Thursday, April 07, 2011

Australia - Concerns expressed that funding of the NBN could rise to AUD 44 billions

[the australian] FRESH fears have emerged that the peak funding of the National Broadband Network could balloon beyond $44 billion, as construction companies urged the government to pare back the reach of its ambitious fibre footprint so it can meet its budget.

The warnings follow a tumultuous week inside NBN Co headquarters in which a number of senior staff have resigned after a multi-billion-dollar construction contract was placed on indefinite hold.

Yesterday it was revealed that NBN Co's manager of cost and resource estimates, Nick Sotiriou, exited the network builder following the shock resignation of the company's network construction head Patrick Flannigan earlier this week.

"I've got no comment as to why I left," Mr Sotiriou told The Australian. "It's inappropriate that I comment at this stage."

He added that he "very much" believed in the NBN project.

"From time to time people have differences of opinion and that doesn't mean one is right or wrong," he said. "And sometimes you have to move on."

Mr Sotiriou declined to comment on a report that he left after sending an internal email expressing unhappiness at NBN Co's suggestion that contractors had been "price gouging".

A spokeswoman for Communications Minister Stephen Conroy said the government did not believe NBN Co was experiencing a staffing crisis, but the opposition seized on the latest resignation to say the company was "in disarray".

Opposition communications spokesman Malcolm Turnbull said: "If this was a publicly listed company, their share price would be in freefall at the moment and management would be out there explaining and providing information."

As the two-year anniversary of the NBN ticked over, new documents released by Treasury under Freedom of Information laws showed that budgetary risks associated with the NBN were raised before Kevin Rudd unveiled plans for a $43bn fibre-to-the-home project.

Construction executives said yesterday that NBN Co could significantly lower the costs of its construction tender if it could reduce the target of laying fibre to 93 per cent of homes and businesses.

An executive of a firm pitching for the building said costs could be significantly lowered if existing fibre networks - such as Telstra's and Optus's cable networks for pay-TV and broadband - could be used in the NBN roll-out, or otherwise allowed to compete with the NBN.

"NBN Co could lower its costs if it just dispensed with the government's stubborn ideology to roll fibre to 93 per cent of homes," the executive said.

"They have gone to the extreme but they still claw it back, but there will have to be some eating of a lot of humble pie if they do."

Last night, another industry source said that even if NBN Co took on more risk as construction contractors were demanding, it would still struggle to meet the project within its budget.

"My gut says that even if they get an appropriate risk model, they are still going to struggle to get it built for their budget," the source said.

"We are sailing into the biggest infrastructure boom the country has seen - it's going to be bigger than the last one in 2007-2008. The escalation on labour and materials is something that contractors will put a large premium on if they are asked to take that risk.

"We can see what the market is doing, the industrial agreements, industrial relations risk. It's such a long project. The short answer is, they will struggle."

The Australian yesterday revealed that construction firms bidding for NBN contracts had warned that unless more risk was transferred to the government business, the capital works bill could surge beyond the $20bn mark. It is believed that NBN Co had hoped to spend only about $12bn on the contract.

According to NBN Co's corporate plan, the project relied on "mid-range" construction costs to stay within its $36bn budget.

But the corporate plan warns that "high" construction costs would lead to substantial blowouts in funding requirements for the projct and erode the already modest internal rate of return.

Construction companies, which asked to stay anonymous, say that high construction costs are inevitable, based on the model that NBN Co had been pursuing.

This could lead to peak funding requirements for the project soaring to $44.6bn, compared with the $40.9bn required if it can be built with mid-range construction costs. The funding will come from a government equity injection of $27.5bn and $13.4bn in debt.

A source involved in the abandoned tender process said NBN Co was pushing the terms and conditions "way beyond market" and "asking the contractors largely to fund the project". The source said there had been liquidated damages associated with "many milestones" in the tender.

"You would not get gradual funding, normal progress payments," the source said.

"They were stacked to the back so that the same contractor would have to carry their own costs for significant periods before they triggered a milestone that would trigger payment . . . No one would take it."

Another key risk cited by builders was that bidders would be burdened with exorbitant costs should the minority Gillard government fail to reach the end of its three-year term in power.

"If there was a change of government in two years' time and (the Coalition) came in and canned half the NBN, then we would be left holding costs that would likely never be recovered," said another executive of a bidding firm.

NBN Co insists it can secure better value for money by pursuing a "plan B".

It is understood that NBN Co has opened up new avenues of dialogue with a small number of the bidders since it suspended the tender last week.

NBN Co spokeswoman Rhonda Griffin said: "NBN Co is still intending to procure construction services for the rollout of the NBN. I am not in a position to discuss those arrangements, which are confidential."

Mr Turnbull said yesterday NBN Co should expect construction companies to be charging more if they are being asked to assume the risk and liability associated with the rollout. "The one thing that is clear is that the budget is wrong," Mr Turnbull said.

"They assumed the construction would be done following a competitive tender on a fixed-price contract and the prices were obviously way above what they anticipated."

Fears National Broadband Network bill could top $44bn

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