Time to come clean on just how uncommercial the NBN is: Kohler

The government needs to pluck up its courage and confess the extent to which the national broadband network is uncommercial – that is, the amount of subsidy embedded in it.

In other words, the government must produce what everyone is now calling for – a cost-benefit analysis. The problem, and the reason courage will be required, is that cost-benefit analyses are better done before, not after, the decision to go ahead.

Yesterday three company chairmen joined the chorus – John Morschel of ANZ, Michael Chaney of NAB and Woodside and Bob Every of Wesfarmers. They’re used to the quaint business idea of looking at a cost-benefit analysis before they make a final investment decision (FID); with the NBN the FID was made long ago and the board (federal cabinet) was locked in behind it. There was an AGM on August 21 and the directors were re-elected (albeit after a close call).

So the NBN is off and running sans business case, and even though there are three more final approvals pending: ACCC approval, legislation through parliament and a vote by Telstra shareholders. If any of these don’t get up, it will be quite a mess.

In the circumstances the government can’t simply ignore the calls for a cost-benefit analysis, and should respond with transparency rather than simply an “implementation study” that confirms the return of 6-7% per annum will cover the government bond rate. That study did not discuss the opportunity cost or the element of subsidy inherent in the project.

Of course the NBN is not commercially viable, otherwise the government wouldn’t have to do it. But the extent to which it is not commercial – that is, the amount of subsidy – should be published.

The simplest way to calculate that, in my view, would be to estimate the actual cost of the network over eight years (it’s less than $43 billion) and then get an independent expert to estimate its market value at the end of that time, since the stated plan is to sell it as a monopoly.

Presumably there will be a gap that will need to be justified on national interest grounds – in other words, a national cost-benefit analysis. It’s a reasonable demand, but would require courage because the figure could be anything, and unless it’s zero, the Coalition would go into a frenzy of inflated opposition.

And it might actually be zero: how often does a legislated national monopoly with virtually 100% of the population as customers come onto the market? Any independent expert would put a big premium on that.

One of the less tangible benefits of the NBN is the transformation it is forcing on Telstra, unveiled last week as ‘Project New’.

The company has known for 25 years – ever since telecommunications was deregulated in the mid-90s – that it would eventually have to do this, but successive CEOs – Frank Blount, Ziggy Switkowski and Sol Trujillo – managed to delay it by gaming the regulatory system and suppressing competition. It was the right thing to do for the company, but not the country.

Now the NBN has forced the issue, and the extent of Telstra’s transformation over the next three years will be extraordinary; possibly the greatest corporate rebuild the nation has ever seen.

Every single process within the company is being examined and re-engineered; every person’s job, in effect, will be spilt. Thousands will leave the business and the company will become a lot smaller.

The result, if David Thodey and the Project New team led by Robert Nason pull it off, will be a company that uses its scale as an advantage rather than being weighed down by it. Telstra would become a creator of value rather than a destroyer of it, both for its own shareholders and the nation.

Without the NBN, this would have been put off and Telstra would have become more and more uncompetitive, a lumbering elephant nipped to death by hyenas. Maybe Thodey and Nason will fail because the task is simply too hard, but they’re pretty optimistic.

It’s an exciting time for telecommunications in Australia. Unfortunately the lack of transparency around the NBN is turning it into a messy, ill-informed debate.

This article first appeared on Business Spectator.