The NBN Co Corporate Plan was released today, and the projected rate of return on investment is an underwhelming 7%. The Government argues this is acceptable through a comparison with the long-term bond rate, with the media release noting:
NBN Co’s expected rate of return is 7.04 per cent, which compares favourably with the average 10 year bond rate (July 2009 to November 2010) of 5.39 per cent. The NBN Corporate Plan shows the Government can expect to recover all its funding costs with interest.
So by undertaking a large-scale, risky $30-40 billion project the Government is expecting to earn a premium of 1.6% above the long-term bond rate. Given the large amount of uncertainty around ultimate take up rates and the cost of building the network, as well as around whether Telstra will play ball, this premium is way too small. The Government would be better off investing its money in a managed fund with Colonial First State.
The NBN Co Corporate Plan actually identifies the significant risks associated with the project on pages 143-144, when it concludes the NBN Co has a cost of capital of 10%, which is the rate of return the project must generate to attract investment from private sector investors. NBN Co will have to clarify how it thinks it is an economically viable business if its internal rate of return (as reported on page 23) is 7% but its cost of capital is 10%.