Conroy's creative NBN accounting

Julia Gillard and Stephen Conroy keep asserting that the national broadband network will be delivered at a lower cost than originally anticipated and will be financially viable. The release of an expanded version of NBN Co's business case doesn't provide conclusive support for either of those contentions.

Take the costs.  Conroy focuses on the forecast government equity contribution of $27.5 billion as the basis for his claim that the network will cost taxpayers less than the $43 billion originally envisaged when he and Kevin Rudd dreamed up their scheme for delivering on their promised high-speed broadband network (and smashing Telstra in the process).

In fact, on NBN Co's numbers the network will cost $35.9 billion and, including the operating losses it will generate before it is expected to become cash flow positive in about 2022, its peak funding requirement will be $40.9 billion. To be able to access debt markets without a taxpayer guarantee NBN Co would have to be generating free cash in line with its projections. Significantly, NBN Co describes the $27.5 billion of taxpayer equity as a "minimum" contribution.

On top of the $40.9 billion estimated cost of building and funding the network through to the point where it generates positive cash there is, of course, NBN Co's $9 billion dollar deal with Telstra, which may or may not pay for itself, and the $2 billion deal (in net present value terms) the government agreed to contribute to win Telstra's support for that deal in the lead up to the election.

The nominal value of the government's concessions alone would lift the potential taxpayer peak exposure to the network to almost exactly the $43 billion Rudd and Conroy originally estimated the NBN would cost. It's certainly a lot more than the $4.7 billion taxpayer commitment in Labor's original fibre-to-the-node plan.

In terms of its financial viability, while NBN Co believes the project will, over its life, generate an internal rate of return of 7 per cent, which is above the longterm bond rate of about 5.5 per cent, that's a very simplistic approach to assessing viability. NBN Co's own estimate of its weighted average cost of capital is between 10 per cent and 11 per cent once a risk premium is added to the risk-free rate.

On any conventional commercial assessment, the NBN Co business case says the NBN will have a negative (and sizably so) net present value and therefore wouldn't normally be considered viable.

The NBN isn't, of course, a normal commercial business. It could have broader social and economic benefits, although it wasn't NBN Co's responsibility for trying to assess them and the government has steadfastly refused to refer the issue to the Productivity Commission or some other body to try to understand whether those externalities justify the taxpayer involvement and the shutting down of perfectly useable competing high-speed cable and fast-enough segments of the copper network.

As discussed previously, the bulk of the costs of the NBN are in connecting the network to homes. It is a consumer network whose economics will be driven by its take-up and usage by households. The business plan makes it clear that its economics in the near to medium term will be dependent on households and primarily (as my colleague Alan Kohler foreshadowed today) by video applications.

That's a lot of taxpayer exposure so that affluent households can download more videos quickly or watch more IPTV.

The NBN business plan is predicated on 70 per cent of households taking its services and gradually increasing their demand for higher download speeds and data usage allowances.  We won't know until the NBN is built whether that's realistic – the disappointing take-up min the trial in Tasmania may not have any relevance to the experience on the mainland.

NBN Co also released indicative wholesale pricing, which showed a surprisingly low entry level 12 Mbps product price of $24 a month, $38 a month for 100 Mbps downstream and 40 Mbps upstream and $150 a month for a 1G/400 Mbps service.  

Even with the retail service providers' margin that will be added, those packages appear considerably cheaper than anticipated although in Tasmania, where NBN Co gave away the wholesale access, the RSPs were charging up to $160 a month for a 100 Mbps plan.

The release of the more detailed version of the business plan won't truncate the debate about the NBN and whether or not the core of its economics – consumer usage – warrants committing such a massive level of taxpayers' funds without exhaustive analysis of the real public benefit of creating a state-of-the-art wholesale fibre monopoly.

It should, however, as the existing players and the broking analysts start working their way through the detail of the numbers and the assumptions in which they are built, provide a slightly deeper insight into the risks and rewards Conroy and Gillard are exposing taxpayers to by pursuing their ''vision'' of a ubiquitous wholesale fibre monopoly.

Thankfully, the extent of that monopoly has been somewhat constrained by the Australian Competition and Consumer Commission's recommendation that, rather than accept NBN Co's preferred 14 points at which the RSPs could connect with its network, which would have stranded existing competitive fibre backhaul and extended the footprint of the NBN monopoly, the network should have about 120 points of interconnect.

That's less than the 200 to 400 points of interconnect that the industry wanted – and Telstra may still be unhappy about the amount of its existing fibre that will remain affected – but is better than stranding even more existing competitive infrastructure.