Another big misconception about the NBN is how it will be paid for. So, in simple terms, here is an explanation of the public funding:
The $27.5bn Government component of the NBN is funded by debt, through the issuing of Australian Government Bonds. That is, the Federal Government offers our AAA-rated bonds to investors, at an interest rate of about 4% (depending on the term).
The NBN however, will provide a return of about 7%. This means that (once the network is operational), the NBN will begin repaying those bonds at a higher rate than what Government is paying on the debt. By 2034, the entire Government investment (including the interest) will have been repaid by the users of the network, leaving the Government owning a valuable asset (the NBN network) and no associated debt. Big users of the network (those who choose the high speed and high volume plans) will contribute more towards repayment of the debt, and actually subsidise those on smaller plans.
Taxpayers don’t really have anything to do with NBN funding. It is users of the network who will pay to build it, whether they are taxpayers or not.
This is completely different to the majority of Government spending, which doesn’t earn any return. To borrow (and modify) an analogy I read on an internet forum:
Think of the NBN as an investment property….
You are borrowing money to build the property at an interest rate of 4.9%pa. But the tenants will be paying you rent which is the equivalent of 7%pa. So once the house has been finished and the tenants have moved in, the mortgage won’t be costing you anything because you’re receiving more in rental income than you are paying in mortgage payments. Then, fourteen years after the house is finished, the tenants will have completely paid off the mortgage. You can then choose to sell the house for a very large amount of money, or keep it and continue to receive the rent as income.
Can the NBN money be redirected to flood relief or other spending?
The opposition’s Tony Abbott and Andrew Robb have begun calling for the NBN to be scrapped in order to help fund the rebuilding of Queensland following the floods. As both of them well know, such claims are non-sensical, and are simply an opportunistic (and rather offensive) political attempt to stop a network they have opposed from the outset.
Because the NBN is funded by debt, and it provides a return which is higher than the cost of that debt, there is no impact on the budget from its funding. If the Government diverted the debt slated for the NBN to flood relief, then the return would disappear and it just becomes debt with an interest bill. Financially, there is absolutely no benefit in doing this over simply borrowing more money and using that for the flood relief. The cost to Government would be identical, but there would be no NBN network at the end to show for it. A lose-lose situation.
Tony Abbott: “You don’t redo the bathroom when your roof’s just blown off”.
Ignoring the funding issue, let’s not forget that the “bathroom renovation” has already begun. Parts of it are finished. We have already purchased many of the materials for the renovation, and begun employing people to do the work. Our material suppliers have spent money upgrading their Australian factories and employing hundreds more staff to make the “tiles”, on the understanding that we will purchase them. If we stop now, then we’ll be left with about half of the total materials needed for the renovation, but no money to install them. We’ll also have to pay the suppliers compensation for their outlay upgrading their ‘tile’ factory, and explain to their employees why they will lose their jobs. We may well cause some of our suppliers to go bankrupt, because they have invested millions of dollars on their factories after we awarded them contracts.
Unlike most Government expenditure, the NBN is a project that will not only deliver improved infrastructure, but it will do so while providing a positive return on investment.
Shouldn’t we spend the money of better health or education?
In a similar vein to the above, there are often statements along the lines of “the NBN money would be better spent on health or education” etc.
Again, since the NBN returns its investment, one can’t simply redirect that money to health or education unless that spending also returned that investment. For example, if you built a hospital with the money, then you would have to charge people to use the hospital to the extent that every dollar spent was returned, plus 7% per annum. Of course, that would not tie in very well with our “free” medicare system!
But, for a moment let’s forget about the NBN’s return and assume that it does not generate any revenue at all, and the entire 10-year, $27bn Government investment is not returned. How does that compare to Government spending on health and education?
Well, over the same 10-year period, Australian Governments will spend over $1.2 Trillion dollars on public healthcare. They will spend over $500 Billion dollars on public education. They will spend over $200 Billion dollars on defence.
Put another way, the Government will spend more on public healthcare every three months than they invest in the NBN over ten years.
If it provides a return, why not let the Telcos build it?
Private sector companies demand a far higher return on investment that the 7% provided by the NBN. Typically, they demand 15-20% return. This means that any private sector alternative (even if they were willing to build it) would result in enormously more expensive monthly pricing than the NBN will provide. For an example, you only need to compare the Internode’s pricing on Telstra’s South Brisbane Fibre rollout to their pricing on the NBN.
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That is the best explanation of the National Broadband Network funding that I’ve ever read. Why can’t Conroy make it that simple?
Indeed Frank, but when he, quite successfully to my mind, did just that at the National Press Club last year, he inadvertently dropped the “F” word, during a response…Guess what totally occupied the media’s attention.
