Independent Audit NBN Public Policy Processes April 2008 – May 2010 i ii Letter of Transmittal iii Acknowledgements ACKNOWLEDGEMENTS I would like to thank all those individuals who met with me and the members of the Audit team during the process of this Audit, and those companies and agencies which gave access to documentation, to assist our understanding of the details of the NBN public policy process. I would also like to thank the Department of Communications which provided significant administrative support and assistance to me and the Audit team. I would also like to thank Stephen Hunter for his assistance in developing a framework for good public policy process which was an important and timely contribution during the development of this report. Finally, I would like to thank the Audit team, under the expert leadership of Dr James Horne - Christine Hoysted, Loretta Power and Ayndri de Soysa for their dedication and commitment and for their outstanding, thoughtful and thorough contribution to this Public Policy Audit. Bill Scales AO iv Audit Report Table of Contents LETTER OF TRANSMITTAL III ABBREVIATIONS/GLOSSARY VII KEY POINTS, FINDINGS AND RECOMMENDATIONS IX Key Points ix Findings and Recommendations x OVERVIEW XIII Introduction xiii Setting The Context xiii NBN Mark I - 11 April 2008 To 20 January 2009 xv Evaluating The NBN Mark I Public Policy Process xxvi Evaluating The NBN Mark II Public Policy Process xxix The Implementation Study xxxii A Final Related Matter xxxiii CHAPTER 1: APPROACH TO THIS AUDIT 1 CHAPTER 2: SETTING THE CONTEXT 5 2.1 Regulatory Reform To Encourage Competition 6 2.2 Expanding Broadband Use Internationally 8 2.3 Australians Embracing The Internet And Broadband 10 2.4 New Industry Players Still Struggling 12 CHAPTER 3: NBN MARK I - ‘ONE STAGE’ RFP TENDER 21 3.1 Tender Process With A Compressed Timetable 21 3.2 Pre-qualification 24 3.3 Work Of The Panel Of Experts And Its Advisors 25 3.4 Bilateral Meetings, External Environment And Market Soundings 27 3.5 Parallel Regulatory Processes 30 3.6 Evaluating The RFP 31 3.7 Concerns About A Successful Outcome 34 3.8 ACCC Advice 36 3.9 The Evaluation Report 37 CHAPTER 4: NBN MARK II - ADVICE AND PROCESSES THAT LED TO THE ESTABLISHMENT OF NBN CO 39 4.1 Developing A New Government-Owned NBN 39 v 4.2 Announcing A New Government-Owned NBN Mark II 44 4.3 Implementation Study 47 4.4 NBN Co Seeks Access To Telstra Network 50 4.5 GBE ‘Start-Up’ Commences The Hard Work 52 4.6 2009-10 Parallel Regulatory Processes 55 CHAPTER 5: OTHER SPECIFIC MATTERS 59 5.1 Fibre Roll Out To 90-93 Per Cent Of Australian Premises 59 5.2 Approach Taken To Cost Benefit Analysis Or Independent Reviews 64 CHAPTER 6: ASSESSMENT OF NBN PUBLIC POLICY PROCESSES DURING THE AUDIT PERIOD 67 6.1 Better Practice Public Policy Processes 67 6.2 Issues With NBN Mark I Public Policy Process 68 6.2.1 The Standing Of Election Commitments 69 6.2.2 Role Of Expert Advisors - The ACCC’s Role In The RFP Process 71 6.2.3 Probity Issues 77 6.3 Rebooting The NBN Public Policy Process – The Role Of Taking Stock 78 6.4 Use Of The Cabinet Process 81 6.5 Developing NBN Mark II – The Need To Establish The Problem And Test The Solution 84 6.6 Implementing The NBN Mark II Vision 89 6.7 Timeframes – Setting Aside Adequate Time 97 6.8 A Final Related Matter 101 APPENDIX 1 TERMS OF REFERENCE 103 APPENDIX 2 ACCESS TO COMMONWEALTH DOCUMENTS AND INFORMATION 104 APPENDIX 3 NBN PUBLIC POLICY PROCESS AUDIT - INFORMATION SOURCES 105 APPENDIX 4 CHRONOLOGY OF EVENTS RELATED TO THE NBN PUBLIC POLICY PROCESS 106 APPENDIX 5 BRIEF OVERVIEW OF NATIONAL FTTN PROPOSALS UNDER THE RFP 124 APPENDIX 6 RESPONSES TO INTRA-COMMONWEALTH QUESTIONNAIRE ON BROADBAND TECHNOLOGIES 127 APPENDIX 7 NBN MARK II – MEDIA RELEASE 129 APPENDIX 8 FAST-TRACKING REGIONAL ROLL OUT 132 APPENDIX 9 INFRASTRUCTURE AUSTRALIA ASSESSMENT FRAMEWORK 133 APPENDIX 10 PUBLIC SUBMISSIONS TO THE AUDIT 134 BIBLIOGRAPHY 135 vi Abbreviations/Glossary ABS Australian Bureau of Statistics ACCC Australian Competition and Consumer Commission ADSL Asymmetrical Digital Subscriber Line AGS Australian Government Solicitor ANAO Australian National Audit Office ASX Australian Securities Exchange Backhaul generally refers to the mid-to-long-distance transport of data from a series of disparate locations such as local exchanges, to and from a more centralised location (usually a point connecting to the backbone of the network from which data can be sent to and from anywhere in the world). The backhaul and backbone portions of a network sometimes overlap and the terms are often used interchangeably. bn billion Broadband an ‘always on’ internet connection with an access speed (bandwidth capacity) equal to or greater than 256kbps CBA Cost Benefit Analysis CEO Chief Executive Officer CPGs Commonwealth Procurement Guidelines Cut-over the exclusive or near-exclusive access to, and use of, Telstra’s customer access