Ricardo’s recent post on Government debt led into a very interesting debate about the merits of the NBN project. I could spend all day debating the costs and benefits of the world’s largest government-funded broadband project, but I was particularly interested to see a comment claiming that NBN Co (the GBE tasked with building and running the NBN) has not demonstrated any systemic mismanagement in its implementation of the project.
Let’s test out that hypothesis against publicly available facts:
- In 2010, NBN Co originally forecasted that 1.3m premises would be passed by fibre at the end of June 2013. This was revised down to 341,000 premises in the 2012 Corporate Plan update (a write down of 74%). This forecast was confirmed as late as January 2013 by NBN Co.[i] But less than two months later the forecast was downgraded to 190,000 (a further write down of 55%).[ii] Even this forecast seems fanciful, given that as at March 2013, only 96,000 premises were passed by fibre.[iii]
- The failure to execute the fibre deployment is seemingly being matched by a failure to execute the deployment of NBN Co’s fixed wireless product. In 2011 NBN Co signed a $1.1b deal with Ericsson to roll-out its fixed-wireless network, with an expected completion by 2015. NBN Co expects fixed wireless to cover 4% of premises, equating to around 500,000 premises at end of the build phase. NBN Co forecasted that its wireless network would cover 70,000 premises at June 2013. However, latest figures show that the fixed wireless network covered only 17,000 premises in April 2013. Adding in planned coverage in May and June, the network will cover only 32,000 premises by June 2013 – missing the forecasts by 45%, a forecast reconfirmed in January 2013.[iv]
Irrespective of what your views are on the merits of the NBN policy, the objective of NBN Co is to build the NBN. Ideally, the build should be as per cost and timeframes outlined. However, NBN Co has drastically missed its roll-out forecasts time and time again – it is either mismanagement of the business forecasting process, or it is failure to execute on reasonable forecasts. Either way, it represents a failure of management to implement the NBN project.
The failure to deploy a wireless network is particularly telling. Telstra was able to deploy its 850MHz 3G network, covering 98% of the Australian population within 2 years. This deployment was also done by Ericsson. The NBN wireless network is to cover 4% of the population and after two years has only covered 17,000 premises. By any definition of managerial competence, this is a failure.
The only aspect of the NBN project that is on time and on budget is the interim satellite component. This, by the way, is the only aspect of the network which is not actually being built by NBN Co. NBN Co is re-selling Optus’ wholesale satellite service, and the vast majority of its satellite subscribers were transferred from existing Government programmes (like the Australian Broadband Guarantee).
There are a range of other indicators that suggest the management of NBN Co is not without flaw:
- Failure to get its regulatory undertaking accepted: NBN Co originally submitted an access undertaking (proposal to outline how NBN Co would be regulated) in December 2011. And yet the process still continues. The first undertaking was withdrawn, and the latest undertaking is unlikely to be accepted anytime soon.
- Failure to reach commercial agreement with its customers: NBN Co has been in negotiation with its customers over its Wholesale Broadband Agreement (WBA) since early 2011. Currently, no major service provider has signed a long-term WBA[v] and negotiations still continue.
- Board and management troubles: As at February 2013, NBN Co employed 194 executive level employees. Since October 2009, 55 executives have left the company, and 12 senior executives have left the company.[vi] Such a high turn-over of senior staff in a growing company (i.e. not redundancies) indicates that there is something not right. It has further been reported that the Chairperson has canvassed other board members to replace the CEO with an aim to become an Executive Chairperson. She also sought to reduce the level of managerial intervention by the current Minister.[vii] And it is well known that the Shareholder Minister-elect does not have faith in the CEO, and will likely replace him soon after the September election.[viii]
In summary, we have what is essentially a building company that: is constantly having to revise grossly inaccurate forecasts; unable to deliver on any of its revised deployment forecasts; unable to get approval from the regulator for its proposed regulatory framework; failing to reach commercial agreement with its customers; with significant turnover of senior executive staff; and a claimed lack of confidence in the CEO by the Chair of the Board and the soon-to-be major shareholder.
If NBN Co was a private company, and I was an investor, I would not be of the view that these facts represented a company without any systemic mismanagement in the implementation of the NBN project. The NBN is bad policy but even worse, the NBN Co is a badly run organisation that again demonstrates Government cannot run corporations. NBN Co is making the NBN an even worse policy.
[v] Service providers are signing interim agreements so as to get services while the long-term agreement is finalised.
[vi] NBN Co, QoN 284, February Senate Estimates.