Background

In March 2007, the Australian Labor Party (Labor) released its broadband election policy to increase broadband internet speeds for 98 per cent of Australians by up to forty times. Labor considered that its national broadband network (NBN) would deliver significant national economic benefits and new services for the benefit of many consumers, particularly those in rural and regional areas. Labor committed that, in government, it would:

• partner with the private sector to deliver a fibre to the node (FTTN) NBN over five years to 98 per cent of the population with minimum speeds of 12 megabits per second (Mbps);
• within a six month timeframe, undertake a competitive assessment of proposals from the private sector to build the network;
• ensure competition in the sector through an open access network that provides equivalence of access charges and scope for access seekers to differentiate their product offerings;
• put in place regulatory reforms to ensure certainty for investment; and
• make a public equity investment of up to $4.7 billion.¹

To meet the new Government's tight timeframe, the then Department of Communications, Information Technology and the Arts (now the Department of Broadband, Communications and the Digital Economy (DBCDE or the department)) provided early advice to the Government on the implementation of its broadband election commitments. The Government agreed in January 2008 to conduct a Request for Proposal (RFP) process to select a proponent(s) to build, operate and maintain the NBN. The Government's broadband policy reflected its election commitments, but broadened the technology choice to any fibre based solution (using FTTN or fibre to the premises (FTTP) architecture). Further, it did not specify a preferred form for the Government's investment in the network, that is, the contribution could have been as an equity investment or some other form of funding. In parallel with NBN RFP process, the Government invited proponents, industry and public interest groups to provide submissions to the Commonwealth on regulatory issues associated with a fibre based network, including consumer safeguards.

There was significant public and industry interest in the NBN RFP process and its potential outcome. The department assessed the potential for litigation during the process and at its conclusion as high. Consequently, the department identified the need for the process to be conducted within a strong probity framework and for decisions to be informed by appropriate specialist advice. In the first half of 2008, the department progressively engaged specialist advisers to assist in developing and conducting the RFP process, including: probity adviser; investment, financial and commercial adviser; technical adviser; legal adviser; and regulatory economic adviser.

On 11 March 2008, the Minister announced the membership of the Panel of Experts (Panel), chaired by the department's then Secretary, that would assess the NBN proposals and put forward recommendations to the Minister for the preferred proponent(s). The Minister also invited industry and public submissions to assist in the development of the RFP document. The RFP document was approved by the Minister and released on 11 April 2008. The document expressed the Government's broadband policy parameters as criteria against which proposals would be assessed, rather than as mandatory requirements. The RFP sought both national proposals and State/Territory based proposals, covering individual States or Territories, as part of a national solution. Potential proponents were required to meet pre qualification requirements by 23 May and lodge proposals by 25 July 2008. A subsequent addendum to the RFP process extended the closing date to 26 November 2008.

Eight parties met pre qualification requirements², although one party subsequently withdrew. The department and the proponents held four rounds of bilateral meetings between June and November 2008 to outline the progress of proposal development, and to clarify aspects of the RFP process and its requirements.

On 26 November 2008, proposals were received from six proponents—four national proposals and two State/Territory based proposals. The national proposals generally put forward FTTN as the principal technology for providing connections to premises. The department determined that five of the six proposals met the RFP's minimum conditions for participation, and these proposals proceeded to the assessment phase. Telstra's proposal was excluded from the RFP assessment process because it did not meet minimum conditions for participation. The proposal did not include a Small and Medium Enterprise (SME) Participation Plan.³

On 20 January 2009, the Panel's Evaluation Report to the Minister advised that the three remaining national proposals had been assessed in accordance with the RFP document and that none offered value for money for the Commonwealth. The Panel further concluded that there was no prospect that the proponents would be able to refine their proposals sufficiently to provide value for money.

As a consequence, and in accordance with the RFP document, the Panel's assessment of State/Territory based proposals did not proceed beyond a preliminary review. In conjunction with its Report, the Panel submitted separate advice to the Minister on how the Government's objectives might be achieved outside the parameters of the RFP. Its primary proposition was that FTTP was a preferable, albeit more costly, technology to FTTN, and that the Government should explore incentive schemes to encourage the roll out of FTTP.

