Executive Summary
NBN Co Strategic Review
The Senate Select Committee on the National Broadband
Network (the Committee) has issued this interim report because it has
significant concerns with the accuracy and reliability of the Strategic Review.
The Committee considers that the assumptions and conclusions
set out in the Strategic Review are unreliable in the case of all examined
scenarios.
The Committee has found that the Revised Outlook includes
financial manipulations and other irregularities, such as:
-
the exclusion from the Revised Outlook of approximately $4
billion in ‘business as usual,’ incremental architecture savings signed off by
previous NBN Co management, and their characterisation as ‘radical’ for
inclusion in Scenario 2 (‘Radically Redesigned FTTP’);
-
an assumption of a delay in the revised deployment schedule that
is at odds with NBN Co’s current run rate, reflects deliberately conservative
estimates of premises passed at peak rollout, and cannot be disentangled from
political control of the speed of network deployment, but has the assumed
effect of stripping out $11.6 billion in revenues and adding $13 billion to
peak funding;
-
assumptions on higher unit costs for the fibre build that add
$14.4 billion in capital expenditure, but:
-
are at odds with recent evidence from NBN Co and the Department
of Finance; and
-
are extrapolated out to 2024 without a single efficiency saving
for three years, and only 2.5 percent in two of the remaining seven years;
-
the addition of a third satellite in the Revised Outlook, without
direct explanation, with launch assumed at such a time (FY2021) to include
costs but exclude revenues from scenario comparisons;
-
overly pessimistic revenue assumptions that:
-
do not reflect existing strong demand for NBN services, or the
high data usage patterns of Australians using the NBN;
-
ignore demand for important elements of broadband quality,
particularly reliability and upload speeds;
-
remove revenue benefits from the superior product set available
on FTTP, compared to other technologies (up to $3.2 billion in the ‘steady
state’); and
-
scenario comparisons that include costs and revenues for the
Multi-Technology Mix (MTM) build at assumed completion, and costs for the
Revised Outlook out to 2024, but exclude revenues for the Revised Outlook
beyond 2021.
The Committee considers that—without the financial
manipulations evident in revenue and other assumptions—the so-called “radically
redesigned” FTTP scenario represents a better estimate of the cost of the fibre
build than the Revised Outlook. This is because the productivity and
architecture improvements included in Scenario 2 had already been included in
the September 2013 Corporate Plan, and implemented, by previous NBN Co
management.
The Committee has equally strong concerns about the
reliability of assumptions underpinning the MTM, the recommended option. These
include:
-
the financial model for the MTM was built using mostly
international benchmarks and estimates, rather than field data;
-
operating expenditure for the MTM is expected to be significantly
higher than for a fibre network. The caretaker advice prepared by NBN Co points
to the substantial costs associated with remediation and maintenance of the
copper network. The committee has heard similar evidence from witnesses representing
the workforce in the field. Material operational costs are also expected from
NBN Co managing at least two additional fixed line networks, and the migration
arrangements and IT systems that relate to them. However, the Strategic Review
assumes that operating expenditure for the MTM will be similar to what is
required for a new fibre build;
-
the ‘limited speeds and product capabilities’ available on FTTN
are expected to result in reduced revenues compared to a full fibre rollout in
the fixed line footprint. Further, NBN Co will need to conduct extensive field
tests before the speeds and broadband quality in the (non-FTTP) MTM fixed line
footprint will be known empirically. However, the Strategic Review assumes
revenues for the MTM that are similar to those for a full fibre rollout,
despite the vast difference in broadband quality and product sets;
-
the Strategic Review acknowledges that the MTM will need to be
upgraded, but provides no costs for these flagged upgrades. The full cost of
the MTM will only be known once these upgrade costs are included in the model.
NBN Co’s previous Corporate Plans have been developed over a
period of many months and have been subject to independent oversight and
verification. By contrast, the Strategic Review was the result of “five weeks
of intensive work on the part of lots and lots of people”[1]
and was subject to no independent external oversight.
Further, the committee rejects the rollout strategy
advocated by the current Government and reflected in the MTM. In particular:
-
the deployment of higher-quality broadband (FTTP) to high value
suburbs, and the deployment of inferior broadband (FTTN) to low value suburbs
is an inappropriate use of taxpayers’ money. As a Government Business
Enterprise, NBN Co should not have a rollout strategy that favours one suburb
over another;
-
the proposed Fibre on Demand product is expected to be too
expensive for many residences and small businesses. This will create
competitive disadvantages for individuals and small businesses outside the
fibre footprint, and will entrench broadband inequality in Australia.
The Committee considers these rollout strategies reflect a
fundamental misunderstanding of broadband quality—particularly uploads—and
demand for this quality and reliability in the residential and small business
market. Failure to consider that broadband quality and capability goes beyond
download speeds is systemic in the Strategic Review.
The Committee concludes that the Strategic Review does not
comprise a sufficient information base for the NBN Co Board or the Minister to
adopt an alternative deployment path for the NBN.
