NBN: A Little Summary

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In the four years that I have been researching and debating broadband policy there is one thing I have learned, it is hard to take a position other than a straight “yes” or “no.” The Government and Opposition know this and have taken sides. Neither are entirely right or entirely wrong. Neither are really serious about gathering proper evidence. Anyhow, let me summarise what we know about the value of the NBN and what we still need to find out.

  1. The NBN will be unlikely to earn a commercial return. The Cost-Benefit Analysis on this has been done but not by the Government but by Telstra and many other telecommunications companies. Telstra told us for years it was not viable. I’d be willing to bet they are right about that but they are silent now because they want it to go ahead. Given that, the Opposition’s call for a Cost-Benefit Analysis to be produced again is surely political grandstanding and a waste of time. But the Government’s continual claims without evidence that it will be commercially viable is a worse affront.
  2. The NBN may earn a social return. This is a Cost-Benefit Analysis that might be done but the problem is that a social return depends on Government policies yet to be enacted or thought about. While the debate is off on the commercial side, the social side has been left for dead. As Peter Martin has reminded us, there is precious little evidence that there is a social return on things like eEducation, eHealth or what have you. But that does not mean the evidence can’t be gathered. The problem is there is no pressure to do so.
  3. The largest immediate social benefit from the NBN is competition in telecommunications. As I wrote way back in 2008 when I first proposed all this, we have failed in telecommunications competition in this country. We have a monopolist and no real way of regulating it. The NBN is a way of doing so; the first real option proposed. It is expensive, to be sure, but it will do the job unless …
  4. The biggest risk to the NBN is a bad deal with Telstra. The NBN will achieve competition by duplicating telecommunications infrastructure. Stop duplicating to save some money and you may kill the benefits from competition. That seems to be what the Government wants to do. Here is Minister Conroy from today: “And the deal we have with Telstra and the McKinsey report was based on no deal with Telstra. The debate about take-up has become completely irrelevant; the deal that we have with Telstra is that they are decommissioning, closing down the copper network. To have a fixed line in what we call the 93 per cent footprint, the only way at the end of this process you’ll have a fixed line is on the NBN’s fibre network.” This is outrageous and I hope the ACCC applies s45 properly and stops it. But the Opposition should get its act together and hold the Government to account here.
  5. The NBN is superior to other alternatives like FTTN or some regional option but is currently being implemented in a manner that is way too costly to the taxpayer. There is no buts about it. As it stands the NBN is a massive subsidy to the rich and will likely cost the poorer half of Australia more than they get in benefits. This very fact should be an affront to any true believing Labor follower. It is to me. We can implement the NBN more cheaply if we put in a solution whereby in areas where it is commercially viable, it receives no subsidy. That is, we need an Austan Goolsbee like scheme here.

We should recognise that at the moment the Government and Opposition are just scoring political points and not really getting to the heart of the issue.

17 Responses to "NBN: A Little Summary"
  1. Correct me if i am wrong, but when the harbour bridge was built it was assumed that there would not be a commercial return, but because the social return would be so great the Govt of the day went into debt and proceeded.
    Just because the accountants don’t understand the mathematics of externalities and Intangibles, it is no reason not to proceed with a project
     
     
     

  2. I see no one has yet commented on the fundamental question that should arise before all others – that of the physical state of our existing copper infrastructure.

    If anyone has some inside knowledge to share it would add a crucial dimension that appears to be missing from the debate: is the existing copper infrastructure in good general shape and likely to remain so for the forseeable future…….or not?

    Is it likely to be able to support expanding usage well into the future………or not?

  3. Isn’t the government able to benefit in a way that Telstra could not: ie they can collect tax from increased business?  So that point 1 is flawed? The Telstra CBA and the Government CBA would take different perspectives…

  4. Which is not to say you can do a gov CBA – it’s just too unknown about how much of a positive economic benefit it would have.

  5. The comparison that can be run most effectively is comparing the rollout of electrical infrastructure to the nation.
    The regulatory framework that is operational there is also a great model to look at (under the AER and market operator AEMO).
    The business case requirements for non-regulated monopoly asset bases are very different to the business cases for competitive non-monopoly asset bases for infrastructure companies.
    The Howard placed the Coalition in a straight jacket for the entire nation when he promised no separation of Telstra into regulated monopoly arm holding the core monopoly infrastructure and a competitive market arm that can compete in a truly competitive market on shared infrastructure that favours no one.

  6. Is there a specific post or paper which compares the current plan to the FTTN option?
    I was under the impression that since a very large proportion of the cost is incurred in the last mile (ie from the node to the residence) then FTTN offered a cheaper away as well as allowing end users choice as to whether they pay for the final mile themselves.
     
    What is the rebuttal to this?