This is a poor analysis. NBN “will” repay 7%? No, it is expected to repay 7% with the risk being on the downside.
The government is funding this as the equity proportion of the capital structure meaning that once the senior bond holders are paid on the cashflow then what is left is going to the government. If the Government funds the equity at 5% but half of the equity is underwater then on a cashflow basis the taxpayer will be worse off.
Seriously poor attempt at a financial analysis here.
Sean, can you give a quick financial analysis, taking into account the debt cash flow and return? or at least link one?
At the moment your comment only adds to doubt without helping provide facts. I would like to look at fact based arguments from both sides.
It’s been a few months since I have been here but sure, I can put together a financial analysis. Project finance is not my speciality but I can put it together and have you guys critique it. I’ll need to recheck the NBN company to see if they have released any additional info.
In any case, it does not take a genius to see where the problem is with the assumptions built around the cost of funding and the expected returns.
Still waiting Sean.
As Frank said “this is the best explanation of the National Broadband Network funding that I’ve ever read.”
Why is the obligation on Sean to provide a proper analysis? That is NBN’s obligation.
Sean has already exposed the major flaw being the suspect 7% quoted. NBN are not entitled to the benefit of the doubt on that 7% figure. I want some substantiation, please.
Goldie, I want your gold plated re-assurance that it definitely will be 7%. I want NBN’s gold plated re-assurance that it definitely will be 7%. Not giving it? You know what, I don’t believe you, Frank or NBN. I believe Sean. I am betting 7% is a lie.
NBN Co have a publicly available corporate plan which details the figures and assumptions they used to achieve the projected “bond rate+3.5%” return. KPMG-McKinsey stated that such a return was achievable in their implementation study, and Greenhill-Caliburn reviewed the NBN Corporate plan and found the assumptions therein to be reasonable.
I’m not sure what more you expect of them, and if Sean wants to say that the projections are not reasonable then I think the burden is on him to identify on what basis he has come to that conclusion.
OK Tom, to help you out, I now give you my gold plated re-assurance that it will definitely be 7%.
Why is it so difficult to understand what Sean has said. Ok, baby steps:
1. NBN.co says it will produce a return of 7%. There is no guarantee that this will happen. If they fall short, then its the Australian tax payer who must pay the bond yield. Simple!
2. How well can we trust what NBN.co has to say and their projections? Not very well at all. For example, again making financial projections we have:
“NBN Co’s corporate plan reveals that it expects to earn $3 million this financial year, increasing to $509 million by 2014, when it expects to have 5 million households connected to its fibre, wireless or satellite services.”
Wow! The NBN more than half completed by 2014?? I think not.
Remember, the NBN is to service around 13 million premises. Not all of those will actually take up those services, so the above figure of 5 million would mean that the NBN is around 3/4 completed. They LOVE to throw around impressive numbers…. without thinking.
We know this to be far from the truth because:
“The National Broadband Network will be available or under construction to 3.5 million premises by mid-2015″.
Now, thats not 3.5 million completed and returning revenue, its only “Network will be available OR under construction”. How many will actually be connected and returning revenue? and one year later than the previous projection? 500,000? 1 million? 1.5 million (very generous). Ok, lets pretend that they actually complete the 3.5 million (which they themselves say they won’t). With the take up rate being around 15%, thats 525000 connections returning revenue.
It is very very likely that yes, Australian taxpayers will be forking out for the NBN
Take-up is currently MUCH greater than expected.
Take-up of the more profitable 100Mbps plans are MUCH higher than expected.
These are two of the key items they use to forecast potential profit.
Since they are both better than expected – the 7% ROI could well be higher – and this is also predicted in the nbnco documents 7% was the conservative figure – as all start-up forecasts should be.
So far so good. Just need to get that roll-out back on track.
Just to clarify: ““NBN Co’s corporate plan reveals that it expects to earn $3 million this financial year”.
That was for 2011, not 2012. What do we actually have? The figure for 2011 was in fact $356,000 -
http://www.zdnet.com.au/nbn-co-rakes-in-356k-in-2011-339335702.htm
So, since NBN.co have shown that their real returns are in fact a little over 10% of their projections, that 7% return is in fact 0.7%
Tax payers, your wallets are getting warm!
There have been many changes since the 2010 corporate plan, which I’m sure will be reflected in the updated version due this year.
However, none of this makes it more likely the NBN won’t earn the projected 7% return.
The project has been delayed certainly, primarily because of the delay in reaching the agreement with Telstra. So while revenue is below expectations at this time, so is expenditure. The construction delay may well delay the provision of the return by a year or two, but that’s all.
There are three key assumptions making up the financials:
Takeup;
Average revenue per user (ARPU);
Construction costs.
