Wednesday, 11 April 2012

....And another question.....

So, we've answered the big question- what is the NBN. Anyone who would like some more detail, please feel free to comment and I'll try to answer any questions, or, there are some great websites out there that will give you some detailed looks into the technology involved in the NBN. The main government site, is quite good in the information it delivers. Although as usual when dealing with governments, the information is delivered in quite a syrupy rhetoric and is relatively simple in its' nature. NBN Co's website is also relatively basic and its' overview is skewed more towards information about the company and its' goals as well as the actual rollout of the NBN. There are some interesting "Case Study" sections which look at how the NBN will affect individuals, schools and businesses on a one-by-one basis. Obviously, these are overwhelmingly positive, as one would expect of any company trying to hock their own goods and services. But it at least gives an idea of what individuals can do with their new connection. There is also an older site (not updated now) that gives a few good analyses of the NBN here.

This is a link to the National Broadband Network Implementation Study, done by the government just before the rollout of the NBN began on a trial basis. This is the study that brought about alot of political contention as to whether it was an achievable goal to have an FTTH NBN that reached over 90% of premises. The study was, of course, paid for by the Labor Federal Government, commissioned by then PM Kevin Rudd and done by McKinsey & Company and KPMG. One interesting point of note on this study, if we look at the overview page, is the last 2 points (quoted directly from the site):

1- NBN Co can build a strong and financially viable business case with the Study estimating it will be earnings positive by year six and able to pay significant distributions on its equity following completion of the rollout; and

2- The Government can expect a return on its equity investment sufficient to fully cover its cost of funds

This is interesting to note, as the vast majority of infrastructure a government builds and maintains is either fiscally neutral or a tax payer burden. In this case, the money NBN Co. receives will be funnelled back to the Federal Government once costs and maintenance have been taken out and the profits will, presumably (although this is, of course, up to the Government of the day) be used to pay back the debt borrowed to build the NBN. This leads me to my next question:

Is the NBN worth the money?

People might say this is an inherently subjective question. But in real monetary terms, IS the NBN worth what it is giving Australia?

It's estimated the NBN will have a final cost around $37 Billion, down from the originally, and much debated, $43 Billion. This includes $27.5 Billion invested (and borrowed) directly by the Government. The remainder will be paid for by private investment (shares in NBN Co.). So, the direct government cost will be $27.5 Billion, assuming, of course, NBN Co. can actually raise the $10-13 Billion odd of private investment; this seems likely, as such a large project, once underway, would limit the high risk of investment. $27.5 Billion is alot of money, no matter where you're from (unless you're Apple, who seems to sneeze and have that much money). But it is not, by any means, an insurmountable, nor particularly large single amount of money for a Government of Australia's size and economic standing. Obviously, some explanation is needed.....I'm afraid this will be quite dry.....

Australia's current GDP (PPP adjusted- read up) is hovering at just under the $1 Trillion mark, around $925 Billion (US). Now, GDP is not ACTUALLY a particularly useful measure in todays economics as it is only a measure of a countries goods and services produced WITHIN a country. In a globalised world, this does not take into account companies that are international, both owned BY Australians and by other countries working IN Australia. Mining companies are a good example. It is only a measure of all companies and services inside of a country. It is also NOT a measure of living standards or income. However, it IS used to determine an economies health, as a general rule. The idea being, a healthy growth in GDP (usually 2%) shows an increase in trade overall and therefore a corresponding increase in income, wealth and capital. For this reason, it is usually also used as a measure of debt.

International debt has been in the spotlight since the 2008 GFC. More recently, the European debt crisis has shown how sovereign debt (that is debt of a government, not private debt, as in the GFC) can destabilise not only the country who owns the debt, but also its' trading partners. A country MUST have room to move fiscally. A government needs borrowing power for the adjustments of budget, building and essential maintenance of infrastructure and the general running of the country. Governments usually borrow money for infrastructure by issuing Government bonds. These are bonds that are issued with a specified annual return interest at a specified maturity date in the future, that other countries governments and private companies can buy as investments. The higher risk the investment in the country (ie. the more unstable the economy) the higher the interest rate for the bonds usually are. There comes a point where the risk is such that other governments and companies refuse to buy the bonds and the issuing government runs into trouble as they cannot borrow enough money. This is the position countries such as Italy and Greece have found themselves in. This is, of course, a generalisation, as there are MANY variables and also other ways governments borrow money. But for our purposes, it is good enough.

The level of national debt a country has is usually measured as a percentage of GDP (hence using GDP as an economic measure). The lowest levels of debt in the world (using IMF statistics) are countries like Estonia, Saudi Arabia, Chile and Brunei. These countries do not necessarily have good, healthy economies, they simply do not borrow heavily internationally. Partly because they may not want to (in the case of North Korea, which doesn't even rank) or because they can't (Estonia, Chile) as other countries consider them too big an investment risk due to instability. There are countries that have healthy economies in this bunch though too, such as Saudi Arabia, Brunei and Luxembourg. Australia, if you look in terms of healthy economies, is just above Luxembourg for ranking in highest debt, about 1/5 of the way up and just below the United Arab Emirates. We have a %GDP debt of 20%. But once you take into account all sorts of corrections like net debt, PPP etc, in monetary terms, this means we have a debt of around $100 Billion dollars. The US has a %GDP debt of 94%, UK 75%, Europe 80% and Italy and Greece, 119% and 142% respectively. Of course, all these are significantly different MONETARY amounts. The US GDP is $14.6 Trillion (US). So it's monetary debt is nearly $14 Trillion. But the US also produces much more, and therefore has greater cash flow, so, technically better ability to pay back. I won't get into the nitty gritty, but suffice to say, lower levels of %GDP debt for a healthy economy are better. But, while no debt is excellent, it is rarely possible, nor likely. So low levels are considered normal and healthy.