network by a non-Telstra provider DBCDE Department of Broadband, Communications and the Digital Economy DSL / xDSL Digital Subscriber Line/ x Digital Subscriber Line DSLAM Digital Subscriber Line Access Multiplexer EU European Union FANOC Fibre Access Network Operating Company FTTN / FTTC Fibre To The Node/ Fibre To The Cabinet FTTP / FTTH Fibre To The Premises/ Fibre To The Home FSA Fibre Serving Area GB gigabyte GBE Government Business Enterprise GFC Global Financial Crisis GPON Gigabit Passive Optical Network HFC Hybrid Fibre Coaxial HiBIS Higher Bandwidth Incentive Scheme kbps kilobits per second km kilometre Labor Australian Labor Party LSS Line Sharing Service Mbps megabits per second Minister Minister for Broadband, Communications and the Digital Economy mn million NBN National Broadband Network OECD Organisation for Economic Co-operation and Development PC Productivity Commission PM&C Department of the Prime Minister and Cabinet PNFC Public Non-Financial Corporation RFP Request for Proposals RIS Regulatory Impact Statement vii SAU Special Access Undertaking SME Small and Medium Enterprise SPBC Strategic Priorities and Budget Committee Treasury The Treasury UK United Kingdom ULL / ULLS Unconditioned Local Loop / Unconditioned Local Loop Service viii Key Points, Findings and Recommendations Key Points There were two NBN Policies developed by the Rudd Labor Government. x NBN Mark I was based on the policy taken to the 2007 General Election, and subsequently implemented through an April 2008 Request For Proposals process. x NBN Mark II was the policy developed after the Government decided not to pursue any proposal submitted under NBN Mark I. It was announced in April 2009. NBN Mark I NBN Mark I was in general conducted appropriately from a public policy perspective. It was a relatively traditional ‘tender’ process, where proposals were sought and evaluated by a Panel of Experts against prescribed ‘value for money’ criteria. However, even a well conducted process could not disguise or overcome lack of information about, for example, the proposed regulatory framework, the relative importance of the Government’s objectives and evaluation criteria, and how best to define and measure the requirement that the NBN should cover 98 per cent of Australian homes and businesses. While election commitments are an important part of the democratic process and it is appropriate that governments are held to account for their implementation, that also places a burden on political parties to ensure their proposals are clear and well thought out, and have been sufficiently tested to allow their direct implementation. From a public policy process perspective, two additional matters stand out in relation to NBN Mark I. They are: x The ACCC overstepped its authority by advising the Panel of Experts that Fibre To The Node was not a stepping stone to Fibre To The Premises. This ACCC advice became influential in relation to the decision by the Government to proceed with NBN Mark II. x The Panel of Experts that conducted the RFP process appears not to have fully tested the ACCC’s unsolicited advice about the unsuitability of Fibre To The Node as a stepping stone to Fibre To The Premises, advice that supported a number of the Panel’s observations, which were submitted to the Government in January 2009. ix NBN Mark II By contrast with NBN Mark I, the public policy process for developing NBN Mark II was rushed, chaotic and inadequate, with only perfunctory consideration by the Cabinet. After just 11 weeks of consideration, the Government had decided to establish a completely new ‘start-up’ company (now called NBN Co) to roll out one of Australia’s largest ever, single public infrastructure projects. The NBN was to be rolled out in eight years at a preliminary estimated cost of around $43bn. There is no evidence that a full range of options was seriously considered. There was no business case or any cost benefit analysis, or independent studies of the policy undertaken, with no clear operating instructions provided to this completely new Government Business Enterprise, within a legislative and regulatory framework still undefined, and without any consultation with the wider community. Most of the important issues in relation to the NBN policy and the operating arrangements for NBN Co remained unstated or unresolved well beyond the end of the period of this Audit, with the Government’s first detailed Statement of Expectations not provided to NBN Co until December 2010. NBN Co was not fit for purpose. It was a start-up company given a job that only a well- functioning, large, and established telecommunications company would have been able to undertake in the allotted timeframe. The governance arrangements that operated in the very early stages of NBN Co’s life had a long lasting and detrimental effect on its operations, and a profound effect on the roll out of Australia’s NBN.