NBN contracts undoable: Fletcher

NBN contracts undoable: Fletcher

Summary: Coalition MP and former Optus executive Paul Fletcher said that contracts for the $35.9 billion National Broadband Network (NBN) are not at a stage where it will be impossible for a coalition government to undo.

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TOPICS: NBN, Broadband
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Coalition MP and former Optus executive Paul Fletcher has said that contracts for the $35.9 billion National Broadband Network (NBN) are not at a stage where it will be impossible for a coalition government to undo.

With Labor struggling to choose between Kevin Rudd and Julia Gillard as leader, a coalition government could come in before the next scheduled election in 2013. Shadow Communications Minister Malcolm Turnbull has previously indicated that a coalition government would significantly alter the NBN roll-out, calling into question multimillion- and multibillion-dollar contracts signed with the likes of Optus, Telstra, Ericsson and Loral, among others.

In an address to journalists at Media Connect's 10th annual Kickstart conference in Sanctuary Cove on Sunday, Fletcher said that although a number of contracts had been signed for the project, he thought the NBN wasn't far enough along for this to be a massive concern for the Coalition.

"I think it's worth focusing on what we know about how extensive the roll-out has been. While it clearly suits the government and NBN Co to give the impression that this is so well advanced it is irreversible, that's not right," he said.

"Clearly, what we need to do is get in and see the full details of all the contracts, but it would be very, very surprising if you had a board [in NBN Co] which had committed to make payments ahead of roll-out actually occurring."

More broadly in his address, Fletcher said that betting big on technology was often dangerous, even more so while using public funds. He said policy makers should examine the long history of financial disasters in the tech sector before embarking on a big technology project such as the NBN.

NBN Co is investing in two brand new satellites for its network. Fletcher pointed out that government-owned operator Aussat racked up $800 million in debt before eventually being bought by Optus in the mid-'90s.

He also pointed to fibre backbone company IP1 that built backbone between Melbourne and Perth before collapsing in 2003. He said that the $25 million price paid for this fibre network by Telstra was "a fraction of what it cost to build".

"Then there was Nextgen, which spent $850 million on a fibre backbone network running 8400 kilometres between most of the capital cities in Australia. This also collapsed in 2003, and construction giant Leightons — after writing off its own initial investment in the venture — bought out the rest of the syndicate for less than $40 million," he said.

Fletcher mentioned the massive collapse of One.Tel after the company paid $523 million for spectrum to build a new mobile network and singled out his former employer Optus as having to write down the value of its hybrid fibre-coaxial (HFC) network.

All these examples showed that you can't guarantee success with technology investments, Fletcher said.

"The last thing you should do with public money is make big technology bets," Fletcher argued.

The success of Australia's mobile networks, by comparison, was driven by private market competition, according to Fletcher.

"This was not achieved by government building and operating a mobile network. Instead, government set the ground rules, issued licences to three competing operators, set some coverage requirements — and then essentially got out of the way," he said.

"All of the mechanics of building the networks, establishing the distribution channels, advertising and marketing the product, and delivering successive rounds of technological innovation were done by private companies.

"I need hardly add that the NBN is using precisely the opposite approach, which is why I predict it will secure precisely the opposite result."

A major problem with the NBN, according to Fletcher, is that the government "can't mandate take-up". He said that as Telstra decommissioned its copper network, people may look to shift to a long-term evolution (LTE) mobile broadband service instead of having a fixed-line service.

Those who did go onto the NBN may not take any more than the basic packages, he said. This would cause problems with the business case, he said, because it had predicted people would want higher tier services, relying on this fact to calculate a rate of return for the NBN of 7 per cent.

As a former Optus executive, Fletcher lamented the government's decision to cancel the OPEL project in 2009, but he said that when Optus was negotiating for the contract, it became clear that the government had a database of what it determined as "under-served premises", which were houses that were unable to get "metro-equivalent" broadband services.

He said the Coalition has called for "a [more] comprehensive and transparent database identifying, on a premises-by-premises basis across Australia, the broadband speed presently available to each such premises".

"This database could underpin rational decisions to be made about where to invest money to upgrade the network — and where such investment was not required."

