The ALPâs proposed investment of $4.7b in a high-speed network

This proposal is still ill-defined and it may be too early to make definite pronouncements on it but I thought I might chance my arm.

First, is it needed? This is not my expertise but there are enough experts around arguing that it would have a high benefit cost ratio for the nation.

Secondly, would the private sector have met the need for high speed broadband without government involvement as Mr. Costello alleges? Perhaps – but it would take longer and almost certainly would lack the public interest safeguards (such as on competition) that government involvement would ensure.

Thirdly, would such a government investment blow out the budget deficit? If it involved setting up a separate entity in partnership with private groups and the government buying shares in that entity and if this entity were to deliver a commercial return (comparable to what it is now getting from Telstra), it would have no effect on the underlying budget deficit or on the Future Fundâs ultimate balance sheet. It would amount to a switch from one financial asset (e.g. Telstra shares) to another comparable one.

Fourthly, at a more macro-economic level, what would it do to net aggregate demand and hence inflationary pressures? Here one must acknowledge that the public investment in broadband could have the same effect as if it were funded by government borrowing. That is, if the economy remains âfully employedâ, it could in the short term put extra pressure on productive resources â albeit spread out over a number of years.

But one needs to be careful here. This short term impact on aggregate demand would not occur if Mr. Costello is right to say that even without government intervention the broadband investment would take place anyway through a private consortium â as private sector investment of x has the same effect on aggregate demand as public investment of x. If Costello is wrong and only government financial involvement can get this project off the ground, then there would be short term pressure on skilled labour resources during the gestation period but in the longer term it would add to productive capacity and lessen inflationary pressures.

Would the âraid❠on the Future Fund threaten the future superannuation rights of employees? The answer is of course not. The Government did not need the Fund to protect these rights – but anyway Rudd has promised that he would leave enough in the Fund to pay for the superannuation liability.

Finally, what would this project do to inter-generational equity and the problems of an ageing population? The answer is zilch. The productivity rewards from a high speed broadband offer at least as good a response to an ageing population as the financial returns from investments by the Future Fund in the share market.

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observa
observa
14 years ago

Or would it not be better for this govt with a Senate majority, to buy out current PS super liabilities ($91 bill at end 2005 as I understand it)thereby putting it on the books transparently. It could do this by the proceeds of remaining Telstra shares and issuing Treasury Bonds for the remainder. Then if Rudd and Co get into govt and want to increase the borrowings and speculate on a middle class welfare broadband system producing better returns, we can look at the soundness of that proposal then. You know, should it be fibre to the node or the household, wireless or down the electricity wires and all that sort of stuff.

observa
observa
14 years ago

Bearing in mind the ‘social returns’ all the needy masses get out of such a speculative investment choice of course.

Robert
Robert
14 years ago

Does anyone know how this thing is built? Does it involve laying out more cables, for instance – to 98% of the population?

And any clues as to why Coonan’s response that this will cost $30 billion wasn’t picked up by the press?

Basically, how solid is Rudd’s costing?

observa
observa
14 years ago

Not a bad political strategy for Costello eh Fred? He comes out and announces Rudd’s attitude to stealing from public servant’s future security needs to be cut off at the sticky fingers and he’s going to guarantee their security with this strategy, calling all boomers to aim to quickly clear this terrible burden for the sake of their children’s futures. He puts up the new national debt figure thermometer and pours his surplus into the debt. Propose to spend and borrow more if you dare Pooh Bear and Co!

observa
observa
14 years ago

“Basically, how solid is Rudd

observa
observa
14 years ago

It’s clever,on the run, politics by Rudd to trot out some middle class welfare/pork barrelling tarted up as investment for all our futures, but I reckon my strategy is the perfect antidote. Imagine all those public servants drooling over their new lump sums in their private super fund accounts, while their funds have lent it straight back to Costello via Treasury Bonds. Up goes the national thermometer in Canberra to clear this debt for the sake of our kiddies and then it’s- “Who do you trust to make your children debt free?” come election time.

observa
observa
14 years ago

Do I smell John Quiggin’s hand in this Rudd policy on the trot? His sudden blogging hiatus may be no coincidence.

James Farrell
James Farrell
14 years ago

It was going to be in Rudd’s speech, Observa: ‘By 2010, no Australian child will be living without high-speed access to John Quiggin’s blog’. Imagine, they’d have the liitle buggers at their mercy then.

