Tuesday, August 17, 2010

Election 2010: Day 32 (or, the cost, the benefit and the profit)

Well today a few things happened – the debate debate continued, Tony Abbott tried to give us a reason to vote for him and couldn’t, the Liberals released an infrastructure plan that involved bonds which apparently do not constitute debt and Malcolm Turnbull became the shadow Communications Minister.

First the debate debate. It’s all a farce and was such as soon as Abbott last night challenged Gillard to a 30 minute debate on the economy last night. When you read the proposal from Brian Loughnane you see it says the debate:

“would begin with 90 second statements from both leaders and then a free-flowing discussion of the key issue of the economy and other important issues election campaign”.

Abbott on Q and A last night also let slip it wasn't going to be a debate on the economy at all:

I hope the Prime Minister accepts and to make it easier for the Prime Minister to accept I've agreed to a half an hour debate, largely on the economy, just her and just me, moderated by the ABC's Chris Uhlmann tomorrow night.

Thirty minutes and only largely on the economy? Pathetic.

It seems the Courier Mail (you know that bastion of objectivity), and Sky News (yes that other organisation famed for neutrality of political matters) are going to go ahead with a Brisbane Rooty Hill forum. Well Julia has announced she will turn up. Not sure who will go first – or if David Speers will actually moderate the event and ensure no Dorothy Dixers are allowed. The ALP has put out a statement which was read out on the 7:30 Report saying that she wants to debate but if not, she will appear after Abbott. If she goes on last – well played.


r621338_4173940Next up for the day, Tony Abbott gave an address at the National Press Conference to outline why to vote for him. It turns out the reason to vote for him is because he is not Labor.

His speech, like all Abbott speech es was all negative.

I can’t be bothered dealing with it.


Thirdly we get to the Liberal Party’s infrastructure policy came out. It is, to be honest, a joke:

Under this proposal, the Infrastructure Partnerships Scheme will allow the operators of qualified projects to issue Infrastructure Partnership bonds. These 10 year bonds will receive concessional tax treatment in the form of a tax rebate.

Specifically, the assessable interest income generated from the bonds will attract a 10 per cent tax rebate irrespective of the tax status or rate of the taxpayer. Accordingly, a superannuation fund would generate a saving of two-thirds of its tax payable on the interest from these bonds.

Now in the press conference and again at the National Press Club, both Abbott and Andrew Robb were at pains to say bonds were not debt. Yep “Infrastructure Partnership Bonds” are not debt. I’m not sure what they think bonds are, but for the entirety of history they have been classed as debt by economists.

From what I can gather the policy will involve private companies tendering for infrastructure projects and if they are successful they will be able to issue these “Infrastructure Participation Bonds” which appear to be backed by the Government. People who buy the bonds will be able to claim a 10 percent rebate on the interest they earn from the bonds. Now the problem of course is what will the bond yield be and, if they are backed by the Government will that mean they will be the same as treasury bonds? Who bears the risk of these “Infrastructure Partnership Bonds? Because “partnership” implies the Government is taking on some of the risk.

The other problem is how companies will be able to qualify for these bonds. The policy states:

…infrastructure projects will qualify for the concessional tax treatment through meeting set criteria, including:

  • The project qualifies as a national priority under Infrastructure Australia’s pipeline of infrastructure projects;
  • A public cost-benefit analysis of the project has been conducted; and
  • The project generates sufficient returns such that the debt can be serviced by the revenues generated by levies or charges that relate directly to the project.

Let’s deal with the third point first: In effect the project has to be one which is commercially viable. In fact one that would be commercially viable without these “partnership bonds” so the question needs to be asked, why the hell is the government chipping in for a project which would have gone ahead anyway? Is that a good way to keep down debt?

homerSecondly, the whole point of government infrastructure is that it is spent on areas that are not necessarily “commercially viable”. How many roads in rural areas do you think are commercially viable? How many railways? What it means is a bridge for example would only be built under this scheme if it could then have a toll attached. Now that may be nice if it is going over Sydney Harbour, but what if it is not in a densely populated area?

The proposal smacks of Homer Simpson’s campaign to be the Springfield Sanitation Superintendant: “Can’t somebody else do it?

On the second point about the cost-benefit analysis – it is obviously a slap at the National Broadband Network which is apparently so terrible because it hasn’t had a cost-benefit analysis done. I’ll get to that in a second, but it again underlines the Liberal’s approach to infrastructure – Can’t somebody else do it?

Yes infrastructure should – nay must – have economic benefits, but economic benefit does not always mean commercially viable. The problem, for example, with talking about what the Government could have spent the money it will spend on the NBN is it does not do the same for commercial communications companies. They can spend money doing other things as well – things more profitable in the short term – things which will improve their share price. And if those things exist, they will do them before building a fibre network.

