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.