Chapter 4 Contracting
The committee’s Second Report foreshadowed an examination of the
NBN Co’s procurement policy and tendering processes.
This chapter will address both issues in conjunction with the wider contracting
practices of the NBN Co.
The design, construction and maintenance works of these contracting
partners must also ensure that a safe and secure network is built. At times,
both these issues have been controversial and raised concerns among the public
and business sector alike.
Procurement, Tenders and Contracts
The National Broadband Network (NBN) is Australia’s largest publicly-owned
infrastructure project since 1950s. Given the size and volume of the rollout,
it is critical that policies be established to ensure quality, effective and economical
The NBN Co Corporate Plan 2011-2013 states:
Procurement carries the responsibility for providing the best
commercial outcomes from expenditure... Best commercial outcomes are evaluated
considering all relevant costs, benefits and risks on a whole of life basis
(best value for money, using total cost of ownership).
According to the Department of Finance and Deregulation, procurement
... begins when an agency has identified a need and decided
on its procurement requirement [and] continues through the processes of risk
assessment, seeking and evaluating alternative solutions, contract award,
delivery of and payment for the property or services.
To guide its procurements, the NBN Co developed a Buying Guide and a
detailed Procurement Manual which defines the ‘practices, procedures and
decision-making rules appropriate to its circumstances and commercial
The NBN Co’s Corporate Plan advises that the Manual establishes a formal
ten-step sourcing process for ‘all major spend requirements [and] provides a
detailed audit trail of each procurement initiative’.
Neither the Manual nor Buying Guide is publicly available.
The Corporate Plan 2011-2013 also states:
These commercially-oriented practices differ in some ways
from those prescribed for government departments but are consistent with
Although it is a recipient of public monies, the NBN Co, as a government
business enterprise, is not subject to the Commonwealth’s Procurement
Guidelines. The NBN Co explained:
As a government business enterprise we are not subject to those
Commonwealth procurement requirements. That does not mean that we do not
voluntarily use them as guidelines, and wherever possible we do use them. Our
overriding interest and objective is to get value for money for the Australian
government and hence the Australian taxpayer.
The NBN Co stated its Procurement Manual is based on the Commonwealth Procurement
Guidelines, and stressed that ‘value
for money is ensured through competitive processes [and] transparent and proven
procurement methodologies’ as provided in the Procurement Manual.
The NBN Co stated:
the company has committed to adhere to the principles of
fairness, transparency, competition and value, which are reflected in those
Further, as a ‘prescribed authority’, the NBN Co is largely exempt from
the Freedom of Information Act 1982 (Cth), with its exemption covering
all documents relating to its commercial activities. In April, the
Attorney-General announced the legislated review of the NBN Co’s compliance
with its remaining freedom of information obligations.
The review will be tabled in Parliament after its anticipated completion date
of 30 June 2012.
Released in October 2011, the Commonwealth Government Business
Enterprise Governance and Oversight Guidelines apply to government business
enterprise (GBE) companies such as the NBN Co. However, the NBN Co
There are no formal requirements in the Commonwealth
Government Business Enterprise Governance and Oversight Guidelines that require
tender outcomes to be published by GBEs.
The Guidelines provide that ‘principal objectives’ for GBE companies
n Operate efficiently
at minimum costs for a given scale and quality of output; and
n Price efficiently
noting economic forces (level of demand, supply costs and, individual goods and
Achieving these objectives requires a level of competition for NBN Co
contracts; most frequently in procurements using public monies, this requires
an open and competitive tender process.
The NBN Co’s ‘standard’ process of tender evaluation includes ranking
responses from respondents on key indicators including:
n quality of project
n occupational health
and safety plans
n quality processes
n pricing and
n contract compliance
Although the NBN Co provides reassurances that the contracts it enters
into are value for money and emerge from a competitive environment, 
it has entered into contracts with companies that were negotiated outside tender
For example, the NBN Co entered into a contract with Silcar after a
tender round was reportedly not achieving results. The NBN Co stated:
It is not uncommon for large telcos to enter into
negotiations such as we did. ... We did go out, as I said before, to a
broad-ranging open tender process, but it was clear after some months of effort
that that was not going to get us where we needed to be in terms of the best
value for this project. So we changed approach. 
Following direct one-on-one negotiation for a period of eight weeks, a
construction contract was concluded between the NBN Co and Silcar for the
construction of the fibre network in Queensland, New South Wales and the
Australian Capital Territory.  The initial contract is
valued at $380 million, with a possible extension of two years and an
additional value of $740 million.
