Monday, October 28, 2013

NBN Review and Henry Ergas

NBN Co has announced the selection of three advisory firms to contribute their services to the strategic review process:
  • Deloitte will provide governance and the program management office services to ensure the Strategic Review fits within the parameters and tight deadline for submission set by the Government;
  • KordaMentha will contribute to the analysis of the current NBN operational and financial performance;
  • Boston Consulting Group will participate in the review of the timing, financials and product offers under alternative models of delivering very fast broadband They are Deloitte, Korda Mentha and BCG.

A forensic accounting firm is an interesting choice that reflects the conviction that the books have been cooked.  It will be very interesting to see what comes of that.

The selection of Deloitte is a bit unsurprising in that both KPMG and E&Y had done work verifying earlier plans for the shareholders and board.  But a concern with Deloitte is the possible presence of Henry Ergas among their number, though this my be slight given the scope of work they have been contracted to do.

Ergas was a champion of competition reform in the 1980s before going on to establish his successful economic consultancy NECG. This firm gained a reputation as an adviser to the big end of town, defending them from regulation designed to introduce competition, especially Telstra. I've previously mentioned on this blog a bit of criticism Ergas scored from a judge about his conduct as an independent expert.

After he sold his business to Charles River Associates (CRA) Ergas did some work for the Liberal party.  One was a flawed study for the Menzies Research Centre on productivity in state governments.  This was followed by a tax policy for Malcolm Turnbull that was never released.

Ergas was a persistent and early critic of the NBN.  In some ways it was like the criticism of Kevin Morgan because it unpicked work he had done.  In the case of Morgan it was the creation of Telstra from the Telecom/OTC merger (in which Ergas was on the other side). In the case of Ergas it was the defence of the vertically integrated Telstra.

Ergas rushed to print soon after the April 2009 announcement claiming services would cost $215 per month.  He also whipped up a cost benefit analysis that claimed the network was worse than an alternative plan by some $17 billion (by recollection).  That CBA assumed there was no need for services at higher speeds achieved with FttN, was over a shorter period than the NBN case (10 I think, rather than thirty) and used a commercial discount rate.

Today in the Oz Ergas has again shown his ability as an advocate rather than as an expert. His theme is a "pathology" of high cost projects.

He claims that a common feature of such projects is that:

The goals being pursued by new programs are not clearly defined, and the difficulties and risks involved not rigorously and transparently assessed.

Of the NBN he writes;

In the case of the NBN, the decision to proceed was largely based on unpublished advice from the Australian Competition & Consumer Commission, which lacked the capability to evaluate the options and bore no responsibility for the outcomes. By the time a more thorough analysis was commissioned, the government's decision was well-entrenched, and the analysis was limited in ways that precluded that commitment being questioned.

He then returns to the general theme;

That troubled programs prove such hardy survivors is partly because the "tyranny of sunk costs" comes into play. Projects that would never have been undertaken if their total costs had been known at the outset are not cancelled because each evaluation concludes spending a (relatively) little bit more might still make the exercise worthwhile. As hope triumphs over experience, natural selection is put on hold.

Ergas then goes on to make some specific assertions about how the NBN fits this description, including reference to a report that shows "accumulated losses" that supposedly wasn't released.  This is somewhat confusing since both the 2011-14 and 2012-15 Corporate Plans made it clear that like any large project there are losses before turning an EBITDA return.  This is confirmed in the 2013-16 Plan that has since been released.

But the crux of the story is the implication that Ministers have lied about the project.  He refers to a July launch of the NBN in Coffs Harbour for a switch on event, and the accusation that nothing was actually switched on. It is true the building was not in the fibre footprint, but that was not an assertion made by the Minister.  Equally the demonstration at the back of the room of an application was not at the request of the Minister.

He then asserts that "the stunt" could have landed the Minister in gaol if he had been a company director.

This must be interesting for the former executives of Optus who launched the Optus local call service over their HFC network - because they actually used a Telstra local call for the event.

Ergas is wrong on the facts of what the Minister actually asserted, and he is wrong on the claim of the extent of the penalty that would apply.

Finally, let's just reflect on another great project - the Jindalee Operational Radar Network.  JORN is another ripper case of a big project that had early implementation problems - when managed by Telstra - but now is usually touted as an outstandingly brilliant part of our defence capability.

Critics of the NBN like Henry Ergas have focussed on its choice of objective and the challenge of delivering that objective, and have developed a narrative that there is some "truth" to be revealed.  The risk is that those revealing the "truth" have invested so much in their own narrative that the counter claim is more flawed than the original.


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