We agree that it must seem odd for a service like ours to be criticizing the government’s $43 billion investment in a national optic fibre broadband internet service.
After all, without the internet it would be a little trickier for us to get these notes out to you each day. We don’t think semaphore or the Aldis Lamp would be quite as convenient. And smoke signals haven’t worked since the Battle of Little Bighorn.
Perhaps that’s why yesterday we received quite a few responses from Money Morning readers suggesting there’s more to the new broadband scheme than we gave credit for…
Peter from Cairns wrote:
“If this happens properly, and the new Board sticks to selecting contractors and executive staff, Australia will have one of the best broadband networks in the world. But there sure are a large number of ‘ifs’!”
And Derek went further…
“What you have forgotten is that with universal high speed broadband all phones will be VOIP. No more phone line rental, and VOIP to VOIP means zero cost phone calls anywhere in Australia and cheap overseas calls. There will be a lot more WIFI stations and VOIP on mobile will be common.”
And Jack suggests that for many cable internet users, the speeds are already available:
“I use Optus Cable, and even though I’ve had my problems with them, one aspect of this service is that my cabled internet access is already at the 100Mbits per second speed. My wireless is 54Mbits per second. This speed is already here & now, without the need for the Fairy Ruddfather to spend $43billion of taxpayer funds (initially borrowed of course), on a fibre optic network.”
There was also this from Stephen:
Your numbers are a bit out! PM Kev is taking $1000 from every Australian, not every taxpayer if he wants to raise $21b. And that’s future Australians, ‘cos today’s taxpayers’ money is already spent (and some). I asked my 4 yr old daughter if she wanted to forgo pocket money till she was about 104 to get faster broadband and she just looked at me blankly… I am dying to see the cost benefit analysis for this mind-boggling binge of stolen money.
Followed by this from Rusty in Melbourne…
And what is the big deal about turning this new internet into a profit making enterprise? If it actually makes money what are the odds that the government are going to sell it?
And finally this morning, Chris who tunes in to Money Morning from the UK:
The numbers on the payback forget one thing: inflation. According to Bill Bonner, that’s why governments get into big projects, high inflation (and boy, we are going to get that) will make the thing seem like a ‘bargain’.
The major problem with any big government project is that they typically spend too much money providing a service that does not provide an economic benefit for the cost incurred.
We will be told that having a world class super fast internet access will make it one of the fastest internets in the world. We will be told that it will be great for the kids and their education. We’ll also be told that it will make Australian businesses more competitive and more productive.
The truth is that it may do all of those things. We can’t possibly know yet. But do these benefits justify the cost?
The government’s initial stake of $21 billion is to be financed from debt. So presuming the government sells bonds with a coupon of 3.5%, that’s $735 million a year in interest payments.
When is it going to pay that money back? We already know that any government anywhere is incapable of spending less, so it won’t be diverted from elsewhere in the budget. Instead, the more likely outcome is that the interest will be capitalized as part of a growing debt programme, to be paid off for years to come.
But according to MM reader Rusty, why does it matter if the thing makes a profit or not, it’s in the public hands after all. Unfortunately, that’s exactly the problem with state owned enterprises. Because they don’t make a profit, they become perennial burdens on the taxpayer. You end up paying more for it without realizing.
The price the user pays may seem cheap, but they are getting stung for it with higher taxes. Take the line rental charge with Telstra. When your editor arrived in Australia in 1996 it cost $11.65 per month under what was still a government owned company.
Within four years of it being privatized you couldn’t get much change out of $30 a month for line rental. It’s not that the private sector stitches up the consumer, it’s that for all those years previous, you were still paying about $30 a month for the rental, only $20 a month was coming out of your taxes rather than being added to the bill.
Aside from that, public sector companies running at a loss end up doing further harm to the economy. They stifle competition and make it impossible for new entrants to come into the market because they can’t possibly compete with a state run subsidized behemoth. Witness the flood of competition following the Telstra sale and deregulation.
It will be the same with the new broadband network.
And there are likely to be cost blow-outs because government will want to be seen to be providing the best available. That will mean 100Mbits when 50, or 30 or 10 could be sufficient. When you’re spending $43 billion, you don’t want to look like a cheapskate by providing a third rate service.
It’s not just Australia that is getting excited about fibre optics. Telecom suppliers must be in seventh heaven. A couple of weeks ago British Telecom announced it was rolling out a 1.5 billion pound (AUD$3 billion) fibre optic scheme to take fibre to the ‘cabinet’ (similar to the original Rudd plan) rather than to the home.
The UK plan will make fibre optics available to 10 million homes, roughly the same number as Australian homes, but only 40% of their total.
Now, we’ll concede that the UK is only a fraction the size of Australia. But let’s not forget that the vast majority of Australians are concentrated in five metropolitan cities.
But why would the UK plan cost about 30% of what the original Rudd plan was going to cost?
As for the total cost of $43 billion. Well, a UK government advisory group reported that it would cost them nearly 30 billion pounds to take fibre to every home. That’s AUD$60 billion, and getting close to our back-of-the-envelope $100 billion we mentioned yesterday.
The only way the super fast broadband scheme could be viable is if the government completely deregulates the entertainment – mainly television broadcasting – industry. We’re not convinced any government will do that though.
Because it will need a complete 180-degree turn in how entertainment is delivered into the household. A combination of internet and television is the next logical step. But while there are restrictions on what you can and cannot get access to, even having 100Mbits of download capability will be a waste of time if you can’t get access to the content.
Other Stuff on the Markets
Yesterday was a tough day for the Aussie market. The S&P/ASX200 dropped almost 3%. The banks took much of the pummeling.
New housing stats were released by the Australian Bureau of Statistics. We’ll have more to say about that tomorrow or Monday.
Money Morning Easter Weekend schedule. While you’re scoffing your Easter eggs, and/or going to church, you’ll still receive Money Morning and Money Weekend over the long weekend. We are publishing as usual.
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