Broadband and telecommunications


Budget Review 2010-11 Index

Budget 2010–11: Infrastructure

Broadband and telecommunications

Brian Dalzell

The broadband and telecommunications measures announced in the 2010–11 Budget do not include any high-value initiatives relative to the initial $43 billion National Broadband Network (NBN) announcement on 7 April 2009. This year’s budget measures mainly concern the continuation of the Government’s NBN initiative and cyber-safety enhancement program.

The National Broadband Network initiative

The National Broadband Network Company or NBN Co. was created in April 2009 to build and operate a new high-speed NBN. NBN Co. is a wholly owned Australian Government company that has been prescribed as a Government Business Enterprise.[1]

In August 2009, the Government commissioned McKinsey/KPMG to conduct an implementation study examining a range of issues relating to the NBN, including operating and governance arrangements for NBN Co., network design, ownership caps and scope for private sector investment.[2]

The implementation study concluded that the NBN can be constructed within the $43 billion envelope identified by the Government in April 2009, even assuming the NBN does not have access to existing infrastructure. In relation to the study’s findings, the Government states that:

The study also indicates that the NBN Co will have a positive business case and that NBN Co can expect to generate a rate of return that allows the Government to cover its cost of capital.[3]

The implementation study recommends that private equity should not be introduced prior to privatisation. The Government states that:

this will allow the Government to retain policy and regulatory flexibility before introducing private sector equity investment.[4]

Excluding private sector equity in the early stages of the NBN construction achieves two outcomes. Firstly, it lowers the cost of capital as it avoids the increased cost of capital associated with equity (the cost of capital increases progressively with the use of internal cash reserves, debt and then equity) and secondly, it avoids being subject to the input of other equity holders during the construction process. This relates to the Government’s aim of retaining policy and regulatory flexibility.

Finally, in relation to the budget measures for the NBN initiative, the Government states that they have made appropriate provision in the Budget for the rollout of the NBN subject to a final response on the implementation study[5].

National Broadband Network policy implementation

Implementation

The Government has announced its intention to rollout an NBN that delivers fibre-optic access to high-speed broadband to all Australians. The Government has therefore allocated $21.3 million to the Department of Broadband Communications and the Digital Economy (DBCDE) over five years, starting from 2009–10, in support of the implementation and regulation of the NBN, including:

  • policy and regulatory support for the rollout
  • overseeing construction of the regional backbone transmission links
  • managing the Government’s shareholding in NBN Co. and
  • a national communications campaign focused on raising public awareness of the value of high-speed broadband to Australian households, businesses and organisations.[6]

Figure 1: NBN implementation—budget measures, 2009–10 through 2013–14

NBN - implementation

2009–10

2010–11

2011–12

2012–13

2013–14

Total

Expense ($ millions)

           

DBCDE

-0.9

14.0

3.9

2.6

1.8

21.4

DFD

 

0.6

0.6

0.5

0.4

2.1

Total

-0.9

14.6

4.5

3.1

2.2

23.5

Source: Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 117, viewed 18 May 2010, http://www.budget.gov.au/2010-11/content/bp2/download/bp2_expense.pdf. Note: DBCDE is the Department of Broadband, Communications and the Digital Economy and DFD is the Department of Finance and Deregulation.

Funding of $2.1 million over four years will be provided to the Department of Finance and Deregulation (DFD) to assist in managing the Government’s shareholding in the NBN Co., given the Department’s role in advising the Minister for Finance and Deregulation as joint shareholder.

The Government will also provide a further $16 million over two years to the DBCDE for a national information campaign, focused on:

raising public awareness of the value of super-fast broadband which will be delivered to Australian households, businesses and organisations through the rollout of the NBN.[7]

Of this $16 million, $7.6 million in 2009–10 will be met from existing DBCDE resources.

Regulatory framework

The Government will provide $24 million over five years to the Australian Competition and Consumer Commission (ACCC) to establish and deliver the proposed regulatory arrangements for the NBN. This measure will also fund the ACCC in its regulation of the NBN Co. in relation to:

  • implementing specific access arrangements for the NBN as well as initial preparatory work and industry consultation
  • undertaking regulatory reporting requirements and
  • providing advice on pricing and quality of service.

