Monday, July 5, 2010
My Cost Benefit Analysis on the NBN
The Senate report ( process here, final report here, pdf (327k) here) on the viability of the NBN asked for a cost benefit analysis. Several have been done already, including:
* Ergas and Robson (2009) here, found $13 - 20 billion loss, based on all revenue generated from usage fees (reported here, pdf here)
* Gans (2009), found overall social benefits, using a month consumer payments and surplus analysis here, and pdf here.
* My previous attempt on this blog (Apr 2009), which suggested an operating shortfall of $40 million per month: available here.
I have updated my Cost benefit analysis of the NBN and attach it for your information (here ; updated for broken link, Apr.2013). Given the recent Senate Report calling for a cost benefit analysis, and media talk, I thought I would have a go at putting one together. About three hours work.
I found that to achieve a positive NPV, the NBN needs to add between 0.5 and 1.0% to GDP per annum. Approx $7 billion per annum, proportional to % build complete from network 50% complete. I add NPV for NBN Co, including projected revenue, depreciation, operating costs, but no interest.
This model assumes, funding/interest at 5%, consumer takeup maximum 70%, corporate takeup maximum 90% at year 8, pro rata over the course of the build, with accelerating takeup as the build passes 50% complete.
In the model I assume that the Federal Government pays interest on $43 billion invested at 5%. That Telstra loses 50% of its value over the network build (about $20 billion). That NBN Co earns profits, which pay down the $43 billion NBN investment, and NBN Operating expenses of 20% of depreciation (about $430 milllion after build). Depreciation straight line at 5% per annum.
Future adjustments to model could include: grossing Telstra loss up to future value (adds about $10 billion, and reduces NPV by $7 billion), adding other telco losses, eg Optus, AAPT, shaping GDP gains from high in mid term, and dropping over the longer term.
The spreadsheet allows all these variables to be manipulated and show the impact on NBN and National NPV. I look at cashflows for years 1-15, and discount at 5%, including debt outstanding at that point. If you have any questions about the model or would like to discuss it, please let me know.