NBN Co shouldn't 'tax' city customers: Ergas

NBN Co shouldn't 'tax' city customers: Ergas

Summary: Conservative economist Henry Ergas has said that NBN Co should scrap its uniform wholesale pricing model and subsidise regional Australian broadband directly.


The Australian Competition and Consumer Commission (ACCC) should force NBN Co to scrap its uniform wholesale pricing model, and instead force the company to subsidise regional broadband pricing directly, according to conservative economist Henry Ergas.

As part of the Labor government's vision for the National Broadband Network (NBN) project, the price for wholesale services across the country and across fibre, satellite, and fixed wireless are the same, starting at AU$24 per month.

This means that the wholesale price for services in densely populated areas is likely more expensive than it costs NBN Co to offer it to those customers, while in regional Australia, the cost is more than is charged to retailers.

In a submission to the ACCC regarding NBN Co's revised special access undertaking (SAU), which outlines how the company will operate for the next 30 years, Ergas said that cross-subsidies should be avoided, or should be fully transparent.

Ergas said that cross-subsidisation is effectively a "tax" on customers in low-cost areas.

"Such a tax is an extremely inefficient way of financing subsidies to consumers in high-cost areas, and hence is inconsistent with the long-term interests of end users. As telecommunications is an intermediate input, imposing such a tax will not only lead to conventional allocated inefficiencies, but will also result in a first-order productive inefficiency."

Ergas argued that NBN Co should be forced to set prices in low-cost areas that reflect the actual cost of providing services in those areas. If NBN Co then wants to charge a similar price in a high-cost area, the losses incurred should be charged back to the government.

"Such a charge would obviously be reflected in the government's budget process, and hence would be subject to the disciplines, transparency, and public accountability that process involves," he said.

Shadow Communications Minister Malcolm Turnbull has suggested that under a future coalition government, customers in regional Australia would have their broadband subsidised directly from government, rather than through the current mechanism of forcing equal prices across the board through NBN Co's wholesale price.

The news comes as Opposition Leader Tony Abbott this week said that he would "hit pause" on the NBN rollout in order to bring the budget back into surplus, despite the fact that all but the interest paid on the debt for the NBN is off-budget.

Turnbull told Macquarie Radio earlier this week that the asset that NBN Co is creating is "worth a fraction of what they're spending." He said that the money in regional Australia would have been better invested in improving mobile network coverage.

"Now, what the government should have done — and it is a scandal that they did not — what they should have done was said to the existing companies, Vodafone, Optus, and Telstra, 'look, guys, we want to provide very fast broadband over wireless in these areas that are too spread out to do fixed line, so we know you're going to have to invest a lot more in towers and equipment, and we know it's not going to be economic, so you tell us how much subsidy you need to do that, and essentially the person who asks for the least subsidy, all other things being equal, will get the job.'"

He said that this would have saved the government from running the business, and would give not only improved mobile broadband, but also good voice coverage in regional Australia.

Topic: NBN


Armed with a degree in Computer Science and a Masters in Journalism, Josh keeps a close eye on the telecommunications industry, the National Broadband Network, and all the goings on in government IT.

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  • What The?

    Clearly Mr Ergas doesn't understand that people in regional areas aren't going to like paying the true cost of the satellite and wireless services. Sounds like he's been talking to Malcolm.
    • Ergas isn't demanding they pay the full cost

      He's saying if the price charged is lower than cost it should be via a public subsidy, disclosed in the budget. We then get to argue to value of the subsidy in the most transparent manner.

      Most (all?) free market economists would agree (and appears from MT's quote above to be the Liberal party's current position).

      The release NBNCo - Fujitsu contract details expose the "value for money" performance. AUD100 million to connect just 500 greenfield premises when forecasted 132,000 gives a valuable insight into NBNCo's performance.
      Richard Flude
      • Yes...but...

        ...but he is demanding that the government do the subsidising, which ultimately has to come from other revenue - meaning we are still paying the subsidy.

        Better to pay the subsidy up front at reasonable levels - (after all, that's how the NBN business plan works) - and keep the wholesale costs under control...and keep them predictable, so ISPs can model their business in a predictable way going forward, instead of having to guess what the wholesale price might be going forward...

        The NBN pays for itself, as it stands, and generates a positive return over its lifetime...
        • A subsidy, if required, must be paid

          The question is around the transparency of the figure. Ergas position non-transparent subsidies are inefficient. Support for Australian car manufacturers probably the best example - laughably now call "co-investment".

