This piece [over the fold] appeared on ABC Online today. It was inspired by some Twitter interaction with Malcolm Turnbull following his SMH piece today. And yes irony about OzEmail investors is (a little) intended.
Broadband and the missing Cost-Benefit Analysis
The Drum, 15th September, 2010.
In 1492, Christopher Columbus sailed the ocean blue, didn’t fall off the edge of the earth and returned with enough prospects to do it again another three times. The project was funded by a combination of public and private funds. Whatever may have been its goals, there is little doubt that it earned a “commercial rate of return” for all concerned and arguably at least for Spain, a decent public return too.
But think about what might have happened here had hard-nosed economists and accountants had a go at evaluating the project’s worthiness. There was a high probability of failure with a complete loss of all funds. There was also a good chance that whatever was discovered was of little use. And then there were ‘pie in the sky’ outcomes of which it would be impossible to quantify properly. It is little wonder that the whole venture was touch and go and it took Columbus years to put it together. 500 years or so later some accountants tried to replicate the cost-benefit analysis and found it hard to do.
There is some similarity between Columbus’s First Voyage and the current debate over the NBN. Both are expensive. Both are requiring a mixture of public and private funds making commercial returns an issue. And in both cases, there is a considerable degree of uncertainty over the potential benefits. To be sure, the NBN will not necessarily fall of the edge of the earth but one of the scenarios is that wireless or a new technological breakthrough comes through and makes it a ‘white elephant.’
The problem here is that when there is uncertainty of this order in play, trying to crunch the numbers and yield a meaningful result is difficult. And what is more, it is going to depend on assumptions and maybe depend on them in a dramatic fashion. It is child’s play to dampen expectations and enthusiasm about the potential upside of the NBN. All you have to do is look at what people use broadband for now (with most bandwidth being video downloads) and there is no case for public investment.
Interestingly, if we played this game ten years ago, we would be able to do the same thing. I recall then that people identified video downloads (so called on-demand movies and television) as something that would come when we moved off dial-up and onto basic broadband (i.e., the slower stuff we have enjoyed since). The basic argument was that consumers already had good options through broadcast television, cable television (which was pretty much just beginning) and video libraries and just wouldn’t pay to watch videos on their computer screen. This means that all of the investment in broadband since would surely have been in error.
In many respects, those assumptions about demand were correct. But they were dramatically incorrect because they failed to conceive that non-copy-protected, relatively low quality video output could absorb so much time and fuel broadband demand. The point here is that no cost-benefit analysis with reasonable assumptions and sanity checks would have included the YouTube scenario. And yet here we are.
I don’t really want to speculate on whether there is a hidden YouTube in our future that justifies the NBN. But I do want to point out two things. First, around the world, there are few examples of firms and governments who have invested significantly in infrastructure in telecommunications who have ended up bankrupt or regretting it. Second, the hidden YouTube could equally be something that drives us to prefer wireless rather than wired networks or perhaps a network configuration that the NBN may not be considering.
My point is that the Government should be held to task on articulating what the benefits of the NBN are. My concern is less that those benefits be quantified but that they are actually public benefits. That is, I don’t think YouTube is worthy of government subsidy but I think education and health may be. But there is precious little discussion of all of that and trying to actually put in policies that deliver them. Asking for finances detracts from the real economic issue of delivering a social dividend.
Malcolm Turnbull likes to talk about opportunity cost: what else could we spend billions of dollars on? I agree that that is a good question. But I also want to ask him: what is the opportunity cost of trying to get the government to cough up numbers that will surely be of little value relative to the real job of working out why the Government is using the NBN to detract from the many other issues in digitisation and competition in telecommunications that remain in the dark? Mr Turnbull: ask Columbus what he is going to do after he discovers America.
Joshua Gans is an economics professor at Melbourne Business School. He blogs on these topics at economics.com.au. Here is his recent advice to Malcolm Turnbull.