James Farrell
James Farrell
14 years ago

Incidentally, Fred: note you don’t need to put your name in the title of tbe post.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Fixed James and Fred

Paul Frijters
Paul Frijters
14 years ago

4.7% billion is less than 1 % of 1 year of GDP. All this talk of blowout, future fund, etc. is a storm in a glass of water.

sdfc
sdfc
14 years ago

Actually Observa your little plan is rather silly, first year finance will tell you, aside from any ideological problems you might have about the proposal, there is nothing wrong with funding infrastructure investment with long-term debt. In fact given the intertemporal aspects of infrastructure investment it is the optimal funding method.

Fred Argy
Fred Argy
14 years ago

Fair point Paul but Rudd and Swan plan to do the same thing with other “productive” infrastructure porposals so it could add up to more than 1% – admittedly spread over time.

Personally, I have long advocated government borrowing to finance sound productive infrastructure so I am not complaining. But one cannot ignore the macroeconomic implications of such a strategy. The timing of the increased spending will be important.

Tom Hayes
Tom Hayes
14 years ago

Fred,

Very clear and I agree with your analysis. Cheers.

cs
cs
14 years ago

I was waiting for a burst of Fred Argy commonsense on this one!

Dick
Dick
14 years ago

Presumably Yobbo will support Rudd on this one – faster porn downloads.

observa
observa
14 years ago

cs, I agree with Fred’s last point too providing the sums stack up here. Personally I smell some middle class pork barrelling or maybe just some tax churning here. I’d like to know for sure and the best way to do that would be to survey the current providers and see what proportion of customers are on their higher/highest speed plans. That might tell us if there’s a bottleneck in the supply of more speed, particularly among private users. I’ve got my doubts about that.

Ken Lovell
14 years ago

It’s beyond me how anyone can regard a broadband network as ‘middle class welfare’, unless they want to apply the same label to roads and power stations and water supplies etc. The internet is not primarily an entertainment medium, even though many people might think so. It’s an essential service and if the quality available to businesses in Australia falls behind that of other countries we’ll quickly suffer a competitive disadvantage.

Needless to say the ageing mob of lawyers who comprise the current federal cabinet wouldn’t have a clue.

observa
observa
14 years ago

Ken,
the vast majority of business which is SMEs use internet for banking, email and the occasional info seeking. eg in the building game you might get a tender to use some particular unfamiliar product and want the lowdown on it, particularly fixing details. That’s a pretty small part of a typical work week for most and can easily be handled by dialup if need be. Privately its the kids downloading entertainment and chatrooms and blogs for the entertainment/news junkies and the like. It’s a small part of industry and commerce that uses internet seriously and like the unis and govt too, they’re concentrated in the big and medium smoke with ADSL2+ or special links anyway. Sure when these workers go home and want to entertain themselves, they want the same speeds as they have at work, but are they really prepared to pay for that? I certainly don’t pay for the maximum speed my carrier offers at home do you? Sure if someone else is paying we’ll happily use it, but there’s really no such thing as a free lunch. Don’t be conned by the Murdochs who want more subsidised speed to flog us more of their commercial content. Still, it will have traction in the marginals no doubt.

David Rubie
David Rubie
14 years ago

observa wrote:

Don

JC
JC
14 years ago

Personally I love the deal. This is possibly best thing that happened to us Telstra shareholders. I love the deal so much that if I were a female I’d want to have Kev’s kids. No seriously, I would. And I was libertarian until Kevs’deal came along.

Telstra owns the last bit of wire that goes to people’s homes. So the best way to look at this deal is to think of the optic cable as the spinee and major nerve centres. The rest of the stuff is Telstra branching out everywhere while the mini mes are living off Tesltras regulatory induced largesse.

Telstra hasn’t wanted to lay the cable because it couldn’t get a good deal from the government in terms of transfer pricing from the mini mes. However with the government forking out the big bucks to lay the fibre Telstra will not be under financial pressure to hit the mini mes with big fees. So it will simply make cash on the existing line without spending a buck. The Rudd government mindful of it’s existing share ownership will offer decent regulatory terms to Telstra. Of course the future fund will win out as a result of the telstra stock price zooming as it owns a truckload of the stuff.

This deal is so Bullish for Telstra stock that Ray Burgess could hardly contain himself with glee. It’s like getting a straight flush in a poker game and then doing everything possible to hide the fact that you’ve won but hoping everyone else thinks you’re loser.

This kind of stuff is retirement stuff. If one thinks Rudd is going to make it across the line and he will keep his promise then owning telstra could help some people out with early retirement.

