This article by Shadow Communications Minister Malcolm Turnbull first appeared on his site and is re-published here with the permission of his office.
opinion The Sydney Morning Herald today published an oped of mine about the need for greater transparency on the economics of the NBN and also an editorial in which it broadly supported the need for full disclosure of the financial analysis, business plan which (hopefully) underpins the investment.
However the Herald went on to take issue with my businessman-like desire for financial clarity and made this point: “Turnbull also argues that government should not invest in projects which the private sector deems uncommercial. But that is precisely the role of government – to provide the public services and infrastructure that no one company has the incentive to build, but from which all citizens benefit.”
The editorial goes on to compare the NBN with schools and hospitals: “But perhaps his experience as a businessman blinds him to the realities of government. It leads him to apply the sort of investment analysis a private company might do in deciding whether to set up a new business. Were the government to take a similar attitude to spending money, arguably nothing would get built. Who knows how long it takes before a school or hospital starts to earn a commercial rate of return?”
The Herald should not let the Government off the hook here so lightly. The NBN is not a public good, like a school or hospital, provided (essentially) free of charge to the public. It is a commercial business which will charge for its services. The Government has held it out as being so commercial that the private sector will want to invest in it and in due course buy it from the Government at a price that will recoup the Government’s investment.
In short, this is not a case of my characterising a non-commercial government project as a commercial one, rather it is the Government that has claimed it to be a thoroughly commercial project. It is important to bear in mind here that almost invariably telecommunications networks (including optical fibre to the home networks) are built by the private sector as commercial projects.
In other words the financial benchmarks that are applied to projects of this kind are well understood in Australia and around the world. The technology may be approaching rocket science, but the financial analysis is not.
It is worth recalling Treasury Secretary Dr Ken Henry’s remarks in 2009 about the importance of rigorous cost-benefit analysis:
“To start with, like all government spending, there is a need to ensure that any activity is cost effective. Government spending that does not pass an appropriately defined cost-benefit test necessarily detracts from Australia’s wellbeing. That is, when taxpayer funds are not put to their best use, Australia’s wellbeing is not as high as it otherwise could be. It is important, therefore, that policy-advisers are able to access quality evidence and use robust frameworks to assist governments to judge the relative merits of alternative policies.”
In fact, contrary to the thrust of the Herald editorial, the need for rigorous cost-benefit analysis of Government projects is even greater than it is for private sector projects. I don’t want to labour the politics of this, but we are dealing with a Government that has already wasted billions of dollars incompetently and dangerously installing pink batts in roofs not to speak of massively overpaying for fairly basic school hall buildings.
This is not to say that public sector cost-benefit analysis is always easy or straightforward. Especially when government services are provided free of charge to the user the usual price signals of the market are not present to let you know whether you are doing well (you are making a buck) or badly (you are going broke). But this is not the the case with the NBN.
It is not a case of the Government doing something the private sector would not do (provide free school education) but rather it is doing something which is almost invariably done by the private sector in developed economies.
The NBN is a case of the Government going into business. So we first need to see the full financial model for the NBN, we need to be able to debate and test the assumptions on which it is based and in particular the assumptions relating to market penetration and the average revenue per user expected.
If, as is very likely, the conclusion is that the NBN once completed will have a value much less than its cost we need to have a debate about whether that subsidy is justified by some other intangible benefits. We also need to debate whether those benefits could be obtained by a different, less expensive approach. But above all we must not fall for the proposition that Governments should be subject to less rigorous financial scrutiny or accountability than business.
Dealing as they are with other people’s money, trustees as they are for the financial security of generations to come, Governments must be rigorously transparent and accountable in their investment decisions.
Image credit: Office of Malcolm Turnbull