Thursday, 26 September 2013

Correcting wrong-headed Journalistic Myths & Memes

I found myself again this morning with my blood boiling over statements that are not just flat-out wrong, but deceptive and misleading.

Turnbull has "taken the helm", so there's no reason to keep obfuscating these key points.

I've been frustrated getting the attention of Mainstream Media journalists - they ignore anyone outside their "bubble".

I'm not talking about false progress measures, like "premises passed" or "years late" etc, when NBN Co have just entered the mass-rollout phase and only 3-months behind schedule, something Kohler has finally noticed!. Nor the absolute fallacy and fantasy of comparing the economics of incumbent Telcos Overseas to NBN Co... These are/were topics the ALP/Conroy should've defended and didn't.

The whole "review" process will be highly political and biased, we know that.
Without informed media scrutiny, Australia is going to be right-royally screwed, not just 'screwed' for the next 75 years.

Turnbull playing the "human flamethrower" is vicious, vindictive and wholly untruthful & misleading - everything you expect in a barrister, but antithetical to an informed public debate.

My pet peeves:

1. "We need a Cost Benefit Analysis for the NBN".
Eg. AIG calling for a Cost Benefit Analysis and "public debt funding for roads":

2. "The Cost of the NBN is $37.4/$44.1 billion versus the Coalition's $20.5/$29.5 billion".

3. "Cheaper" and "Cost-Effective" are the sole Figure-of-Merit or assessment criteria, not Rate of Return.

1. "We need a Cost Benefit Analysis for the NBN".

NO!!! It's the wrong measure for an investment! It doesn't cost the taxpayer a cent over its full lifetime.

CBA's only makes sense for fully public projects where Govt don't 'invest' but spend with NO return to them. By definition, ALL returns & benefits are to the public, direct or indirect, and none to the Govt.

That's why they are tricky, costs are easy to identify (look in the Budget) while benefits are diffuse, time-delayed and

You'll also note that the Coalition, and folks like AIG, are NOT querying Abbott/Turnbull on the CBA's for their road infrastructure spending.
This is precisely where they should be done, yet they aren't.
Are the Coalition hypocrites, deluded or in denial? I don't know and don't care - it a reasonable question for journalists to ask & pursue in the public interest, but aren't currently asking.

The full cost to the Goverment, to 2033, for the NBN is zero.

Dividing by zero has one answer: infinity.

Any investment that makes a return, by definition, has an infinitely high Cost:Benefit ratio...
It's simple Maths, not even high-school Maths. What's difficult with the concept?

The "razor" question is: What does BHP do?

Do large mining companies run "Cost Benefit Analyses" or something else?
They run extensive modelling, discounted cash-flows, NPV's and finally compare options on "Internal Rate of Return" (IRR).

NBN Co is a company, admittedly wholly Govt owned, but a private-sector enterprise with an ABN, tax-file number, a Board and a duty to pay taxes and return value to its shareholder(s).

It is NOT an on-budget Government expenditure program, nor a Government Department/Agency.

Is this off-budget investment so hard to grasp??

There doesn't NEED to be a CBA because it's wrong.
There does need to be an assessment of the full-term options.

Turnbull needs to be up-front, saying he'll compare the full-term project costs on a sound commercial basis: Internal Rate of Return, IRR.

He ran a comprehensive spreadsheet model of his 4-way network proposal, but didn't release it, or the full-term Rate of Return and payback period.

Why has that not been reported and picked apart?
Are journalists too ignorant, stupid or just too blinkered to understand business basics?
I can't see a valid reason for it not being reported or the questions not asked.

2. "The Cost of the NBN is $37.4/$44.1 billion versus the Coalition's $20.5/$29.5 billion"

Now with the "$1.6 billion" extra peak funding- all paid out of direct borrowing and still returning 7+% Rate of Return.

Every-time this nonsense is repeated I bristle. The NBN Co budget has nothing to do with the Federal Budget, in the same way that what's owing on your house isn't important for your personal budget, only meeting the month repayments.

There's a world of difference between direct, on-budget expenses and independent, off-budget investments. It's not even Accounting 101, so why don't journalists understand and report this???

The real cost to the taxpayer is the on-budget costs, the interest on the loans used to provide the $30.5 Billion equity for NBN Co. While the yearly Equity owed hasn't been released, we know that it peaks in 2018 at $30.5B and doesn't start to be paid down until 2025, with full pay-back by 2033. From 2033 to 2040, it provides the "return on investment" of around $50 billion in total (7.1%/year equivalent).

My calculation of interest on equity, for the whole on-budget cost to 2033, is $12.5 billion at 2.5%.

Turnbull has never once mentioned the difference between on-budget costs directly out of the taxpayer pocket, nor how his spreadsheet model paid down the equity. There's only one statement on needed returns, and that's imprecisely worded. It could be "cashflow positive", which means it pays back interest and operational costs, but doesn't pay off the equity or cover depreciation.

This is Accounting 101: Expenses used to calculate profit must include non-cash charges, like depreciation.

Profit = ( Revenue - Expenses)

Cashflow is not profit, as many a small business has discovered too late to prevent ruin,

Why aren't journalists asking for the full on-budget cost to taxpayers over the full life of the project?

Turnbull calculated all this in his spreadsheet model, just refused to give any details of half the equation (Revenues and Charges), and only released a fraction of his full model for the period 2014-2019.

It's time that journos demanded his full spreadsheet model for the full life of the project. This has to include the second-phase that he's modelled, the replacement of the FTTN.

This is needed as a baseline for comparisons with the full FTTP Corporate Plan and the new 4-networks Corporate Plan.

We already know he's scammed the cost of FTTP ($3600/premise, not $2350) and FTTN line ($900, excludes the Telstra lead-in etc payments).

3. "Cheaper" and "Cost-Effective" are the sole Figure-of-Merit or assessment criteria, not Rate of Return.

Would you rather buy as an investment "The best house in the worst street" or "the worst house in the best street"?

Investors know that cheap is not always most profitable, in fact, almost never.

This is why Taxis are bigger, more expensive cars, not the smallest, cheapest, nastiest little cars on the market. There are so many taxis on the road, that if buying a Hyundai, Getz or other cheap piece of crap, could be profitable, we'd see them out there. The fact we don't is proof of: "cheap is not always best".

Same for long-distance trucks. The majority of prime-movers are $250,000 or more, where alternatives that look the same on paper are available for one-third that. Truck fleet owners look well past the initial
purchase price to full lifetime ownership costs: running, repairs and reliability. Just one unscheduled breakdown may cost more in penalties than a decade's profits.

According the Turnbull rhetoric, there is only ONE method of assessment for investments: initial purchase price (CapEx).

Its truly idiotic and ludicrous to compare real investments without examining both sides of the Ledger: Revenue and Expenses.

All the profit of the NBN is generated by the top 25% of high-demand users. The rest of us get a free-ride, either at cost or subsidised.

The high-demand users have already shown they are very willing to pay a lot more for guaranteed faster access: they place a value on their time and lower their total costs by reducing unnecessary wait times.

Turnbull had to have very detailed revenue forecasts to create his spreadsheet model, and those figures rested on his charging model and pricing.

Why has the mainstream press ignored the most important part of the business equation, profits, focussing only on expenses while entirely ignoring the other half the ledger, revenue?


  1. " there is only ONE method of assessment for investments: initial purchase price (CapEx)."
    This problem exist in the majority of goverment owned assets.

    1. Yes. My point was that NBN Co is NOT a 'government owned asset'. It's a business. A real live company that needs to make a profit.

      Turnbull and the Libs understand the difference very well. They choose to confuse the general public by not making the differences clear.


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