On 7 April 2009, the Minister terminated the RFP process. All proponents were immediately advised of the Minister's decision and the Government's new policy approach. The Prime Minister, the Treasurer, the Minister for Finance and Deregulation and the Minister jointly announced the establishment of a new company to build and operate a new super fast NBN (National Broadband Network Company Ltd). At the same time, the Minister released the Panel's observations from the Evaluation Report. The Panel observed that each proposal contained attractive elements and, collectively, they provided a good evidence base for the Government to move its policy agenda forward. The Panel also observed that:

• proposals lacked committed private sector funding;
• none of the national proposals was sufficiently well developed to present a value for money outcome;
• no proposal submitted a business case that supported the roll out in five years of a NBN to 98 per cent of Australian homes and businesses with a Government contribution of $4.7 billion;
• FTTN is unlikely to provide an efficient upgrade path to FTTP;
• there was a risk of liability to pay compensation to Telstra for exclusive or near exclusive access to Telstra's customer access network; and
• proponents sought excessive regulatory restrictions on competitors building and operating their own fibre based networks in competition with the NBN (that is, overbuild protections).

The department offered oral debriefings to all proponents that met the minimum conditions for participation and returned bid bonds to all proponents, although there was some delay in one instance.

Audit objective and scope

On 21 April 2009, Senator the Hon. Nick Minchin, then Shadow Minister for Broadband, Communications and the Digital Economy, wrote to the Auditor General requesting consideration be given to conducting an audit of the NBN RFP process. Issues raised included the outcome of the process; whether amendments were made to the RFP documents relating to non compliant bids; Telstra's exclusion from the process; the costs associated with the RFP process for both the Government and bidders; and the refund of bonds paid to bidders.

After conducting a preliminary review, the Auditor General decided to undertake a performance audit into the NBN RFP process. The objective of the audit was to examine key aspects of the NBN RFP process, including:

• the background to and conduct of the RFP process;
• management of key risks associated with the process and outcome; and
• stakeholder consultations.

The audit examined DBCDE's management of key aspects of the:

• implementation of the NBN RFP process from the time of the election of the new Government on 24 November 2007 to the release of the RFP document on 11 April 2008 (Chapter 2); and
• conduct of the NBN RFP process after the release of the RFP document to the termination of the process on 7 April 2009 (Chapter 3).

Overall conclusion

Labor went to the Federal Election in November 2007 with a commitment to create a national FTTN broadband network, with construction to begin by late 2008. Following the swearing in of the new Government in December 2007, the department gave priority to developing and implementing this election commitment. The Government's approach was to pursue a process that maximised competitive tension between potential proponents and promoted innovation to achieve the best outcome and best use of up to $4.7 billion in government funding. It has been generally acknowledged within the telecommunications sector that this amount was the level of funding sought by Telstra from the former Government in 2005 to upgrade its equipment to build a FTTN network covering 98 per cent of Australia's homes and businesses at speeds of 12 Mbps.

After considering advice on the pros and cons of conducting the process in one rather than two stages, the Government concluded that a one stage process was appropriate and its risks could be managed. The alternative, adopting a multi-stage process, would have been the more conventional approach for conducting tender processes of this size, nature and risk, particularly when seeking innovative solutions. Proponents contacted by the ANAO considered that the two way dialogue an expression of interest stage in a two-stage process generates, would have better informed the RFP process and the RFP document, increasing the likelihood of a successful outcome. The main disadvantage of multi-stage tendering is the additional time required to approach the market, or particular proponents, more than once, which was a factor considered by the Government given the tight timeline envisaged for the assessment process.

The department identified the likelihood of many of the key risks to a successful outcome to the RFP process when assisting the Government to settle the details of its broadband policy, although some were not fully analysed at the time. These risks included the sufficiency of government funding to attract commercially viable proposals capable of acceptance, the potential payment of ‘just terms' compensation to Telstra for the compulsory acquisition of the right to use its assets should a non Telstra proposal be successful⁴, and the uncertain regulatory environment. The primary means of addressing these and other risks was to design the RFP process to maximise flexibility, minimise mandatory requirements and allow proponents to offer innovative solutions.

National proponents were asked to submit binding proposals against the 18 Commonwealth objectives for the NBN and other evaluation criteria, and outline the regulatory changes necessary to facilitate their proposals. The process left open the prospect that a proposal may be acceptable even though it did not meet all objectives and criteria. The competitive assessment process was expected to determine the NBN that the market could build and operate. Although the RFP document met the requirements of the Commonwealth Procurement Guidelines (CPGs), there was insufficient time to fully address specialist advisers' concerns that a lack of detail in the RFP put at risk attracting binding offers. Nevertheless, the RFP document was drafted so that it could be varied to address risks and issues as and when they arose during the process.