Just a word of advice. When you have Packer jnr, Ray Burgess , his amigo and the rest of the gang extolling ther virtues of prublic / private ownership you just know the kids are up to something.

The issues:

The cost. But who cares? Just be sure to ride the Telstra wave.

sdfc
sdfc
14 years ago

I really don’t really care what Telstra’s shareholders want but if it leads to the increased efficiency of the telecommunications network then I don’t see what the problem is. If their costings are out it just means another solution will need to be found.

The fact that Telstra might want to earn monoploy rents from its infrastructure assets is a function of the sale of the network not ALP policy.

observa
observa
14 years ago

With my swag of Telstra shares you’ve bought me off JC. I’m an amigo with Murdoch, Burgess and Co. It’s obvious the nation is crying out for this bold new railro…err superhighway to the future!

observa
observa
14 years ago

Mind you I’ve got my Spark Infrastructure shares(own poles and wires) to cover my bases just in case http://www.zdnet.com.au/news/communications/soa/Tasmania_powers_up_12Mbps_broadband/0,130061791,139211616,00.htm

JC
JC
14 years ago

SDFC says :

“I really don

harry clarke
14 years ago

My concern with this expenditure is that it will turn out to be a waste of money motivated by the prospect of winning an election. What next? Renewable energy wind farms instead of nuclear, fast train services?

The Future Fund was a tempting cookie jar that would inevitably be a target for aspiring governments. So too was the High Court finding on Federal powers – dangerous power in the hands of the wrong people.

Watch Rudd now as he attempts to use Federal powers to wind back IR legislation. Reregulated Labor markets with higher unemployment and lower productivity next on the agenda. Individual effort out – trade union hacks in.

David Rubie
David Rubie
14 years ago

harry clarke said:

Watch Rudd now as he attempts to use Federal powers to wind back IR legislation. Reregulated Labor markets with higher unemployment and lower productivity next on the agenda. Individual effort out – trade union hacks in.

Rubbish Harry. Trade union membership is down to 18% (see the ABS). Fixing the IR laws so that they are not so heavily slanted towards employers isn’t the apocalypse – it didn’t kill us for the first 100 years of federation.

If the money in the future fund can’t actually be invested in a revenue generating asset, what’s the point of it? How is the money supposed to grow to cover the unfunded super if it is just sitting there? If Rudd can pull this off, he might be able to retro-fix the appalling telecom situation here, pay some pensions and give us 30 years of returns, isn’t it possible that it’s a good idea?

observa
observa
14 years ago

It’s possible David but is it probable? What we as taxpayers really need to appreciate is the current debt liability for unfunded super and that cost will be borne by fewer and fewer productive workers just as my demographic bulge reaches retirement. As I said, if we brought that onto the books transparently with the remaining sale of Telstra shares and a bond issue, then we could look at the true opportunity costs of additional borrowings for these sorts of risky investments (choosing between wireless, fibre or down electricity wires?) Should we not be salting away the benefits of the resources boom now, to ameliorate the twin burdens of health costs and retirement for an aging demographic? That’s what the Future Fund was designed to do, but I can see the flaw in it now. It will always be tempting to raid it, when what we’re really doing is racking up the plastic for the kids, albeit they might enjoy faster Youtube and Myspace at home now.

David Rubie
David Rubie
14 years ago

Observa, Fibre optics are pretty low risk in terms of futures – you can do all sorts of funky things with the available bandwidth and the boffins dream up more all the time (unlike copper or power lines). Wireless is too hard – look at the problems we’re having getting people to give up analog TV, the radio transmission spectrum is a royal pain to deal with when it comes to two way telecoms.

Your earlier comment was more insightful – “middle class pork barrelling or maybe just some tax churning here”. What will we plug into the high speed network when it gets installed? IP based telephones, doodads like Apple TV and OLPC machines will be more affordable than a full-blown PC I suppose.

“when what we

Kim
Kim
14 years ago

Bizarre to see the chorus line of conservatives against progress. Oh no, there might be more spam! It’s just a middle class thing! This is total nonsense.

The costings are based on Telstra and Optus’ estimates regarding taking fibre cables to nodes. Coonan’s claimed comparison is with South Korea where the fibre was taken into houses, which is a much more expensive proposition. The communications minister either doesn’t understand communications or is lying.

Might be nice if some of the knockers bothered to find out what the proposal actually entails.