The costs of this measure will be fully recovered by the Australian Communications and Media Authority (ACMA) from annual carrier licence charges collected under the Telecommunications (Carrier Licence Charges) Act 1997.[8]

Regional Backbone Blackspots program

The amount of $216 million originally allocated to the Regional Blackspots program in 2009–10 has been deferred until 2010–11 to reflect actual contractor payments. From 2011–12, net capital investment in the program is expected to decline.[9]

Australian Broadband Guarantee

The budget measures indicate that the Australian Broadband Guarantee (ABG) program will now focus on the 2 per cent of premises where adequate broadband services are not available commercially. This follows independent testing of the Telstra Next G broadband service, which found that the Next G broadband network provides services that meet the program’s requirements everywhere, except at the margins of the 3G network.[10]

The increased availability of metro-comparable broadband services to residential and small business premises has reduced the funds required for the delivery of the ABG by $16.4 million over three years ($4.1 million in 2009–10, $4.9 million in 2010–11 and $4.0 million in 2011–12).

The Government will raise the minimum standard for services provided under the program to increase speed and download limits. The level of financial assistance available to eligible residents or businesses is not affected.[11]

National Broadband Network funding

Aussie Infrastructure Bonds

On 7 April 2009, the Government announced that its investment in NBN Co. would be partly funded through the issuance of Aussie Infrastructure Bonds (AIBs) to both households and institutional investors.[12]

In 2010–11, the Budget indicates that $300 million of this investment will be financed by AIBs. The component of this funding to be provided by institutional and other wholesale investors will be through the issue of Commonwealth Government Securities (CGS) as part of the Government’s overall debt issuance program. These bonds will not be separately identified from other CGSs at the time of issue, but will be reported in the annual budget statements.

Institutional investors are likely to have first access to these CGSs on issuance and government consideration is currently being given to offerings of AIBs for household investors.[13]

The contingency reserve

The contingency reserve (other purposes function) is an allowance included in aggregate expenses, principally to reflect anticipated events that cannot be assigned to individual programs in the preparation of the Australian Government’s budget estimates. The reserve is used to ensure that the budget estimates are based on the best information available at the time of the budget. It is not a general policy reserve.

The contingency reserve includes provisions for future equity investments in the NBN. This is subject to the Government’s final response to the implementation study and is not disclosed in the Budget papers.[14]

While the Government has not disclosed these amounts in the Budget papers, an indication of required total future NBN Co. funding amounts is presented in the implementation study which recommended government funding amounts. In addition, budgeted equity injections from the Building Australia Fund (BAF) to the NBN Co. present another component of future funding, as expected by the Government. These budgeted equity injections/transfers from the BAF to the NBN Co are discussed in further detail below.

Building Australia Fund

Transfers to the BAF Communications Portfolio Special Account (PSA) relate to eligible NBN matters. The 2010–11 Budget measures indicate a budget for the construction of the NBN, via equity injections from the BAF only, of $2.965 billion (through the five year period to 2013–14). This amount is in addition to:

  • the $300 million worth of planned AIBs in 2010–11
  • any future contingency reserve amounts and
  • any future amounts raised through further debt issuance.

To date and as compiled from this year’s Budget, there is a total funding allocation to the NBN of $3.265 billion (comprising the $2.965 billion BAF PSA equity and $300 million in AIB/CGS debt allocations). This is lower than the amount recommended in the implementation study as discussed below.

Figure 2: Building Australia Fund—communications budget, 2009–10 through 2013–14

Building Australia Fund

2009–10

2010–11

2011–12

2012–13

2013–14

 

Estimated actual

Budget estimate

Forward estimate

Forward estimate

Forward estimate

Total

Expense ($ millions)

           

Communications

           

PSA

335

2 062

136

432

-

2 965

Source: Australian Government, Portfolio budget statements 2010–11: budget related paper no. 1.9: Finance and Deregulation Portfolio, Commonwealth of Australia, Canberra, 2010, p. 53, viewed 18 May 2010, http://www.finance.gov.au/publications/portfolio-budget-statements/10-11/docs/2010-11-PBS-PORTFOLIO-FINAL.pdf Note: PSA is the Portfolio Special Account. Transfers to the BAF Communications PSA (as shown above) relate to eligible NBN matters.