Throughout the process, the department kept the Minister informed of progress, including:

• updated appraisals of most risks to the process, and the likelihood of a successful outcome;
• possible scenarios including their likelihood and consequences; and
• summarised feedback from proponents on the elements likely to feature in their proposals and the challenges posed by the RFP.

After the announcement of the RFP process, potential proponents were initially concerned that the proposed timeframe would be insufficient to prepare and lodge fully developed proposals. However, the proponents considered that their concerns were addressed when the RFP timeline was extended to allow them time to consider carriers' network information. Proponents advised that the RFP's flexibility gave them significant scope to submit eligible proposals with innovative technical solutions. However, they found it difficult to develop competitive and commercially viable proposals that would be acceptable to the Government, while not necessarily meeting all the objectives and other criteria.⁵

Proponents requested guidance on the relative importance of the Commonwealth's objectives, evaluation criteria and the regulatory changes that would (or would not) be accepted. However, as the Government had no determined preference for the NBN within its stated objectives, further advice on these issues was not forthcoming beyond that included in the RFP document. As a consequence, proponents found the bilateral meetings with the department and its specialist advisers of limited value. State/Territory based proponents considered that the late clarification of the way their proposals would be assessed under the RFP disadvantaged their proposals and, if received earlier, may have influenced their decision to participate in the RFP process.

The RFP document saw FTTP as the future platform of the network to meet future customer demand and service developments to at least 2020 and beyond. However, after the RFP had been issued, the department received unsolicited advice from the Australian Competition and Consumer Commission that FTTN was not a stepping stone towards FTTP. Most FTTN expenditure would be on equipment that becomes obsolete under a FTTP network platform. A FTTN network could also serve to delay FTTP if the successful proponent was not under significant competitive pressure and could therefore delay further investment until they had fully recovered their initial investment.

As the RFP open period progressed, it became increasingly obvious to the department that the likelihood of a successful outcome was reducing. Initially, the department and its advisers considered that the RFP process was unlikely to attract binding offers capable of acceptance, necessitating some form of ‘second stage'. In mid August 2008, the department first noted possible options for progressing the Government's broadband policy within, subsequent to, or outside of, the RFP process. By late October 2008 and prior to the RFP closing date, alternative methods of delivering the Government's broadband policy began to be looked at more formally, should the RFP process not result in any acceptable proposals. By this time, it had become apparent that:

• the global financial crisis was having an adverse impact on proponents' ability to attract funding for their investment in the NBN;
• Telstra was seeking certain assurances from Government, including in relation to the confidentiality of its bid information and potential regulatory solutions, before committing to lodging a proposal;
• some members of one pre qualified consortia announced their withdrawal from the consortia; and
• non Telstra proponents were unlikely to propose a national technical solution that would not require Telstra's equipment, or submit a viable business model that took into account potential compensation to Telstra of some billions of dollars for the compulsory acquisition of the right to use its equipment.⁶

Although not guaranteeing a successful outcome, the flexibility within the RFP process meant that the Government could have varied the RFP document and process when it became apparent that:

• proponents were looking for clearer direction and were unlikely to submit proposals that met all the Commonwealth's objectives and other evaluation criteria; and
• the global financial crisis was impacting on the proponents' ability to finance their proposals.

Proponents would have had an opportunity to submit better developed and more competitive proposals had they received:

• greater clarity as to how the information requested was to be used when assessing proposals against the RFP's multiple objectives and criteria;
• guidance as to the relative importance of the evaluation criteria and Commonwealth's objectives; and/or
• a clearer understanding of the Government's regulatory intent for the NBN.

Providing the clarity and guidance proponents sought would most likely have necessitated an extension to the Government's timetable for the RFP process.

The NBN evaluation plan, which was approved by the Panel and the Minister before the closing date for proposals, comprehensively set out the assessment process and aligned with the RFP document. Nevertheless, its development proved to be a complex and time consuming exercise. The Panel, assisted by the department, specialist advisers and other Australian Government departments and agencies, assessed NBN proposals in accordance with the evaluation plan. The then Secretary's decision to exclude Telstra's 12 page proposal from the assessment process was informed by comprehensive legal advice. The Panel assessed the remaining national proposals against the six evaluation criteria and determined that nearly all criteria were either met to a marginally acceptable standard or failed.