          "The NBN pays for itself, as it stands, and generates a positive return over its lifetime..."

          Actually it doesn't. NBNCo is loosing a bundle, total expenses paid with taxpayers guaranteed borrowing.

          NBNCo is expected to break-even in 2021, after spending a forecast $63+b. A min of $44b of this expenditure is taxpayer guarantee borrowing.

          NBNCo forecasts a return of 7% over it's lifetime; a return well below that required for the massive risk. Even this is not guaranteed (current 15% take-up rate in rolled out areas well below that required).
          Richard Flude
          • Your numbers are wrong

            >(current 15% take-up rate in rolled out areas well below that required).

            Wrong. It's in the 30s and 40s in the older areas, and is increasing over time. The Telstra and Optus deals should take this out to 80% to 90% after the 18 month transfer period.

            >NBNCo forecasts a return of 7% over it's lifetime;

            Yes. It's a utility earning a utility return rate.

            >a return well below that required for the massive risk.

            What risk? The risk of people suddenly not using broadband in the next 10 years?

            >The question is around the transparency of the figure.

            You can achieve "transparency" by legislating to require that NBNCo publish a full report on the operation of the cross-subsidisation, or to provide the necessary figures to an external auditor. Completely destroying the current wholesale model is a moronic "solution" to this non-problem.
          • Indeed Mike

            We keep hearing about risk...

            These ultra-conservatives actually view the NBN simply as an investment, akin to the ASX :/

            They aren't interested in benefits (place silly CBA argument....here) to Australians and Australia's economy.

            Worst case scenario... our tax dollars will be needed for some of the cost (fancy using our tax dollars to provide infrastructure for us tax payers... shock/horror).

            Best case scenario... NBNCo is a rip roaring success, which totally pays for itself/debt and there isn't any taxpayer impost.

            So really, why all the FUD from these people?

            Ooh that's right the idea of the NBN doesn't fit within their political ideology or their own wallets...

            Yes the anally conservative "Veruca's"...want a subsidy tooooo!
          • You are supporting Ergas

            A direct subsidy would lower prices on the NBN (at uniform prices).
            This would increase take-up rates across the economy of broadband services and higher speeds as well.

            Why are you attacking his model for not incorportating economy wide benefits when Conroy's has higher prices?
          • What is a

            Veruca? Please explain?
            Blank Look
          • K

          • Wrong?

            "The average take-up rate for services so far sits at 15 percent, but sits as high as 44 percent in the southern New South Wales town of Kiama."

            15% it is, average across the network the revenue reality. You can predict any value you like.

            "Yes. It's a utility earning a utility return rate."

            7% was required to keep it off-budget. There's no guarantee of such a return for any project.

            "What risk? The risk of people suddenly not using broadband in the next 10 years?"

            Not realising forecast revenue, costing more than budgeted, technological change, change in govt, etc.

            The rollout alone is a 10+ year project.

            "You can achieve "transparency" by legislating to require that NBNCo publish a full report on the operation of the cross-subsidisation, or to provide the necessary figures to an external auditor. "

            True, however the later encourages the inefficiencies Ergas alludes to. Even then what you're saying isn't required by NBNCo.
            Richard Flude
          • I understand

            interest payments on the government supplied (on borrowed money) capital is on budget, which means the taxpayer is already funding the NBN rollout. Remember this government has no money in the bank and is borrowing large sums of money every day to fund its operations.
            Blank Look
          • Actually...

            There is a guarantee of a 7% return. In a nutshell, its legislated to return build costs plus 7% while it remains under Government control.

            As 100% of internet users and home phone users will be using it, its pretty easy to forecast revenue generation and see it will be turning a profit at some point. The profit pays off the current build costs, then generates a small overall profit - around 7%.

            That event determines the length of time NBNCo stays as a GBE, after that its anyones guess. Sell off (likely), remain a GBE (quite possible), or upgraded to the Atomic Banana tech of the day (least likely).

            To try and argue that its not profitable, based on events right now is FUD at its worst, and undermines any point you try to make.

            As for the 'subsidy', why is there such a big argument over it? Seriously. A simple cost per user makes it very simple to account and manage, while an open subsidy based on location creates a very complex accounting system.