As of May 2012, the total value of awarded contracts is $9 billion.
Table 4.1 shows the key contracts awarded and their value.
As evidenced in Table 4.1,
a major component of the NBN Co’s contracting is for construction works.
Construction tenders are evaluated by the Construction Steering Committee
consisting of: the Chief Executive Officer, Chief Finance Officer, and the
Heads of Construction, Operations, Network Technology and Corporate Services
together with the Chief Legal Counsel and Chief Procurement Officer.
The contracts have attracted public debate on the preliminary processes
and ongoing progress of the NBN rollout. This section details the initial
suspension of the tender process in April 2011 and then, in turn, provides
details on the contracts awarded for the fibre, wireless and satellite
Suspension of Construction Tender Process
In April 2011, after an 18-month tender process, the NBN Co announced
that it was suspending its tender process. The decision to suspend the process
was made by the Construction Steering Committee and came after the fourth
In May 2011, Mr Mike Quigley, Chief Executive Officer of the NBN Co
I have stated that we will not ‘build at any cost’. We
understand our obligations to taxpayers to deliver value for money for their
tax dollars, so we announced on 1 April that we had suspended the existing
construction process and entered into a new process, which is ongoing.
The NBN Co explained that value for money was the main consideration in
deciding tenders and stated:
In all these large tenders, you have to make a judgement in
the end about whether or not you believe you are achieving value for money. ...
We were not satisfied, with the construct we had put in place and the responses
that we had, that we were going to get the best outcome, so we changed that
process. We suspended that process and moved into another process. 
Though the NBN Co’s procurement policies are not publicly available nor
have been made available to the committee, the NBN Co has stated that its
procurement policy did not change after the suspension of the tender process.
After the tender process suspension, the NBN Co altered the request for
tender to introduce joint-venture contracting. The round was then reinstated
and completed. In October 2011, NBN Co announced that the suspension in
construction tenders has caused a delay of ‘some months’.
Table 4.1 Key Contracts Awarded
by the NBN Co as at 22 May 2012
FTTP Solution Providers for
Estimated at over $100M for
the first 12 months
Fibre network construction
Syntheo (SA and NT)
<$341M for 4 years
<$484M over 4 years
<$395M over 4 years
Silcar (Qld, NSW, ACT)
<$1.12B over 4 years
Visionstream Australia (Tas)
$300M for 4 years (option to
<$1.1B for 10 years
Interim Satellite Solution
Optus Network Pty Ltd
End User Technology Services
IT Data Platforms and
$9.5M over 3 years
Business and Operational
Support Systems and Services
$200M+ over 3 years
First Release Site
Telstra (Brunswick VIC)
ETSA Utilities (Willunga,
Silcar Pty Ltd (Armidale,
Passive Network Hardware
$300M over 5 years
<$1.2B over 5 years
Warren & Brown
<$100M over 5 years
TE Connectivity (formerly
Tyco Electrics Pty Ltd)
$400M over 5 years
Design Services for First
Bilfinger Berger Services
Downer EDI Engineering
GHD Pty Ltd
Silcar Pty Ltd
Active Network Equipment
Alcatel-Lucent (GPON and
Ethernet Aggregation Equipment)
JEP Services A (Optical
ERP Platform and Service
valued at $23M over three years
Co, ‘Tenders Awarded’, www.nbnco.com.au, viewed 22
The Shareholder Ministers’ second NBN rollout Performance Report (the
Performance Report) states that approximately 88 per cent of the total of NBN
construction activity over the next two years has been awarded to contractors.
The construction contracts have been awarded as follows:
n Syntheo (Lend Lease
Group/Service Stream); for the construction in South Australia (SA), Western
Australia (WA) and the Northern Territory (NT):
the design and construction of the fibre optic network in NT and SA over a
period of two years, with an option to extend a further two years;
n value of
the initial agreement for delivery in SA and NT is approximately $141 million,
with a potential value of up to $341 million if extended for a further two
construction in WA, the initial contract worth $174 million, with a potential
value of up to $484 million if extended for a further two years.
n Transfield Services
for the construction in Victoria:
initial 2 year contract with the option to extend for a further two years; and
agreement worth $133 million, with a potential value of up to $395 million if
extended by a further two years.
n Silcar for the
construction in Queensland, New South Wales and the Australian Capital
almost 40 per cent of national construction activity planned over the next two
agreement worth $380 million over the next two years, with the option of a
further two years at an additional value of $740 million. 
