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Monday, 28 November 2011 09:56

New warnings of NBN cost blow-out

By

The organisation engaged by the government to review NBN Co's corporate plan reportedly told the government that NBN Co capex would total $50.8b by 2028, as opposed to NBN Co's estimate of $35.9b by 2020.

The claim is made in the Australian newspaper on the basis of it having obtained, under Freedom of Information, the full report - albeit heavily redacted - to the government on the commercial viability of the project.

Following the release by NBN Co of its corporate plan in December 2010 the Government engaged investment bankers Greenhill Caliburn (now headed by former ACCC chairman Graeme Samuel) to review the plan and provide a commercial assessment, identifying and analysing the plan's key assumptions and potential risks.

The government released an executive summary of the Greenhill Caliburn report in February 2011 with communications minister Stephen Conroy saying: "The Greenhill Caliburn report confirms NBN Co's key assumptions underlying revenue and cost projections which provide the Government with a reasonable basis on which to make commercial decisions about the NBN."

The government however refused to release the full report on the grounds that "the complete document deals with sensitive, commercial-in-confidence material."

According to the Australian the report "reveals that $50.6bn in capex would have been spent on the network by 2028." This, it says "is dramatically higher than the $35.9bn in capital costs to build the project by December 2020 that is usually cited by Labor. The heavily redacted document also shows the extent of the criticism of the NBN's pricing model, which includes a fee based on the amount of data carried through the network."

CONTINUED

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However The Australian's news story does not explain what the additional capex might be spent on in the years 2020 to 2028. It adds: "As well as warning of a 'potential consumer pushback' to the NBN's assumption that it can charge more for higher speeds, the report says the model was abandoned by Korea Telecom - and Time Warner Cable discontinued trials of the model in the US."

The Australian also quotes the report as saying that slower digital video could adversely impact the number of users attracted to and retained on the NBN, as well as growth in the average revenue per user. And it quotes NBN Co spokeswoman Rhonda Griffin saying there was not a suggestion in the report that the main usage of the NBN was for entertainment. Digital video, however does not necessarily equate to entertainment.

The publicly available executive summary of the Greenhill Caliburn report makes no specific comments on capex significantly in excess of the $35.9b over 10 years quoted in the NBN Co Corporate Plan. It does however warn that the accuracy of this estimate relies on a number of assumptions that have a good chance of proving to be invalid.

"Given the complexity and large number of variables, a number of environmental, regulatory and other operational factors could potentially result in unanticipated costs or delays," it says. "For example, the expected real gains in labour productivity are dependent on delivering consistent productivity improvements throughout the project's lifetime."

It does concede that "the impact of such isolated factors is likely to be relatively insignificant on the overall plan," but adds: "Key risks of capital expenditure overruns include changes in government policies and / or local approvals, which could require more expensive underground installation costs, or lack of productivity improvements in materials or labour sourcing over time."

The overarching finding, as reported in the Executive Summary, is that "Based on our preliminary review, as more fully described in our report, and subject to the assumptions contained in the Corporate Plan itself, Greenhill Caliburn believes that, taken as a whole, the Corporate Plan for the development of the NBN is reasonable."

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