Tall claims, few facts in $43bn broadband gamble

SHOULD the National Broadband Network be required to generate a positive financial return?

The Rudd-Gillard government's decision to spend $43 billion to build the NBN has been the subject of intense controversy.

The Coalition has repeatedly criticised the fact that there has been no cost-benefit study, and there was no business plan prepared before the decision was made.

We have also criticised the assumptions in the implementation study subsequently prepared by McKinsey and KPMG. These firms found that the venture would generate a modest return of 6-7 per cent.

However, their finding depended on optimistic assumptions that 70-90 per cent of all premises would take up a service on the network and that prices would increase by more than the rate of inflation every year.

The Coalition's criticisms meet a fairly standard response from defenders of the project.

They say the NBN is a visionary, forward-looking infrastructure investment and that it is wrong to apply narrow financial metrics such as return on investment, or to ask detailed questions about the credibility of the business case being used to justify this investment.

I think there are at least four reasons why this is a very poor response. The first is that the Rudd and Gillard governments have stated, in justifying the decision to allocate so much public money to this project, that it will generate a positive financial return.

When Kevin Rudd was asked at the announcement of the project in April last year about the risk to public money, he said: "We believe this is a first-class solid investment for the nation."

This claim was repeated by Communications Minister Stephen Conroy in May this year when he released the implementation study. It showed, he said, that the NBN "can be built on a financially viable basis".

The second reason why financial return is critical is that, without it, Labor will not achieve its plan to privatise the NBN. In his May media release, Conroy said taxpayers would be repaid their capital, and receive "a modest return by year 15 of the project on the basis that privatisation is completed".

But the privatisation will not be completed if the NBN is not a good investment. Unless it generates positive returns, private sector investors will not be interested in buying into it -- and in turn taxpayers will not get their return.

Financial return is important for a third reason: We need to understand the amount of taxpayers' exposure -- and how it might increase if NBN Co does not meet its business plan and financial targets.

The implementation study says taxpayers will expend $26bn in building the network, but it will start to generate positive financial returns and they will ultimately be paid back. But what if these returns do not come as expected? What if building the network costs more than planned? What if it takes longer to build the network than hoped?

And what if Australians simply do not want these broadband services to the extent that government is assuming? What if, rather than the 70-90 per cent of households assumed in the implementation study, only 50 per cent of households take up a service?

A lower than expected take-up might occur, for example, if the remaining households are happy to get their broadband services over the wireless networks operated by Telstra, Optus and Vodafone.

If the take-up is lower than expected, this will mean lower revenues for NBN. It could even mean that the NBN operates at a continuing loss, so as well as not getting their capital back, taxpayers are required to pay a continuing operational subsidy every year. The answer to all of these questions is critical in assessing whether taxpayers are in fact exposed to a greater risk than the government's claimed $43bn. And the only way to come to an informed assessment is to look carefully at the business case which underpins the projected financial returns, and determine whether or not it is realistic.

There is a fourth reason why assessing financial return is so important -- which goes to the public policy rationale for building this network. We are told that the NBN will have enormous productivity benefits. In fact the Gillard government has failed to tell us with any precision what they might be.

But even if we take the government at its word, it is clear that the extent of the benefits will depend on how many people connect to, and use, the NBN. So this gives another important reason why Australians need to see a robust and credible business case for the NBN, which demonstrates convincingly that a high percentage of households will take the service.

Without such a business case, we have no basis to believe the claims about the productivity benefits to flow from this network.

So far, there has been no such robust and credible business case. Instead, we have an implementation study, which shows every sign of being reverse engineered to meet a minimally respectable financial return target.

It would of course be open to the Gillard government to argue that the NBN is an infrastructure project which will generate society-wide benefits which exceed its costs, even though it makes a financial loss because users of the NBN are not charged the full cost of its construction and operation. But that is not what Labor has argued in making the case for the NBN. Indeed, it has consistently refused to conduct a cost-benefit study, which is what would be required to demonstrate such a surplus of society-wide benefits over costs.

Instead Labor has claimed that the NBN will generate a positive financial return and that in due course it will be privatised, allowing taxpayer capital to be returned.

Is it any wonder that so many Australians are sceptical about this fundamental claim?

Paul Fletcher is a Liberal member of parliament. He is a former telecommunications industry executive and author of Wired Brown Land? Telstra's Battle for Broadband (UNSW Press, 2009).

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