Australia Pty Ltd for the construction of the remainder of the fibre network in
will construct the network for the remaining 190,000 premises by 2015;
valued at approximately $220 million over an initial four year period; and
contract also includes provisions for ongoing maintenance of the network in
Fixed Wireless Contracts
On 1 June 2011, the NBN Co announced a ten-year contract with Ericsson
for the design, build and operation of the NBN’s wireless service. The turnkey
contract is worth up to $1.1 billion and the NBN Co ‘intends to assume greater
responsibility for construction and operation’ of the network.
Both the wireless and satellite services also require the NBN Co to
acquire the spectrum licences regulated by the Australian Communications and
Media Authority. In February 2011, the NBN Co announced that it had acquired
wireless spectrum from AUSTAR that is ‘sufficient to meet most of its needs for
the fixed-wireless services’. However, the spectrum acquired from AUSTAR,
valued at $120 million does not include the
necessary spectrum for Western Australia and the Northern Territory.
The contract with AUSTAR allows NBN Co to acquire the 2.3 GHz (gigahertz)
and 3.4 GHz spectrum holdings and includes payments of $58 million for the
subsidiary that holds the spectrum licences, and a further $62 million for the
assignment of this subsidiary’s debt.
In February 2012 the NBN Co announced that contracts for the
construction of the space segment of the satellite service had been awarded to
Space Systems/Loral. The contract is worth approximately $620 million and
follows a two year procurement process. The contract is part of a total cost of
$2 billion for the NBN Co’s satellite service.
Under the contract, 40 personnel will receive training to conduct
maintenance on the space segment. It is unclear whether
this training will be for NBN personnel or its contractors.
Contracts for the supporting gateway segment (a series of ground
stations located around Australia) are yet to be announced. Similarly, the
satellite infrastructure installed on individual premises and their future
maintenance is currently the subject of an ongoing procurement process.
Further discussion of the satellite service’s components and service is
included in Chapter 5.
Throughout its inquiries, other issues regarding the contracting and
procurement practices of the NBN Co have been raised. This includes the impact
of delays in procurement on the rollout, the transparency of the NBN Co’s
tender registry, and the awarding of contracts to Australian companies.
Causes and Costs of Delays
The NBN Co has frequently cited the following reasons for delays
incurred in the rollout as projected by its Corporate Plan 2011-2013:
n Suspension of the
construction tender round in April 2011;
n The decision to
increase the points of interconnect by the Australian Competition and Consumer
n The protracted negotiation
and finalisation of the Telstra Agreement.
Importantly, the NBN Co is incurring contractors’ late fees as a result
of these delays. At a Senate Estimates hearing in February 2012, the NBN Co
Obviously I cannot say no, we are not going to pay, at some
point compensation if we have really delayed contractors. [W]e have tried to
build a very good relationship with the construction contractors [and] we have
not seen at this point in time any big impact of that, because we try to give
them a reasonable amount of notice before they are mobilised. Clearly, in this
environment, you are not being as efficient as you could be.
Online Tender Registry
The NBN Co website operates as a tender portal where current, closed and
awarded tenders are announced and submitted.
However, this website appears to be so infrequently updated that its
information is no longer accurate. This is true of both the ‘current’ tenders
and those tenders that have been formally awarded. As at 22 May 2012, the NBN
Co website was advertising a ‘current’ tender that had a closing date of 30
The ‘awarded’ register is also incomplete. In May 2011, the NBN Co
Over the past 18 months we have conducted some 90 tenders
involving literally hundreds of companies. 
Many new tenders and contracts have been announced since May 2011, yet
very few tender rounds are declared on the NBN Co website. A notable absence
from the online register is the $620 million contract for the satellite service
space segment awarded in February 2012.
At the end of the current reporting period, 52 per cent of the NBN Co’s
activities are using local ‘Australian content’. The Performance Report states:
Local content is actively promoted as part of NBN Co
procurement processes. Certain contracts are inherently local such as
construction and network operations. For other contracts, NBN Co has sought to
maximise the local content, particularly where local manufacturers are already established.
The fibre equipment supply contracts are examples where investment is being
made in local production capacity. Local content reached 52 per cent by
December 2011. Future Australian construction and operations contracts are
expected to increase the value of local content.
