THE government’s ability to deliver surpluses in the short term is in large part dependent on maintaining that the National Broadband Network is a commercial investment and that equity injections consequently can be kept off-budget. This financial year NBN Co will receive $4.7 billion, with a further $6.1bn billion to be injected in 2013-14.
The key to keeping the NBN off-budget is the claim it is a public non-financial corporation, a commercial entity that charges market prices, gets most of its revenues from consumers, not subsidies, and that ultimately generates returns that will allow the government to get its investment back.
The Australian Bureau of Statistics is responsible for granting such status and deemed NBN Co to be a PNFC in early 2010, based on a $25 million McKinsey NBN implementation study. That study said NBN Co could generate a 7 per cent return, slightly more than 1 per cent above the long-term government bond rate.
McKinsey had to crunch the numbers to get that outcome. Documents recently released by the Finance Department under Freedom of Information legislation show that five months into the study, in late December 2009, McKinsey believed the NBN would generate only a 6 per cent return and might need as much as $10bn in subsidies. Finance noted: “The initial (McKinsey) indications are that NBN Co could provide 6 per cent internal rate of return on equity; however, it is critical to note that this rate of return is predicated on a substantial subsidy, which could be several billion dollars, with a resultant impact on the fiscal and underlying cash balances.” In effect, the NBN would show up on-budget.
A couple of months later the study’s numbers were healthier. The study was handed to Broadband Minister Stephen Conroy on February 28, 2010, and after some revision it was finalised on March 17. The rate of return had become 7 per cent and the subsidy eliminated.
The McKinsey study and the initial NBN corporate plan that flowed from it have been the government’s defence against opposition claims that the NBN should be on-budget. The government has used both to argue that the NBN would be commercially viable across a 30-year period.
But the pretence the NBN is commercial is dissolving and the McKinsey assumptions that led the ABS to grant the NBN its off-budget standing are no longer tenable. Much has changed.
The NBN has been utterly incapable of meeting the business case on which the ABS relied. Only 3 per cent of its cumulative target for connections had been achieved by the middle of this year. NBN Co has ready excuses. It claims drawn-out negotiations with Telstra delayed access to the facilities it needed. That is scarcely plausible, given NBN Co had an interim agreement with Telstra on the use of ducts and exchanges that would have allowed it to meet its original rollout schedule.
Second, NBN Co claims delays in finalising construction contracts halted the rollout. In April last year, it called off negotiations with 14 companies amid allegations of collusion and price gouging by bidders. In reality the prices on offer from NBN Co were not commercially viable, given the risks contractors were expected to take. Now the risks have been pushed on to taxpayers and some contracts have been signed but with such small margins that subcontractors are finding it’s not worth taking on NBN work. Hence little rollout of cable appears to be under way.
These failures haven’t stopped NBN Co from paying 10 executives $640,000 in bonuses for the past 12 months. Hardly the mark of a commercial organisation. And the delivery of the few connections that have been established has scarcely occurred
And it’s not just installation contracts that are non-commercial. At Telstra’s behest NBN Co is buying out the Optus cable TV network, which has 400,000 broadband customers, and the price paid per customer is about five times the level in the case of other recent acquisitions of broadband networks.
Most tellingly, the revised corporate plan released in August confirms the original plan was way off the mark. The latter underestimated the size of the fibre network by 14 per cent – about 25,000km.
Curiously, even though the capital costs in the new plan rose by a corresponding 14 per cent, the overall outcome remains the same. To achieve this, numbers have been massaged, and none more obviously than NBN’s financing. To reduce costs, debt will be paid off after 2021, leaving NBN Co with a bizarre debt-equity ratio of 1:10 in 2028; $7bn less will be repaid to the commonwealth from its equity, leaving the NBN just 8 per cent debt funded, with the outstanding equity taking on the characteristics of a grant or subsidy rather than an investment.
The business plan has become a joke, a danger foreshadowed by NBN Co’s chairman Harrison Young, who said mid last year: “This is a 30 or 40-year project. Anyone who tells you he can see that far into the future is speaking metaphorically.”
In a speech to the Institute of Directors, Young also revealed that NBN Co had never been instructed to generate a 7 per cent rate of return, or indeed any rate of return. He said: “Our shareholder hasn’t given us a return hurdle. They’ve given us a task and asked us to keep them posted.”
So much for the NBN being run on commercial lines. Even its pricing is not grounded in commercial reality, given that NBN Co’s advisers inadvertently revealed to the Australian Competition & Consumer Commission that prices have been set to “meet the market”, a move designed to eliminate any shock to consumers. Like everything else about the NBN, its prices are driven by political, not commercial, imperatives.
Kevin Morgan was the ACTU member of former ALP leader Kim Beazley‘s advisory committee on telecommunications.