Now for a strategic review of the fibres that bind
The board of Rio Tinto blew up $40 billion, and it's cabernet as usual; but the NBN is apparently still on track to cost $37 billion and the entire board got axed this week. Incoming governments are far more demanding shareholders than those big lazy institutions.
The NBN story has stumped us for years. Every time you read about it, NBN is either screwing its contractors or racking up humungous cost blowouts. How it can do both at the same time is unfathomable.
On Monday, the NBN Co board was rolled. New communications supremo Malcolm Turnbull had asked directors for their resignations the week before. All but one complied.
On Wednesday, NBN Co's corporate plan leaked to the press. It confirmed the network was still going to cost $37.4 billion to build, up to 2021. The government outlay was still $30.4 billion, and operating costs remain - wait for it - unchanged at $26.4 billion over the next eight years.
The bad news is the fibre has passed far fewer homes than forecast, and the good news is the cost of running fibre from a "fibre access node" to the inside of a house has fallen sharply.
That's the pesky thing about budgets. Unlike historical data, they tend to change. But, when it comes to the NBN, don't be surprised if history changes too, and soon.
Turnbull is sceptical about the NBN's numbers. And no wonder; he must have read ten thousand times in the press how unreliable they are. So now there is a strategic review. If it turns out that there are no huge cost over-runs, and the NBN is more or less on track, it could be a case of "Turn Back the Nodes" - like Turn Back the Boats. Perhaps they can take a leaf out of Scott Morrison's book and bring down the cone of silence, so nobody knows if fibre-to-the-home is back on again.
Reaping where others sowed
Executive pay season is upon us. The public is now inured to grotesquely large and largely riskless "rem" deals. The final tranche of pay for departing BHP chief Marius Kloppers was revealed this week, to little fanfare.
Kloppers got $US16 million for 2013 which, toting up his five years at the helm, gets him to $US70 million. He'll enjoy some share takeaways with that too as he officially leaves the building next week, but the company was transmitting its message of prudence, that there would be "no farewell payment".
Is it all worth it? This is a big company, a big job, why not pay big? BHP has also outperformed its peers and relativity is the main benchmark for its executive incentives.
We know, however, from most of the studies that there is zero correlation between executive pay and performance. Kloppers would have taken the job anyway, even if he knew the board would have paid him only $US35 million.
The share price was around $44 in October 2007 when Kloppers succeeded Chip Goodyear in Australia's premier corporate gig. Now it is $36.40. On that result, and not accounting for dividends, BHP shareholders have gone backwards. Of course, that metric is just as inadequate as the measures the BHP board and its myriad remuneration consultants use to calculate their executives' labour.
You see, Kloppers and BHP shareholders have been reaping the benefits of decisions taken 20 years ago. Most of the company's projects are mammoth mines with 30-year production lives.
Yet the pay is struck over five-year performance benchmarks. By industry standards, this is a long time, and BHP is at the vanguard of governance. A huge mismatch remains though, and one that arguably puts shareholders at risk.
The pay is so large, and BHP the company is so large, that in order to make a big difference to his personal balance sheet, Kloppers would have to really roll the dice with shareholder funds.
And that he did, at the top of the market, via the takeover bid for Rio, the Pilbara merger and the Canadian potash deals. It's a good thing they didn't come off, particularly the first Rio deal. Kloppers' undoing was the Chesapeake deal, a shocker in the short term. But who knows, US shale oil could be a big winner in 20 years' time.
When the South African took over, BHP had a pristine balance sheet. It had no debt heading into the global financial crisis - and a suite of top-notch, low-cost, long-life assets. This was due to previous management; the China boom to good timing.
You can hardly point the bone at Kloppers for backing up the truck and loading in his riskless fortune. You could blame the board. They set the pay. But they are just doing what all the other big kids are doing in the playground at public-company-land. The issue is that size does matter, as it can induce higher risk to make a significant difference to pay.
In any case, NBN Co has a similar conundrum to BHP. We won't know for 20 years if the rollout was right.
Frequently Asked Questions about this Article…
According to the article, a leaked NBN Co corporate plan put the build cost at about $37.4 billion to 2021, with a government outlay of roughly $30.4 billion and operating costs of about $26.4 billion over the next eight years.
The article says the NBN Co board was rolled after communications minister Malcolm Turnbull asked directors for their resignations; all but one complied, leading to the board being replaced as part of greater scrutiny of the project.
The strategic review, prompted by scepticism about NBN numbers, is intended to reassess costs and rollout choices. The article suggests the review could reopen options — including a potential return to more fibre-to-the-home — depending on whether large cost overruns are found.
No — the article notes that fibre has passed far fewer homes than originally forecast, although it also reports that the cost of running fibre from a fibre access node into a home has fallen sharply.
The article highlights that budgets and historical estimates can change. For investors, uncertainty around NBN costs and rollout timing can affect contractor revenues, government spending plans and market confidence, so keeping an eye on the strategic review and official updates is sensible.
The article reports Kloppers received US$16 million for 2013, taking his five‑year total to about US$70 million. This is relevant to shareholders because it raises questions about executive pay-size versus performance and the potential for large incentives to encourage risky decisions in big companies.
The article states that BHP’s share price was around $44 in October 2007 when Kloppers took over and was $36.40 at the time of writing — a decline that, excluding dividends, suggests shareholders had gone backwards on that metric.
The article notes that the Rio Tinto situation involved a $40 billion blow-up and that the entire board was axed that week. For investors, the event underscores how large strategic decisions and governance issues can lead to major corporate upheaval and investor scrutiny.
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