Predominantly, these contracts have been for the premise-infrastructure
associated with the NBN rollout such as:
n Internal fibre
distribution hubs for apartment blocks and offices;
n Internal cables and
patch leads; and
n Wall outlets and
devices that will house the connection of the fibre from the street to the
outside of premises. 
However, in answers to questions on notice to a Senate Estimates
Hearing, the NBN Co updated and clarified this information:
Australian controlled companies have been awarded $1.6
billion contract value out of $9 billion total contract value to date, or 18
per cent. It should also be noted that the value of Australian content in all
contracts to date is $4.3 billion.
On the matter of ‘Australian content’, the Performance Report stated:
n All services
performed in Australia are regarded as 100 [per cent] local content –
construction, installation, design, testing and most consulting.
n All equipment
substantially manufactured in Australia is counted as 100 [per cent] local
content even though a certain small percentage comprises imported components.
n All imported
equipment is assigned zero local content even though the contract value may include
10 to 20 [per cent] local services for installation, commissioning and ongoing
Contracts Awarded to Australian-Controlled Companies
In November 2011, the NBN Co released the names of Australian companies
who had been awarded contracts for the localised equipment in the fibre rollout
such as the fibre distribution hubs, the fibre distribution terminals and
premises connection devises. Table 4.2 provides details of these contracts.
Table 4.2 Australian Industry Contracts for Provision and
Installation of Local Equipment
5 year potential value
Internal fibre distribution
Fibre distribution terminals
Internal service drop cable
Internal multi-fibre cable
Network termination unit patch
Premise connection devices
Fibre distribution terminals
Fibre Collector Distributors
Warren & Brown
Fibre wall outlets
Premise connection devices
Retro-fit cable pathways
Co, ‘Equipment contracts awarded to companies with strong local presence’, Media
Release, 15 November 2011.
The size of the key contracts awarded raises concerns that the NBN Co
procurement process might prevent smaller local companies from submitting
proposals as the potential contract combines multiple elements that only large
multi-national companies can deliver. When asked if competition and
cost-efficiency would be enhanced if contracts were divided into smaller,
separate contracts, the NBN Co stated:
Not always; it depends on the nature of the procurement of
goods and/or services. Factors to be assessed include the market structure, and
the risk that the technical and management resources required to integrate the
disparate elements may exceed any gains from attempting to optimise every
single element of the purchase.
The NBN Co requires all contracts over $20 million to develop Australian
Industry Participation (AIP) plans identifying local businesses and how they
will be engaged by the third party. The NBN Co also stated that ‘certain
contracts include specific requirements for local manufacture of certain equipment
such as fibre optic cable after a certain transition period from overseas
supply’. The NBN Co did not
provide examples of such contracts.
To meet these AIP requirements, the contracting company must engage
local supplies or ‘demonstrate local production capabilities and activities to
the satisfaction of the NBN Co’. For example, Ericsson
(the contractor for the construction, operation and maintenance of the wireless
network) has engaged local businesses including Netcom and local wireless
AIP plans are not required for construction or installation services
which, by their nature, use 100 per cent local content or, contracts for the
supply of equipment like satellites which have ‘unique global sources’.
The NBN Co is required to consult with law enforcement and security
agencies to ensure that national security and resilience considerations are
considered in the design and long-term operation of the network.
However, the extent to which the security concerns are considered when
evaluating tenders is unclear, as is the extent of government involvement.
Government and security agencies do have a role in the evaluation of
tendering companies’ suitability to provide services under NBN contracts.
The NBN Co stated:
NBN Co has been established as a wholly owned Commonwealth
company with an independent Board responsible for the day-to-day operations of
the company. NBN Co is required to operate on a commercial basis and at
arms-length from Government. In accordance with the Commonwealth Authorities
and Companies Act 1997, NBN Co must notify responsible Ministers of
significant events. This includes notifying Shareholder Ministers prior to
signing significant contracts.
Despite this, the NBN Co does consult with government agencies where
contracted works may involve potential security risks. The NBN Co stated:
In those tenders where there is a potential security risk to
the network (either through the provision of equipment, software or services),
NBN Co consults closely with Government security agencies. There is also an
evaluation of successful suppliers as part of the ongoing contract management
As recent examples demonstrate,  there are certain works
where vulnerabilities in the network could potentially be created or extended
as a result of a particular company providing those works. This leads to a
broader issue of the security of the network.
