AFR: Transparency lacking on NBN cost

The theory behind the government's spending on the NBN doesn't match reality, writes Paul Fletcher.

Why is the Gillard government trying to hide the true impact of its spending on the national broadband network?

The budget papers reveal that about $19.9 billion of taxpayers’ money will have been pumped into the NBN by the end of 2014-15, but this spending does not form part of the headline budget numbers. 

For example, the 2011-12 deficit of $22.6 billion – strictly known as the “underlying cash balance” – does not include the $3.1 billion to be spent on NBN in 2011-12.

It seems the Gillard government does not want its full financial exposures to appear in its published accounts. To keep the figures from appearing in your published accounts is one thing; whether you are in fact liable for the money is quite another. On closer inspection, it is clear that the government, and therefore taxpayers, are all too liable for the NBN. Almost all of this money is being funded through the issue of additional debt.

If the same ratio persists in coming years, nearly $16 billion will be added to Australian government debt by 2014-15 to finance the NBN.

At current government bond rates, this will add nearly $1 billion a year to the Australian government’s interest bill. The theory behind this accounting treatment is that the commonwealth is making an investment – in shares in NBN Co – so it is a “capital measure” rather than an “expense measure”.

Is this realistic? The government has already provided $1.7 billion in equity to NBN Co.  If the business were to be sold now, no rational purchaser would pay anything like $1.7 billion.  NBN Co has already churned through hundreds of millions of dollars, it has less than 1000 services in operation, and it is earning no revenue.

Will things get any better as the NBN expands? Hardly.  According to its Corporate Plan published in December last year, the company’s weighted average cost of capital is estimated at between 10 and 11 per cent. By contrast, the company will generate a significantly lower rate of return: a mere 7 per cent. This company is destroying value every day it operates.

Why not treat the NBN the same as, for example, spending on the Pacific Highway in this year’s budget, which is treated as an expense and included in the “underlying cash balance”? It is true the NBN is a wholly owned government company, which in turn owns assets (telecommunications networks), whereas the Pacific Highway is an asset directly owned by government. But surely a simple change in legal structure should not blind us to the economic substance of this expenditure? Excluding this spending from the headline budget numbers is hard to justify.

First, NBN Co is operating on a thoroughly uncommercial basis.  There is little basis for believing that the company, and the equity in it held by the commonwealth, will retain a value equal to the amount of money invested in it. Second, the underlying reason why NBN Co is operating uncommercially is that much of this money is being spent to subsidise the provision of services. 

This is normal thing for government to do, as it does with health and education and other services.  But it should include the spending in its budget. Third, the amounts being spent on this venture are enormous.  Excluding them from the budget has a highly material impact. If accounted for as an expense, spending on the NBN would wipe out the projected surplus in 2012-13 and turn it into a deficit.

The government is exploiting blurry public sector accounting standards to disguise the NBN liability it is taking on. It should be more transparent about the way it is accounting for the taxpayers’ money it is spending on the NBN.  Its failure to do so raises the suspicion that it has something to hide.

Paul Fletcher is a Liberal MP, a former telecommunications executive, and author of Wired Brown Land: Telstra’s Battle for Broadband (New South Books, 2009).

Click here to view the AFR article: 110607 AFR opinion Transparency lacking on NBN cost.pdf