NBN 101: The Economic Argument

The economic benefits of faster broadband should not be discounted or neglected in discussions around the NBN

This article is part of Computerworld Australia's NBN 101 series, in which we take a look at the arguments surrounding the fibre-to-the-home (FTTH) network, and dissect them one by one. The articles are meant to be an overview of the debates central to the National Broadband Network (NBN) to give you a grounding as more and more media outlets and commentators speak out on the project. We encourage people to take the discussion further in the comments section.

In our first article we took a look at how Australia’s NBN plan compares to the rest of the world and the statistics and graphs from the OECD, and then we strapped in for a tour of speeds. Last week we had a look at wireless technologies versus fibre optic.

This time we delve into the economic argument for a high-speed national broadband network.

The Economic Argument

Arguably at the forefront in the public discourse on the National Broadband Network (NBN) is the debate around the commercial return or direct benefits of rolling out the fibre-to-the-home (FTTH) infrastructure that has been promised.

But while it is an important argument that we will address in coming articles, whether NBN Co or the Australian Government as its major shareholder writes its results in black or red ink on its profit and loss statement - and we all hope it will be black - is only one part of the story. Indeed, it is only one of the many objectives the NBN is aiming to achieve.

For many years now, telecommunications providers and private firms have evaluated the potential returns of broadband investments and have only proceeded if the market value of the investment exceeds its costs to an attractive level. To cut a potentially long story short, when they decide they can’t get a high enough rate of direct return, they don’t invest. When they can, they will likely take the plunge and try and monetise the network to generate revenue or profit.

Yet, these evaluations of market value often do not include other macro-economic and social benefits - what some academics and analysts call "spill-over effects" or indirect benefits. There is simply no imperative for the private sector to consider them, particularly those that are beholden to shareholder obligations.

However, it is because these potential indirect returns to a society or economy are thought to be so great or essential to development that governments are called on to step in to invest when the market can’t or won’t. After all, the Government has stated several times that it is fulfilling an objective with the NBN that the commercial sector refuses to do.

In one of its most recent reports on ICT, the World Bank described investments in faster broadband (with no distinction on technology platform) as "no regrets" infrastructure that carry little risk.

"We used the phrase ‘no regrets’ investment to capture the idea that, even if broadband does not immediately deliver the direct benefits expected, in terms of jobs and competitiveness, it will certainly benefit the economy as a whole and therefore the indirect benefits (for instance in terms of capacity-building, opportunity creation or speeding up the general flow of information) are substantial,” the World Bank’s lead ICT policy specialist, Dr Tim Kelly, told Computerworld Australia in a written response. “In other words, the broader, intangible benefits of investment in broadband mean that it is rarely, if ever, a bad investment.”

Quantifying the benefits

Although some observers have recently suggested a cost-benefit analysis of the NBN could be completed in three days given access to the assumptions used in the NBN Implementation Study, these statements appear to only consider the direct returns possible and not the wider socio-economic picture.

In fact, most observers note there is a need for much more detailed empirical evidence and research into higher-speed broadband networks like that being promised in Australia. That is unlikely to come quickly, despite the efforts of organisations such as the Melbourne University-based Institute for a Broadband Enabled Society (IBES), investigating both the economic and social benefits of faster broadband.

So while caution must always be taken when drawing conclusions on the existing body of research, it is noteworthy that the consensus view of organisations such as the World Bank and the Organisation for Economic Development (OECD) - two of the world’s most reputable economically-focussed intergovernmental bodies - is that faster broadband and specifically fibre optic networks are a very good thing for any economy.

For instance, one recent World Bank study of 120 countries found that for “every 10-percentage-point increase in penetrations of broadband services, there is an increase in economic growth of 1.3 percentage points”.

NBN arguments 101: The Economic Argument

Other research by McKinsey & Company similarly concluded a 10 per cent increase in broadband household penetration produces a rise of 0.1 to 1.4 per cent in GDP growth.

Booz & Company meanwhile suggested countries that have higher broadband penetration rates have achieved up to two per cent higher GDP growth than those with lower penetration rates.

In Australia, a 2002 report commissioned by the then Australia’s National Office for the Information Economy (now the Australian Government Information Management Office or AGIMO) by authors Allen Consulting Group, estimated broadband would add 0.6 per cent to Australia’s gross domestic product (GDP) growth rate each year through 2005.

In a second World Bank report, Broadband Infrastructure Investment in Stimulus Packages: Relevance for Developing Countries (PDF), author, Christine Zhen-Wei Qiang, concluded that “policy makers can wait for serious bottlenecks and areas of insufficient investment to appear before investing, or choose to invest as a way to attract economic activity”.

“In the case of broadband network, the significant time lag between identifying a bottleneck and building a network can forego large economic gains, given its positive spillover and network effects,” she wrote.

“Therefore, timely public spending in broadband infrastructure can realize immediate network effects and bring forward long-term aggregate spillover effects which improve the productivity of the entire economy.”

Commonly it is the transport, healthcare, education, and electricity sectors that are presented as being the most easily identifiable benefactors of higher speed broadband. An Australian-focussed Access Economics report commissioned at the behest of IBM, The Economic Benefits of Intelligent Technologies also added water management to this list.

It found that while it is hard to quantify the full economic benefits of using smart technologies in the electricity, irrigation, health and transport sectors on the back of a fibre-to-the-node (FTTN) broadband network, there were grounds to conclude that the significant benefits would have been greater had a FTTH network like the NBN been used.

In short, it found the net present value of benefits of smart technologies on a fibre optic network to 2018 would be between $35 billion and $80 billion.

Next: Another way of putting it...

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