Julia Gillard and Stephen Conroy keep asserting that the national broadband network will be delivered at a lower cost than originally anticipated and will be financially viable. The release of an expanded version of NBN Co’s business case doesn’t provide conclusive support for either of those contentions.

Take the costs.  Conroy focuses on the forecast government equity contribution of $27.5 billion as the basis for his claim that the network will cost taxpayers less than the $43 billion originally envisaged when he and Kevin Rudd dreamed up their scheme for delivering on their promised high-speed broadband network (and smashing Telstra in the process).

In fact, on NBN Co’s numbers the network will cost $35.9 billion and, including the operating losses it will generate before it is expected to become cash flow positive in about 2022, its peak funding requirement will be $40.9 billion. To be able to access debt markets without a taxpayer guarantee NBN Co would have to be generating free cash in line with its projections. Significantly, NBN Co describes the $27.5 billion of taxpayer equity as a "minimum" contribution.

On top of the $40.9 billion estimated cost of building and funding the network through to the point where it generates positive cash there is, of course, NBN Co’s $9 billion dollar deal with Telstra, which may or may not pay for itself, and the $2 billion deal (in net present value terms) the government agreed to contribute to win Telstra’s support for that deal in the lead up to the election.

The nominal value of the government’s concessions alone would lift the potential taxpayer peak exposure to the network to almost exactly the $43 billion Rudd and Conroy originally estimated the NBN would cost. It’s certainly a lot more than the $4.7 billion taxpayer commitment in Labor’s original fibre-to-the-node plan.

In terms of its financial viability, while NBN Co believes the project will, over its life, generate an internal rate of return of 7 per cent, which is above the longterm bond rate of about 5.5 per cent, that’s a very simplistic approach to assessing viability. NBN Co’s own estimate of its weighted average cost of capital is between 10 per cent and 11 per cent once a risk premium is added to the risk-free rate.

On any conventional commercial assessment, the NBN Co business case says the NBN will have a negative (and sizably so) net present value and therefore wouldn’t normally be considered viable.

The NBN isn’t, of course, a normal commercial business. It could have broader social and economic benefits, although it wasn’t NBN Co’s responsibility for trying to assess them and the government has steadfastly refused to refer the issue to the Productivity Commission or some other body to try to understand whether those externalities justify the taxpayer involvement and the shutting down of perfectly useable competing high-speed cable and fast-enough segments of the copper network.

As discussed previously, the bulk of the costs of the NBN are in connecting the network to homes. It is a consumer network whose economics will be driven by its take-up and usage by households. The business plan makes it clear that its economics in the near to medium term will be dependent on households and primarily (as my colleague Alan Kohler foreshadowed today) by video applications.

That’s a lot of taxpayer exposure so that affluent households can download more videos quickly or watch more IPTV.

The NBN business plan is predicated on 70 per cent of households taking its services and gradually increasing their demand for higher download speeds and data usage allowances.  We won’t know until the NBN is built whether that’s realistic – the disappointing take-up min the trial in Tasmania may not have any relevance to the experience on the mainland.

NBN Co also released indicative wholesale pricing, which showed a surprisingly low entry level 12 Mbps product price of $24 a month, $38 a month for 100 Mbps downstream and 40 Mbps upstream and $150 a month for a 1G/400 Mbps service.  

Even with the retail service providers’ margin that will be added, those packages appear considerably cheaper than anticipated although in Tasmania, where NBN Co gave away the wholesale access, the RSPs were charging up to $160 a month for a 100 Mbps plan.

The release of the more detailed version of the business plan won’t truncate the debate about the NBN and whether or not the core of its economics – consumer usage – warrants committing such a massive level of taxpayers’ funds without exhaustive analysis of the real public benefit of creating a state-of-the-art wholesale fibre monopoly.

It should, however, as the existing players and the broking analysts start working their way through the detail of the numbers and the assumptions in which they are built, provide a slightly deeper insight into the risks and rewards Conroy and Gillard are exposing taxpayers to by pursuing their ‘’vision’’ of a ubiquitous wholesale fibre monopoly.

Thankfully, the extent of that monopoly has been somewhat constrained by the Australian Competition and Consumer Commission’s recommendation that, rather than accept NBN Co’s preferred 14 points at which the RSPs could connect with its network, which would have stranded existing competitive fibre backhaul and extended the footprint of the NBN monopoly, the network should have about 120 points of interconnect.