It varies widely what IS considered "healthy" debt, but in general anything under 50% is considered reasonable and healthy, depending on the economy. Here is a global map of %GDP debt (reference).

This map will be slightly different to one made from the %GDP debt I was quoting as it is made from rankings done by the CIA not the IMF. But the principle is illustrated.

Australia's debt, at 20% is considered very healthy and is among the lowest in the Western world. Our government does not live beyond its' means, although it has done in the past and will probably do so in the future, should our economy be mismanaged at some point again. To give an example of dubious relevance, but easy to understand, Australia's income is $100 000 a year. We want to buy a block of land that costs $20 000. It would not be difficult to get financing for said land, nor would it be inadvisable to do so, assuming the land will appreciate (which it almost certainly will). It is a reasonable investment. This is an example of our current debt in one lump sum.

When it comes (finally) to the NBN, we want to build a national network that will cover the country (or 93% of it fixed line) with fast, reliable, cheap (I'll get to this in a following post) and essential communications. The NBN will cost the government $28 Billion dollars, which it will borrow;

Note- this does NOT come from the budget as some media outlets have reported. This is government debt (or government capital debt) and only the interest is paid from the budget. Obviously interest, even at an average 3.5% (Bloomberg) on $28 Billion dollars is significant, but this is only accumulated until NBN Co. begins to turn revenue and pays back to the Government.  Bond maturities (interest payouts) are calculated and taken into account in the National budget. They are planned, as each bond can have a different maturity time, and contingencies are in place for early terminations of maturity. See here for an interesting article about the politics surrounding these issues.

So the $28 Billion the Government ponies up for the NBN is approximately 25% of our current debt or 5% of %GDP debt. All that JUST to explain that single sentence?? Well yes, and it is even more complex than that (here's an interesting piece on CBA or Cost Benefit Analysis of the NBN usually done on infrastructure and how difficult and often useless they are). We haven't yet taken into account the monetary return the NBN will provide for the Government (NBN Co. are predicting 7% returns by 2020) the ongoing returns from revenue and cash flow and the possibility (hopefully not in my opinion) of the sellout of the NBN after it is complete and a lump sum return. And THAT doesn't even include the actual, tangible economic growth gain the NBN will provide! There is a great Blog article by Google Australia which shows how much the Internet contributes to the Australian economy.  It's estimated it will "boost GDP by $27 Billion in 2011." So the Internet, at its' current demand, will boost the Australian economy by almost the same amount estimated the Government will spend on the NBN.....and that's BEFORE we take into account the increased economic activity the NBN will provide once built.

Now some might say this is a narrow view, "blinkered" if you like, by a love of technology and all cats playing the piano videos on youTube.  But the fact is, there is measurable, quantifiable data that shows the Internet is, quite literally, revolutionising the way we live. There is anecdotal evidence, such as the verb "to Google" something being entered in the Oxford Dictionary. There is the observable consumer evidence which shows Australia has the 2nd fastest uptake of smartphones in the world (behind only Singapore) and more than 50% of us are now using them. There is personal evidence; when was the last time you looked up an address in the Yellow Pages? Or even a phone number for that matter? And if you did, was it in the paper book, or online? Did you REALLY get that idea to see The Hunger Games from TV, or was it on an Ad next to your email? Businesses like JB HiFi, Harvey Norman and Myer have been realising in the past 2 years they've been late getting on the band wagon of online and their plummeting revenues reflect this. Why would your average consumer pay $100 for something from Harvey Norman, when they can buy the same from an Australian selling on eBay for $75 including postage if they know what they want?

The fact is, we have only been living with the commercial Internet for around 20 years (and that's being optimistic, global information traffic on the Internet was around 1% in 1993) and we are only beginning to see the potential it has. Currently, Australian demand bandwidth is at between 10 and 20Mbps. By 2016 it is predicted to be close to 100Mbps and by 2025 to be close to 1 Gbps. Even if Telstra were to roll out HFC in massive quantities, it would not be able to afford to do it to even half the country by 2021, around the time the NBN is due for completion. The Internet is ever expanding and ever consuming. The only way for Australia to grow, both nationally and internationally, is to keep pace with growing Internet demand. The NBN is a golden opportunity to allow and encourage this growth. It is large national infrastructure. But, considering the growth of Australia since the late 1940's (7.5 Million) compared to now (~23 Million), it is not much more expensive than building the original CAN (Customer Access Network) that we still have now for the increased population (£42 Million- or $10 Billion in todays money). And this is not counting the life of the network, pegged at 50 years in its current form, but with upgrades to the hardware, but not the lines, well beyond that.

And if we were to cancel it now? Cut our losses and go with the cheaper option (explained next!) Well, I won't go into detail, many people have done that already. Suffice to say, it'll save us.....about $1 Billion. Sounds like alot. What would that get us? Well, in the 2011 budget, $1.1 Billion was saved with "Public service efficiency." It is also about 1/8 of the budget of Community Services and Culture, our lowest budget category. Or 1/120 of Welfare, our highest budget spender. $28 Billion is about twice the current yearly infrastructure budget. That's BUDGETED infrastructure, such as upgrades of major highways and motorways like the M5 and Pacific Highway. So for twice the annual budget we spend on infrastructure, we have an almost entirely new network of cables in the ground and hardware to run them at current speeds of 100Mbps, rising to 1 Gbps in 10 if that's not bad, tell me what isn't?

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