Friday, 30 August 2013

NBN: Real Cost Benefit Analysis.

Dr Henry Ergas, Professor of Infrastructure Economics, has called for over a decade that Cost Benefit Analyses be performed before infrastructure investments are made. His first target was the Coalition Government under John Howard, more recently he's questioned the NBN investment.

Infrastructure CBA's take one known variable, the Government Budget expenditure, and attempt to quantify the economic benefits that accrue to the community/country.

Government accounts, and hence CBA's, are fundamentally different to Corporate Accounts.

At the heart of Corporate Accounts are sales transactions: there is an exchange between the company and customers. The company provides goods or services in exchange for payment, or promise of payment, from the customer.

Government accounts are very different. There is no sales transactions. There is revenue, given up by taxpayers in exchange for nothing, there is expenditure where services mostly are given to recipients without payment.

For Government Cost Benefit Analyses, there is NO sales transaction, no exchange of payment and service/goods. There is an only an expenditure, a Cost, without income. The Benefits that accrue in the community are hard to identify and quantify.

Here's my contribution: it's very simple to create an accurate & quantifiable CBA for NBN Co.

The Cost is solely the interest on the Government Equity, raised as loans. This is an on-Budget expenditure. At 2.5% interest on $30.4 billion, the maximum current planned equity, this is just under $1 billion a year. This high-water mark is reached in 2018 and is maintained until 2023, being fully discharged by 2033. A total on-budget expenditure of around $12.5 billion.

There is an easy to measure economic benefit: the increase in the 12.44 billion Telstra shares.
These have gone from a pre-NBN agreement low of $2.55 to a recent high of $5.15, more than doubling, at least $30 billion of identifiable, linked gains.

In just one sector is a provable 2:1 Benefit. That qualifies as proven, useful CBA.

There is also the treatment of additional Tax Revenue created: as a business, NBN Co pays direct and indirect taxes. Company Tax and GST, plus Personal Income Tax, Payroll Tax and Fringe Benefit Tax.

In total, these are 30% of Profits plus over 20+% of Revenues.

But all this is moot:
We know the Cost-Benefit ratio of all profitable investments before we start: it's infinite, because the cost is ZERO. NBN Co at 2040 won't just have cost the government nothing, but will have paid back the equity invested, with a 7% ROI.

Included below are the current NBN Co Funding forecasts.

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