It is why I live a 20 minute car drive from Parliament House and yet the fastest download speed I can get is about 3.97 megabits per second, even though my broadband plan offers me a theoretical maximum download speed of 20MBps.

But not to worry because the Libs won’t even bring this in. How do I know? Read their policy:

Under this plan, the Coalition will seek advice about the creation of a new form of infrastructure financing product

A final decision on introduction of an Infrastructure Partnership Bonds Scheme will be a matter for government upon receipt of expert advice

Those two sentences give them a nice easy out – especially as the expert advice will no doubt tell them it’s a crock.


Due to Tony Smith’s complete incompetence as Shadow Communications Minister, Malcolm Turnbull has stepped into the breach. Yesterday he wrote a piece for the Business Spectator, and today it got a run in The Oz, under the heading:

Seven reasons why the NBN will fail

To be honest I can’t actually see his “7 reasons” because after number two he seems to make a long point and then ends with “finally”, but let’s have look at them:

…the NBN will cost far too much to build. It will be the largest investment of taxpayer funds in the country's history. While Labor claims it will find private partners, the NBN is so risky and its likely returns so low that it will probably be entirely funded by taxes. And even the chief executive of NBN Co admits the final cost is highly uncertain.

Several countries have subsidised high-speed broadband, but not on the scale Labor proposes. The taxpayer contribution in Singapore was $200 a person and in New Zealand $330 a person. Labor's extravaganza will cost Australian taxpayers more than $2000 a person.

Well the first sentence is opinion supported by a false comparison: namely, that because the NBN will cost more per person in Australia than it does in Singapore it is too expensive. Well let’s just have a think about that. The area of Singapore is 710.2 km2, and its the third most densely populated country in the world. Australia has a land mass of 7,617,930 km2 and is the 233rd most densely populated country in the world. Which do you think would be more costly to roll out a fibre network?

He is also only thinking in commercial cost-benefit terms (ie profit) – he is not thinking in economic cost-benefit terms. The problem with a cost-benefit analysis is it all depends on the assumptions you put into the model. I could do a cost-benefit analysis of the NBN and have it coming out a winner because I will assign a great return to non-financial aspects than you will, you for example may give negligible value to education or health impacts. Anyone who thinks there could be only one version of an NBN cost-benefit analysis is kidding themselves. The main problem is how to assign costs and benefits, as Joshua Gans and Stephen King wrote in their paper, “Big Bang Telecommunications Reform”:

… it must be recognized that any analysis of the social benefits of the NBN will be extremely imprecise. Alternative cost-benefit analyses of the NBN have been presented. These studies reach substantially different conclusions – from large net positive to large net negative so- cial returns. This gap is unsurprising. The studies make very different assumptions. This is under- standable and reflects the significant uncertainty surrounding a project like the NBN.

One thing that is also forgotten in the desire from the Libs for a “cost-benefit analysis of the NBN” is the structural separation of Telstra. Have fun guys assigning the cost and benefit of that aspect of the policy and putting it in a document that will be agreed upon by everyone…

Think about this aspect of the flexibility of cost-benefit Analyses as well when you look at the Libs need for their infrastructure programs to have them.

Turnbull continues:

Second, the NBN will increase internet costs for users. Once the government has built a white elephant utterly incapable of earning a reasonable return on capital invested but assured of a monopoly over carriage of internet services, what do you think is going to happen to user charges?

If the government instead decides to charge reasonable wholesale fees, the cashflows earned by NBN will not justify a value remotely near $43bn.

Well firstly, this $43b is a figure that gets thrown around ignoring that Telstra is ponying up $11b of it. But still, again it’s all about profit for Malcolm. It shouldn’t be done because someone won’t be able to make a decent enough buck out of it – which ignores in the first place why most people in this country don’t have fibre to the premises yet. The Libs don’t get that infrastructure can be a public good while simultaneously not being commercially viable.

More Turnbull:

Let's say the NBN turns out to be the dud that most business observers expect and that five years down the track an alternative emerges providing adequate service at a lesser cost; say a variant of wireless.

Don’t you love how he throws in the first line as though his opinion is the word of God? And this alternative? Yes good old wireless – that wireless which will never be as fast and will never do what fibre to the premise can do. Sure we’ll always have wireless ipads etc. But Turnbull is doing the standard Liberal line of focussing on personal use – and also aligning that personal use with what we are happy with right now. The NBN is much more than kids downloading stuff off of bittorrent.

But even on a personal level, “adequate services” is an interesting thing. Ten years ago I would never have dreamed I could watch a press conference during an election campaign live on the internet. Five years ago I would have have been content that I would not be able to afford such a fast connection. Now I get stroppy if it buffers for 5 seconds. I haven’t got richer, and am now indulging in luxuries – I just have the type of broadband connection everyone thinks is normal.

