If you have an innovative idea it is difficult to convince a bank or superannuation fund to invest in that idea. In fact you will be hard pressed to find any fund manager willing to invest in an idea. This is because they do not care whether an idea is innovative or not, nor are they interested in how much money an idea will potentially earn. Their main concern is whether at some time in the future their money will be returned along with some interest. This means that most finance institutions require you to first have assets that can be “mortgaged” against the loans.
You would think that successful companies would be the main drivers for investment in innovation but they are constrained by “The Innovator’s Dilemma” so well described by Claytton Christensen in his book of the same name.
For small companies who are yet to be profitable there is another source of funding – the government through its R&D tax credit scheme. However, funding innovation this way will not raise the large amounts of money needed to introduce new technologies that will address problems such as climate change, secure water supplies, build broadband networks, create efficient public transport networks, invest in education etc. The initial funds needed to address these problems will not come from Australian private companies or individuals. Funds will come once innovative approaches have been proven to work and are profitable with low risk but the funds to get innovative processes to this stage are difficult to obtain.
An alternative way
Funding innovation is risky and it does not always work. This is something that risk-averse governments are well aware of and it is the reason why governments so often put all their investment “eggs” into one basket, or favour existing players.
One solution to the problem is to fund the innovation in such a way that the entire community bears the risk. For example, use public money but give that money to the population (or at least to a large number of people) and require them to invest in ways of producing goods and services that address particular problems. This brings the market place – which is a good conduit for allocating resources – to investment in innovation.
This paper proposes that we invest public money by giving the funds to the population and requiring them to invest in the infrastructure to provide goods and services through an investment market place. The risk of failed innovation is thus spread. The funds can be raised by taxes, surcharges or even by increasing the money supply via the issuing of funds. Some people will make good investment decisions while others will back duds but they will all invest because that is all they can do with the money. People are not risking their existing wealth so they will not feel quite so bad if they lose their funds because in a sense they never had it – and they can always eliminate their risk by selling their investment money at a discount to someone who is prepared to take the risk.
Although special investment money is given to the population as a whole it is expected that brokers (fund managers) will do the investing.
If we use this approach it is unnecessary to create public debt to get Australia through the GFC and beyond. Debt is about who owns things. It is not about wealth creation. If we have public debt what does that mean? We owe money to other members of the public, be it in Australia or elsewhere. Debt is a zero sum game while growing the economy is a non zero sum game. We have let the mechanics of debt (or who gets ownership of the results of investment) cloud our view of what is important for wealth creation – innovation. What we need to concentrate on are the mechanics of encouraging innovation or new wealth creation through investment markets where there are many people investing for particular purposes and where the wealth is then widely distributed.
That is what the current system is supposed to do and it has worked well for some. What is proposed is an innovation in how we, the community, invest public monies for the public good and where debt is not the mechanism used to fund innovation.
Financing the National Broadband Network
The cost of last-mile access infrastructure is a major hurdle for broadband network suppliers around the world. Ideally the investment would be supported through the margin on the services provided over the network. However, in practice the capital cost of establishing the network must frequently be written down before the services can become price competitive.
TransACT is an example of the latter – writing down of the capital investment. I was one of the original investors in TransACT and for the service to be price competitive the value of my original shares had to been written down to near zero. TransACT has since become a viable operation, but only because the capital cost of the infrastructure has been largely removed. The reason that the capital costs were so high was because TransACT only supplies a percentage of the total high-speed communication services used within its network “footprint”. If all dwellings in the area that required broadband used TransACT the capital burden per dwelling would decrease and the write-down of my investment would have been less.
With the National Broadband Network (NBN) the capital cost of building the network may be higher than the wholesale charges can reasonably support. That is, to cover the capital cost of the Network either the investors are going to write down much of the value of their investment or the wholesale prices will have to be so high that the takeup rate will be low, which in turn will increase the price of services – fuelling a vicious cycle of failure. As in many areas, there is difficulty in funding vital infrastructure projects that benefit an entire community. It is not easy to measure the flow-on benefits of a widely-used service and even if it were possible, individuals tend to be unwilling to pay for them.
To solve this problem and to ensure the system achieves wide takeup, the wholesale price of broadband will have to be kept competitive with the cost of the existing copper network.
One way to achieve this is for the Government to fully fund the NBN. This would result in the building of the network plus an asset that the government could eventually sell. Governments however have little appetite for such ventures as they are invariably difficult to administer. What tends to happen instead is that governments form a quango to achieve an objective. While these bodies have proven successful in some instances, it is a strategy that is unlikely to succeed for the NBN. Australia has already been down that path with the Postmast-General’s Department, Telecom and ultimately Telstra. In the long run it was a strategy that proved ineffective in keeping up with developments.
An alternative approach is to seek private investment and to match those funds with money provided by the government. This will reduce the capital cost to investors to a level that allows a commercial return whilst still ensuring that broadband pricing remains competitive. The main problem with this approach is that it is unfair in that it delivers a publicly-funded subsidy to private investors who are a minority of the community (often they are not even members of the community), and it is difficult to control the level of the subsidy.
