Thursday, 5 September 2013

Australian Media: Worst. Reporters. EVER. Example - the NBN election coverage.

I think it's not just possible, but easy to make a case for a "Fail" by Australian Media in reporting the election issues through the lens of the topic I know best, the NBN.

My opinion of the Australian media, at least on this issue (NBN), is that they are "soft" (vs hard) questioners, credulous and lazy. I hope what I write substantiates that for you. If one crucial issue is badly reported, then why would others be different?


The NBN is an investment, not an expenditure, by the Federal Govt.
NBN Co is a company, running a business and being given $30.5 billion in equity to run a project for 30 years. It is expected to payback the entire equity and return a profit (7%pa) in the 30 years.

Both parties are funding the investment the same way: off-budget loans of around $30 billion raising 100% of equity, with on-budget interest payments. NBN Co has to raise any additional capital required by direct debt - raising loans itself above the $30 billion equity.

Both parties are making a pitch to the taxpayers/voters to fund around $30 billion via loans BUT the Downside Risk is that the taxpayer-as-investor has to underwrite ALL losses, besides funding the interest.

These losses are an uncapped amount.

There are two things that come out of this:
  • there is a very significant BUSINESS story comparing the pitches, the Rate of Return, structure of income & profitability and likelihood & magnitude of losses.
  • The "costing" of the both policies is trivial:
    • what is the on-budget interest payable up until break-even? (equity repaid in full)
    • Over the project period (2040 for the ALP), what is the equivalent yearly Rate of Return (IRR)?
      How much extra is returned after the equity is repaid?
From the 2012 NBN Co Corporate Plan, we know for the current project:
  • The $30.5 billion equity is reached in 2018.
  •  Equity repayments start in 2023 and is fully repaid in 2033.
  • NBN Co from 2014 to 2021 expects to raise direct debt of ~$2 billion/year.
  • At 2.5%, on-budget interest is $12.5 billion until 2033.
  • By 2040, equivalent yearly return is 7% pa.
  • Downside risk is low, with current financial results running well ahead of Plan and costs on-budget.
The Turnbull Node Plan sets an equity limit of $29.5 billion and tells us NOTHING else.

As investors, the Australian Taxpayer doesn't know about the Turnbull Node Plan:
  • the timing of equity drawdown
  • repayment schedule and break-even period
  • the on-budget interest
  • the Rate of Return
  • maximum risk exposure

Turnbull supplies "summary financials", but these cover just a 5 year period (2014-2019) and NOTHING is revealed for the next 25 years.

NOTHING is supplied about the charges, traffic volumes or demand & growth used in the project forecasts/model.

As a business plan, the Coalition documents are woefully incomplete and do not pass basic sanity checks.

What we've seen is:
  • NO mainstream media (MSM) has reported on the lack of basic business data and missing Financial Forecasts nor taken Turnbull to task over this.
  • NO MSM has had BUSINESS reporters critically examine the Turnbull Node Plan.


Turnbull has specialised in "smoke and mirrors" illusions and distractions.
The outrageous estimate of "$100 billion cost" for the full Fibre NBN is one of these. I've published a rebuttal of this, it's been ignored.

There have been many technical furphy's from Turnbull, like "", that would need 1.25 million nodes. These are solely distractions, not serious argument, meant to mislead and keep attention off the real business issues.

Point 1. "Cost" not "Returns"

According to the MSM (there are many side-by-side NBN Policy comparisons), what's the cost of each sides NBN?

Coalition: $20.5 billion and $29.5 billion are quoted.
But they are almost never preceded by "claimed".
These claims, as above, have NEVER been checked or questioned by the MSM.
In late April I published a simple "sanity" check that says the Turnbull Node Plan can only save $4 billion, while it deliberately wastes the same amount AND transfers $2-$4 billion of extra costs onto VDSL subscribers while denying them multi-port access and multicast TV.

This has never been refuted by Turnbull's team, even though I did converse directly with them. I got abuse and disdain in buckets instead.

But the real story is COST.