Fletcher couldn't say how much such a database would cost, but said that telcos would have this data for each premise on hand, and then end users could then verify that the telco data matched their own experience.

"It would also allow individual citizens to compare the speed they were actually getting with what the database showed — allowing anomalies to be highlighted and corrected."

The Coalition has outlined broad policy — as yet uncosted — for broadband, including fibre to the home for greenfields, fibre to the cabinet for brownfields, and the use of fixed wireless and satellite services for regional and rural Australia.

Fletcher said the aim was to ensure 24Mbps services overall, but that it was wrong to subsidise rural services by forcing metro Australia to pay more.

"Telstra always argued for a geographically averaged charge. That is now the approach which the Rudd-Gillard Government has mandated for NBN Co. It is a big mistake," he said. "It entrenches much higher costs for the majority of Australians who live in the cities, and it also disguises the cost of serving rural and remote areas."

"In my view, a much better approach would be to provide explicit, on-budget subsidies — allocated on a competitive basis — to operators providing services in rural and remote Australia."

Josh Taylor travelled to the Kickstart conference as a guest of MediaConnect.

Topics: NBN, Broadband

About

Armed with a degree in Computer Science and a Masters in Journalism, Josh keeps a close eye on the telecommunications industry, the National Broadband Network, and all the goings on in government IT.

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18 comments
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  • So there you go. The last concern about changing government for all fibre rods is removed.
    Knowledge Expert
  • Aaarrrgh. Where to begin?

    Firstly, Fletcher has at least acknowledged that the NBN rollout is actually taking place. Of course, he dismisses it as irrelevantly small, and won't countenance the idea that it will have made some significant strides by the 2013 election. But at least it isn't a total dismissal of where we are now. The framing of Fletcher's comments allude to the Coalition belief that they expect to go to an early election any day now. Well, you can't blame them for wishing. But you can blame them for not grappling with reality.

    Where to begin with the rest? There's the scare-list of previous telco disasters, from Aussat to One.Tel, Nextgen and Optus. Note, though, the focus on stories specifically where FIBRE decisions have apparently gone bad, whereas MOBILE networks are all rosy and a symbol of competition in rude health. Got that, everyone? Fibre bad! Mobile good! Moving on now to...

    Fletcher's warning that the Government "can't mandate takeup", along with the claim that the NBN Co business case needs lots and lots of people taking high speed packages. Once more, you simply never hear from the Coalition any recognition at all of the part to be played by the Telstra agreement, under which copper services will be switched off and all fixed line users in the 93% fibre footprint will be migrated to NBN Co fibre. While you can't mandate that people will migrate, a great majority will do so as a matter of course. And it won't be "NBN Co" or "the Government" that forces them to do that, it will be the RSPs themselves who will be guiding their customers through the migration process. Why will they do this? Because, very simply, they want to keep those customers! Telstra certainly does, and the other telcos will be no different.

    Fletcher makes no mention of any of this, of course, and relies on misleading early takeup figures to create the scary prospect of an expensive network that no one will use. In the light of the migration deals, any extrapolation from current figures (however represented) is utterly meaningless.

    Oh, and the business plan is extremely conservative about the speed packages. I haven't got the page reference in front of me, but I recall the spread of speed options assumes that very few customers will take the 100/40 package for the first few years. Instead, it is the most popular package so far (a fact which can be explained partly by the enthusiasm of early adopters for maxed out speed, but still).

    And the fearmongering about costs and expensive packages flies in the face of what are already some very competitive prices on the market - and this is just stage one, without even any participation yet from the big whale, Telstra.

    Oh, I could go on and on.
    Gwyntaglaw
    • "Aaarrrgh. Where to begin?"

      I suggest a good start would be reading the article.

      The biggest in the "the scare-list of previous telco disasters" was One.Tel. It sank for many reasons and one of the biggest was its pathetic mobile network. Fletcher was not portraying all mobiles as "rosy". Although not mentioned in the article, no one could suggest Vodafone's mobile service is "rosy" either. The point is that regulation in the mobile network is light, competition was allowed to flourish, and we have a healthy mobile phone market.

