senior management.

Will Telstra do a better job?  

One hope within NBN Co and the opposition is that Telstra may be able to competently manage the network’s construction.

While Telstra has a better track record of managing contractors like Service Stream, the question of money and budgets still remains. It’s clear now that the original fourteen tenderers were closer to reality on their bids for the work and it’s difficult to see how Telstra can complete the project for less.

At the time of the failed construction tender Brown said, "We have thoroughly benchmarked our project against similar engineering and civil works projects in Australia and overseas and we will not proceed on the basis of prices we are currently being offered.”

Those benchmarks were obviously flawed and while NBN Co’s management and board will need to be held to account for that mistake, the question of building the network on time and within budget remains.

For Syntheo there is still hope yet, at the April Parliamentary hearings in Sydney, Lend Lease’s chief operating officer for construction and infrastructure, Dale Connor, told the committee “Lend Lease are committed to working with NBN Co under the Syntheo joint venture to deliver the passive fibre rollout in South Australia and Western Australia”.

If that commitment is genuine, then there’s the possibility the NBN can still be completed within its timeframes. However, time is running out as Service Stream gets ready to put its cards on the table.