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.

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.

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 ?

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.

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.

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


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.

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


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.

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


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?