The conclusions and recommendations in the Panel's Evaluation Report are supported by appropriate evidence. The Panel's published observations of the process generally represent the reasons for the non selection of a national proponent, as well as provide some advice to the Government on policy options for going forward. In separate advice to Government at the conclusion of the Panel's role in the RFP process, the Panel identified FTTP as the preferred technology for the NBN. Although more expensive, the Panel identified a number of ‘hidden' costs in FTTN proposals, including potential compensation to Telstra, risk of obsolescence and reduction in competition through requested regulatory changes.

The Government's choice of a fibre based technology platform for the NBN and the quantum of government funding available to the successful proponent(s) meant that Telstra's assets, including its customer access network and ducts from the exchange, were a critical dependency for the success of the NBN RFP process. It was generally accepted that the only other technology for a national fibre based network, FTTP, would require a significantly greater government contribution to be commercially viable. Analysis by DBCDE as the RFP progressed determined that, although a FTTN network could co exist with copper based broadband networks, the amount of government assistance on offer meant it was unlikely to be commercially viable for reasons that included its ability to attract enough customers to cover its costs and that it would still require access to Telstra's customer access network.

As a consequence, Telstra was inherently well placed to lodge a competitive (and potentially successful) proposal. Non Telstra proposals were likely to present significant risks, including:

• the payment of substantial levels of compensation to Telstra for the compulsory acquisition of the right to use its assets; and
• potential regulatory changes that would restrict other entities (mainly Telstra) building a parallel fibre based broadband network (which could be inconsistent with Australia's international trade obligations, and therefore at odds with the Government's broadband policy).

Despite the RFP process's complexity and short timeframe, the Panel and the department conducted the formal process well, within the parameters of the Government's broadband policy and in accordance with the CPGs. As the RFP process progressed, the department advised the Minister that the prospects of a successful outcome were reducing. At the end of the RFP process, there were no successful proposals.

The RFP process has come at a significant cost to the Government and proponents, with costs incurred being in excess of $30 million. DBCDE's costs were some $17 million and the proponents' costs (where advised) ranged between $1 million and $8 million. In reviewing the process employed and in light of the outcome, there are a number of observations that can be made:

• early in the process, most NBN stakeholders considered that a two stage process to select proponent(s) for the NBN would have improved the prospects of a successful outcome and may have reduced proponents' costs;
• requesting proponents to outline their preferred regulatory environment for their NBN was unusual for an RFP process and made a complex commercial transaction considerably more complicated;
• a non Telstra proposal was unlikely to build and operate a commercially viable NBN in circumstances where the proponent was responsible for the risk of paying compensation to Telstra;
• the global financial crisis significantly reduced the prospects of a successful outcome by affecting the viability of the proposed NBNs; and
• using FTTN technology for the network limited its potential scalability.

The department has informed the ANAO that the Government was made fully aware of all of the key risks and their significance for a successful outcome to the RFP process. While it is the case that the key risks and their broad significance were identified in early advice to the Government, the department did not fully assess the consequences of some of these risks until relatively late in the RFP process.

These included, in particular, the possible magnitude of: the potential payment of compensation to Telstra should a non Telstra proposal using FTTN technology be successful; and the consequences for investment in FTTN equipment, which largely would become obsolete, should the network be upgraded to FTTP technology. The design of the Government's approach to the market would have been better informed had the department provided timely advice on these issues ahead of the RFP process being settled.

As it was, the Government decided to seek binding offers from the market through a one stage RFP process and give proponents wide scope to request regulatory changes to facilitate their proposals. This approach was not conventional for a competitive assessment process of this size, nature and risk. Given the amount of government funding on offer, Telstra was the proponent most likely to be in a position to build and operate a viable fibre based NBN. The likely impact on the prospects of a successful RFP outcome had Telstra lodged an eligible proposal, is indeterminate. As the outcome of the RFP process showed, no other proponents were successful either.

The audit has not made any recommendations to the department as the RFP process has been finalised. Nevertheless, the audit emphasises the importance of departments gaining, as early as possible, a sound understanding of the implications of those risks that are critical to the success of major tender processes, amongst the many risks that are required to be managed. This is particularly challenging in a one-stage process that is seeking binding offers.

Formal comments on the proposed report

Summary comments received on the proposed report from the department and the former Secretary of the department are reproduced below, along with further ANAO comment. Appendix 1 contains the full formal responses received.