We know the COST to taxpayers for the current NBN, it's $12.5 billion in interest until 2033.

Whatever NBN Co is given in equity or borrows itself is irrelevant to the taxpayer. As investors, taxpayers need to know:
  • what they will pay each year out of taxes
  • how long they'll be expected to pay that
  • their maximum exposure.
It's Accounting 101 that a business ONLY accounts for the assets it owns and controls. That's why NBN Co is "off-budget".

It's an investment and a separate entity with separate assets, revenues, expenditure, debts and profit/loss. The ONLY connection it has to the Federal Government Budget & Accounts in the investment.
 - the equity put in and repayments due later.

The on-budget cost that's identifiable and linked to NBN Co is the interest payable on the loans taken to provide the equity.

This is so simple & basic, WHY hasn't any business reporter in the MSM asked questions?

The only reasons I can think of:
  • a complete lack of critical thinking
  • a herd mentality (play "follow the leader")
  • an incomprehensible laziness, they report media releases, nothing else.
  • an unwillingness to listen to anyone outside "the bubble".

Alan Kohler, the doyen of Australian Business media, interviewed (or debated) Turnbull and in his own words "lost convincingly".

But he asked NONE of the basic questions and continued the false view that the NBN Co accounts and budget were on-budget Federal Government "costs".
Consequently, he didn't ask Turnbull any of the most salient business questions.
Kohler followed everyone else in asking only about NBN expenses and never asking about Profit or Revenue. That's not just "soft" journalism, it's amazing thought capture or worse.

My modelling suggests that the Turnbull Node Plan makes a $10 billion LOSS over 20 years, at best getting to be cashflow positive, but never paying back the equity it's given.

I arrived at this by modelling Revenue AND Expenses. First I had to come up with a figure for VDSL/Node wholesale charges that weren't included in the Turnbull documents. A figure the same as the current ULLS charges, $16/mth, seemed in-line with the 2014 ARPU of $21.50.

When I queried a Turnbull staffer on this (and other) figures, I wasn't just stonewalled, but abused, reviled and sworn at.

The MSM did pick up this story when one of their own reported it.
But NOT as a Business story, but as "bad behaviour" by a staffer.

My modelling of the Turnbull Node Plan suggests:
  • a $10 billion loss by 2034, leading to liquidation
  • Interest on $29.5 billion from 2014 to 2034 of $20 billion, and
  • a crystallised debt of $30 billion on the loans.

That's at least a $50 billion on-budget cost to the taxpayer.
This massive downside has not been reported in the MSM, nor discussed by any of them.

I put these points to Lateline Business amongst others, suggesting that he could get a series of experts to comments on the suitability & completeness of the Turnbull documents as a pitch for an investment of $30 billion, which is all it is. Nothing came of this.

A simple question to ASIC would be:
"Would these documents constitute an acceptable Company Prospectus to raise $30 billion?"
This question has never been put.

Point 2. "Cost Benefit Analysis"

I've put to Prof Henry Ergas of UoW the proposition that "Cost Benefit" Analyses are irrelevant if there is NO COST. Prof Ergas has advocated & been an activist for CBA's for public expenditure for over a decade.

Whilst being helpful, Prof Ergas was too busy to answer the question. Prof Ergas was also a co-author of a commissioned report that found in 2009 that NBN Co would have to charge $215-$380 retail for this services. A far cry from the $50 entry-level plans now available.

The whole basis of a CBA, especially of public programs, is that there is a NON-commercial expenditure with an unlinked benefit.

Businesses link expenditure and revenue. They are based around identifiable transactions where goods/services are traded for money or cash-equivalents.

Government accounts & budgets are fundamentally different: they raise money by "fiat" (demand it) through taxation. This isn't "revenue" but income, unrelated to ANY activity or transaction. Taxpayers give money to the Government because they have to, not in direct exchange for anything.

Government expenditures are gifts, untied to any revenue. There is NO backing transaction.

For Government, identifying the national/community benefits that accrue from their expenditure programs is important. It allows them to quantifiably assess the economic desirability and performance of different means of giving away money in their budget.

