## Funding the NBN

Simon Rumble posts some thoughts on the costings for the national broadband network. He offers some working, and requests corrections, so I thought I might redo the calculations.

First, at its most basic $42B divided by 7.4M households means infrastructure costs of about$5,700 per household. That seems like a lot of cash, when (non-Telstra) ADSL2+ upfront fees are only $130, with no contract. It’s covering businesses too though, and potentially is a qualitative change to the service compared to ADSL coverage (whether due to speed or reliability). For me, that’s way more than the government should be committing to this; if people really think fibre speeds are worth$6000 per household, let an ISP sell it to them privately. I’d completely support having local neighbourhoods able to vote to have fibre (or high speed wireless or similar) installed locally, paid for by an increase in everyone’s rates, eg.

But hey, the point isn’t to see whether it’s worth going ahead, it’s to see what it’ll end up costing when/if it does. Infrastructure development is apparently going to be funded by a bond issue, which means the government sells bits of paper with “$1000 treasury bond” written on it, with a “coupon” rate that’s currently around 5.75%, and a maturity date (up to around ten years away). The government will then pay$28.75 every six months to the bond holder, until the maturity date, at which point they’ll give them the full $1000. Over a ten year period, that’s a total of$1,575 paid out. The initial price is just whatever the government can get, which might be more than $1000 or less, but certainly won’t be$1,575. If I’m reading the RBA’s numbers right, the current price for a $1000 treasury bond with a coupon of 5.75% that mature in 2021 is about$1105.42.

So what’s that mean? To get $42B now at that rate, you have to issue just under 38 million bonds. You then have to pay each person who holds one$57.50 per year, and then pay them $1000 in 2021. That’s$2.185B per year, and $38B in 2021. If you’re balancing the budget, you’re thus hoping to collect$300 per year from every household ($25 per month) over the eleven year period for the coupon costs; and you also have to come up with$38B from somewhere. If you’re going to do a Telstra again and just sell the infrastructure you built, then hopefully it’ll be worth $38B (or more) at that point and you’re okay. If you’re hoping to have built a public asset, you’ll want to have collected roughly$3B per year more than that, so you’ll be able to pay off your bond holders and keep the infrastructure, which means about $700 per year for every household, or about$60 per month.

This is averaged over every household in range of the NBN, including ones that don’t have computers or don’t want access to the internet. That’s likely inaccurate: if it’s paid for by people who use it, and only one in ten of the people who can, do, then that’s $250 to$600 per month instead. On the other hand, if it’s taken out of income tax/GST receipts, it’ll be a different group of people who end up paying for it, and working out how that’ll actually affect tax rates or consumption or other government projects is beyond my ken really.

Those are, presumably, just infrastructure costs, so additionally you presumably need to factor in maintenance fees, tech support, external bandwidth, and other costs too — as Simon pointed out in his post, effectively all your $60/month is getting you is the equivalent of the copper wires we already take for granted and pay Telstra about$20/month for (whether directly or not); running actual data over it is an add-on either way. Going on Internode’s charges, getting 40G of data a month would be an additional $55/month (if you want less than that, I’d presume you don’t care about the NBN anyway). It’s possibly slightly worse than that, in that the$20 that Telstra gets also covers routine network maintenance after the service is initially setup, while it’s not clear the $42B (and hence$25-$60/month) does. And of course, while$42B is a very Hitchhikers numbers, as a government project it might blow its budget and require additional financing later, so multiply it out for that reason as you see fit too.

So by my count, that means retail prices are something like $25-$60 (infrastructure) plus $? (infrastructure maintenance) plus$0-$540 (unused capacity costs borne by early adopters) plus$55 or more (data, service) plus $? (corruption, waste, budget blowouts, profit), which sums to a monthly retail broadband fee between$80 or more and $700 or more. That sounds like it’s in the right ballpark for the scale they’re considering — about$80/month for low-end fibre sounds plausible if you don’t get forced to try to provide it outside of major population areas (ie, the new 90% of the population target, not the old 98%), but only if there’s a high takeup in the area, and it’s implemented with a lot of competence. If there’s low takeup, then you get to multiply the cost accordingly; and if there’s problems in the implementation, you get to add to the cost, and lower the adoption when people avoid it.

Of course, the more likely scenario is the budget doesn’t get balanced, and the final $38B is either rolled over into ongoing debt (“we need to come clean on$38B of bonds? let’s issue more bonds then and pay the old debts with the new debts! ponzi scheme? what’s that?”), taken out of taxpayers’ hides, or we have a round of inflation so that $38B is barely enough for a morning coffee. The other issue is that$42B worth of bonds would almost double the amount of debt Australia currently has on issue, which could easily affect the price we get for our debt — and that we’d have to issue more bonds than I’ve estimated above or have a higher coupon to get the same cash now, with corresponding increases in the prices needed to keep the budget balanced.

(And of course, if there really is a credit crisis, and people aren’t willing to loan money, issuing $42B of bonds wouldn’t be possible. If there’s just a credit crisis for private borrowers, this probably just makes it worse by giving even less reason for people to loan money to anyone who doesn’t have their own mint and tax agency) ### 5 Comments 1. aj says: Oh, my bad, it’s priced at$43B not $42B. 2. James says: Other people have pointed this out, but the real beneficiaries and profit centre will be businesses – currently they pay through the nose (hundreds of dollars a month) for just a few megabit/s. 3. Russell Stuart says: All good, but you seem to assume the fibre is only going to be used for Internet access. But that is not what is proposed. Instead, the goal of the project is to replace the current copper network with fibre. So it won’t be just Internet that goes through it. At the very least it will carry phone and cable as well. Thus the uptake becomes close to 100% of households and businesses. None of this effects the fact that it is going to cost$50B. But that cost will be spread across all Australians, not just those that use the Internet.

4. Simon Rumble says:

What’s a billion between friends? We all know this is unlikely to be the final figure — it’ll either be a lot less or a lot more.

Russell is right, it’ll be used for much much more than just Intawebs. But with the copper network still staying around, it’ll have to compete with that (and wireless). Cable telly I suppose less so.

And yes, businesses will get great use out of it.

5. Jason Muirhead says:

Russell, the difference between “all Australians” (read income earners) and “those who use the internet” is small. There are approx 7 million households in the 90% coverage of the NBN and there is 10 million in the labour force. But new taxes will not be targeted at lower income earners, particularly with the current government. So should the bulk of the finance need to be covered by the tax payer due to low uptake Anthony’s analysis is probably about right as either a burden per household or per tax payer.