As to whether or not it’s infrastructure, think about B2B transactions, distributed teams working across space, even online advertising. And a host of other things. If it has escaped people’s attention, Australia’s productivity growth has flatlined under Howard. You might like to check up the literature on the connection between faster and better communications infrastructure and productivity improvement.

Or maybe you’re all too busy sending telegrams to Rudd decrying this or something…

David Rubie
David Rubie
14 years ago

Jacques,

Voice is data. Now, with digital and network communication, we can stuff even more things down more versatile pipes now than we could 100 years ago and it’s high time that copper was replaced.

Kim
Kim
14 years ago

Yes, some people really need to grasp that the internet is more than just a series of tubes! :)

observa
observa
14 years ago

“..it

jc
jc
14 years ago

Kim

If a faster internet is financially viable under the present regulatory set-up Soul would have been on it like a rate up a drain pipe. He walked away because of regulations.

Don’ get me wrong, I love Rudd’s proposal from personal perspective. But is it the best deal for the Oz public? I very much doubt it would add anything to business efficiency- so little it would be meaningless. Faster download time for movies perhaps, which is why the Packer kid was rapped over it.

Beju
14 years ago

The Internet in Australia is poor. Very poor actually compared to other developed nations in the world.

Telstra owns all the copper wire throughout Australia that all the other carriers have to use which is the biggest problem. Telstra has been happy to do as little as possible to build on the existing infrastructure. Why no other carriers have looked into laying out infrastructure is anyones guess. Probably because it will cost too much for very little return and they are happy with the status quo that Telstra has been providing.

By taking the control away from Telstra, this country finally may be able to get out of the hole that it is currently in for its Internet services.

By improving the Internet in this country, businesses will improve. No, not by email and surfing the web, but IT companies will be able to develop web based services that can utilize the new infrastructure. Essentially its like saying if I have an old PC that can still access email then why should I upgrade? Well if a new PC can do other things that you don’t know about that you find useful then shouldn’t you upgrade?

Well what are these things I talk about that a PC can do besides email and surfing the web? The big answer to this is Web Services.

Web services are going to be a big thing in the not too distant future. Yes, it is a term that has been used for a long time now without any real substance. Companies like Google and Microsoft are looking into major web services. For instance, after Windows Vista, Microsoft is looking into an operating system which is completely online based. Details are still up in the air and it could all be hot air by Microsoft, but its a sign that web based services are going to be prevalent in the not too distant future. Essentially, major companies don’t want to distribute software on a CD or a DVD if possible and want to distribute software and services via the web. The main reason for companies wanting to do this is to combat piracy.

The main reason why web services have not really taken off globally is that Internet infrastructure in a lot of countries is still stuck in the past.

So why should Australia then take the plunge and have excellent Internet infrastructure and speed while a lot of other countries are behind and wont necessarily mean that Australia will see these web based services in the short term?

Well its like Global Warming. If nobody does anything then nothing gets done. If people start making change, then others will follow and companies will jump on board.

So should the Government of Australia fund for this or should the private sector do all the work? I believe that if the Government continued to ignore the Internet services in this country then Telstra would be happy to do nothing. If in the very least this scares the crap out of Telstra and they start to do something then kudos to the Government for trying to make a stand. Something needed to be done.

One thing is clear though in the IT sector, we are happy that Telstra is losing its monopoly for the Internet infrastructure in this country.

David Rubie
David Rubie
14 years ago

observa wrote:

The ALP have to take the blame for [blocking the sale of Telstra, causing price issues] and now they want us to believe they have better foresight than the existing telcos in the marketplace. Sadly, experience tells us that is not the case.

I don’t think they are claiming better foresight, they are trying to leverage a far healthier balance sheet. The ALP had some very good reasons for objecting to the sale of Telstra – one of which was the disastrous way it was done. I’m sympathetic to the idea that splitting the company would have made it worth far less than the government got, but that hardly seems to justify maintaining a monopoly which is soon to be completely in private hands. In fact, given the current Telstra share price vs. the original listing price, the government over valued the company despite (or perhaps because of) it’s monopoly over the last mile of copper. There is no blame to be layed except at the feet of the Liberal party.

JC
JC
14 years ago

Beju

You can now buy Bigpond Extreme from both Telstra and a rebadged vserion from the other competitors. Please explain how this service is too slow?

Please also explain that if the government did lay the optic cable whether the country side would actually take it up without subsidy?