Government have costs, but there are rarely identifiable, linked benefits. For on-budget Government expenditure, "Cost Benefit" Analyses are very important to maximise the social and economic impact of the limited resources/money available.

But Investments ARE NOT A COST.
Investments, by definition, make a return on equity.
Any cost:benefit ratio is therefore infinite (divide by zero = infinity).
There is NO need for the Coalition to run a Cost Benefit Analysis on NBN Co: we already know the answer, and it cannot be better.

There is a GOOD, well-known method for businesses to compare different investments, the ratio of returns, not costs, to equity invested.
This is the "Rate of Return" or IRR. It presumes Net Present Value discounts on the value of money.

Turnbull and the whole Coalition KNOW that CBA's are irrelevant for NBN Co, it's an investment.
What matters is the Rate of Return, payback period and Maximum Downside Risk. There are financial methods to assess risk. These are built into loans as "premium" above base rates. In market trading, volatility and "risk" are nominally measured by "beta".

What everyone learned from the sub-prime Mortgage collapse that led to the GFC, is that NOBODY in business has an infallible method to estimate Risk OR to insure against Risk. But you have to take your best shot and allow the investors to decide if they'll accept the risk, it's estimated likelihood and maximum, or not.

The Coalition KNOW that a CBA for NBN Co is irrelevant and misleading. The correct way to compare investment proposals is IRR, yet Turnbull has not provided one.

Why has NO MSM reporter, especially BUSINESS & Economics reporters picked up on any of this?

It's basic accounting, economics and Maths.

Point 3. Acquiring Telstra Copper

Turnbull was in the Howard Ministry that sold Telstra, with no attempt at Structural Separation.

He KNOWS that the Government does NOT control, own or have any claim to the 215-250,000 km of distribution copper that he wants from Telstra, for nothing for his plan to work.

Even at a massive discount of $5,000/km, there's over $1 billion, more likely Telstra would value the last 800m of its network at $15-$20 billion, based on $45/year line rental, pro-rata from the $16.22/mth ULLS fee.

Yet, when asked about this "drop dead" project risk, and one that is only mentioned in passing in the Turnbull documents, Turnbull has remained tight-lipped on the question, only ever asserting "They will" in response to questions on the topic.

This is THE most important question he has to answer, yet NOBODY pushed him on an answer.
This is not "hard journalism", but passive, soft and weak.


I contend that the treatment of the NBN by the MSM since 09-Apr-2013 when the Coalition released the Turnbull documents, shows they are credulous, lazy and "soft" reporters.

Credulous because NOBODY challenged Turnbull on his costs or claims of "$94 billion" for the current NBN, they took these numbers at face value. The word "claimed" does NOT appear in any of the side-by-side comparisons of the NBN plans. The lack of critical thinking shows up by NOBODY noticing a) only on-budget costs are important, b) 25 years of financial forecasts were deliberately left out and c) there's a potential $50 billion downside that's never been mentioned, let alone discussed.

Lazy because NOBODY asked Turnbull about the critical Business of his NBN proposal, nor how he would raise a cent. There's been no sanity checks of the Turnbull proposals, nor any serious questioning and challenging of the outrageous and ever-inflating "$100 billion" estimate for full Fibre.

Soft because even when the best business reporter, Alan Kohler, went up against Turnbull, NOTHING about the business plan, financing, risks and downside was asked.

Where is the hard questioning over the drop-dead issue of acquiring Telstra's distribution copper? Do they plan to nationalise the asset with a compulsory acquisition? That's a pretty hot news topic right there.

Where is ANY questioning about charges, revenue, profitability, rate of return, payback period or maximum downside?

When my questions to Turnbull's staff were reported by the MSM, the real issues (charges, revenue, profitability) were ignored, they focussed on the "person within the bubble" and that they'd behaved badly.

BTW, there were widespread reports of Turnbull "apologising". I was never offered any apology or even contacted. Although I've raised this with multiple journalists, this has never been reported in the MSM.

Where is the basic fact gathering and fact checking in the Australian Media?? It seems completely absent.

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