Australia's $31b NBN: Smart politics, but who will pay?

The Australian government upended 20 years of private sector-driven policy yesterday by declaring it will lead the construction of a A$43 billion ($31 billion) national fiber broadband network.

The new version of the NBN, intended to deliver fiber to 90% of Australia's homes, requires ten times more public funding than that promised by Prime Minister Kevin Rudd on the election trail 18 months ago.

The sheer scale of the project has dramatically reshaped the troubled politics of the project. Whether the economics stack up is a different question.

Under the plan, the government will take 51% control of the new company. It is hoping that Telstra, Optus and infrastructure firms will take up the remainder.

Rudd explained his decision to take the wheel because none of the private sector bids - from SingTel-owned Optus, the Macquarie-backed Acacia and smaller local players - was acceptable. A "market failure" due to the recession, he said.

In reality the biggest failure was of the tender process itself. Having excluded Telstra because of its scant and non-compliant bid, the government was left with bit players.

Wiring Australia, with just 21 million people in a country the size of continental United States, requires the deepest of deep pockets.

After 12 years of full deregulation, Telstra is still the market's 800-pound gorilla. This network was never going to be built without Telstra's participation. And still won't.

The clever politics of the Rudd decision is that it allows Telstra a way to buy its way. With the imminent departure of Sol Trujillo, the way is also opened up for a fresh start in relations between the government and the incumbent.

Telstra cautiously welcomed  the plan. "We will work with the Government to assist with the implementation of its strategy," said chairman Donald McGauchie in a statement.

Telstra investors were cheered, too, ticking up the share price by 16 cents to A$3.37 by late morning Wednesday.

But underneath the smart footwork and the stirring talk of nation-building is the massive chit at a time when public finances are already hard-pressed.

The government will start selling "Aussie infrastructure bonds later this year, backed by a public marketing campaign - the first such promotion in two decades.

That's telling. And that's just the start.

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