Commsday: Is it costing NBN Co more than expected to roll out its fibre network?

NBN Co budgeted $11.3 billion to build the network past 10.2 million existing (or ‘brownfields’) premises by 2021: that’s a cost per premises of $1100. The Coalition has been pressing NBN Co for some time to reveal its actual cost per premises on the parts of the network built to date.

The company has consistently refused – although at a parliamentary hearing in October 2012 it said (without giving numbers) the cost had reduced over three successive rollout stages. Last week, at another parliamentary hearing, NBN Co finally gave some hard numbers. It said actual cost per premise was $5,000 in stage 1 of the rollout (in Tasmania); $4,000 in stage 2 (also in Tasmania) and $3,100 in stage 3 (the five ‘first release’ sites on the mainland).

NBN Co also said that its ‘estimate at completion’ of the cost per premises on parts of the network currently being rolled out was much lower: between $1100 and $1400. Taken at face value, that sounds like encouraging progress. For several reasons, though, I think taxpayers – the people funding this rollout –should be wary of taking these numbers at face value. To start with, these numbers are estimates or forecasts – not actuals – and NBN Co has a bad record of failing to meet its forecasts.

For example, in its first corporate plan issued in December 2010, NBN Co said the fibre network would pass around 1.3 million premises by 30 June 2013; in the second corporate plan issued in August 2012 that forecast dropped to 341,000; just weeks ago NBN Co admitted it would miss even the second forecast badly, with the expected number now between 190,000 and 220,000. Second, even if these costs are achieved in the areas presently being rolled out, we do not know how representative these are of the 10.2 million premises which must ultimately be passed.

There is an interesting comparison available from New Zealand company Chorus, which is rolling out a national fibre network in that country. Recently Chorus said that it was finding very high variability in the cost per premises – varying from NZD 1,000 to as high as NZD 8,000 – with very high costs being experienced in around 10 per cent of areas.This meant its average cost per premises passed across the whole rollout – which was forecast to drop from NZD 3,300 last year to NZD 2,500-NZD 2,700 for work commenced this year – was in fact not dropping, and would instead increase somewhat in the second half of 2012-13 compared to the first half.

When NBN Co says that it will achieve costs of $1100-1400 in the areas it is currently building, we do not know if these areas are representative of all 10.2 million premises to be passed by the brownfields network. Feedback from contractors suggest the actual cost is very sensitive to factors like terrain (rocky ground is much more expensive); speed of approvals (for example, from electricity network owners approving NBN Co using their poles in areas where the network is being built overhead); and the speed at which Telstra remediates ducts which are damaged.

If the more difficult and expensive areas been left until later, then the cost per premises could rise as the rollout continues. A third issue is whether the contractual prices negotiated between NBN Co and its contractors, which are doing the physical work to roll out the network, can be relied upon for the long term. Because NBN Co is largely doing the build using contractors rather than in house labour, its cost per premise depends on how much it pays its contractors. We know that the relationship between NBN Co and the contractors has been difficult, with contractors complaining that NBN Co is not paying them enough to make a reasonable profit.

Earlier this year, NBN Co disclosed substantial problems with one contractor, Syntheo, which had been contracted to build the network past 48,000 premises in South Australia, Western Australia and the Northern Territory. Syntheo was making very slow progress – which may suggest it is finding it difficult to make money under the contract. If the build in current areas is occurring at contractual prices which allow NBN Co to meet its target cost per premises passed – but if the contractors will not continue in other areas at current prices – then taxpayers should be worried. A fourth question is the speed at which NBN Co says it is going to get these sharp cost reductions. NBN Co says its average cost per premises for 2012-13 will be $1200 –a reduction of more than 50 per cent on the cost it incurred for its mainland first release sites. When an experienced network business like Chorus tells the market that it expects to get its costs per premises passed down from current levels of NZD 2900 to NZD 1300-NZD 1500 – but it will involve a steady reduction over several years – that helps to calibrate the ‘degree of difficulty’ in what NBN Co is claiming it will do.

It is pleasing that NBN Co finally provided some hard data on rollout costs to the Parliamentary NBN Committee. But it is too early to celebrate. When NBN Co can show actual rollout costs rather than expected costs; when it can demonstrate they are truly representative of the entire rollout; and when it can show they are achieved using sustainable business arrangements, then we can satisfied that this cost element is under control. Until that time, taxpayers should remain very concerned about how much this rollout is actually going to cost.

Paul Fletcher is a Liberal MP. He serves on the Parliamentary NBN Committee.

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