That’s less than the 200 to 400 points of interconnect that the industry wanted – and Telstra may still be unhappy about the amount of its existing fibre that will remain affected – but is better than stranding even more existing competitive infrastructure.

what scares me longy is nothing they tell us ever evenuates does it.all these figures are all maybes..in some cases if onlys..as you say untill it starts who knows.. but I wouldnt be sweating on any of those figures thats for sure.

I would'nt worry to much, the NBN is a good idea and even though there will be teething problems it will be a godsend for business and education well into the future.
The costs will look like a pittence over the coming decades and as will also be the case when we face up to combating climate change, future generations will thank us for our investment and foresight  :)

adelcrow - the experts say it'll have a negligable effect on productivity.

$36B + of wasted money will never be a pittance.
future generations willl curse the leftards

how is the bootlicking course going ?

adelcrow wrote on Dec 21^st, 2010 at 8:29am:

I would'nt worry to much, the NBN is a good idea and even though there will be teething problems it will be a godsend for business and education well into the future. The costs will look like a pittence over the coming decades and as will also be the case when we face up to combating climate change, future generations will thank us for our investment and foresight  :)

You could be a Greenie with motherhood statements like that! Godsend for business?? this that need 100Nbs connections can already get them . the rest seem quite happy with how it is going.

Are you so sure future generations will thank us? That woudl be assuming it actually works and ever makes a profit - which few think it will (besides Conroy).  it assumes a 70% takeup rate which is ridiculously optimistic.

Longy, I doubt very much that it will make a profit, at least in the short term.
I dont see that it needs to make a profit to be worthwhile, all it needs to do is make business in Australia more profitable and efficient as well as making it easier to do business in regional and remote Australia.
It also does not have to be profitable if it brings our health and education systems into the 21st century.
Lets be honest..I get faster and more reliable internet (and mobile)coverage in remote regions in SEAsia then I do in Australia once I get out of capital city centres.
How rediculous is it that communications is far better in Stung Treng and Nai Soi than in Lenswood and Narrabri.

adelcrow wrote on Dec 21^st, 2010 at 1:01pm:

Longy, I doubt very much that it will make a profit, at least in the short term. I dont see that it needs to make a profit to be worthwhile, all it needs to do is make business in Australia more profitable and efficient as well as making it easier to do business in regional and remote Australia. It also does not have to be profitable if it brings our health and education systems into the 21st century. Lets be honest..I get faster and more reliable internet (and mobile)coverage in remote regions in SEAsia then I do in Australia once I get out of capital city centres. How rediculous is it that communications is far better in Stung Treng and Nai Soi than in Lenswood and Narrabri.

A) why shouldnt it be expected to be profitable? because if it ISNT profitable guess who ends up picking up the tab? you and me. SO yes, Id expect it to be profitable

B) I dont know why you are swallowing this garbage about health and education desperately awaiting the NBN to revolutionise their industries. That just makes you sound silly. It will make nexto to ZERO difference.

C) your point about internet access outside capital cities is quite valid. SO therefore why are we proposing a mammoth expenditure to fix a problem that doesnt actually exist in 85% of the country? Why not just do as Howard contracted for and actually fix the weak areas? not only was it 1/10 the cost but would actually be already done.

longweekend

A/ leftys are 'above" a grubby profit. They're just happy to take everyone elses money.

B/ uhuh, doctors heal people, teachers teach people.
   computers don't.

C/ I'm on cable at home tx.

longweekend58 wrote on Dec 21^st, 2010 at 2:01pm:

adelcrow wrote on Dec 21st, 2010 at 1:01pm: Longy, I doubt very much that it will make a profit, at least in the short term. I dont see that it needs to make a profit to be worthwhile, all it needs to do is make business in Australia more profitable and efficient as well as making it easier to do business in regional and remote Australia. It also does not have to be profitable if it brings our health and education systems into the 21st century. Lets be honest..I get faster and more reliable internet (and mobile)coverage in remote regions in SEAsia then I do in Australia once I get out of capital city centres. How rediculous is it that communications is far better in Stung Treng and Nai Soi than in Lenswood and Narrabri. A) why shouldnt it be expected to be profitable? because if it ISNT profitable guess who ends up picking up the tab? you and me.

