The Australian: Team ready to tackle Labor's NBN debacle

LAST week NBN Co released its strategic review -- and some commentators expressed surprise that the company's recommended option (the "optimised multi-technology mix") would cost $41 billion.

This is actually $32bn less than the true cost of completing Labor's original design, the strategic review found.

But it is clearly a very large amount of money. As the strategic review lays out in some detail, bad decisions and bad execution under Labor have locked in a very high-spending "floor" for the NBN.

The first problem is the delayed rollout means delayed revenues -- and hence a higher "peak funding requirement".

The "peak funding requirement" is a measure of how much money NBN Co needs from external sources (equity and debt) at the highest point -- and this is what the $41bn figure measures.

If the rollout is delayed, then the network earns less revenue and generates less cash -- which pushes up the peak funding requirement.

The strategic review concludes that the rollout is so far behind plan that revenues will be $13bn-$14bn lower, over the period to 2021, than the corporate plan assumes.

The next problem is that NBN Co has high operating costs. With about 3000 staff, it is not a lean business.

In fact, according to NBN Co's current corporate plan, the cumulative cost of corporate overheads -- salaries, office space, travel, legal and consulting advice, advertising and the like -- will reach almost $8bn over the period to 2021.

A third factor which explains why the cheapest option still costs $41bn is that NBN Co has already spent billions. Equity contributions to NBN Co have already chewed through more than $6bn of taxpayers' money -- even though the network can so far serve only 341,000 premises, 3 per cent of the total NBN Co must reach to finish the job.

As well as operating costs, capital expenditure is well above what was planned. Page 61 of the strategic review concludes that completing the current rollout will require $17bn more in capital than is currently stipulated in the corporate plan.

Some of this cannot be mitigated even through moving away from a fibre-to-the-premises architecture. For example, the cost of NBN Co's OSS/BSS (the critical IT systems needed to run a telecommunications business, such as the billing system and the provisioning system) is now estimated to be nearly double what the corporate plan assumes, and this will not materially change whether the network is fibre, cable or some mix of the two.

The fourth problem is that NBN Co is locked in by contracts to pay enormous amounts to third parties. As the strategic review reveals on pages 51 and 52, direct operating expenditure through to 2021 is forecast to be about $19bn, of which 90 per cent, or more than $17bn, is payments to Telstra and Optus.

These payments reflect agreements struck under Stephen Conroy in June 2011 for Telstra and Optus to migrate their customers to the National Broadband Network and decommission their networks, and for NBN Co to enter into long-term leases over Telstra infrastructure.

Conroy also ensured that the commonwealth government entered into a formal legal guarantee of NBN Co's obligations to Telstra, meaning that if NBN Co fails to make these payments, Telstra can sue the government to collect the money.

Would the Coalition like to be able to walk away from the existing arrangements and start again with a clean sheet of paper?

Of course we would, but thanks to the previous Labor government's irresponsible approach, that is not an option.

What we can do is appoint a management team that will work vigorously to identify savings options -- within the business model and contractual framework NBN Co has inherited.

There are some degrees of freedom. For example, the bulk of the payments to Telstra and all of those to Optus only become due if and when the NBN is actually rolled out.

There is also scope to reduce NBN Co's corporate overheads, which have grown ahead of customer numbers.

But the NBN Co team and its advisers who worked on the strategic review suggest at least $15bn of these obligations are essentially inescapable.

The new management of NBN Co has a challenging task. It must keep costs controlled as much as possible, even though much of the cost base is now largely locked in thanks to the reckless approach of the previous government.

It will be critical to keep the peak funding requirement contained, so a key consideration is how quickly the network can generate revenue to cover the very large expenses to which NBN Co is committed.

As NBN Co chair Ziggy Switkowski says, he and his team are up for the challenge aiming to rein in the $41bn which the Strategic Review estimates as the cost of the recommended option.

When a business faces significant challenges, it is incumbent on its board and management to clearly identify those challenges, and then develop and execute a credible plan to meet them. With the strategic review, that is precisely what NBN Co is now doing.

Paul Fletcher is a federal Liberal MP and parliamentary secretary to the Minister for Communications.