commentary Federal Finance Minister Lindsay Tanner has confirmed what was suspected: in arriving at its estimate that the cost of the revised National Broadband Network (NBN) would be $43 billion, the Rudd Government essentially dreamed up a big number and then added to it.
Committing to spending up to $43bn of taxpayer funds ... without rigorous and detailed analysis and modelling of the economics of the network and its interaction with existing broadband networks is extraordinary
Tanner told Business Spectator (KBG Interrogation) that the $43 billion was the "outer limit" of the estimated cost of the network and included a "pretty sizeable chunk of contingency built into it" because of the complexity of projecting forward eight years. There were a lot of variables, he said, including how Telstra responded to the project.
"We just formed the view that, in effect, we had to make the clear decision that said 'this is the outcome we are going to achieve come hell or high water because it is of fundamental importance to the future of the Australian economy'," he said.
He conceded that the economics of the new NBN were "crucial" and that it had to have a cash flow that was commercial, but said the government felt there had been too much delay and obfuscation in relation to the NBN and too much structural regulatory inefficiency. It believes the network will lead to a "dramatic transformation".
There are two related levels at which one could query the decision to commit to the new NBN. One is whether proper process has been followed and the other is whether its economics will actually stack up. Committing to spending up to $43 billion of taxpayer funds, perhaps more, perhaps less, without rigorous and detailed analysis and modelling of the economics of the network and its interaction with existing broadband networks is extraordinary.
When one considers the time and effort Infrastructure Australia put into compiling its list of priority national infrastructure projects, the way the NBN decision was developed — essentially as a response to the failure of the original lengthy tender process that involved only $4.7 billion of taxpayer funds — is even more remarkable.
The evaluation that should have preceded the commitment will now occur, with the government commissioning an "implementation study", which one assumes will consider the complex economic issues involved and come to a conclusion whether the NBN is a viable commercial proposition.
It doesn't necessarily have to be — the government might believe, and may be right, that it has to be built as an essential piece of long-term public infrastructure — but that's a very different proposition to saying that the NBN will be a commercial public-private partnership that generates appropriate returns for the taxpayers.
As discussed previously (Time for a regulation rethink, 29 April; The NBN numbers game, 8 April) an unsubsidised FTTP network would deliver broadband services that in the near term at least would be significantly more expensive than what's available today. It is unclear whether a sufficient mass of customers would pay a substantial premium simply for higher speeds.
It is also unclear why the internet service providers (ISPs), or Telstra, would want to shift their customer bases — which has to happen if the new NBN network is to have even the faintest hope of being something other than a massively expensive white elephant — from existing networks that deliver fabulous margins to a higher cost network where the margins would be dramatically thinner unless most customers were prepared to pay far higher retail prices.
The government wants to conserve cash by inviting industry participants, most importantly Telstra, to vend in their existing compatible fibre assets in exchange for equity in the new NBN.
Unless they want to be in breach of their fiduciary obligations, the directors of those telcos won't be able to seriously consider "selling" cash-generating assets unless they understand and are convinced of the value of the equity on offer. They will need to see the detailed investment and business case for the NBN, which would in turn inform their decision on whether it is attractive to shift their customers en masse into a new network.
By announcing the new NBN — and foreshadowing a regulatory assault on Telstra that, perversely, would almost certainly make access to its copper network cheaper and more profitable for the ISPs, and therefore the new NBN less appealing — the government was able to deflect attention from the collapse of its original plan.
However, because the business and investment cases for the new NBN have to stack up for commercial third parties at arm's length from the government, the failure to properly evaluate the network's economics in the context of what is a very dynamic sector where there are competing technologies and incentives leaves the government exposed to the outcome of the implementation study.
If its conclusions don't convince the industry, including Telstra, that participation is attractive commercially and in the interests of their own shareholders and customers relative to the alternatives, the government will have a major set of political and financial issues to confront.
The new faces of Telstra — David Thodey and Catherine Livingstone — have improved the odds on the government convincing/coercing Telstra into wanting to participate, which remains the real key to any hope of the network being viable.
However, where the "old" Telstra used to stud its forecasts with asterisks that made them subject to regulatory outcomes, even the new warmer and friendlier Telstra leadership — and Telstra's competitors — will have to make their support conditional on it being in the best interests of their shareholders.
The government, with its threats of harsher and value-destroying regulatory changes, can influence the shareholder interest equations but can't remove them as the central consideration for Telstra and its peers.
This article by Business Spectator's Stephen Bartholomeusz is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
2%
4%
Finally, articles are starting to appear that question the enormity of spending for the NBN. The idea of an NBN is fantastic; however, there are currently two major problems. The first is that mentioned in this article ie the Government have absolutely no idea how much it will cost because it has never been properly costed. Second, they've no idea whether or not it will be viable because they've not prepared business plan! It simply defies logic to make such an announcement without having done these two crucial and basic things. I am not against the NBN, but I am certainly very concerned about this Government's handling of it!