ARPU is initially expected to be ~$33 per month. Just looking at the NBN’s revenue for 2011 indicates that they are well on track to achieve the required level, since they earned their $356k despite only charging for services from October and having 4,000 active connections as at 31/12 (but an unknown number at 1/10). On the available figures, it’s quite likely that ARPU is already above the required level to achieve the 7%.
The takeup rate is already over 15%, despite the numerous current (or just rectified) barriers to connection (eg: ISPs representing over 60% of the market not counted, no phone service/number portability, no IPTV). The average in the trial sites is now over 20%, with some sites already reaching 30%. Even if numbers don’t grow naturally (which of course they will. Just look at ADSL with its initial 3%-after-18-months takeup), once the Telstra copper network is switched off and customers migrated to the fibre network they are essentially guaranteed to achieve the expected customer numbers.
Finally, construction costs…. NBN Co have now signed on-budget contracts for nationwide greenfield and brownfield fibre rollouts for the next 2 years (with options for another 3), plus nationwide wireless until completion, plus most of the satellite portion.
So, with these three key points essentially covered, on what basis do you claim the return target is unlikely to be met?
“The $27.5bn Government component of the NBN is funded by debt, through the issuing of Australian Government Bonds.” – NBN Myths
As somebody who purports to be debunking myths, who do you spend so much time propagating them.
Lets just look at some facts, shall we?
Of the almost $17 billion that is being thrown at the NBN to 2015, only $300 million of this is coming from government bonds and securities. Please take the time to read the budget papers and aquaint yourself with FACTS.
So, the fact is that over $16 billion is coming from elsewhere and is money that belongs to the Australian people, rather than debt from bonds (which also taxpayers are liable for, since there is no way the NBN.co can pay the interest or maturity on those bonds)….. no ifs, no buts….
You’re going to have to try harder than that.
The initial $300m was from the 2010 budget, see this report. In May 2011, the Govt announced a further $2.7bn bond issue for the NBN. See this report. Further issues will take place in the future as equity is injected.
Thats all well and good, only $15 billion more to go to 2015 projections. DO you know how much in TOTAL the government raises in bonds each year? I think you had better go and have a look…….. the fact is that most of the money is budgeted from OTHER than bonds…. please start publishing the true facts, not your “its all being paid by bonds” guff.
They are hardly going to issue the bonds before they need the equity, are they? That’s just ridiculous. As they did in 2010-11 and then in 2011-12, they will issue the bonds as they inject the equity into NBN Co. It’s not rocket science.
SO here we go again, more obfuscation from NBN Myths.
How about some facts? Please tell the World how much thus far has been raised from bonds for the NBN. Then tell the World how much thus far has been SPENT on the NBN….
It is pure guff to say that “all the money is coming from bonds”, the fact is it is not. MOST of the money spent thus far on the NBN has come from PUBLIC FUNDS, not bonds. To say otherwise is to out and out lie.
Well said Backslider. If it smells like a white elephant, earns like a white elephant and obfuscates like a white elephant, it is probably a white elephant.
Its just sickening Tom. We are supposed to believe that if money doesn’t come DIRECTLY from tax revenue (as per the budget), its not tax payer’s money. This is just pure guff! Shuffling money from the future fund and contingeny fund IS using taxpayer’s money. If that money does not belong to the Australian people, I don’t know who it belongs to…?
Fortunately it does none of those things then, huh Tom? The ARPU so far is well above expectations, with the takeup of services overall being above expectations and the takeup of high speed (and therefore higher ARPU) speeds being massively above expectations. See: http://delimiter.com.au/2012/05/29/higher-100mbps-uptake-will-spur-nbn-price-cuts/
I’m not sure how much more info you’d like to have on the NBN. There is a corporate plan which has been out for almost 2 years. NBN Co is reviewed by Senate Estimates and the NBN Parliamentary Committee on a regular basis. Their pricing and contractual arrangements are subject to ACCC regulation. NBN Co was deliberately subjected to FOI laws even though GBEs are usually exempt. I doubt that any Australian GBE has even been subjected to such scrutiny. What more would you like to see?
[...] How are we paying for it? | NBN MYTHS ^^^ An explanation of the financing for the NBN. Debt by way of bonds is the mechanism. [...]
The article explains why the NBN’s cost is treated off budget, but what I am interested to know is, do we know for sure that when it starts paying back, will it still be treated off budget? It seems too tempting for the government to just take that money into the general revenue and use it pay for new schemes, which would put the tax payer back on the hook.
I was really hoping this would be a well researched, unbiased view that most lay people could read and get the real facts about. IT ISN’T! Please research the real facts, there is a lot of it about.
Would you care to provide some examples of “real facts” for assessment?