Just like those pesky public hospitals, schools and transport systems

buzzanddidj wrote on Dec 21^st, 2010 at 3:55pm:

longweekend58 wrote on Dec 21st, 2010 at 2:01pm: adelcrow wrote on Dec 21st, 2010 at 1:01pm: Longy, I doubt very much that it will make a profit, at least in the short term. I dont see that it needs to make a profit to be worthwhile, all it needs to do is make business in Australia more profitable and efficient as well as making it easier to do business in regional and remote Australia. It also does not have to be profitable if it brings our health and education systems into the 21st century. Lets be honest..I get faster and more reliable internet (and mobile)coverage in remote regions in SEAsia then I do in Australia once I get out of capital city centres. How rediculous is it that communications is far better in Stung Treng and Nai Soi than in Lenswood and Narrabri. A) why shouldnt it be expected to be profitable? because if it ISNT profitable guess who ends up picking up the tab? you and me. Just like those pesky public hospitals, schools and transport systems

are you a child or something like that? is there no limit to your stupidity? Internet is not in the same league as the above. you truly are a sore-loser, buzzard and it is begining to affect everything you write. Your area is one of those that needs to be fixed - but mine isnt, yet apparently we are all geared up to give me something Ive already got and have had for nearly 10 years - 100 years if u included the telephone.

You lost the election. get over it.

Businesses, corporations private schools, private health will all benifit from the NBN..so although it may not in itself ever turn a profit the businesses that support our communities will profit and benifit from it.
Leave out the public system if you like.
The profits dont have to be glaringly obvious to be there.
Public roads, buses and trains will never turn a profit without huge public subsidies but they make it easier for us all to go about our business and in turn we and the community profits from them.
Would we argue against building roads simply because they in themselves do not make a profit?

adelcrow wrote on Dec 21^st, 2010 at 4:15pm:

Businesses, corporations private schools, private health will all benifit from the NBN..so although it may not in itself ever turn a profit the businesses that support our communities will profit and benifit from it. Leave out the public system if you like. The profits dont have to be glaringly obvious to be there. Public roads, buses and trains will never turn a profit without huge public subsidies but they make it easier for us all to go about our business and in turn we and the community profits from them. Would we argue against building roads simply because they in themselves do not make a profit?

roads hospitals schools etc are hardly in the same category of infrastructure. This is a spurious argument that you continue to make. Or is your argument one that you believe govt should fund everythgin you  want and like? what about subsidised air travel? What about a national food network with a massive loss making food network run by the govt??

You talk about business schools and health benefiting form the NBN but the vast majority of the cost is RESIDENTIAL and you seem not to have identified any benefit other than the 15% that currently dont have access.

The argument for an NBN seems generally spurious. spend MASSIVE amounts of monmey to replicate a network that is working in 85% of the country.

Surely Longy..you can see my point
A major truck bypass may cost billions of dollars to ring route a part of a city.
As taxpayers we flip the bill and the transport industry profits by saving time, fuel and wear and tear on the vehicles.
In turn we all profit from (hopefully) cheaper goods, faster turn round in goods ordered and less wear and tear on other roads.
My point is the NBN should make communications, sending of data etc better thus saving time and money and even encouraging businesses to grow outside of the major cities creating employment in regional areas..well thats the idea anyway.
If you can live where u want to eg: Blue Mountains and work as if you were in the centre of Sydney surely you are better off and regional employment is better off.  
As a businessman surely you are going to benifit from less travel, more efficient ordering, delivery of goods and services, video conferencing etc that the NBN is supposed to bring.
I would rather video conference with someone in Perth than have to spend a grand to jump on a plane, stay in a hotel and fly back the next day..that will save businesses money and time.

adelcrow wrote on Dec 21^st, 2010 at 4:36pm:

Surely Longy..you can see my point A major truck bypass may cost billions of dollars to ring route a part of a city. As taxpayers we flip the bill and the transport industry profits by saving time, fuel and wear and tear on the vehicles. In turn we all profit from (hopefully) cheaper goods, faster turn round in goods ordered and less wear and tear on other roads. My point is the NBN should make communications, sending of data etc better thus saving time and money and even encouraging businesses to grow outside of the major cities creating employment in regional areas..well thats the idea anyway. If you can live where u want to eg: Blue Mountains and work as if you were in the centre of Sydney surely you are better off and regional employment is better off.   As a businessman surely you are going to benifit from less travel, more efficient ordering, delivery of goods and services, video conferencing etc that the NBN is supposed to bring. I would rather video conference with someone in Perth than have to spend a grand to jump on a plane, stay in a hotel and fly back the next day..that will save businesses money and time.

you CAN videoconference now. you can already order goods and services online. you can already do ALL Of those things so etc. would you support building a NEW truck bypass costing billions when the other one worked fine? That is my major argument against the NBN. no one has indentified a single NEED for it outside of areas that dont currently have ADSL2+. there is not a single application that cant be run on the existing network and business that want faste can already get it - at a cost.