The world changes and the one thing that will not change is us being content with “adequate” internet connection – because what is adequate now, will not be in 5 years time. Turnbull and the Libs are betting it will be (how’s that for picking winners?).

Turnbull finishes:

Clever governments understand that you fix problems by empowering initiative and enterprise, by creating an environment where the ingenuity and flexibility of the market is best able to deliver the cheapest and most effective solutions.

He leaves out “profitable”. Governments cannot make a company do something if it is more profitable for them to do something else. It is why climate change policy NEEDS a price on carbon which will make doing something on climate change profitable for companies. But on this issue we can’t “put a price on fibre” as it were. He also again ignores the separation of Telstra- as though the NBN is just about the internet. Stephen King (who is neither a complete NBN apostle or critic) puts it nicely:

There are two alternative policies for broadband internet in Australia.

  1. use government money to build the NBN using fibre to the home; or
  2. restructure Telstra and leave it to the market.

The government’s policy is the first of these. The coalition’s policy is neither. And that is the coalition’s problem.

Turnbull and the Liberals see the NBN as purely a commercial decision of profit and loss, they see not the public good.

My advice to those who those who win Government and decline to build infrastructure – you are mere idle kings, for whom there is little profit…


For some light relief, here’s the election campaign in Lego: Tony’s Boatphone:


SM said...

Based on Turnbull's argument you'd think he built Ozemail by personal tech know-how. True he saw an emerging market - but like any merchant banker, got in on the ground floor, sold at the height of the dotcom boom and took his profit. Perhaps he is still thinking as a merchant banker, and we all know how well Goldman Sachs has been doing lately.

As for the debate farce, poor Tony, if he doesn't get his own way he is going to take his ball and go home. Should Australia elect him & his lot, that is going to play out well both in the media and the international stage.

Bushfire Bill said...

Interesting to think that Turnbull made his big pile from a telephone modem based business that required NO new cable infrastructure.

Malcolm thinks it's still 1993 and that somehow or other someone will invent a widget that gets around basic physics. Hey maybe they'll invent a new modem that goes at, wow, 56k!

That's what the last 17 years has been all about.

Copper is worn out now.

db said...

Grog, the other thing to be remembered is that in Brisbane when Peter Beattie sold the electricity retail wing of ENERGEX, Orgin paid over $1000 per household connection. Basically they bought the right to retail the electricity to the home or office.

So by that same rationale NBN must be worth a significant multiple per household. That is in raw $ not just the "greater good" argument.

ssdfsdf said...

Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.

L said...

Ah, I think I see what they mean when they say these bond things are not debt - they are not Federal Government debt, as they'll be issued by companies (and State governments? I'm not sure). Basically they're a tax concession for investments in certain chosen infrastructure projects, which could in theory be a good idea but will probably just lead to more toll roads that nobody wants.

Anyway, from their policy document (yes I read part of it, god help me):

We will strengthen the role in Infrastructure Australia and introduce a new infrastructure financing product that will Australia meets future economic infrastructure needs.


In this way, the Coalition proposes that the Infrastructure Partnerships Scheme will provide an impetus to spur on those projects that already make commercial sense, but not handouts to projects that do not boost Australia’s productive capacity to sufficiently generate economic returns.

They're not even trying to make sense here.

L said...

Meant to add: best of luck to Hockey in trying to explain the practical difference between revenue forgone due to tax concessions and interest paid on debt.

Anonymous said...

Thanks for keeping me sane in these last weeks, Grog.

Another excellent clinical dissection of the LNP's NBN policy.

I believe future political historians will refer to this one as "the Broadband Election", and be scathing of the Coalition's short-sightedness.


Nicholas Gruen said...

You're right that the description of those infrastructure bonds could be clearer - and more equivocal - , but it is fairlyclear that the 'bonds' are debt to private interests. On a quick squiz I couldn't see any government guarantees in there.

2353 said...

Thanks again Grog for a great post. Here's something of interest to add to the debate - a critical piece of analysis on the Infrastructure Bonds posted on ABC Online this morning.


Greg Jericho said...

Cheers Nicholas, I did hear Andrew Robb this morning say there would be no govenrment guarantee on the bonds.

And yep Bleeter, Look on my works, Ye Mighty and despair!

L - it seems they think if you mention the word infrastructure enough times that makes up for not actually building any...

Anonymous said...

What is clear is that Rabbitt was running away from a Debate on the Economy all along. All the to and fro about rules, where, etc. show he cannot do it and is terrified of screwing it up in public.
The "costings" saga is delegated - just like the Internet to his "front Bench" - (read A Robb as Hockey is there for ballast not argument). This is in case someone asks a question that Rabbitt would get wrong.

oliviareeves said...

Turnbull's modem approach seems to drift and make some changes... I enjoy the work done by these people...

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