The leading broking and investment firms, Goldman Sachs JBWere and Merrill Lynch have cast doubt on the ability of the Federal Government to fund $43 billion cost of the National Broadband Network.

And Citigroup said the Government will build it regardless of the financing pressures.

In reports to clients overnight, the analysts say the funding will be a big ask, so much so that it will boost the expected debt position of the Federal Government substantially.

The Government says it will provide 51% of the $43 billion cost (before inflation). That will in fact rise to close to $50 billion at current inflation rates.

That could mean the Government is up for around $22 billion in extra bond sales, but that will be more because it will finance the whole project, and therefore any delays in getting partners from the private sector, will add to the funding burden.

Merrill Lynch said bluntly:

$43bn FTTH funding will be very difficult to secure: Even if the government is able to negotiate through the Senate funding of $22bn+ for its NBN and the new netco is able to raise private sector funds of up to $21bn (which we think is highly unlikely), the rollout is not due to be completed until FY18 (at the earliest).”

Stage 1 will likely achieve the goal of getting improved broadband access into regional and rural areas (including Tasmania). However we suspect that when the government completes its implementation study looking at how to attract private investment, it will find very little interest (even from Telstra) given the challenging economics and inadequate rates of return from a national FTTH rollout.

With the three remaining NBN bidders effectively being ruled out, we wonder what Telstra’s incentive will be to spend $10-$20bn to be a minority shareholder in a FTTH network, given it did not believe a $10bn FTTN majority investment would generate adequate returns.

It is possible the netco vehicle could raise its own debt, although we believe this would also be difficult given the challenged economics, no guaranteed return and no overbuild restrictions on Telstra. But even if it was able to raise $14bn of debt (ie 1/3 debt, 2/3 equity), this could still leave up to $30bn of equity contributions required from the government – a big ask in our view.

And Goldman Sachs said:

Part of the proposal involves the issuing of infrastructure bonds, which will take net federal government debt up from our current estimate of 5% of GDP to 7.8% of GDP. This is quite a turnaround from the positive net asset position of the federal government less than 12 months ago.

Only via tax subsidies do the infrastructure bonds have an appeal, yet the last time Australia issued similar bonds, in the early 90s, the program was cancelled due to the excessive cost on the Budget position. Given that the size of the new program is 7x the early 90s version, it is hard to believe that it will not come with a large medium term fiscal cost.

Citi said:

The project struggles to earn a commercial return (unless access prices increase above $55/month). However this announcement is bigger than broadband. We believe the FTTP network is nation building in disguise and the Govt will fund the entire $43bn build with or without private investment.

However today’s announcement is in effect a third stimulus package in disguise in our view. There are two components to the Government’s policy: (i) to deliver high speed broadband to all Australians; and (ii) solve structural competition issues that have plagued the telecommunications industry for the last 10 years.

In the absence of any private investment we believe the Government will fund 100% of NetCo over time given it’s nation building status.

Peter Fray

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