news Shadow Treasurer Joe Hockey has taken an axe to the Federal Government’s budget treatment of its National Broadband Network project, arguing that NBN Co is not an asset like previous government-owned companies such as Qantas or the Commonwealth Bank, which were eventually successfully privatised.
In a post-budget address to the National Press Club this week, Hockey said that one of the reasons why Government debt kept rising while the budget was “supposedly” in surplus was that spending on the NBN and other projects such as the Clean Energy Finance Corporation were “off-budget” and financed through increased Government borrowings. “If both entities are treated on budget then the $1.5 billion surplus forecast for next year would be a $4.3 billion deficit,” Hockey said. “Add in the $8 billion of money shuffles and the deficit would be $12 billion.”
According to a research note recently published by the Parliamentary Library of Australia last year, Labor is technically correct to account for the NBN on this matter, and the Coalition is wrong.
“Australia has adopted internationally accepted accounting standards, and these are applied in the budget treatment of the NBN,” the library’s Brian Dalzell, who works in its economics division, wrote in the report (available online here in PDF format). “While the applied accounting treatment depends on the specific transaction conducted between the Government and NBN Co, this treatment is governed by accepted accounting standards and is applied equally to all government business entities (GBEs). This treatment is not determined by the return generated by NBN Co (or any other GBE).” The NBN’s long-term return is currently projected to be between $1.93 billion and $3.92 billion.
But Hockey said he didn’t accept this explanation for the NBN’s budget treatment. “The Treasurer says this is normal accounting but the $50 billion NBN and the $10 billion CEFC are not “normal”,” he said in his speech. “Their size and asset quality are not on a par with a Qantas floated for $2 billion, Commonwealth Bank floated for $8 billion, or Medibank Private valued at around $4 billion.”
“Nor is their asset quality the same. For example the CEFC is offering taxpayer funded credit for green projects where the banks will not … and on this basis it does not seem a good business proposition. And the business case for the NBN is so poor that the government refuses to have a cost/benefit analysis.”
Hockey said if the Coalition won government, one of his earliest administrative tasks to improve public finances would be to “meet with senior public servants to identify the real commercial value of the NBN and the Clean Energy Finance Corporation and their treatment in the Budget”.
However, Communications Minister Stephen Conroy didn’t take Hockey’s comments lying down, issuing his own statement following the Shadow Treasurer’s speech. “The Coalition has won the trifecta for economic illiteracy in their claims that the National Broadband Network should be treated as spending in the budget,” Conroy said.
“In his National Press Club Speech, Mr Hockey has once again shown he is unfit to be in charge of the nation’s finances. Mr Hockey not only masterminded the Coalition’s pre-election costings debacle – where the firm hired by the Coalition to audit its election promises was later fined and reprimanded for unprofessional practices – but now he wants to ignore international accounting standards.”
“The NBN is an investment in an asset from which the Government will receive a return. It is classified by International Accounting Standards as an equity investment rather than a budget expense. This is consistent with long-standing budget treatment applied by this and previous Australian Governments. Instead of wilfully misleading the public, the Coalition should support Labor’s NBN, which will provide fast, reliable, and affordable broadband to all Australians, regardless of where they live.”
As I have previously written, I believe Conroy is factually correct in his assertion that the NBN’s costs should not be on-budget as an expense. The facts of the matter are that the NBN is expected to make a return, and the government’s funding of the project is not an expense, for accounting purposes, but an investment. The Coalition has wilfully ignored the fact that even if the NBN makes a loss, that loss will not represent the entire cost of the project, but only its revenues minus its costs. Furthermore, the Coalition has not presented any analysis for what it estimates that loss might end up being.
In this sense, the Coalition’s continual claims that the NBN should be included in the budget papers as an expense appear to be quite ridiculous. If the Government did include the cost of the NBN in the budget as an expense, then later on, when it started making money from the NBN, it would then need to include those revenues as well. Frankly, this isn’t how accounting works, to my mind, and, it would appear, the mind of the Parliamentary Library, which produced a detailed paper on the issue.
I also want to address Hockey’s comments about NBN Co not being similar to Qantas and the Commonwealth Bank.
Frankly, NBN Co is the very definition of a company which is similar to Qantas and the Commonwealth Bank. And I note that there is a third company which Hockey should have included in that comment, but chose not to — another company which was also very similar to the first two and even more similar to NBN Co, because it also rolled out a national telecommunications network with government funding. A company which was also highly successfully privatised and made a stack of cash for the government in the process, and continues to make stacks of cash for its shareholders.
I speak, of course, of Telstra.
The Government’s creation of a national fibre broadband network is directly analogous to the creation of value inherent in Telstra, the Commonwealth Bank and Qantas, and my personal feeling is that this fibre infrastructure will end up being more important than any of these three companies to the long-term future of the Australian economy.
I think if we look ahead 30 years or more — and bear in mind that this time scale is “normal”, compared with the Qantas, CommBank and Telstra examples — the NBN infrastructure will continue to be worth an incredible amount to Australia, and my feeling is that the return on its investment will continue to grow over time. The estimates of NBN Co’s long-term value which we currently have, in my view, are quite conservative estimates and don’t reflect the way that financiers and the sharemarket will view the company in three to four decades.
I think at that time, the Government of the day may find that the private sector is willing to pay a very pretty penny for a well-established national company with a giant fibre network and a monopolistic grasp on its sector, with guaranteed customers. A very pretty penny indeed.
Image credit: Office of Joe Hockey