Anyone makng comments about the slowness of our firms to add newer cabling needs to first read the media and communication regulations before reaching any conclusion.

observa
observa
14 years ago

David,
The ALP are telling us they are great party for telecommunication forward thinking for the next 10-15yrs and as well remind us that they were the party responsible for lots of todays economic good fortune ( floating the dollar and privatising the odd airline and bank as you’ll recall) All fair enough, but we have to ask ourselves the simple question then. If that’s the case, why when the Howard govt proposed to privatise Telstra, didn’t they ably demonstrate all that foresight by jumping up and saying – great idea, so long as it’s split into Testra retail and infrastructure for all the right reasons, including the need to put the proceeds from Telstra retail into more optic fibre for the infrastructure part and to secure our future. Presumably if they had, by now the Oz taxpayer would be raking in juicy returns from Testra Infra and 98% of our kiddies would be enjoying lightning fast Myspace and Youtube. What am I missing here with their ‘over our dead bodies stance’ to any privatisation of Telstra whatsoever at the time?

Beju
14 years ago

JC

Yes I realise my opinion is biased since I am in IT, but I know of the plans large corporations have for web based services and how it has been talked about for so long and never implemented because of the technology not being there yet.

Everyone uses Telstra infrastructure. It doesn’t matter what ISP you use in this country, they all use Telstra copper wire.

The fastest Internet we can currently get is 24 megabits per second and thats only if I am sitting next door to an exchange. The further away you are from an exchange, the slower the Internet is. I am relatively close to an exchange and can get 4 megabits and I live just outside the city too. Most people generally get around 2 megabits per second.

Why is this too slow? Because I’m talking about web services of the future which can do more than just email or surf the web. As I said in my previous post, Microsoft and other big companies have ideas and plans for web services that can run large portions of an operating system for example. 4 megabits a second to run an OS is not enough! And I am right next to an exchange! And then there is the country areas with very limited broadband connections and speed!

I’m talking about moving forward with a revolutionary technology. Staying with the same old, same old is easy. But if you look outside the square, possibilities are endless. Telstra has done nothing but sit on their hands for too long and they were quite happy to continue to do this.

I am in IT, so from my perspective and others within the industry, upgrading our internet service and removing the control that Telstra currently has will be priceless.

Will the general end user see any difference in the short term? Well no. But in the long term, once we start seeing companies utilise the power of web services, then the general end users will see the difference.

Would the country side take it up without subsidy? Probably not initially but this would change over time just like the Internet did when it first came out. How many people first used the Internet when it first came out and look at it now? I remember when the Internet first came out and people thought “Why should I get it? I don’t chat or send email”

David Rubie
David Rubie
14 years ago

observa wrote:

What am I missing here with their

Beju
14 years ago

Yes Jacques, Microsoft does talk up a lot of things and it could all be hot air. Microsoft want to not give entirely an OS in a web based application, but have very little software distributed on a CD and have a vast majority of it in a web based solution. But its other companies as well besides Microsoft talking up web services lately. Google wants to run houses to compete with Microsoft’s vision of doing the same thing for instance. But that sort of talk is still a little down the track.

The point I was trying to make is that without the infrastructure, then these ideas will stay ideas and if Rudd didn’t say something, we would be stuck in the past.

I do have questions regarding if the Government should foot the bill for the upgrade completely. Probably part foot the bill with the private sector or look into deregulating Telstra.

My issue is that something needed to be done, this is why I want it done, so everyone needs to stop blaming someone else and get up and do something! This is why I am happy that something seems to be getting done. Even if its all talk at this stage :)

I think the big issue that needs to come across is that its more than just faster YouTube and MySpace. The ideas for the technology is there and investing in this technology is not a waste of money. It will generate money. Lots of money.

JC
JC
14 years ago

Beju

“The ideas for the technology is there and investing in this technology is not a waste of money. It will generate money. Lots of money.”

Could you please explain how Rudd’s proposal will show a positive return above the risk free rate if it is not monopolistic and adds more than just easier access to movies on demand. Please also show why business and not movie consumers need such a fast internet outside of the the big cities. Show us the economies for the Bush.

sdfc
sdfc
14 years ago

JC

In case you haven

Fred Argy
Fred Argy
14 years ago

If I have understood sdfc, I agree with him.

There appear to be three options:

(i)a part-public owned broadband network with adequate access for competitors; or

(ii) a heavily regulated private broadband network with similar access rights for competitors (not very likely in practice); or

(iii) a lightly regulated network with a quasi private monopoly,

If, as an economist, I had to choose between these three alternatives, I might well opt for (i), although in fairness I have not done a full benefit cost analysis of the three.

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