Recommendation 1
NBN Co should submit a revised Strategic Review that
provides transparent assumptions and corrects deficiencies and distortions. The
revised Strategic Review should provide details of only two scenarios:
-
An optimised FTTP rollout that adopts the technology changes
and other management initiatives outlined in Scenario 2, together with a plan
to address identified industry capacity constraints; and
-
A revised Multi-Technology Mix that is based on actual costs
for FTTN and HFC derived from discussions with Telstra, Optus and vendors. This
scenario should also include all costs to undertake the flagged upgrades to 100
Mbps by 2023, 250 Mbps by 2028 and 1000 Mbps by 2030.
The revised scenarios should include consideration of
broadband quality beyond just download speeds, and the demand for attributes
like upload speeds and reliability in the residential and small business
market.
Prior to submission, the Strategic Review should be
scrutinised and verified by an independent advisor engaged by the Department of
Communications and the Department of Finance.
NBN Co should be directed to continue and accelerate the
FTTP roll out while further analysis is undertaken by NBN Co, the Departments
and the Minister. The Committee notes that NBN Co is not able to progress the
FTTP rollout at the maximum rate possible at present. This is because—under the
interim Statement of Expectations—NBN Co is required to obtain approval to
issue additional build instructions. This places the management of the current
FTTP rollout under direct political control. The committee considers that,
given the continuing review work, and the fundamental problems with the
Strategic Review, NBN Co should continue the current FTTP roll out at the
maximum rate possible and free from political interference.
Recommendation 2
NBN Co should continue and accelerate the roll out of the
FTTP network while further analysis is undertaken.
NBN Co should be allowed to proceed free from political
interference.
NBN Co Governance and Review
Processes
Key appointments to the NBN Co Board and management relevant
to the Strategic Review reflect to a large extent personnel named in media
reports before the election. There is also clear evidence that key appointees
have prior personal associations with the Minister. The Committee considers that
some of the processes of recruitment for the Board and management of NBN Co
have created the perception that these are political appointments for a
political purpose. In reaching this conclusion, the Committee is not making any
judgements about the skills and experience of any of the individuals.
A key finding of KordaMentha was that “no material issues
exist within the accounts of NBN Co.” However, the Strategic Review draws
radically different conclusions from the information contained in the 2013-16
Corporate Plan signed off by an independent board in June 2013.
It is not clear to the Committee how the NBN Co Board could
have endorsed the Strategic Review, given its clear deficiencies. In the
Committee’s view, this should be investigated to ascertain how and at what
point the governance processes at NBN Co have failed under the current
Government.
Recommendation 3
Governance processes between NBN Co and the Minister
should be investigated to determine how a document with the deficiencies
evident in the Strategic Review was produced and signed off by the NBN Co Board
and the Minister.
The committee is also uneasy at the multiple reviews of the
NBN that have been announced and the very short timeframes for their
completion. Noting the Committee’s findings as to the Strategic Review—and the
Government intention for reviews to inform the development of NBN Co's
Corporate Plan 2014-17—the committee considers that the reviews and their
findings should be subject to continuing and close parliamentary scrutiny.
The committee also notes the finding of the Strategic Review
that the intense politicisation of the NBN—driven principally by Coalition
opposition to the project—has adversely impacted the performance of NBN Co and
the efficient deployment of the network.
Recommendation 4
The Committee recommends that the Senate amend the
Committee’s Terms of Reference to enable ongoing and robust Parliamentary
oversight of the National Broadband Network.
Transparency and Accountability
The Committee considers that transparency has decreased
markedly at NBN Co since the change of government, despite undertakings prior
to the election. In summary:
- there is clear evidence of community uncertainty about the
rollout of the NBN. Communities are not informed when physical construction is
taking place in their area, and local communities are not being advised when
services are expected to become available. Further, published weekly rollout
information is only a subset of what is available to NBN Co management;
-
NBN Co personnel appear reluctant to be subject to Parliamentary
scrutiny. On three occasions summons have been issued, and in some cases
requests for specific personnel have been denied. Answers to Questions on
Notice have been submitted late or not at all, are evasive, and some do not
attempt to address the questions asked;
-
there is evidence of a Freedom of Information request being
denied for spurious reasons; and
-
a request for in camera scrutiny of the unredacted Strategic
Review has been denied by the Minister, despite the fact that the redacted
assumptions underpin a proposed Commonwealth investment of over $40 billion—not
including required technology upgrades.
Of key concern to the committee is the uncertainty evident
in the community about the rollout. The lack of consultation with local
communities, and the absence of information available to these communities on
the rollout, has been a key theme of submissions to the committee and evidence
given at public hearings.
Recommendation 5
Shareholder Ministers and NBN Co should implement
concrete measures to improve transparency and accountability. At a minimum, NBN
Co should:
Immediately take steps to rectify community uncertainty
about the rollout. NBN Co should inform communities where physical construction
is taking place, and provide forecasting data on its website to advise local
communities when services are expected to become available;
Attend all Parliamentary Committee hearings and answer
questions on notice accurately and in a timely fashion, as is appropriate for a
Government Business Enterprise accountable to the Australian people; and
Publish the full program summary report on its website,
in accordance with the interim statement of expectations.
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