David Havyatt
September 15, 2015

The NBN is no template for change

The NBN is no template for change

Bill Morrow: the very model of a modern CEO

At his first press conference after his successful leadership ballot Mr Turnbull was asked whether he was going to change the economic direction or going to change the way you tell the story. He replied:

You build confidence by explaining what the problem is, making sure people understand it, and then setting out the options for dealing with it. And you’ve seen in my own portfolio of communications, where I’ve had to deal with very big business problems, whether it’s with NBN or indeed with Australia Post. That’s the approach I have taken: Laying out what the issues are, getting the facts straight, explaining that and then presenting a path forward and then making the case for that path forward.

The answer lays out two essential parts of Mr Turnbull’s character. The first is self-delusion about his own ability. The second is an almost hypnotic ability to bring an audience into the delusion.

On the same day as the leadership challenge the full extent of his NBN delusion was revealed before the Senate Select Committee. Before we get to the committee let’s set the scene.

After teasing the Australian public with the idea that he had a plan for the NBN that involved technologies being used elsewhere, notably vectored DSL, Mr Turnbull was forced to release a more detailed policy in April 2013. At a press conference at which his leader was confused by a hologram of Sonny Bill Williams, the Coalition laid out its broadband plan.

Before doing so, Mr Turnbull had given to the Daily Telegraph – since dubbed the Government Gazette by the bureaucracy – an exclusive on Mr Turnbull’s own alternative costing of Labor’s broadband plan. The racy headline ‘Ninety Billion Nightmare’ even rated a segment on Media Watch The unwritten rule of the drop.

The policy outlined the ‘plan’ to use the most ‘cost effective technology’ and committed to deliver 25 Mbps to 100 per cent of households by 2016. All this was to be achieved within a required funding of $29.5 billion.

Against this was the first Turnbull counterfactual – his “real cost” of Labor’s NBN of $94 billion dollars. This was derived making a series of assumptions, including a delayed roll-out, a higher per premise cost, a lower take-up rate and a lower average revenue per user (ARPU). The last of these was the easiest for anyone half-way numerate to understand as a fudge.

Because the first year had most customers joining the network in the second half year, the standard ARPU calculation underestimated the actual monthly revenue per user. (Confusingly ARPU’s are always stated as a monthly figure). The analysis asserted that NBN Co wholesale ARPU’s would treble from a starting point of $22.46 per month in 2011-12 to $62.11 in 2020-21. No one noticed that the lowest access price was actually $24 and so the starting point was wrong.

To provide more current detail on that, the Background Paper released by Mr Turnbull in April 2013 noted that the NBN Co Corporate Plan estimated ARPU for FY2015 at $40.72 but that the ARPU used for the counterfactual was $29.11 per month. NBN Co’s annual results presentation showed ARPU for 2015 as $40, up from $37 the previous year.

No matter how much analysis was provided to commentators, the analysis of Malcolm Turnbull, former merchant banker stuck.

The Coalition policy committed to three reviews to take place in Government; a strategic review to re-cost the NBN and cost alternative strategies, an independent review into the policy process and NBN governance, and an independent cost benefit analysis. Any review of his NBN pronouncements from April 2013 to about June 2014 will find implications from Mr Turnbull that these reviews were going to identify conscious deception or worse malfeasance by NBN Co and the Labor Government.

Each of these was duly commissioned. None ever identified any doubtful behaviour.

There was never any doubt by the former Prime Minister about the competence of his Minister for Communications. In his letter to Australians published in News Limited papers on election night Mr Abbott wrote:

We will deliver a new business plan for the NBN so that we can deliver faster broadband sooner and at less cost. I want our NBN rolled out within three years and Malcolm Turnbull is the right person to make this happen.

In releasing the Strategic Review in December 2013 Mr Turnbull broke the commitment to deliver 25 Mbps to all Australians by 2016. Not sacking Mr Turnbull immediately was perhaps the first of Mr Abbott’s undoubted acts of loyalty to his colleagues.

The Strategic Review also announced that the cost (peak funding) of the Coalition plan would be $41 billion – not the $29.5 billion in the policy.

When challenged on ABC’s 7:30 program to explain why these NBN commitments were being broken Mr Turnbull blamed NBN Co and Labor saying “And the fact is that the NBN Co is a much bigger mess than even we had thought it is.”

Yet the Strategic Review’s estimate of how much Labor’s NBN would cost was $73 billion. The Strategic Review also based that on a set of assumptions that didn’t reflect cost and process changes already being introduced.

It wasn’t in worse shape – it was at least $20 billion better off than Mr Turnbull had claimed barely eight months previously.

With the release of the NBN Co 2015-18 Corporate Plan Mr Turnbull’s credibility should have been dealt a fateful blow. The cost of the Multi-Technology Mix had now blown out to a range from $46 billion to $56 billion, though management is targeting $49 billion.

CEO Bill Morrow’s excuse on ABC’s Lateline for this “blowout” was that the Strategic Review wasn’t reliable, it was really a rushed job, saying:

But the $8 billion difference that we're seeing in the increase is really because it was only a seven-week program that looked in the strategic review to give an indication as to what is the best option for the country.

That was a great difference from Mr Turnbull’s 2013 description of the Strategic Review when he said:

Importantly, all forecasts in the Strategic Review have been arrived at independently by NBN Co and, in the view of the company and its expert advisors, are both conservative and achievable.

To defend the MTM scenario Mr Morrow went on to state:

The cost of putting fibre out there has also gone up. We were asked to do a bit of a review on that. So the delta is still between $20 and $30 billion between the two different policies.

The Corporate Plan identifies this work, saying:

At the request of Government, management has prepared a high level desktop analysis, not to the same level of detail as the Operating Plan, to update an assessment of an all-FTTP fixed line deployment scenario as an alternative to the current MTM approach.

At the Senate committee on Monday NBN Co was very clear that this was a high level desktop study. It is not at anywhere near the level of the Corporate Plan itself, which identified significant errors in the earlier Strategic Review.

More importantly the Committee discovered that this was not at all what Mr Morrow had described it as on Lateline. It was not a costing of the original FTTP policy left untended, it was what it would cost to restart now. NBN Co has already stopped providing new designs for new fibre serving areas.

This isn’t a costing validating the decision to move from the FTTP NBN to the Multi-Technology Mix. It is an exercise in costing a move now.

Read in that light it is stunning that the peak funding estimate is only in the range of $74 billion to $84 billion. The expenditure thus far in FTTN and HFC, including IT systems to accommodate them, would all be sunk costs. There would be a significant hollowing out of revenue as no new premises were added for a year as construction ramped up again.

Mr Turnbull had been so successful in imprinting the dreamt up cost claim that the Lateline story didn’t even lead with the Corporate Plan estimate as the FTTP cost, but instead regurgitated the $94 billion assertion at the top of its interview.

It is also clear that these scenarios included reaching the peak rollout rates forecast in the last plan prepared by the previous management team (v13 of the 2013-16 plan). The Senate Select Committee’s first interim report detailed how the assumptions about revenue and cost also distorted the view of the FTTP rollout.

That means that had the Coalition abandoned its crazy options and simply prosecuted the FTTP build it was deliverable within the original parameters.

Here we are two years into the implementation of Mr Turnbull’s plan and everything he said about it in 2013 is now in tatters. Yet Mr Turnbull wasn’t sacked by Mr Abbott, it happened the other way around.

Those who follow the NBN could believe that Mr Turnbull’s rush to bring on the leadership challenge was motivated by the need to move before his NBN debacle caught up with him.

It takes the special kind of person that Mr Turnbull is to instead use his management of the NBN as a template for governing the country.

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