On ABC radio this morning I described to the minister that the NBN business plan as the scariest business plan that I had ever seen. It is impossible to go into detail as we were not supplied with many facts, the actual business model from which to test the assumptions let alone a cost benefit analysis.
The first major issue is the length of time for the investment to reach a return of 7.0% is 30 years. Business models normally have a three-year period for projections and then years 4-5 are purely estimates to give a longer view. The NBN estimates that after 10 years build Capex will $35.9 billion, Opex another $21.8 billion for a total of $57.7 billion and with revenue of only $20.9 billion it will be $36.9 billion in the red. Even on the most optimistic of assumptions the plan does not expect the NBN to become EBIT positive for 10 years until 2020 and most of the return has to be made in the latter part of the 30 years.
It is interesting that the report itself make no delusions to being a business model with the title Corporate Plan 2011-2013 but then paradoxically goes on to project out for 30 years to 2040. Forecasting costs is a perilous exercise in the short term but highly unreliable for the 10 years of the build. The plan highlights this point at the beginning warning of an “economy wide shortage of available construction resources at an acceptable cost … in particular the overall market demand for labour.” This plan was partly a response to the GFC and the need for stimulus and employment but with Australia now at near full employment cost pressures will build. The mining industry for example has problems attracting workers in remote areas and yet much of the NBN build will be in regional areas requiring substantial labour supply and the danger of significant cost blow outs.
Again the plan points out that it does not include expenditure on public policy objectives in the areas of health, education and community services, which is where the US is placing most of its financial investment but will be additional government outlay in Australia.
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The POI increasing from 14 to 120 after criticism from the ACCC added to reducing the returns but that has been well covered elsewhere. There are many other shortcomings such as unproven demand for more costly high-speed services, the size of the 2011 number of residential homes varies from the ABS and the TV households, the results of the Tasmanian test market, the use of cable DOICSIS or RFoG and the structure of funding that we do not have time for here.
The plan is totally reliant on the government quashing any competition such as Optus from upgrading its HFC system in Sydney, Melbourne and Brisbane and cherry picking the low cost but high revenue households and businesses.
The elephant in the room could be the public demand for wireless and in particular for mobility with laptops, smart phones and tablets such as the iPad. The plan acknowledges that in a short period residential wireless homes have grown to 13% but project that this will only rise to 16.3% by 2025 and incredulously to 16.4% in 2040. This is an area that Telstra, Optus and other telcos with 4G and LTE may provide highly effective opposition to the NBN and damaging to the corporate plan.
However, the plan does warn on many occasions that forecasts may prove to be unreliable and therefore be a substantial risk to the Corporate Plan but the minister avoids these issues.
No wonder the minister delayed releasing the plan until after the end of the parliamentary year and why he will never let it be exposed to a cost benefit analysis.