There's nothing inherently wrong with using debt to create a productive asset. It's not usually smart to fund spending on consumption with debt, other than on a temporary basis. Kevin Rudd is using debt for both purposes at present. Provided he has a clear strategy for paying off the second type of debt, he should be able to convince voters of the merits of borrowing to build a very fast broadband network that breaks Telstra's anti-competitive stranglehold on the telecommunications market.
Although the wisdom government's cash handouts is debatable, it has to use debt to fund budget deficits over the next few years unless its wants to plunge the country deeper into recession by increasing taxes and making savage cuts to spending. But the May budget will give a good indication of how serious the government is about eliminating the deficits after a recovery gets underway.
So long as the deficits are manageable, Rudd will be in a better position to justify the new high-speed broadband network he announced last Monday. If all goes well, the nation will end up with a much improved communications network that encourages the development of new entrepreneurial businesses, especially in regional Australia. The electronic delivery of health and education services should flourish. Farmers will find it more productive to use the internet; households will enjoy access to videophones and much faster downloads of high definition movies.
There is no technical obstacle to Rudd's proposal to connect 90 percent of the nation directly to a high capacity fibre optical cable, and the remainder to improved wireless broadband. But it is impossible to guarantee that the new network will offer cheap internet access or prove a roaring commercial success. Some critics believe the growth in high-speed wireless broadband will undermine the new network. Other analysts say that fibre optic cable does not suffer from the "back spots", or the loss of speed, that can effect wireless, and is more secure and better suited to future growth.
Rudd says the new network will be 51 percent owned by the government and 49 percent by private investors. It will not offer services to retail customers. That job will be left to competing telecommunications companies that pay for access to the network. Their offerings could range from simple internet access to bundled plans that include full phone and pay TV packages. The Australian Financial Review has reported that subscription prices in countries with similar networks vary from $14 a month to over $140.
Final charges will depend on future demand. Some analysts say costs should be relatively low because they expect that only about 25 percent of the network's income will rely on traditional internet usage. The rest is expected to come from new revenue sources as companies exploit novel ways to take advantage of the network's high speeds.
The government will contribute $4.7 billion in cash and borrow about $19 billion for its share of the network's estimated $43 billion cost. The government will issue infrastructure bonds that it expects to appeal to retail investors. It will need to borrow more if it can't find enough private investors to pay for the rest. Given that Australia's net government debt is only one tenth of the average for developed countries, the borrowings — offset by a new asset — should not be a problem.
The level of private sector investment will depend on the network's anticipated profitability. Some investors, such as superannuation funds, may be content to obtain steady, if unexciting, yields suitable for retirement annuities. Until the project is near completion, however, the government may have to provide a higher proportion of the initial funding.
Rudd says the government will start selling its 51 percent share five years after project is completed. Given high-speed broadband's strong growth prospects, it could exit with a solid profit. If this seems unlikely, Rudd will doubt argue that the network makes a worthwhile contribution by boosting national productivity and delivering improved services to the bush. This latter aspect is one reason two prominent National Party MPs, Barnaby Joyce and Fiona Nash, claim that Rudd has copied an idea they proposed.
State Liberal Party leaders are also backing the plan, making it harder for the federal Coalition leader, Malcolm Turnbull, to reject the required legislation in the Senate. But Turnbull is on strong ground in criticising the lack of detail in last Monday's announcement. He is also putting a normally respectable case that it would be better to leave the task to the private sector.
However, Telstra has previously signalled that it only wanted a cheaper cable that let it retain control of the copper wires that currently provide the final connection to most premises. Competition would improve if Telstra were split up, but smaller players would still struggle to fund new investment during a financial crisis.
Rudd's decision to take the new cable directly into premises has the advantage of finally resolving the big problem created by Kim Beazley, while Communications minister in the Hawke Labor Government, when he structured Telstra so it could dominate the market. John Howard only entrenched the problem by privatising Telstra without separating its wholesale and retail arms. If nothing else, Rudd proposal deserves a big tick on this score alone.