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Wednesday, 25 May 2011
Page: 4679


Mr FLETCHER (Bradfield) (11:34): The Booker prize is one of the world's great prizes for works of fiction. I think the Treasurer, Wayne Swan, might want to consider lodging the 2011-12 budget as an entrant in the Booker prize as a work of fiction, because the numbers in the budget bear very little relation to reality. For one thing, we are told repeatedly that there is to be a carbon tax introduced in Australia, but the budget makes no reference to either costs or revenues associated with the carbon tax.

Another gaping omission in the 2011-12 budget and in the forward estimates is the National Broadband Network—this policy which we are told is one of the centrepieces of what the Labor government is delivering to Australia, likely to cost some $56 billion on the latest estimates. Yet, if you try and work out where, in the underlying cash balance, the contribution from the National Broadband Network is to be found, you will search in vain because those numbers make no reference to the National Broadband Network. What you can find are some statements about the amounts of capital to be injected into the National Broadband Network. In particular, at page 342 of budget paper No. 2 it is disclosed that the capital contribution in 2012-13 will be $4.4 billion. If that number were treated appropriately as an expenditure, it would have the consequence that the projected budget deficit for 2012-13 would disappear, because $4.4 billion is more than the projected surplus for 2012-13.

I want to make three points in the brief time available to me today. Firstly, the basis on which the moneys to be paid by the government on behalf of taxpayers, on behalf of citizens, into the National Broadband Network are not included in this budget is conceptually extremely shaky; indeed, a less charitable description would be to call it straight-out misleading. The second point I want to make is that the National Broadband Network shows every sign of being, in financial terms, a disaster. That is something that all taxpayers and all citizens ought to be very concerned about, because we are all compelled to have our collective funds invested in this venture, notwithstanding all of the signs that the return we will get on that investment is going to be highly unsatisfactory. The third point I wish to make is that the root cause of this looming financial disaster is decisions about the broadband strategy for this country which are needlessly extravagant. There is no question that our broadband infrastructure in Australia needs to be upgraded, but there are vastly more cost-effective ways of doing it than the ill-advised strategy which this government is pursuing.

Let me turn firstly to the question of the justification for not including within the budget, within the numbers that make up the underlying cash balance, the expenditure which is to be made on the National Broadband Network. I put to you, Madam Deputy Speaker, that it has been done for one reason and one reason only: a desperate desire to try to make the budget look better than it actually is. I might incidentally make the point that even the numbers which have been included in the papers that are provided only provide for government funding of $18.2 billion to go into the National Broadband Network by 2014-15. If you look at the corporate plan of the NBN Co., it assumes funding of $30.2 billion. That is a $12 billion gap. Where is that money to come from when we know that the only source of funding for the NBN Co. is the government, is the taxpayers of Australia? That is a question as to which so far no answer has been provided. There is a $12 billion gap by 2014-15 and no answer has been provided.

If we turn to the core question of why this money is being spent but does not appear in the budget, there is a very illuminating parallel with the practices of investment banks such as Bear Stearns and others which collapsed in 2008. You could look at Enron some 10 years ago. All of those companies followed the practice of having so-called off-balance sheet vehicles which spent real money but pretended that in some way the parent entity was not liable. That was a fallacy then, and the approach being taken in this budget in relation to the National Broadband Network is a fallacy now. Taxpayers are on the hook for this money. This is real money which is being spent. It is being spent every year. There are billions of dollars being spent out to 2014-15. As I have demonstrated, there is a yawning gap compared to what NBN Co. seems to expect, and yet none of that appears in the budget. We are simply deluding ourselves if we think that for some reason, based upon the numbers that Treasurer Swan has put forward, there is going to be a genuine surplus in 2012-13. There will not be.

Is there any theoretical basis for the proposition that this money ought not to be included in the underlying cash balance? The claim is that this is an investment by taxpayers, by government, and in due course a return will be realised. But what a threadbare claim that is when you look at some of the realities. Firstly, even the returns that it is claimed NBN Co. will generate, in the order of six to seven per cent a year, are extremely low rates of return which no private sector investor would accept. Even those extremely low rates of return are based on highly unrealistic assumptions about the number of people who will take up this service.

But there is another reason to be deeply sceptical about the application of the theory that this is an investment and in some way taxpayers can be confident that the government is going to get this money back. Last year legislation was introduced and passed which set out five detailed steps which need to be completed before NBN Co. can ever be privatised. Those five steps include a declaration by the communications minister, an inquiry by the Productivity Commission, a parliamentary joint committee, a declaration by the finance minister and parliament not disallowing that declaration. All of that has been done to appease the Greens, whose stated position is that NBN Co. should never be sold. So now we are supposed to treat as an investment an asset which is in practical terms constrained from being sold with alacrity. In reality, there is real reason to doubt it will ever be sold at all.

