Pipe Networks CEO Bevan Slattery opens up on the risk the credit crunch posed to its Sydney-Guam pipeline and reiterates his opinion that the National Broadband Network builder had to be Telstra or no one.
Bevan Slattery
(Credit: Pipe Networks)
Has construction started on the actual pipeline yet?
We've finished building the landing station in Sydney and if you actually go to our blog pipeinternational.com, there's a fairly detailed progress report on how it's all progressing so yeah, we finished the landing station in Sydney with a cable of land in Sydney, we've finished boring the pipe that goes from the landing station in Sydney out to the ocean and interestingly I just got a video this morning of the guys in Guam actually installing some of the first pieces of equipment in Guam, so the equipment that sits on the end of it to terminate the cable is being installed right now.
Have there been any hiccups along the way construction-wise?
Yeah, there have been some hiccups, but they've only been fairly minor, so it's actually been a fairly smooth process. You're always going to get hiccups in a project of this scale, but it's actually been going relatively smoothly actually, so we've been very, very fortunate.
On the funding and administrative side, there were some issues last year and there was some [speculation] that the project was in doubt at one stage. How was all that overcome?
So, heading into August/September last year, things got pretty messy in terms of the general market for the availability of credit. Now, the project that we have here is a project with some very strong counter-parties, you know some fairly significant international players as well as domestic players who signed commitments for capacity on the system over very long terms and so it was very strong from that perspective.
But we were going through a process of finalising our project financing and the project financing was around US$90 million in value and then the credit crisis hit.
Just to kind of be clear, the project financing of it, you know the vast majority of it, actually gets completely paid out within about 90 days after completion of construction, because mostly customers pay their bills there. So, really the only challenge that we really had at that point was making sure that all the conditions, precedents would be met and we were just waiting on the offer from the banks.
You're always going to get hiccups in a project of this scale, but it's actually been going relatively smoothly actually
Now, in the midst of the credit crisis, that offer was taking quite a while to go through the credit committees of the relative bank and banks that we were dealing with. They were coming back with further questions, but they weren't regarding the viability of the project, but I think the conditions relating to the financing were becoming more and more onerous as time progressed.
So, we really got to the point where, as the board we said "we think we have alternate way in which we can fund", which is really sit down with the supplier and sit down with the clients and as we said in the press release, if you bring your payments forward to meet some of the supplier payments and to the supplier, if you could delay some payments to coincide with customer payments, then we can pretty much do this project without bank finance. So, in December, we flew over to the US, we met with all the major players in the project and that's exactly what we did.
Did you ever think in the midst of the crisis — and there were so many projects by the wayside and companies for that matter going under — did you ever think the project was at risk?
Yes, absolutely. We disclosed that to the market. In our annual report, we put in a fairly significant risk section there and that's something you have to do and that was the thing that probably concerned me the most was that a project which is so important to the country in terms of access to the internet and bringing competition to the marketplace to make broadband access so much cheaper, that had strong commitments from not just suppliers but from our customers and Pipe Networks, something that was a very, very, very strong project.
Just in the insanity of what was going on late last year was threatening the viability of the project and I think had the project not been of the scale and with the support of its customers and suppliers that understand how important this is, but also how financially viable the project is. If it hadn't been for that, then you know I think there would be a very, very significant risk that the project would've died, but fortunately it is a strong project with strong financials and with strong support from our counter parties.
How much relief do you feel when you look back that you got through that sort of rocky period intact?
Incredibly.
It's carnage out there.
And that's the thing. People say this and think it's a cliché, but the funny thing about clichés is that until you live them, you think that's exactly what they are and the cliché I'm going to give is: nobody could see it coming. Most people could not see that coming. That level of, you know, of tightening of the credit market was unprecedented, certainly or at least in my lifetime and I certainly hope not to see that again.
As I understand it in February last year you were cash positive.
Yes.
What is the state of the accounts now?
I think [back then we had] $3 million in net cash. Right now we have about $27 million in net debt which is where we told the market we would be at.