The NBN Co gave evidence to the committee’s Second Review on the
security aspects of the network and stated:
A lot of [cyber] attacks take place at layers that sit above
us. We are at layer 2, the Ethernet. We move bits across the network. So what
we have to pay close attention to is the security of the equipment, the
physical security of the plant. The fact is that it is certainly not as easy to
tap into fibre as it is to tap into either copper or a wireless service. We are
looking at the physical security of points of interconnect, we are looking at
the physical security of the systems that we lay into the ground and of course
we are looking at the physical security of buildings.
The NBN Co adopted the Government’s Protective Security Policy Framework
(developed by the Attorney-General’s Department) and the Information Security
Manual (issued by the Defence Signals Directorate) to guide the design,
construction and maintenance of the network.  The NBN Co stated:
These documents provide physical and technical security
guidance for networks that are of national security concern. The NBN Co’s
Security Framework is designed around these standards, including annual
compliance reporting to [the Attorney-General’s Department].
To guard against potential network vulnerabilities, the NBN Co employed
the following preventative strategies: ‘certification and accreditation, regular
testing, security validation exercises, and a range of technologies’. Although
the NBN Co stated that ‘any network could potentially be a target for cyber
attack’, the NBN Co actively engages with relevant government agencies and has
... adopted a strategy that incorporates certification and
accreditation, regular testing, security validation exercises and a range of
technologies that guard against cyber attack.
It is concerning that the NBN Co’s Procurement Manual is not available
to the committee. In light of the numerous tender rounds that have been
abandoned, it appears that there may be issues of cost-effectiveness and
probity with the NBN Co’s procurement policies. It is concerning that these
policies have not been altered following several abandoned tender rounds.
It is not known whether the NBN Co has already incurred contractor’s
late fees nor is it clear if the NBN Co can reasonably negotiate alternatives
with its contractors.
As the NBN Co is not subject to the Commonwealth Procurement Guidelines,
the Australian community has no reassurance that the vast procurements
associated with the network rollout are cost-effective as would be encouraged
in a competitive tendering environment.
There may be legitimate commercial-in-confidence reasons not to publish
the Procurement Manual. Whether directly or indirectly, concerns of
commercial-in-confidence material continue to be raised by participants in the
information they provide to the committee. Both the First and Second Report
noted that limiting the information provided to the committee on
commercial-in-confidence grounds severely limited its ability to report on its
oversight responsibilities to the Parliament.
During the second review, the Department of Broadband Communications and
the Digital Economy committed to examining the public interest test to assess
whether material is commercial-in-confidence. This advice was neither
provided to the committee in its second review nor during the current review
period. The committee again requests that this examination takes place.
The committee notes that the NBN Co is not formally required to publish
its tender outcomes. However, as the NBN Co
is currently publishing details of some tender processes, it is appropriate
that this register be a complete and up-to-date list.
The committee appreciates that there may be circumstances where the
publication of details of awarded contracts may be inappropriate for reasons of
commercial sensitivity. However, the significance of the public expenditure points
to a need for greater transparency of the NBN Co’s contracting practices.
The list of key contracts provided in Table 4.1 is clearly not an
exhaustive list of the contract obligations of the NBN Co. The information
contained in the table is basic information, but information that is so
dispersed in the public record that it is possible that some details have been
overlooked in the table’s compilation.
Similarly, other than the contracts listed in Table 4.2 totalling $635
million, the individual value other contracts awarded to Australian companies
However, the NBN Co has publicly released information of its awarded contracts
which is not reflected in the online register. At the very least, the NBN Co
tender registry should be frequently updated to accurately reflect the status
and outcomes of its tender processes.
Although a fibre network is comparatively more secure than the existing copper
network, there are still questions surrounding how the NBN design, construction
and maintenance projects will not expose end-users to risks as a result of
potential vulnerabilities. As the ‘digital age’ progresses, these issues will
be of critical importance to the security of data and communications.
||The committee recommends the Department of Broadband,
Communications and the Digital Economy review its internal processes where
the public interest test is used to assess whether material is
commercial-in-confidence, and provide details of this review to the
The committee recommends that, as a matter of urgency, for
all future contracts the NBN Co update, and regularly maintain, its tender
registry to include the following basic information:
n A list of works included in the original request for tenders;
n The dates at which the tender opened, closed and was awarded;
n The name of the awarded company or companies;
n The length of time the services or goods are expected to be
n The value of the contract, or where commercial sensitivities
prohibit disclosure, the aggregate value of the contracts;
n The details of any extensions and variations to contracts as
well as the value of an extended contract;
n The value and percentage of local content in the awarded
n Any other relevant accompanying information.