Wednesday, November 24, 2010

The NBN Business Case

It's out:

NBN Co Business Case Summary

Office of The Hon. Malcolm Turnbull MP

Shadow Minister for Communications and Broadband

In her efforts to win over Senator Nick Xenophon, Julia Gillard has arranged for the NBN Co to release today a 36 page summary of its 400 page business plan – that’s the one she hasn’t had time to read.

It is a curiously inadequate document. It does not include any financial statements at all – no profit and loss statement, no cashflow statements, no balance sheets. There are a few numbers. We are told that as a result of paying $13.8 billion to Telstra in decommissioning and infrastructure payments (p.29), the estimated capex to build the NBN will be reduced from $37.4 billion to $35.7 billion (p.28)

And yet the Telstra deal is stated to be a real positive for the NBN – presumably it results in much lower net operating losses the savings of which justify the $13.8 billion spent. But how can we know without seeing the financial details?

The summary acknowledges (p.32) that the project is a very risky one now requiring a weighted average cost of capital of 25% until the concept is proved over the next three or four years reducing, if all goes according to plan, to an average of 10-11 percent over the 30 year period modelled.

While the plan asserts that the NBN will be able to carry debt, it is not clear when and how much debt can be raised, at what cost or whether it will require a Commonwealth guarantee – again a crucial issue unable to be assessed from this inadequate document.

The Implementation Study said that Internet access prices would increase each year in real terms. This document says that the NBN anticipates being able to reduce real prices for all products except the basic service offering of 12 mbps down and 1 mbps up. Since that is the product which experience suggests the majority of households will take up, it seems the NBN is not going to offer cheaper Internet at all and, at least on the basis of this document, has left itself room to increase the cost of the basic service.

However, beyond a few scraps of information and other warm words this is a thoroughly inadequate document. It is a sop thrown to the independent Senators in the hope that they will give the Government their vote. Real accountability, real transparency requires a thorough and complete business case, not 36 pages of reassurance devoid of financial detail.

There has never been a business plan which did not paint a rosy picture of the prospects of a new business venture and no doubt the NBN business plan, if we ever see it, will be no exception.

But the fundamental, threshold issue which the business plan does not and cannot address is whether the NBN is the most cost-effective means of realising the objective of universal and affordable broadband. That is why a Productivity Commission inquiry is so vital. Its main task would be to ask the question the Government has ignored: What is the most cost-effective means of achieving universal and affordable broadband? The NBN is, so it is claimed, one way of getting there. But there will be others and surely none could be more expensive than this plan.

Nobody has trumpeted the need for rigorous cost benefit analyses of major infrastructure projects more than the Rudd and Gillard Governments but on this, the biggest project in our history, they are determined to avoid any scrutiny for fear that the answer they will get will be that this is yet another ill considered, wasteful white elephant.


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