With these sorts of construction projects, things often do go slightly differently from plans. If there is any more funding required, do you think you're going to have any problems raising capital?
Not really. You know, it's always a risk, but I think the likelihood of requiring any more investment what's already been reaped from the parties is very low.
And elsewhere in the business, you have a large datacentre, how's all that going? Are other parts of the business fairly healthy?
Yeah, very. That business is just continuing to go from strength to strength. We've been experiencing 50 per cent year-on-year growth in terms of profit and we expect that trend to continue this year.
And there has been no impact from some of your corporate customers suffering from the economic woes?
No, not at all. I think we're pretty fortunate in that regard. Half our business is kind of the wholesale industry or what we call the carrier internet service provider industry and the half is made up of corporate government clients. No single corporate client would make up any more than probably 2 per cent of our revenue. The largest client we have is the Queensland Government these days and so they're pretty safe.
But we don't have these single corporate clients that make up a very, very significant portion of our revenue and the network services we provide to those types of clients are providing conductivity to their disaster recovery sites, their core infrastructure. So if there is any sort of rationalisation that's going to occur in terms of telecommunication services, the one thing these guys keep in place is obviously their core network infrastructure. We haven't seen any significant move whatsoever in that area.
You must be watching the National Broadband Network tendering process quite closely, I imagine.
Yes, reasonably closely.
How do you feel about Telstra being excluded?
Oh look, from a personal perspective, I think they should've been excluded on the basis of their original submission which I thought was not in the spirit of what was required. It was probably not in the spirit of what was planned. I think probably, technically, not what was appropriate; you know a 14-page document to a fairly significant tender like that, but in saying that, I can in some ways understand why Telstra did that. I can understand why they did that, because from a commercial perspective they wanted to control the process, so it was obviously their plan and obviously Senator Conroy didn't agree with that plan.
How do you think things are going to progress from here on in? What are you expecting?
Well, a year ago I said that in terms of the NBN it's Telstra or it's no one and I still stand by that comment.So it's pointless? The other players aren't capable of delivering?
For what Senator Conroy put forward, which was the guaranteed 12Mbps to 98 per cent of all Australians, I've shown and it's been proven correct, that his price tag of $10 billion just woefully underestimated the cost to actually do it. I suggest it's at least $15 billion to $25 billion to build it to that standard.
So, one of the reasons I've suggested that no one else can do that is because first of all the entire principle of the whole NBN project is completely flawed and I think secondly, I saw first-hand how bad the credit markets were for a project that was a strong project with guaranteed counter-parties and rate of return and I know how tense and difficult the current credit market is.
Now, to try to build what will be a $15 billion network with a government handout of around $5 billion or thereabouts, you're still going to have to come up with $10 billion and the reality is that even if you could find the money, Telstra will obfuscate and litigate and make it near impossible for any party to possibly roll it out. So even if you could get the financing sorted out, even if you get all these other matters resolved, the reality is that Telstra will take all their customers off the network as fast as they can before the NBN's rolled out which will make the potential rate of return for any investment unattractive.
If Senator Conroy called you know and said "what should I do now...?"
Kill it. We've been arguing for three years, four years that what the country needs is competition in the backhaul space. We call it "backhaul", but it's far out into the regional communities as it can be and let the community determine what is the best way to then get it from community access points.
If you bring fibre out to a community and you say "here's an access point for anyone to then deliver services from", you'll get mobile operators plugging into it, you'll get some wireless operators plugging into it and you can get people putting fibre to the premises or fibre to the exchange and deliver services from there.
Again, either Telstra's going to get let back into the process or the process will die and I think it's at that point. I think the government needs to seriously sit down and listen to what the industry leaders who build infrastructure and create competitive infrastructure say, and what we're saying is: you should roll out a fibre network. They should be focusing more on the transmission capacity or what we call the "backhaul" to those regional and remote communities. That's the most important thing and then things will look after themselves from there.
This article by Business Spectator's Isabelle Oderberg is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
So why does Bevan want to throw out the baby with the bath water?