      The government cannot mandate take-up. The deal with Telstra is to shut down the copper. No one is putting a gun to anyone's head insisting they take up a fibre access instead. Wireless services will suit many people. I am not suggesting for one minute that it will suit everyone, but the question is how many will find wireless services adequate and will that number put the NBN under financial pressure? If you read the various reports that have ben published you will find that the project's financial success is contingent on a large take-up. They may have a monopoly on fibre access, but that is no a monopoly on all access. Telstra has a strong incentive to encourage people to migrate to the NBN, but other RSPs do not have the same multi-billion dollar incentive. Wireless access networks are far cheaper to build than wireline ones, so all it takes is a wily operator with a wireless access network to undercut the NBN for the lower end of the market and they could drain the business case enough to cause major problems.

      The biggest danger to the NBN is not the "fearmongering" but the fools who cannot see through their rose coloured glasses. You cannot fix problems you refuse to see, but those problems are no less damaging.
      BRC-4c5c4
  • If the government listened to this guy,there would be no investment in technology, or roads, or water, or power or health systems...

    Sometimes you have to invest in infrastructure not because it's 100% guaranteed to be financially lucrative, but because it's in the interest of the nation as a whole...

    Or we could leave it in the hands of private industry.... And we won't have any investment that doesn't generate immediate short-term short-sighted shareholder returns..
    Wyseman
  • I guess this is a wake up call to traditional LNP voters who hoped they vote LNP and have the NBN because even the LNP wouldn't be foolish enough to cancel something that would be good for all future Australians and waste billions unrolling :)

    This reminds me of Labour saying they wouldn't vote against the GST if people gave the liberals government.
    Paul Krueger
    • Which is all good right?
      Knowledge Expert
      • Good in theory or in practice? Is it good that voters want to have their cake and eat it? Is that realistic?

        Assuming that Abbott takes power next year, he isn't going to particularly care how he does it. Admittedly, the events of the past week have given him all the ammunition he could need, if he hadn't loaded up already with a range of cudgels - Carbon Tax - bad! Mining tax - bad! NBN - bad! All's fair in politics, and it hardly matters whether they attain power while being honest about their intentions, or not.

        What will Abbott do? He could go through a frenzy of repealing everything in sight, but that will take an awful lot of effort, and will get stymied in the Senate. You could expend all your political capital trying to set up the trigger for a double dissolution, along with whipping up all the righteous anger you would need to get a clean sweep of the Senate; but since you will already have gained power, why would you really want to do that?

        While crusading against everything nasty and bad that Labor left behind, what would such a Government be able to achieve? Far more relaxed and comfortable to enjoy the trappings of power, work towards some quick, symbolic victories and changes, and just let the lot slide. And don't think that Abbott is a true culture warrior in that ultimate sense - he's actually pretty lazy, and will enjoy the trappings of office far too much to be driven by righteous zealotry.

        Repealing the NBN legislation would come a distant second or third after the Carbon Tax and MRRT. It's also a much more complex mix of legislation, and one where you can't simply repeal without replacing with alternative arrangements.
        Gwyntaglaw
  • "singled out his former employer Optus as having to write down the value of its hybrid fibre-coaxial (HFC) network."

    Hmm, a conservative strategy of rolling out decades old technology to the same over-serviced footprint as Telstra HFC, ADSL + wireless providers, with no additional benefit and he wonders why it bombed - duh.

    Now he would have us believe that the answer is a conservative strategy of rolling out to the same over serviced footprint as Telstra and Optus HFC, ADSL, mobile data with no additional benefit (i.e. max 12Mbps).

    Please dont tell me this guy is our next ICT minister.