  7. Fact 1: the last mile is unavailable for business because it belongs to Telstra, a former state owned business turned into a monopoly.
    Fact 2: The government intends to spend 40 billion (and blow that amount 3 or 4 fold, be assured)  in basic infrastructure to bypass Telstra, a monster paralyzed by its own incompetence and guaranteed fat gains.
    Fact 3: Telstra is loving it, because will be left alone and if eventually fiber is installed Telstra will be able to use the expensive infrastructure (again) at a cost heavily subsidized by tax-payers.
    Why would this solve the problem? It will take long, cost much and solve nothing. Will be poorly done, will be used as a political bargaining chip – as it has been in the “independents” affair – and will also increase the control and power of government over the markets.
    This government is afraid to do what it should do, which is to foment competition, but is very bold when it comes to burning money. Absolutely indefensible.

  8. I don’t understand point 4, about Telstra and duplication. Surely nobody can mount an effective argument that the nation would be better off if the telecommunications infrastructure was duplicated; that’s a waste of money and effort. Yes, we do need competition so consumers benefit. This is to be achieved by other means – in particular, ensuring all service providers have equal access to the infrastructure which will, at least initially, remain in public hands.
    A deal with Telstra that covers physical infrastructure (using Telstra’s conduits and pits) and capacity (moving Telstra customers over to the NBN-backed service) doesn’t erode this competitive landscape. It’s better than the original scenario in which Telstra might have been a competitor to the NBN, making the NBN more expensive and difficult to build without bringing much in the way of benefit to the consumer. If the two fibre networks were rolled out, then that is double the investment that needs to be recouped from users in the coming decades.
     
     

  9. @ZAc,
    I agree.  I would love to see an answer to your question.  The only plausible explanations I can come up with are:
     
    (1)  It is expensive to include the “nodes” in the FTTN option.
     
    (2)  It is cheaper to “roll out” the NBN systematically, than do it ad hoc depending upon which customers wish to connect.
     
    Nobody gets a free connection to electricity or telephone currently.  There is a significant connection charge, although this may not completely recover the connection cost.  Why not similarly levy a tariffed connection charge on NBN?
     

  10. Laura Tingle in the Fin on Friday:
    QUOTE
    Tony Windsor, the independent MP whose  crucial vote locked Labor into minority government, has one way of looking at it.
    “One of the arguments against the NBN is its $43 billion price tag,” he noted last week.
    “Well, apparently the actual government investment is closer to $27 billion. But I’d just note that over $40 billion has been spent on tax cuts since the last election.”
    He’s right, of course.
    It’s funny how no one ever asks for a cost benefit analysis to be done on personal tax cuts.
    For that matter, until Labor came to office in 2007, governments rarely asked for any cost-benefit analysis on infrastructure projects.
    END QUOTE
    Tingle cites the $12 billion Auslink and $10 billion Murray-Darling plans as well as the Darwin to Alice Springs railway as having escaped cost-benefit analysis. Then again, although Tingle does not mention it, the Sydney cross-city tunnel had a cost-benefit story that saw the private sector enthusiastically competing to fund it, with eventual very red faces after it went into receivership 16 months after it opened.
    Tingle’s criticism is not at odds with the program Joshua lays out above, but it emphasises that arguments about cost-benefit analysis miss more fundamental issues.

  11. @MikeM,

    I think you have it backwards – it is always the government of the day that should provide the justification as to where taxes are spent. There is no need to perform a CBA (?!) for tax cuts – it’s your capital and income to begin with. (Though in real GDP terms I’m not sure if Oz governments have actually reduced the taxation burden in a meaningful way – maybe they have reallocated it.)

    As for the actual govt investment figure being limited to $27billion – I doubt it when the rate of return quoted is about 6%. No private investor with half a brain will touch it given alternative returns elsewhere. They could just purchase government bonds, i.e. almost the same return, but safer.

  12. My NBN Cost Benefit Analysis, including:
    1. 50% writedown of Telstra value
    2. Business and consumer uptake assumptions
    3. Social benefit as increase in GDP (well $ benefit anyway)
    4. Tax, interest and debt repayment included
    5. Over 15 years…
    is at http://valman.blogspot.com/2010/07/my-cost-benefit-analysis-on-nbn.html
    Enjoy..>>! NBN is NPV positive with 0.5 – 1.0% increase in GDP (up to year 15). Spreadsheet allows you to play with the variables.

  13. The issue is always who will pay for it.  The answer is the people who will use it.
    So give everyone in the country some interest credit that they must invest with some company to build a connection to their dwelling. They repay the credit over the next x years as part of their monthly bill.  x is about 20 if we use the existing wholesale cost of an ADSL2 connection. This will include operating costs as well as repayment.
    The credit is attached to the dwelling so that when the dwelling is sold the credit and connection go with the sale.
    Problem solved. No government debt. No increase in price of connection. Market used to select builders of network. Telstra sells their ducts and/or copper for a fair price – like how much it would cost to replace.
    When there are things to be done then cost benefit analyses are a waste of time. We just find the cheapest way to do it be it a transport route over the harbour, a way of producing emissions free electricity, or a NBN.

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