Coalition slams NBN’s six-month delay, $1.4 billion cost blowout

The Federal Government’s control over the National Broadband Network has been questioned after it released an update for its corporate report yesterday, confirming the project will be delayed by six months and cost an extra $1.4 billion.

The Opposition has slammed the Gillard government’s handling of the project, with Opposition communication spokesman Malcolm Turnbull saying the release of the report is insulting to taxpayers.

“Labor’s national broadband network is falling disastrously behind every benchmark the government has set for it except one – the amount of taxpayers’ money being spent,” he said in a statement.

It’s a key point – the government is trying to frame the next election battle as a fight for broadband.

The Coalition intends to scrap most of the NBN, and this report gives it plenty of ammunition.

The report, released yesterday by Communications Minister Stephen Conroy and NBN Co chief executive Mike Quigley, reveals some damning statistics:

• Construction costs will rise by 3.9% to $37.4 billion.

• A six-month delay in the construction timetable will push completion back to June 2021.

• Revenue will drop to $23.1 billion, down by $600 million.

• Only 92,000 homes and offices will be connected by June 2013. That’s a connection rate of 14%, down from the previous forecast of 566,000.

Quigley said yesterday changes to the sheer size of the project have contributed to the increased costs, such as the larger number of access points needed for wholesale customers – a decision mandated by the Australian Competition and Consumer Commission.

The handover of Telstra infrastructure has also contributed to the delay, as some work couldn’t be started until NBN Co had access to ducts and trenches.

Capital expenditure is up 3.9% to $37.4 billion, and operating expenses are forecast to be up 13% to $26.4 billion. That means funding requirements are also up 8% to $44.1 billion. The Opposition has highlighted these blowouts in its criticism of the government.

Turnbull pointed out some indirect operating expenses, which include staff pay, have increased from $3.7 billion to $7.8 billion over the estimate period.

Over the entire project, the Federal Government will put in $30.4 billion instead of $27.5 billion.

Quigley said some of the costs can be attributed to some building changes. NBN Co is running cable to the edge of 93% of homes using a method called “build drops”. The previous plan would only provide fibre to the number of people who signed up.

“We’re not breaking down all the numbers other than to say it was a substantial increase [in costs] but it was a good investment,” he said.

“It’s not ‘billions’ but it’s not a few hundred million either.”

Conroy also said the extra costs wouldn’t affect the government’s plan to deliver a surplus this year.

“The government has built it into budget and forward estimates and when we do a mid-year economic update it’ll be built into there,” he said.

But there is some good news. NBN Co expects to generate earnings before interest, taxes, depreciation and amortisation in 2019, a year later than it had previously forecast. But that EBITDA is also expected to be $394 million – up from the previous forecast of $47 million.

Debt will start being paid down in 2022, and costs will be recovered by 2033. Over the long term, the rate of return will come to 7.1% – higher than the previously forecast 7%.

But not everyone is as concerned about the state of the NBN as the Coaliton.

Telecommunications analyst Paul Budde says it’s good that a much more detailed plan has been released and that, in the grand scheme of the project, a six-month delay is reasonable.

However, he says the extra costs are a disappointment.

“The extra costs are only 4%, but on the size of the project, that remains a significant dollar amount. This will certainly be an issue that the Opposition will seize upon.”

But he also points out the uptake estimates are conservative and predicts these could be much higher than forecast.

“Uptake is very dependent on word-of-mouth so you need some mass before the message starts spreading. Once that happens, you often see a J-curve reaction to the uptake rates, such a reaction often has a 12-18 month delay period.”

As long as there aren’t any further delays or increase in costs, he says, the NBN should be on track.

“The good thing is that we now do have a far more accurate and credible plan than the one that was put together in 2010.”

This story first appeared on SmartCompany.