Let me make another point here. In addition to the $27.5 billion of equity investment in NBN Co., the corporate plan also assumes that there will be a further $13 billion of debt issued by NBN Co. What private investor is going to want to acquire this paper? The only condition on which a private sector investor is likely to invest in these debt securities is if they are either explicitly or, at the very least, implicitly guaranteed by government. So there is another significant element of public commitment and government commitment to this project which ought to be included in this budget and has not been.

Let me turn to the second proposition I want to put, which is that all the signs are that the National Broadband Network is going to be a financial disaster. The first point to substantiate that claim is that the network design choice which has been made is enormously expensive. Building a fibre-to-the-premises network is hugely expensive. The build cost, we are told, will be $36 billion and a return needs to be generated on that capital. One of the practical consequences of that is that the pricing will need to be sufficiently high to accommodate that return, and of course the higher the pricing is the lower the take-up will be. We also know that the build plan is a very lengthy one. It is not to be completed until mid-2020, and again that delays the rate at which customers can come onto the network and start to generate revenue.

We also know that the take-up assumptions to achieve even the paltry six per cent return which is promised are exceptionally optimistic. The corporate plan assumes that 70 per cent of homes passed will take a service. One of the core issues here is the extent to which homes and householders will choose to be connected to this network or will choose to take a wireless service, including a fourth-generation wireless service, likely to be delivered by all of the major mobile operators after the coming spectrum auctions. We know from the NBN Co.'s corporate plan that already 13 per cent of homes are wireless only—that is, they do not take a fixed broadband service. Yet there is an assumption in the plan that that number, 13 per cent—which has grown from four per cent in less than 10 years—is going to conveniently taper out at 16 per cent and miraculously everybody else will take a service from NBN Co. Therefore, the revenues will be secured and we need have no concerns. I am deeply sceptical. No private sector investor would accept the proposition that it is plausible that this network is going to achieve a 70 per cent take-up and, in turn, therefore, no private sector player would be persuaded by this corporate plan to put in the kind of money that the government is proposing to compel all taxpayers collectively to invest in this venture.

Indeed, even on its face, the corporate plan reveals that this venture will lose investors money. The corporate plan notes that the weighted average cost of capital for a venture of this kind is typically around 10 per cent. It might be plus or minus a bit, but it is typically around 10 per cent. We also know that the return on investment is a little over six per cent. It is a basic proposition of corporate finance that if your return on investment, your internal rate of return, is lower than your weighted average cost of capital then the net present value of the project is negative. This project loses money. The corporate plan of NBN Co. makes that absolutely plain on its face.

Overlay that with the fact that there is increasing evidence that the project is already running behind time. For example, there is an assumption in the corporate plan that the deal with Telstra will be both signed and approved by 30 June this year when in reality we are almost at the end of May and the deal has not yet been signed. Even if it were signed tomorrow, the approval process would take several months.

All the indicators are that the company is struggling to meet its optimistic assumptions as to the costs it will be able to achieve. A key cost is building out the network. The company has tried several times to secure a deal with construction partners which gives it a price for homes passed which is low enough to meet the overall parameters of the corporate plan. It has not been able to do that. The reality is that the NBN Co. is facing construction costs materially higher than it has assumed.

Let me turn thirdly and briefly to the underlying problem behind this financial disaster which is increasingly afflicting the budget of the federal government and will affect it to a greater extent with each passing year until such time as corrective action is taken. Yes, we need to improve the broadband infrastructure in this country. That is not contested on our side of the House. Indeed, it is vigorously supported as a proposition. But it makes no sense to choose such an extravagantly expensive design. Where is the case for the applications which require 100 megabits per second? We have seen very little evidence. For the kinds of instances that have been put to, for example, the House Standing Committee on Infrastructure and Communications, such as the Hunter nursing trial—a very impressive trial involving home monitoring of patients—we were told that the speed required is 512 kilobits per second in each direction. Why are we pursuing a policy of building out immediately everywhere? Why are we not making good use of existing infrastructure such as the HFC networks, which pass almost a third of homes and can already, or with very little upgrading, deliver 100 megabits per second?

In conclusion, this budget is a fiction because it excludes the National Broadband Network expenditure. This will be a growing and increasingly serious black hole for Commonwealth budgets for years to come unless corrective action is taken. (Time expired)