    Now the
    xBeanie
  • Hey National party voters in rural areas! You know that really great broadband you enjoy now? Guess what - the Coalition will make sure you get to keep that for a long, long, long time.
    Gwyntaglaw
    • They key point being made by Paul Fletcher is "The last thing you should do with public money is make big technology bets," Simply because the track record of all government investments in technology based public services leads to the same ultimate outcome –higher costs to the public, for less benefit. Which is why it was the right thing to do to privatise Telstra in the first place; its worth noting telco charges consistently dropped year on year since then because of the competition. So I would be far less tactful than Paul Fletcher and suggest that the government has made a strategy mistake with the NBN which may ultimately come back to bite it; firstly using public money to make a major business bet on NBN Co is not easily defensible without a cost benefit analysis, re-nationalising the carrier network and compounding the approach by blatantly skewing industry regulation to create a new carrier monopoly is socialism and corporatism at its very worst. Which is plenty of reason to justify an incoming Liberal Government publicly reviewing the whole shooting match, its never to late to sell it off remember. Perhaps that’s why Telstra has suddenly woken up and agreed to hand over the copper before its too late. Oh, by the way I live in a small rural town and my ADSL service is pretty good –thank you.
      Takenforgranted
      • But if the funding is being derived from bonds, securities and not from general taxation revenue (as Mr Fletcher is well aware) then it's not taxpayer money, is it?

        As for higher prices, where are they? The NBN plans generally comparing apples are less expensive.

        Well if you are happy with your copper based ADSL for now and for your kids and their kids futures good for you...!

        Back to hibernation with Fletch and Turnsie with you now!
        Beta-9f71a
        • From NBN Co's web site:-

          "What is NBN Co's source of funding?

          The NBN is being funded initially by equity funding from the Commonwealth. So far the Commonwealth has provided $662 million equity funding to NBN Co which covers all of NBN Co's commitments as well as projected costs into the medium term. The Government's Implementation Study estimates that $26 billion in equity funding will be required for the project. It is intended that the remaining funds needed to build the network and fund the company will come from NBN Co's own revenues and, at an appropriate time, the private debt markets."

          The "Commonwealth" is the taxpayer. "Private debt markets" are bonds among other things. So, the NBN is being funded by the taxpayer. The bonds will come later. It probably explains why you can't buy them today.
          BRC-4c5c4
      • Delighted that your ADSL service is so good where you are. Remind me why "I've got mine Jack" is always a good basis for public policy again?

        Governments make big technology bets all the time. Every time a new rail line is announced - that's a technology bet right there! Road, rail, light rail, bus, O-bahn? I'll have... rail thanks!

        But characterising the NBN as a "bet" is misleading - every investment by a private corporation is also a "bet" - but government has the unique ability to set the regulatory environment to suit. Along with the business deals with Telstra and Optus, this means that NBN Co is in a far better situation than if it were a "build it and they will come" speculative private investment. It's more like a housing development where you've pre-sold most of the new apartments, thereby removing much of the risk surrounding this "bet".
        Gwyntaglaw
  • Finally a polly that actually thinks. Sounds like a lot of research went into this speach. Really good point on the sucess of the mobile networks, enabled and then government got out of the way them get on with it. Good to get some discussion going that should have happened two years ago.
    Rossyduck
    • What do you mean finally a polly who actually thinks, absolutley no thought went into his words he was simply regurgitating the party line...
      Spiraldeath
    • "Finally a polly that actually thinks."

      Sounds like you are impressed with what he said. I've said on previous occasions that Fletcher is a simpleton, what he has said here practically confirms it... how unfortunate for you.
      Hubert Cumberdale
    • Ooh Rossy that's priceless even for you?

      Those true colours are really shining through now. I suppose you also love to visit Menzies House too.

      Oh please my sides are splitting with laughter.
      Beta-9f71a
  • Given the 180 degree philosophical turn-around by Fletcher since his book "Wired Brown Land" should we expect another 180 degree turn when they are back on the government benches?

    Of course we should - a lick of paint, some cosmetic changes and we will be told this is the NBN we had to have. The one the Coalition wished was their idea in the first place.

    There seems to be a lot of confusion in the Coalition camp about why the NBN is so bad, we're told governments shouldn't make big technological bets and then, to make the point, Fletcher presents a string of private sector failures as examples !! Then, to prove that big bets can be successful, he points to the billions spent on mobile networks.

    The sleight of hand trick around cross-subsidising regional with metro is simply swapping a commercial cross-subsidy with a government hand-out cross subsidy. We all know how cost-effective government grants are.

    Come on Paul, you're not doing yourselves any favours with this confused messaging.
    Dalbs