NBN Implementation Study—recommended funding approach amounts

The NBN implementation study presents its recommended funding approach on page 367 of the report.[15] The approach recommends the use of 100 per cent government funding in the first five years of construction. The total recommended government funding amount for each of those five years is $22.400 billion (see Figure 3 below).

Figure 3: NBN Implementation Study – recommended funding amounts, years 1 through 5

Source: Department of Broadband, Communications and the Digital Economy (DBCDE), National Broadband Network Implementation Study, Australian Government, Canberra, 5 March 2010, p. 367, viewed 12 May 2010,       http://www.dbcde.gov.au/broadband/national_broadband_network/national_broadband_network_implementation_study

To sum, the difference between the $3.265 billion allocation to the NBN Co. to date, is less than the amount of government funding recommended in the NBN implementation study, for the first five years, by $19.135 billion.

This value is calculated in the absence of any allocated AIB/CGS debt issuance amounts after 2010–11 (2011–12 through 2013–14), any contingency reserve amounts and any funding utilised from the general revenue pool in future.

Cyber-safety enhancement

The DBCDE Portfolio Budget Statement indicates that the existing cyber-safety plan was subject to a re-allocation of an existing $40.8 million available over five years, to enhance cyber-safety education, awareness and counselling programs. This funding will also assist with the Government introduction of legislative amendments to the Broadcasting Services Act 1992 to require all Internet service providers to filter overseas hosted Refused Classification (RC) material on a RC content list, to be maintained by ACMA.[16]

The measures include provision of additional and ongoing funding of $3.0 million per annum to enhance a range of initiatives to help protect children from inappropriate material on the Internet. Examination of the reported cyber-safety enhancement measures for DBCDE and ACMA resulted in the following figure:

Figure 4: Cyber-safety enhancement budget measures, 2009–10 through 2013–14

Cyber-safety enhancement

2009–10

2010–11

2011–12

2012–13

2013–14

Total

Expense ($ millions)

   

ACMA

1.400

4.300

4.400

4.500

4.500

19.100

DBCDE

           

Administered expenses

-25.828

0.760

-1.388

-1.444

-3.102

-31.002

Departmental expenses

2.078

1.016

0.704

0.110

3.908

Total

-25.828

2.838

-0.372

-0.740

-2.992

-27.094

AG’s Department

-

1.500

1.800

1.400

1.500

6.200

Total

-24.428

8.638

5.828

5.160

3.008

-1.794

Related Capital ($ millions)

           

ACMA

0.800

0.800

-

-

-

1.600

DBCDE

-

0.100

-

-

-

0.100

Total

0.800

0.900

0.000

0.000

0.000

1.700

Total expense and capital measures

-23.628

9.538

5.828

5.160

3.008

-0.094

Source: Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no .2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 115, viewed 18 May 2010, http://www.budget.gov.au/2010-11/content/bp2/download/bp2_expense.pdf and Australian Government, Portfolio budget statements 2010–11: budget related paper no. 1.3: Broadband, Communications and the Digital Economy Portfolio, Commonwealth of Australia, Canberra, 2010, p. 17, viewed 18 May 2010, http://www.dbcde.gov.au/__data/assets/pdf_file/0006/127842/2010-11_BCDE_PBS_Complete.pdf

Figure 4 illustrates:

  • an increase in funding (expense and capital measures) to ACMA for the cyber-safety enhancement program of $20.7 million ($19.1 million plus $1.6 million) over five years (2009–10 inclusive)
  • a reduction in funding to the DBCDE in relation to cyber-safety enhancement of $26.994 million (a $27.094 million reduction plus $0.1 million capital increase) over the same period; and
  • an increase in funding to the Attorney Generals Department (AG’s Department) for the cyber-safety enhancement program of $6.2 million over four years (2010–11 to 2013–14)

resulting in a total net reduction in cyber-safety enhancement funding across the three agencies of $0.094 million, for the period 2009–10 through 2013–14.

In addition, the cyber-safety enhancement budget measure states that the Government will also introduce a grants program to assist and encourage internet service providers (ISPs) to offer wider forms of filtering to customers on a commercial basis, in addition to the extra funding provided to ACMA to enhance cyber-safety education, awareness raising and counselling services.

