Wednesday, 26 March 2014
National Broadband Network Select Committee; Report
I present the interim report of the Select Committee on the National Broadband Network.
Ordered that the report be printed.
That the Senate take note of the report.
In doing so, I am very proud to present this report. The Senate Select Committee on the National Broadband Network has issued this interim report because it has significant concerns with the accuracy and reliability of the NBN 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. These include the exclusion of approximately $4 billion in business-as-usual incremental architecture savings signed off by the previous NBN Co management. It also includes an assumption of a delay in the revised deployment schedule that is at odds with NBN Co's current run rate. It also includes assumptions on higher unit costs for the fibre build that assume an additional $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 per cent in two of the remaining seven years.
They also include the addition of a third satellite in the revised outlook, without direct explanation, with launch assumed at such a time, financial year 2021, to include costs but exclude revenues from scenario comparisons. It also includes 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. These overly pessimistic revenue assumptions also ignore demand for important elements of broadband quality, particularly reliability and upload speeds. They are also overly pessimistic about assumptions that remove revenue benefits from the superior product set available on fibre to the premise compared to other technologies with up to $3.2 billion in the steady state.
Finally, it also includes scenario comparisons that include costs and revenues for the multitechnology mix or 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 multitechnology mix, the recommended option of the strategic review. These include the fact that the financial model for the MTM was built using mostly international benchmarks and estimates, rather than field data of real-case scenarios here in Australia. They include operating expenditure for the MTM that 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 multitechnology mix will be similar to what is required for a new fibre build; and the limited speeds and product capabilities available on fibre to the node are expected to result in reduced revenues compared to a full fibre rollout in the fixed-line footprint.
Finally, 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'—that was a quote—and was subject to no independent external oversight.
Further, the committee rejects strongly the rollout strategy advocated by the current government and reflected in the multitechnology mix. In particular, we reject the deployment of higher quality broadband, fibre to the premises, to high-value suburbs and the deployment of inferior broadband, fibre to the node, to low-value suburbs as 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—and this was a principle that was demanded by the current government when they were in opposition.
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 upload speeds—and demand for this quality and reliability in the residential and small business and home business markets. Failure to consider that broadband quality and capability goes beyond download speeds is systemic in the strategic review. The strategic review also fails to consider the value of widespread access to this infrastructure to the digital economy.
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. NBN Co should be directed to continue and accelerate the fibre-to-the-premises rollout 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 fibre-to-the-premises 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 fibre-to-the-premises rollout at the maximum rate possible and free from political interference.
There are a number of other issues that have been raised through the course of the report, including that 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 many of these key appointees have prior personal associations with the minister, and 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 those 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 previous corporate plan signed off by an independent board back 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. I commend the report to the Senate.