The new NBN nightmare

Can the national broadband network be built within its estimated $36 billion budget? New information indicates cost control is at risk and budget control probably unlikely.

In April this year the NBN hit a brick wall. Tenders were so costly that NBN Co accused construction companies of price gouging (The secret circuits of NBN Co, April 4). The tender process was halted and several leading NBN Co executives resigned.

There wasn't price gouging. Tenderers were prudently responding to assumed embedded costs in the NBN rollout. At the time, I suggested (IR ghosts of Leighton past, April 11) that one of these costs was industrial relations. The disastrous industrial agreement at Victoria's desalination plant was flowing over to the NBN construction. The desalination agreement imposes pay and conditions way above standard construction rates. If NBN tenderers had applied the desalination agreement rates to the NBN, this would arguably have increased the NBN's construction costs by some 25 per cent.

Robert Gottliebsen revealed, however, that recently NBN Co and the government have worked on deals to get around the militant construction unions that have caused trouble and cost blow-outs at the Victorian desalination plant (Abbott's tender NBN bruise, June 2). Apparently they have secured alternative industrial agreements with other unions that will deliver the NBN construction within reasonable costs. I can now reveal a further development in this continuing saga.

I've received a copy from highly placed sources of the alleged revised template industrial agreement intended to apply to all contractors who undertake the NBN rollout. I'm reliably informed that any company bidding for NBN work 'understands' that this industrial agreement is the one they will need to apply to their workforces if they win work. There's nothing official about this, of course. That's the way big business-big government-big union deal-making works in Australia. There's lots of winks and nudges, but any company putting in a tender 'knows' that if it doesn't apply the 'politically approved' union agreement, its chances of tender success are negligible. My information is that current tender preparations are based on the industrial agreement template I've received.

Assuming this to be the case, I've been able to undertake an assessment of the impact of the agreement on tenderers and the cost of the NBN construction. For reference purposes I've extracted the key clauses from the 628 clause master agreement. The following observations apply.

The pay rates and conditions applicable under the agreement are generous but within a normal range expected of construction jobs in Australia. The huge overpayment evidenced in the Victorian desalination agreement is not being applied to the NBN. The pay and conditions, in themselves, should not cause uncontrollable cost blow-outs.

However other clauses in the agreement effectively neuter any construction company's capacity to manage its workforce so as to maximise productivity and efficiency. A company must have union approval on any matter to do with the way it manages its workforce. If the union disapproves it can declare an industrial dispute and force the company (ultimately) into compulsory arbitration. That is, any operational function is potentially subject to imposed decisions by the union or Fair Work Australia.

The consequence of this is that no construction company could be certain that it could manage the NBN rollout in a productive and efficient manner. Any imaginable thing it might do (or not do) could cause a formal industrial dispute to be triggered, resulting in uncontrolled cost blow-outs. The alternative action is to effectively hand the management of the NBN rollout to the union and to do only what the union authorises. This loss of management capacity would presumably also result in uncontrolled cost blow-outs. This situation would never be resolved and could last for the many years of the rollout programme. The cost blow-outs may not occur – but the risk is guaranteed because it is written into the enterprise agreement.

There is, as a consequence, only one thing that the CEO of any construction company bidding for the NBN rollout can do. Assuming that for political purposes the company must comply with the pattern industrial agreement, a cost-escalation clause would have to be written into the company's commercial agreement with NBN Co. The cost-escalation clause would ensure that where the company was prevented from managing its workforce productively and efficiently due to the industrial agreement, the associated costs would be passed on to NBN Co. If a CEO failed to ensure that his or her company was protected by such a clause, he or she would be exposing the company to substantial known risk.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.