Despite the protestations to the contrary we actually DO do a form of cost benefit analysis on raods and hospitals. we generally do build them in places where there is a demand and an actual need. We dont build a 1000 bed hospital in innaminka just because we can. Why cant the NBN be an organisation that fills an ACTUAL need rather  than try and build something new to replace something that already exists?

I asked the same question. Surely if these future advances that the NBN, and only the NBN, will be able to profit from, are right around the corner, why not just wait until they actually appear before deciding whether or not they're worth 43 billion+?

Longy, surely you dont accept the slow and unreliable broadband we have here.
Its like saying we had dirt roads that were sufficient so building highways and freeways around the country was a waste of time and money.
Our broadband in this country is not up to international standards and if we continue to rely on copper wires for communication and sending of data then we are only going to get further behind and that will only cost businesses more money.
Personally I dont care if people can download  porn, movies or games faster but as far as doing business in Australia, we need an NBN

Broadband is slow and unreliable?

How? Mine never stops working and loads pages instantly.

adelcrow wrote on Dec 21^st, 2010 at 4:50pm:

Longy, surely you dont accept the slow and unreliable broadband we have here. Its like saying we had dirt roads that were sufficient so building highways and freeways around the country was a waste of time and money. Our broadband in this country is not up to international standards and if we continue to rely on copper wires for communication and sending of data then we are only going to get further behind and that will only cost businesses more money. Personally I dont care if people can download  porn, movies or games faster but as far as doing business in Australia, we need an NBN

it is neither slow nor unreliable. I get 10Mbs and it is reliable. It is the same for most people. The speed of our internet at home is a fundamental irrelvancy. Business yes, not home. Identify what you cant currently do because of our network?

Im not saying the network is perfect. it isnt. Im not saying it doesnt need upgrading. it does. what it DOESNT need is being thrown away and started again at enormous cost. I keep asking for the reason, the killer need for the network and no one ever gives me one. Some nebulous undefined 'future need' is not good enough - not when $43 is being spent. Can you identify an actual REAL  need that couldnt be fixed by simply upgrading everyone to ADLS 2+ standard?

Adelcrow wants faster internet so he can download his dominatrix porn in the time it takes for his wife to start and finish work

Quote:

Personally I dont care if people can download  porn, movies or games faster but as far as doing business in Australia, we need an NBN

why?  you can get 100Mbs for business now in many places. VDSL is coming out in some places and is almost as fast. You can tie multiple ADSL 2+ services together to increase broadband and you can get a variety of other services as well. But if what you say is true why not build an NBN that excludes rsidential services and save 75% of the cost?

JC Denton wrote on Dec 21^st, 2010 at 5:04pm:

Adelcrow wants faster internet so he can download his dominatrix porn in the time it takes for his wife to start and finish work

Whilst I dont belive that is true I think a lot of people support the NBN so they can get faster pirate movies, pirate software and download porn quicker.  So why shoudl we pay for it?

Quote:

I think a lot of people support the NBN so they can get faster pirate movies, pirate software and download porn quicker.  So why shoudl we pay for it?

Because a lot of people want it, as you've just said, ta. You can always move to New guinea if ya dont like it here, I hear the drums are very effective. 8-)

Quote:

you can get 100Mbs for business now in many places

You can get 1Gps, 2Gps... pretty much whatever you want in the various city CBDs around the country.

You just have to be prepared to pay a sh!tload for the privilage.

But at least there's no download limits.

skippy. wrote on Dec 21^st, 2010 at 5:19pm:

Quote: I think a lot of people support the NBN so they can get faster pirate movies, pirate software and download porn quicker.  So why shoudl we pay for it? Because a lot of people want it, as you've just said, ta. You can always move to New guinea if ya dont like it here, I hear the drums are very effective. 8-)

Another shining example of dippy`s half wit.