There is a third way that will keep the price of broadband low and which avoids the issue of subsidies to private investors. It involves the government giving part ownership of the NBN to the entire participating population: (existing broadband users and others willing to commit to using the service when it becomes available in their area). Government money is provided on condition that the funds are spent building fibre to the home (FTTH) infrastructure or equivalent. In other words, the individuals receiving the money use the funds to buy equity in a company such as Telstra, Optus, TransACT or any other NBN-approved organisation. These organisations in turn are required to use the invested money to build the FTTH or equivalent infrastructure.
The price of a broadband connection should ideally be fixed and uniform throughout Australia. Australia could be divided into geographic zones and companies can purchase rights to those zones through a competitive bidding process. The NBN would fix the wholesale price of broadband connection. Bidders would have some limit on the amount of investment they can receive from the FTTH investing public – perhaps related to the number of people in the zone and the size of the zone. When bidding for a zone the companies would be allowed to make negative as well as positive bids. That is, for an area that is difficult to service the bidders might require additional funds from the NBN rather than giving the NBN funds. If the NBN sets the wholesale price at the right level, funding received from bids for the easy-to-service areas will finance the subsidy required for expensive areas.
Under this scenario the money invested in shares may give the public investors who received FTTH dollars a lower return than might be expected given the notional value of the shares. That is, if $x of money is given to a person who signs up for broadband then the shares they purchase may only be worth a fraction of $x on the open market.
However, those signing up for broadband will end up owning part of the NBN infrastructure through the companies appointed to build it in each region. The people who sign up are the ones who ultimately pay for the network through their cost of the services they receive. (It is similar to mobile phone operators who give away phones if people sign up for a service plan). People can either keep their shares or sell them. The price of the shares will establish the subsidy being given to build the network. Given that the network will last for a long time and the wholesale supplier will continue to receive an income, the returns on the infrastructure (either through lower prices or through profits) will sooner or later cover the total cost of the money received.
Many companies will compete for investment funds but they will only be eligible for the funds if they agree to supply broadband to all the dwellings (and businesses) in a particular geographic area. This brings more competition into the system. Companies would bid for geographic areas. Money collected from these sales would be returned to the NBN and used to subsidise geographic areas where the bidders require extra money because of difficulties or high costs in supplying FTTH (or its equivalent) within that zone. Companies purchasing a geographic area will also be required to agree to provide everyone in their area with FTTH within a reasonable time when requested.
The money given to the community will create an asset that in the long term returns more money than is invested. This means the money need not be borrowed by the government or collected as taxes but simply supplied as funds. This is an alternative way to increase the supply of money instead of the government selling bonds. It allows the government to reduce the amount of bonds it sells so that the money supply does not expand too rapidly. It is non-inflationary because the money is spent on a productive asset and the increase in the money supply can be reduced by the government cutting back on bonds or by increasing the fractional reserve requirements of Authorised Deposit Institutions.
The effect of giving people money to purchase shares in companies that supply infrastructure and of obtaining commitments to use broadband when it becomes available will be to increase demand for the service which in turn will reduce the cost.
It will not be necessary for people to be initially connected to get the funds. Anyone who asks for funds will receive them and the amount will be the same for each person (including children). The reason for requiring people to apply for funds is to prevent individuals from receiving more than one issue of funds and to build a committed user base for the service. People are free to decide that they do not want to use the NBN, but if they apply and receive funds they will be obliged to use broadband for communication purposes as soon as the network becomes available in their area.
The approach will be politically acceptable to the electorate. If a person does not want to participate there is no compulsion for them to do so. If everyone in Australia has the same opportunity to receive the same amount, the subsidy remains equitable.
It is likely that private companies will be formed to supply a particular geographic area. It is also possible that Telstra may sell its infrastructure to those companies which succeed in winning an area. A secondary advantage will be that the funds will act as an immediate stimulus to the economy because many people will not wish to hold shares for the long term and will instead choose to sell their funds or shares as soon as they have received them.
To protect the integrity of the system there would be a requirement that the money invested through the companies MUST be spent on new infrastructure and not on operating the system. In addition, companies would be required to give individuals shares in return for the money – not bonds or other forms of non equity.
The system would be relatively simple to implement as the government only has to provide the rules, the funds and ensure that private companies deliver and deploy the system according to the rules. The total system – including distribution of money, share investments and accounting for the sales of the shares – requires information systems and services that could be readily supplied by private companies. These private organisations could also be eligible to receive investment funds from participants providing they give shares in their companies in return.
In summary the “third way” of funding broadband FTTH could be financed without the government going into debt. Existing infrastructure would be utilised where practical. The system will apply to greenfields and brownfields. Every dwelling that wanted broadband would receive retail services based on the same wholesale costs. The system would have competitive tensions through the market in infrastructure funds and the bidding for geographic areas . This will ensure the most efficient use of funds and the ownership of the resulting assets from the use of the funds would be distributed equitably throughout the community.