The NBN 'summary' business case

Sean Garman on the NBN summary business case:

I have just read the NBN “Summary” business case and I cannot believe anyone would produce something so shoddy and then to get it signed off by parliament.

To put it into context. I recently completed a transaction where there was financial, commercial, tax, legal and insurance due diligence completed by both the seller and the buyer. In total, well over 1,000 pages worth of due diligence was read. That transaction is for a fraction of the cost of the NBN.

This project is bound to fail. The business case does not describe the take-up rates and the impact of lower take-up rates. It does not provide a revenue and EBITDA “bridge” that shows where and when the growth is expected to come from to provide enough confidence that it is achievable. It does not explain the debt structuring and whether it will be guaranteed by the government or not which is vital if it is to get debt costs anywhere near the 6% long-term bond rate.

The WACC is assumed to be between 10-11% but it does not explain how that figure is derived and the underlying assumptions (I can guess but in any investment it should be spelled out clearly). It states a risk premium takes a 15-20 year project and discounts it to a shorter-duration bond rate. In short, the financing case is not properly spelled out, the take-up rates are not sufficient for a third party to sensitise and the risk management section is so poor as to be useless.

Malcolm should be able to rip this apart.

Sean Garman works in banking in the City of London. He was Vice Chairman of Macquarie University Student’s Council, President of Macquarie University Liberal Club and currently provides policy advice to Conservative Party MPs and MEPs on economic policy.

Comments

[Andy]

1.

Consumers sign up for 24 month telecommunication plan
Taxpayers are now signed up for a 24 year NBN company
(NBN docs reveal the NBN should be fully paid off by 2034 if you believe the summary)

[Vikas Nayak]

2.

my thesis was longer than this. Im wondering exactly how much was removed because it was declared "commercial inconfidence"

[Andy]

3.

It really gives me the shits when politicians hide behind the “commercial inconfidence” BS excuse.
Politician are there to represent the people, not to hide things from the people.
So much for Gillard’s swallow “let the sunshine in”. She and Gov are just using the same playbook of treating the people like mushrooms, content to feeding us endless amounts of BS.
This Gov is rotten, sneaky and incompetent. We the people are fed up. Don’t Stand on Me!

[Andy]

4.

Terry McCrann Today.
http://www.heraldsun.com.au/business/terry-mccranns-column/broadband-fairytale-nbns-latest-chapter/story-e6frfig6-1225960519762

Although actually, while they say it's a good idea, the numbers that do leak through the deliberate cloak of obfuscation actually prove the exact opposite. That it is a very bad idea.
Further, a very bad idea which will chew up and waste billions of dollars of taxpayer money even on the wildly overoptimistic (and undisclosed) assumptions about costs and revenues that the 'Business Case' makes.
The NBN's return is "expected" to exceed the long-term bond rate. So it makes sense for the government to borrow the $27 billion at around 6-7 per cent, to give to NBNCo?
Actually, absolutely no. Because NBNCo is actually a high-risk project, its cost of capital is estimated at 10-11 per cent averaged over the next 30 years. So if it's just returning, say 8 per cent, it will be destroying value.
Worse, for the first few years, its capital cost will actually be much higher. As NBNCo itself says, around 25 per cent. Precisely when its 'return' will be much less than the long-term bond rate.
The reality of compounding, and the time value of money, means that the huge losses that will be incurred upfront will be almost impossible to recoup. Even on NBNCo's own internal optimistic case.

What a dud!
Where's the P&L, Balance sheet, Cash flow??
And the Taxpayers will carry the can for over 24 years!

[Sean]

5.

I think we need to ask if the government is going to stand behind the NBN. A guarantee would mean that if the NBN fails to get customers to sign up, the taxpayer is still liable for the debt interest and amortisation payments. This guarantee is the only way I can see private sector investors preparing to sign up at a low interest rate (just above the LT bond rate).

Andy - Terry is completely correct. I cannot believe the lack of detail here. You need the P/L, B/S and cash flow statement because it shows whether or not it is has the capacity to service the debt and allows investors to sensitise the assumptions. We do not have that but we are expected to pay for it!

Andy, in your work life would you recommend a company if they are not prepared to give this basic info across?

[Andy]

6.

Sean,

There is no way I would advise a client to invest funds into an entity like the NBN, even if it had a government (aka Taxpayer) guarantee. The cost of capital is greater than the estimated return = FAIL!
What’s worse is how the independent senators got sucked into this Gillard Gov Ponzi scheme – its mind boggling.

[Sean]

7.

Andy,

What concerns me is that when it comes to private investors taking risk, you and I would demand the utmost transparency. But when it comes to public investment and taxpayer risk, that is not applied.

I guess it is because for the Senators it is Other People's Money - they do not take the hit if this goes pear shaped.

[Phil S]

8.

The fact is most politicians on both sides, are career pollies and party apparatchiks, and there is a serious shortage of real business background and experience. What business experience does Senator Conroy have? What business experience does Gillard have? I doubt that there's anyone in there to raise the kind of points raised in this article and the following comments. This is really frightening.

[Andy]

9.

Sean,

Dead right. Politicians find it too easy to spend other people’s money. We need to remember our Parliaments are really just money exchanges – exchanging our money for dog shit. Only Government and our Military can buy $5,000 Hammers etc
Jesus, it would have been cheaper for Gillard to buy TLS outright -> TLS MKT cap is $35.8 billion.

[Georgina]

10.

Excellent article Sean. I have not read the "summary"
but it really tells of a very fishy way to conduct business. Where is the transparency when not all is revealed. We the taxpayers wanted answers but no - we are going ahead no matter what you Australians think. Terry McCrann's article is very true. How Xenophon could fall for such a blatantly and obvious cover-up.. How much more are we borrowing going to borrow from China? They must be laughing their heads off and they will be keeping their eyes on the progress ready to make an offer to take it over.

[Sean]

11.

Thanks Georgina, but I think this is more of a rant than a proper article ;) I was literally outraged when I read through the document. It was lightweight to the point of uselessness!