Digital television switchover and public broadcasting

The Government will provide $375.4 million over 12 years under the digital television switch-over program to assist commercial and national broadcasters to provide a digital television satellite service for those Australians unable to receive digital terrestrial transmission. In addition, the Government will provide $2.6 million in 2009–10 to assist the community television broadcasting sector to meet the costs of commencing digital simulcasts.[17]

For further analysis of the digital switchover see the ‘Arts and media’ brief in this publication.


[1].    K Rudd (Prime Minister), L Tanner (Minister for Finance) and S Conroy (Minister for Broadband, Communications and the Digital Economy), New National Broadband Network, media release, 7 April 2009, viewed 19 May 2010, http://www.minister.dbcde.gov.au/media/media_releases/2009/022

[2].    Department of Broadband, Communications and the Digital Economy (DBCDE), National Broadband Network Implementation Study, Commonwealth of Australia, Canberra, 5 March 2010, viewed 19 May 2010, http://www.dbcde.gov.au/broadband/national_broadband_network/national_broadband_network_implementation_study

[3].    Australian Government, ‘Statement 7: asset liability and management’, Budget strategy and outlook:budget paper no. 1: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 7-8, viewed 18 May 2010, http://www.budget.gov.au/2010-11/content/bp1/download/bp1_bst7.pdf;

       This claim has been subject to debate in the media and among analysts, particularly given the fact that the Government’s cost of capital is around 6 per cent. For the Government to recover its cost of capital, the NBN need only generate a rate of return greater than the 6 per cent cost of capital. However, finance theory suggests that in order to efficiently allocate capital, the discount rate should reflect not only the cost of capital but the risk associated with the investment project, which in this case is likely to be substantially higher than 6 per cent. In addition, had the Net Present Value (NPV) calculations been subject to a discount rate that was comparable to similar projects in the market, the NPV would have likely been negative. Ultimately, given mutually exclusive projects, finite capital and appropriate discount rates, finance theory is such that the projects which realise positive NPV’s represent a growth in value and the project with the highest NPV represents the best use of capital. For more information see the following source:

       P Kerin, ‘Implementation Study gets the NBN Numbers Wrong’, The Australian, 13 May 2010, p. 24, viewed 19 May 2010, http://parlinfo.aph.gov.au/parlInfo/download/media/pressclp/XXOW6/upload_binary/xxow60.pdf

[4].    Budget strategy and outlook: budget paper no. 1: 2010–11, op. cit., p. 7-8.

[5].    Budget strategy and outlook: budget paper no. 1: 2010–11, op. cit., p. 7-8.

[6].    Australian Government, Portfolio budget statements 2010–11: budget related paper no. 1.3: Broadband, Communications and the Digital Economy Portfolio, Commonwealth of Australia, Canberra, 2010, p. 14, viewed 18 May 2010, http://www.dbcde.gov.au/__data/assets/pdf_file/0006/127842/2010-11_BCDE_PBS_Complete.pdf

[7].    Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, pp. 117–118, viewed 18 May 2010, http://www.budget.gov.au/2010-11/content/bp2/download/bp2_expense.pdf

[8].    Budget measures: budget paper no. 2: 2010–11, op. cit., p. 118.

[9].    Australian Government, ‘Statement 6: expenses and net capital investment’, Budget strategy and outlook: budget paper no. 1: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 6-48, viewed 18 May 2010, http://www.budget.gov.au/2010-11/content/bp1/download/bp1_bst6.pdf

[10]. Portfolio budget statements 2010–11: budget related paper no. 1.3: Broadband, Communications and the Digital Economy Portfolio, op. cit., p. 14.

[11].  Budget measures: budget paper no. 2: 2010–11, op. cit., p. 114.

[12]. Rudd, Tanner and Conroy, op. cit.

[13]. ‘Statement 7’, Budget strategy and outlook:budget paper no. 1: 2010–11, op. cit, p. 7-12,

[14]. ‘Statement 6’, Budget strategy and outlook: budget paper no. 1: 2010–11, op. cit, p. 6-54.

[15]. National Broadband Network Implementation Study, op. cit., p. 367.

[16]. Portfolio budget statements 2010–11: budget related paper no. 1.3: Broadband, Communications and the Digital Economy Portfolio, op. cit., p. 14.

[17]. Budget measures: budget paper no. 2: 2010–11, op. cit., pp. 114–116.


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