NBN fix to blow $20b hole in Budget

After ACCC head, Rod Sims, last week called for the value of the $50 billion National Broadband Network (NBN) to be written-down in order to lower prices, ABC business editor, Ian Verrender, has warned that the Morrison Government is facing a $20 billion budget hit to fix the NBN:

As a cautionary tale of the potentially caustic brew that can result from the intersection of government and investment, politicians and infrastructure, the National Broadband Network has it all.

What should have been a landmark project that projected Australian telecommunications into the modern era has turned into a decade-long debacle, marked by political infighting and cheap point-scoring.

After a series of roll-out miscalculations, what will be delivered on completion next year will be an expensive, sub-standard product incorporating a mix of retrograde technologies with higher running costs that, ultimately, will require a great deal more investment.

It also should sound a warning to those increasingly urgent calls for government to quickly ramp up infrastructure projects; to soak up workers as the residential construction boom rapidly comes to an end.

Without independent oversight and bipartisan political support, even the best-intentioned projects can end up a compromised, overpriced mess.

Is there a fix for the NBN?

There is. But it involves a write-down of the project of up to $20 billion. Politically, that’s an unpalatable solution and one that would blow a massive hole in the Morrison Government’s surplus ambitions…

[The NBN] is more expensive than the old ADSL service it replaced, and, at least in the experience of your columnist, it’s often no faster…

Perhaps the first mistake was the Howard government’s decision to privatise Telstra but leave it in control of the fixed line telephone network, which competitors had to rent at wholesale prices…

In 2011… David Thodey, struck an incredible deal; $9 billion that would be paid in instalments as Telstra’s fixed line customers migrated across to the NBN.

Three years later, under the Abbott government, it was renegotiated to $11 billion to include older technologies such as hybrid fibre coaxial cable…

That massive transfer from taxpayers to Telstra shareholders — agreed to by management and voted upon by shareholders — for a century-old network in terminal decline has turbocharged the company’s earnings and lucrative dividend stream ever since. It’s also a factor behind the exorbitant price tag for the rollout and why NBN Co’s business model is broken…. because the NBN is committed to delivering a commercial return to the Federal Government on the massive outlay, it is charging way too much to retailers who then are passing on the costs to consumers…

Given it is an investment, the NBN has to earn a commercial return and since the costs have blown out, it has to charge retailers like a wounded bull. They, in turn, pass on those costs to you and me.

There is almost no debate now about how to fix the problem. Everyone from ratings agency S&P to the telcos themselves are demanding the Government write down the value of the NBN by around $20 billion.

If it did this, the NBN wouldn’t need to charge as much and everyone would be better off.

There’s just one problem. Given it represents a loss, that $20 billion write-off would be very much on-budget, which essentially means taxpayers rather than NBN users would foot the bill.

It also would hit the budget bottom line, which explains why the Morrison Government, already facing a slowing economy, will be reluctant to do anything that endangers its promised surplus…

That’s a great summary of the NBN debacle.

As I keep saying, the federal government might as well write-down the NBN and take the Budget hit now – which seems inevitable anyway – and allow the NBN to lower its access charges. It should also open the NBN to competition in capital city areas where it is not a natural monopoly.

Low cost and reliable internet is now an essential service, just like electricity, water and gas. So it makes little sense for Australians to be charged excessive user fees, in turn dragging on Australia’s productivity.

It seems the biggest barrier to a write-down is political in that it would punch a huge hole in the Budget and destroy Scott Morrison’s surplus narrative. Accordingly, Scott Morrison will try to kick the problem down the road for the next government to fix.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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