NBN contracts undoable: Fletcher

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.
Written by Josh Taylor, Contributor

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.

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