            To me a simple attack to shut that down is that overcomplication. One shoe does fit all in this situation, why mess with that? You dont see people pay different income tax rates because they are rural, do you?
          • You are correct

            Public accounting standards not my area.

            Accuses me of profanities so excuse the multiple posts if they appear
            Richard Flude
          • Reply to karlww

            Gav70: there's no guarantee of 7% return, just a forecast.

            And no argument it's currently profitable, it isn't. We could argue whether it will ever be.
            Richard Flude
          • Nothing is guaranteed

            "there's no guarantee of 7% return, just a forecast."
            Of course there isn't a guarantee of a 7% return, none of these things can ever be guaranteed.

            Just like there's no guarantee that FttN will cost a third of FttP, as Turnbull promises. In fact, there isn't even any evidence or forecasts that it would.

            However as you point out, there are forecasts of the 7% return. They are carefully considered forecasts based on predictions which are turning out to be conservative, as has been discussed many times.

            So what are you suggesting? That we never invest in anything ever again because it can't be guaranteed that it's going to turn out perfectly?
          • Err

            You're mistaking revenue for profit Richard.

            Of course NBN isn't profitable yet and won't be for many years. Although revenue streams are already trickling through nicely.

            You do understand that the NBN is a 10 year build and it really has just past the trial phase... so seriously expecting any more is foolishly naive...

            And yes we could all argue over "whether". But I again remind you (and stress as it seems to get lost somewhere in the translation) we the pro-NBNers are in the ascendancy in relation to such arguments having the NBN corporate plan spelling out exactly how profitability will occur. Whereas you're entire argument is still based around the NBN will fail because I say it will and I know because I am the CIO of a Traffic Counting devices company (and although I sound more Liberal than Abbott I'm not).

            Thanks for coming.
          • Wrong again, Richie FUD

            "7% was required to keep it off-budget."
            You like to pretend you keep yourself informed, yet this was clarified over 9 months ago:

            "To sum, accounting treatment does not depend on the realised rate of return of NBN Co, or whether that rate falls below a benchmark. In addition, the accounting treatment does not depend on whether the government intends to sell NBN Co in future. The sale, funding, operation and all payments stemming from these activities, are accounted for in the budget statements as per normal accounting procedures."
        • "The NBN pays for itself, as it stands, and generates a positive return over its lifetime..."

          Indeed it does. As you already know the earlier conservative estimates based on 52 to 36% taking up the 12/1mbps plan over the period indicate there would be no problem doing so. Of course since real world numbers show more people opting for faster speeds such as 44% on 100/40mbps that return will no doubt happen much sooner.
          Hubert Cumberdale
        • Incorrect Understanding

          It seems that there are a lot of misconceptions about what Henry Ergas is proposing. He is proposing that everyone is charged at the marginal cost of urban customers. The extra cost of servicing rural customers is subsidised from the taxpayer.

          Currently in a cross subsidy only users subsidise rural users and push the price up to a point inbetween the two prices. This will lower the takeup rate in urban areas.

          In a direct subsidy model as the price for urban area is lower, there will be a higher take-up rate of services and also faster services. This will increase the benefits to the economy from the NBN.

          In addition Ergas argues that as a direct subsidy there will be incentives from both the corporate angle and government angle to drive efficency and transperency to reduce the subsidy and cost of it.

          As to those who argue that it pays for itself. There is no magic pudding. It always comes from the public, just different groups of the public. It is either from the government through taxes or through NBN Co' as increased fee's. Either way the public pays.
          • "The extra cost of servicing rural customers is subsidised from the taxpayer."

            In case you haven't realised that is what makes it so hypocritical. Why should the taxpayer pay? Isn't using taxpayers money the problem? So you have people willing to pay for fibre to pay back the money used to build the NBN with subsidies coming from willing customers and you'd rather part of it to come FROM THE TAXPAYERS. Amazing. Simply amazing.

            "This will lower the takeup rate in urban areas. "

            Flawed logic and ridiculous claim. So far there is no evidence that supports this.

            "Either way the public pays."

            Well no, seems to me you are the one who doesn't quite understand. Customers will be paying for the cost to build the NBN. In other words it will pay for itself eventually and taxpayers are not inconvenienced one little bit despite the erroneous claims about the sky falling. Unless the coalition of clowns win the next election and make a complete mess of it of course, but you can't rely on them proving that point for you, if we knew the result of it there would be no need to vote.
            Hubert Cumberdale