NBN: price gouging or price dreaming?

Stan Beer
Friday, 01 April 2011 15:43

Opinion and Analysis

Those of us old enough still remember the controversy over the building of the Sydney Opera House, which ended up costing eight times the original budget. The NBN building project is orders of magnitude larger than the Opera House so why should we believe that politically motivated cost estimates would be within a bull's roar of the real price?

First we were told that the NBN would cost $43 billion to build, then it was a slightly more palatable $36 billion. Now we are told that not one of 14 major building companies are prepared to meet NBN Co's (read Government's) cost targets in their tender submissions.

The latest spin from the NBN Co / Government claims that all the builders in contention for this project are attempting to rip us the taxpayers off by price gouging. Could this be true?

Of course it could be true, but in the cut-throat highly competitive building game, with 14 companies vying for the most lucrative building contract in Australian history, it is highly improbable.

As one of my erstwhile colleagues who specialises in the telecoms sector has been telling me from day one, the big cost of the NBN implementation will not be the equipment or the fibre. As most of us know, the globalisation of hardware manufacturing have driven costs down in recent history.

One thing that has not gone down, however, is the cost of labour in Australia. Digging ditches, building structures and laying cable in Australia is one cost that can't be globalised by outsourcing to offshore locations.

In an economy that is booming with near full employment, driven by largely by a resources sector which pays top dollar for skilled and semi-skilled workers, the sort of labour required by the NBN does not come cheap. What's more, increased competition is driving the cost of labour up.

Add to that, upward pressure on the cost of fuel, increasing food prices, and general wage inflation, and you have a recipe for cost blowouts in any building project - even without union factors.

As a result, any building company that allows itself to be cornered into tendering for a massive multi-billion dollar government project, with wafer thin margins, which don't take into account cost over-runs, is simply asking to go bankrupt.

Returning to the original question, there were 14 building companies deemed suitable for tendering for the NBN project. This list was narrowed down to five. The competition was fierce. So unless they were illegally colluding with each other to fix prices - highly unlikely - the prices quoted were probably close to market rates for this country.

That being the case, any claims from NBN Co of price gouging is almost certainly spin designed to cover the fact that cost of building the NBN has been grossly underestimated. At least, from this observer's viewpoint that's what it looks like.