The return on Ruddnet

Let's have a look at the numbers.

Malcolm Turnbull is saying that an optimistic one-year rate of return on the proposed $43 billion of investment in the NBN is

[{(($70 * 12) annual subscription rate times 4.5 million subscribers) minus $260 million in annual costs} divided by the investment of $43 billion]

These are optimistic assumptions, but we can work with them.

"[O]ne thing is very, very plain. Unless we (completely unrealistically) assume the vast majority of potential customers take up the Ruddnet services and that they will pay very high monthly fees in the order of $150 to $200 a month then there is no way that Ruddnet can deliver a commercial return on $43billion of investment."  An extract from Malcolm Turnbull's Op Ed in The Australian

The right way to asses an investment is to look at the internal rate of return (IRR). That is, the discounted yield on an investment over time for a given 'discount' (or interest) rate.

Let's assume that the appropriate discount rate is the government's cost of capital. We'll assume that the coupon value of the 'infrastructure bonds' issued to fund the $43 billion is 6%. That's a substantial premium to the current 10-year Australian government bond rate (about 4.5%). We'll also assume that the revenue ($3.78 billion on our assumptions) is maintained in real terms—an unrealistically high revenue.

The 10-year IRR on this assumption is negative (-4%). The 10-year net-present value of the investment is also negative (-$14.7 billion).

As Turnbull acknowledges, it may be worthwhile to do this even if the result is a massive loss to the taxpayer. But the terms of the debate must be framed accordingly: should this choice be placed ahead of, say, roads or public hospitals, or more funding for universities?

Update:  Former Optus director Paul Fletcher also thinks the Ruddnet proposal commercially unviable. He concludes it is a ruse:

Perhaps the real intent of the decision is to shock Telstra back to the bargaining table — in other words, the Government is still covertly following the second option which I identified. It will certainly work to get Telstra talking — although any serious discussions will be delayed until after the new chief executive is appointed."   Extract from Paul Fletcher in New Matilda

Tags for this entry: policy evidence investment nbn