Tuesday, 3 September 2013

NBN: Cost Benefit Analyses and NBN 'Reviews'

There's an issue on the costs of the NBN that's simple, profound and has been completely ignored.
The current on-Budget cost of the NBN, pre-2033, is only $12.5 billion in interest charges.

Rob Burgess wrote a piece today, mentioning Conroy didn't allow a Cost Benefit Analysis, and finishing with:
The all-fibre NBN is a precious baby that looks likely to be thrown out with the Labor bathwater. That’s not just a pity. It’s an historic opportunity – to be truly ahead of the world for once – lost forever. 
Paul Budde wrote on avoiding preconceived or biased outcomes of any 'reviews' of the NBN. Paul doesn't offer opinion or reporting 'news', his organisation is "The largest telecommunications research site on the internet". He & his company are globally significant Telecomms researchers and analysts.

Not surprising, his 10 points on setting review guidelines is wide-ranging, focusing on Business, Economics and Costs & Benefits, not the technology:
While costs are important the overall economic and social issues are far more so.
 The 2009 Ergas/Robson report to the Productivity Commission Roundtable, also submitted to the Senate Enquiry,  "The social losses from inefficient infrastructure projects: Recent Australian experience", focussed on CBA's for the NBN and rail investment. Their bottom-up modelling estimated retail pricing 3-4 times higher than the $50 entry-level plans currently being offered:
"(range of) $125 per month and $225 per month... most likely estimate of $170 per month, unit costs in metropolitan areas are of $133 per month, while those in non-metropolitan areas are just under $380".
But there was another egregious error in this analysis that I approached Prof Ergas about, and while he was very helpful, did not have time to address.

The only cost that is significant with the current NBN investment funding is the on-budget expenditures. These are only interest payments, with the Government currently able to borrow at 2.5%, a record low, the projected total, $30.4 billion, reached in 2018 and being paid down between 2023 and 2033.

Summed over time, without discounting for inflation, total interest payments are $12.5 billion by 2033.
BUT, the project has an annualised Rate of Return of 7% by 2040. It's not a cost, but a revenue item.

For anyone to claim that the cost of the NBN to government is other than the interest is absurd, foolish and ignorant in the extreme. The $30.5 billion government equity, $37.4 billion CapEx and $44.1 billion maximum funding are nothing to do with the Federal Budget.

This leads to two problems:
  • Turnbull has failed to disclose the break-even period or IRR of his FTTN proposal, presumably because it's only bad news. My modelling is that the Turnbull FTTN makes a $10 billion loss, and after 20 years, lands the taxpayer with a $15 billion interest bill and a $30 billion on-budget charge to pay-off the loans.
  • Calling for a Cost Benefit Analysis of the NBN as a revenue-making proposition defies logic: an investment is, by definition, not a cost.
    • The 'cost' to the Government is ZERO, hence any CBA must find an infinite Cost to Benefit ratio. That's as good as it gets.
Prof Ergas, Turnbull and Rob Burgess have all made the same simple, fundamental error, it's like they never did 1st year Accounting: they've confused the separate accounts of NBN Co with the Federal Government.

If you've ever owned a rental property or financed an income-producing asset, say a truck or shares, you know the Maths. You raise money for a deposit (equity), then find a lender to finance the remainder of the asset, being careful that your repayments are covered by the income (revenues - expenses) generated by the asset. If like the vast majority of businesses, it follows the plan and survives and thrives, then when the loan is due, it's repaid and the owners walk-away with a tidy profit and/or ownership of the asset.

The Funding, Capital Expenditure and Cashflow of the business are all separate from the principals. If you borrowed for the equity, then your books only show those costs.

This is done thousands of times a month in Australia. It's not a secret sauce or unknown to any of the players.

At worst for the NBN, a Cost Benefit analysis can be done on the total interest paid by the Government until 2033, the planned break-even. As mentioned, this is $12.5 billion at 2.5%, not discounted for inflation.

There are already identifiable, linked (as in provable causal relationship) Benefits from the NBN: the increased value to Telstra shareholders.

TLS shares bottomed pre-SSU (Structural Separation Undertaking) at $2.55 and reached $5.15 recently before the shares went ex-dividend. That's a provable $2.60 gain of 12.4 billion Telstra shares: or a $32.3 billion benefit already. The TLS price was in long-term decline since 2007 with over 100% of profits being distributed as dividends, an unsustainable and desperate measure by the Board.

The NBN investment, can already show a 258% benefit just as the mass-rollout phase starts. It's not complete and rather than being a lemon, has already becoming the exemplar of Government projects.

Which raises the question: just what are the Coalition hiding by not disclosing 25 years of their financial forecasts for their FTTN NBN?

No comments:

Post a Comment

Note: only a member of this blog may post a comment.