[LINK] NBN build cost 'underestimated': analysts

[Bernard Robertson-Dunn]

NBN build cost 'underestimated': analysts
Ben Grubb
April 8, 2011 - 12:39PM
SMH
http://www.smh.com.au/technology/technology-news/nbn-build-cost-underestimated-analysts-20110408-1d6xx.html

The $36 billion national broadband network is headed to a significant 
cost blowout, analysts say, after the the company building it failed to 
accurately predict the cost of construction when it took it to the market.

Last week the company building the network, NBN Co, wrote to 14 
construction firms saying a key tender process was ''suspended'' 
indefinitely because none of their proposals had acceptable prices.

Following the suspension, NBN Co’s head of construction resigned, 
fuelling speculation from Telsyte analyst Chris Coughlan that he was 
"responsible for the assumptions in the business plan associated with 
the construction costs". He made a "substantial mistake" and wasn’t 
"able to land the deal".
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And just today, The Australian reported that the company's manager of 
cost and resource estimates, Nick Sotiriou, had also left the NBN Co. 
"From time to time people have differences of opinion and that doesn't 
mean one is right or wrong," he told The Australian. "And sometimes you 
have to move on."

The newspaper also reported yesterday that companies it surveyed that 
had put in a bid for the construction placed a 50 per cent premium on 
the cost because NBN Co placed a lot of the build's risk on them.

The NBN Co would now be looking at ways to try and lower the cost of 
construction, such as looking at the amount of overhead and underground 
cabling, Telsyte's Coughlan said. Overhead cabling was sometimes 
cheaper, he added.

NBN Co made the move to suspend the build tender because it believed the 
bidders were trying to gouge excessive profits from the taxpayer-backed 
project. But, according to some telecommunications analysts, rather than 
price gouging occurring between bidders, the company may have 
underestimated the build’s cost.

“I would find it very hard to believe and very legally difficult to 
demonstrate collusion or a conspiracy has taken place,” said IBRS 
analyst Guy Cranswick.

He said the ICT industry had been “very buoyant” about the NBN because 
there was a “certain amount of self-interests that may [have] come into 
play”.

“Now whether that motive has proved to show higher prices is very 
difficult to prove,” he said. “There could be an underestimation on one 
side but there could also be a certain enthusiasm about working for a 
government backed corporation”.

Ovum telecommunications analyst, David Kennedy, said it was “clear” that 
the tender process hadn’t “delivered a result consistent with the [NBN 
Co] corporate plan”.

And despite the company’s claim it had been gouged, it was “difficult to 
see” how that “could be sustained in a competitive process that’s been 
going on for five months and in which there’s been ongoing negotiations 
between NBN Co and the tenderers”.

Independent telecommunications analyst Kevin Morgan said the idea that 
fourteen different companies “would all get together and all inflate 
their prices” was “not realistic”. “It’s just not on.”

Morgan believed the build's cost had been underestimated and said that 
it “wouldn’t be surprising” if the prices all came in at a roughly 
comparable level “because the inputs are all pretty well known”.

“Where it may differ is in the element of risk that the contractor wants 
to build into [their bid] because this is an extremely risky project 
from the contractor’s point of view.”

Telecommunications analyst Paul Budde also questioned the gouging claim. 
“If there was only one company or two companies involved with it” it may 
be reasonable to suggest such a thing occurred, he said. “But there are 
fourteen companies involved with [the tender]. They can’t all work in 
that way. So I don’t think that that is a reality; that all of them in 
one way or another have created a situation of gouging. I find it very, 
very hard to believe. I mean, perhaps 20 years ago in the construction 
industries things like that were happening but the construction industry 
has become extremely professional in Australia and I can’t see that that 
could happen on a massive scale”.

He said there might be “one or two” companies who would try to “use or 
misuse” the tender process “but I don’t accept that the total 
construction industry would do that”.

“So I think it, NBN Co, might refer to one or two situations where it 
feels or expects that some of that has taken place but I don’t accept 
that that would apply to the whole industry.”

The gouging ideology was also rejected by Telsyte's Coughlan. For price 
gouging to occur, he believed that there would have had to of been 
collusion. “And I very much doubt there’s collusion,” he said. “The 
whole price gouging thing, I think, is a bit of a misnomer. I don’t 
believe that [the bidders] are price gouging. I think some of the 
respondents have probably done a fair bit of work in understanding the 
costs and this is probably a big issue for NBN Co in that their business 
plan assumes a certain [capital expenditure].”

Coughlan said one of the options NBN Co would be looking at now would be 
partnering with Telstra on the construction of the NBN rollout further 
than it already plans to. “However, at the end of the day, Telstra is 
going to be using the same sub-contractors that all these construction 
firms will be using. So the costs really aren’t going to substantially 
change that much.”

Budde said Telstra was in a “unique position” to offer the services that 
NBN Co was seeking in the tender but said that it “would be very 
difficult” for NBN Co to give it to them because there “would be in 
uproar” with people afraid that Telstra was becoming “so dominant in the 
NBN business”.

Delays to the rollout as a result of the tender suspension were 
inevitable, IBRS' Cranswick said.

“This will add more time and more delay and of course that will cost 
money,” he said.

“I think all of these things add delay. They all compound, they all 
knock on. And they all of course mean that corporations with a large 
public quota have to consult with their executive boards and discuss how 
they manage strategy, how they manage their dealings with such a large 
corporation such as NBN Co. So yes, it causes delays all the way down 
the chain; It produces a kind of negative feedback loop if you will.”

One analyst, who wished to remain anonymous, said that NBN Co may even 
look to setup their own construction operation if they couldn’t get the 
market to do the job at the price they wanted. “[The] easiest way to 
kick that off would be to buy a construction company," they said. “[But] 
that’s going to delay the project and they’ve said there’s not going to 
be any delays."

The other option, the analyst said, was for NBN Co to "basically buy [a 
construction company]" and build the network itself.

When NBN Co announced the indefinite suspension of the tender, a 
spokeswoman for Communications Minister Stephen Conroy said it expected 
the company to "negotiate the best rates on a building project, and 
that's exactly what NBN Co are doing".

Opposition communications spokesman, Malcolm Turnbull, said the 
suspension underlined the risk of cost blowouts, and cited industry 
claims the government was underestimating the NBN's cost.

-- 

Regards
brd

Bernard Robertson-Dunn
Canberra Australia
email:	brd at iimetro.com.au
website:	www.drbrd.com



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