Department of Broadband, Communications and the Digital Economy

The NBN RFP process was designed to meet the policy commitments of the Government, particularly with regard to the priority attached to implementation. It also provided maximum flexibility for Proponents to develop innovative proposals. The Department welcomes the ANAO's conclusions that the Department conducted the RFP process well, within the parameters of the Government's broadband policy and in accordance with the Commonwealth Procurement Guidelines.

The Department notes the ANAO conclusions that the Department identified the key risks to a successful outcome to the RFP process, kept the Minister informed of progress throughout the process, and that there was a strong commitment to the timeframe.

The Department disagrees with the ANAO's view on analysis of the compensation risk. More detailed analysis of the possible compensation that could become payable would not have materially altered the RFP process or its result. The Department agreed with the Government a defined implementation approach in regard to the Government's NBN policy and kept the Government well informed of the key risks.

Former Secretary of the department and Chair of the Expert Panel

The former Secretary and Chair of the Expert Panel considers that the Request for Tender process was in accordance with the Government's policy and guidelines and conducted well, in a professional and impartial manner. The ANAO report reaches the same conclusion.

For clarity, the Department's work in late 2007 on the cost of the NBN stopped when the Minister stated that the work should be discontinued.⁷ I do not agree with the ANAO's conclusions regarding moving to FTTP at an earlier stage and question the practicalities of the ANAO's suggestion that a credible estimate of the possible compensation cost could have been available very early in the process.

ANAO comment

The comments by the department and former Secretary concerning the risk of potential compensation payable to Telstra do not sufficiently recognise the department's responsibility to provide the best information it can, in the time available, to inform decisions on new policies and key matters arising. The department considered the compensation risk was ‘significant' for a FTTN solution but did not estimate the quantum of this risk until relatively late in the process. Consequently, the department was not in a position to provide early advice to the Government on its likely impact on the viability of non-Telstra proposals, having regard to the Government's proposed contribution. While an estimate of any compensation range, understandably, would be broad and caveated, there was a need, earlier in the process, to put some dimensions to the ‘significant risk' that a non-Telstra solution may require the payment of compensation to Telstra. The estimate of the potential cost of compensation developed by the department 10 months into the RFP process was some billions of dollars. The compensation risk had a considerable bearing on the outcome of the process following the exclusion of Telstra. No other national proponent was able to meet the Commonwealth's objectives and accept the potential compensation costs.

Estimating the potential compensation could have begun early in the process by using publicly available information and engaging specialist expertise, and been updated when better information became available (as noted in paragraph 2.57). While recognising the approach to delivering the NBN would be a decision for the Government, information on the scale of potential compensation would have better informed, and may have influenced, the Government's approach.

Concerning the former Secretary's comment on FTTP technology, the ANAO has not suggested that the focus of the RFP process should have moved to FTTP at an earlier stage. Rather, the ANAO considers that the department should have informed the Government earlier that FTTN does not provide a cost-effective migration strategy to a future FTTP network (as noted in paragraphs 2.77 and 2.78).

Footnotes

¹ Australian Labor Party 2007, New Directions for Communications: A Broadband Future for Australia—Building a National Broadband Network, pp. 4 and 19. Before the 2007 election, the current Minister for Broadband, Communications and the Digital Economy also announced (while in Opposition) a six month timeframe to undertake the competitive assessment process.

² To be eligible to lodge a proposal, potential proponents were required to lodge with the department a $5 million bid bond and sign a confidentiality agreement by 23 May 2008. For ease of reference, those potential proponents that met pre qualification requirements have been referred to as proponents in the report.

³ The RFP minimum conditions of participation were that proposals: be in English; use Australian legal units of measurement; include a completed and signed proponent's declaration; meet the conditions relating to the submission of multiple proposals; and include a SME Participation Plan.

⁴ Section 51(xxxi) of the Australian Constitution provides the Parliament with the power to make laws with respect to the acquisition of property on just terms.

⁵ The objectives were competing and, at times, conflicting. For example, the RFP asked proponents to build and operate an NBN that: covered 98 per cent of all Australian homes and businesses; offered speeds of 12 Mbps; enabled low access prices while allowing proponents to earn a return on investment commensurate with risk; and provided the Commonwealth with a return on its investment (Objectives 1, 2, 11 and 13).

⁶ The ANAO has not disclosed the range of potential compensation in view of the commercial sensitivities attaching to such estimates.

⁷ The ANAO notes that this comment relates to the Sufficiency of government funding sub-section in Chapter 2, and paragraph 2.48 in particular.