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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Not to put too fine a point on it but the article misses some key facts, indeed some facts written by you...


Notable quotes:
"To maximise the positive impacts of their investment programme, the authorities should submit proposed projects more systematically to a rigorous and transparent cost–benefit analysis," the report reads.

"The report, The Need for Speed: Impacts of Internet Connectivity on Firm Productivity which studied 6,000 New Zealand businesses, found while broadband adoption did boost productivity, no productivity differences where found across different types of broadband."
The OECD seem to be contradicting their previous stance...

This article is rife with references to broadband but makes little specification on speed (apart from a generalised "more = better"). By that logic, 10 gigabit networking should be even better, why don't we do that? Or we should FTTH to 100% no matter where you are.

The answer is that the benefits, both tangible and intangible, have to be balanced against costs.

I have to stress that I am not opposed to A nbn, just dubious about the NBN's ability to fulfill the stated goals of the government (commercial etc) at a cost that Australians are willing to pay. Businesses include intangibles in their forecasting and studies all the time, just because their intangibles don't usually cover community benefit is irrelevant...

I'd suggest http://www.proj-management.com/PMBusinessCase.html as a reasonable layman's reference.

Trevor Clarke



@Asmo - Thanks very much for the comments. If you check out page two of the article I have included the OECD's recommendation for a "robust cost-benefit" analysis and they have consistently called for this - as many others have. Their comments are not contradictory but essentially what the OECD has said is that when, or if you do a cost-benefit analysis you should also look at the cost savings in the key markets they identify in addition to any direct benefits.

As for the speeds point you are right that I should have outlined this in more detail. I have done this previously in this article:

The World Bank has looked at a variety of speeds and noted in their reports that the common definition of broadband as being 256Kbps (as used by the ABS) is arguably outdated (which I agree with). But as there really is no consensus on what the speed that defines "broadband" should be. However, most research suggests that "faster" or "better" speeds will provide greater (indirect) benefits. The key here is not to pick any one target speed as the best - this would be an extremely tricky and probably impossible task - but rather to provide a suitable upgrade path as demand in the market appears. And as the OECD suggests and many others conclude, a fibre optic network is the best for this with FTTH providing the most ubiquitous connectivity (and therefore arguably greatest benefits). That said, there is also general agreement that the cost of going 100% FTTH in Australia would be too high (as you rightly point out) - hence the debate around what percentage of the population should get wireless connectivity.



@Trevor, indeed, certainly benefits from productivity increases, people moving to well served but more regional areas etc are all factors to be included. I guess my issue is that the Rudd gov. (bit to early to comment on the Gillard gov. despite it's striking similarity ; ) have constantly ducked the need for any attempt to quantify the variables and instead relied on PR slogans. Quigley is of a different cut and so far I've been impressed with his, and his staffs, communicative and open approach. If it were up to him alone I would feel less unsure but the pollies are hip deep in this thing.

In terms of longevity and ability to be upgraded, fibre is currently peerless if you look at capacity. Whack in two new devices at either end and you can have 10 Gb over the same cable.

As a sysadmin, I definitely recognise the need to plan infrastructure upgrades before the need becomes desparate, and building in or provisioning for future requirements (another fuzzy figure when it comes to cost vs benefit). I also know that I do not have unlimited budget so when I propose such an upgrade (such as an upcoming SAN upgrade), I need to be able to demonstrate to my employers why I need to spend so much, what benefits they will gain etc (including talking about intangibles) and indeed what are the risks if they don't upgrade. In some fairly horrific detail... ; )

The government have skipped most of this step. As one of their 'employers' (for what it's worth) I expect better of them particularly after hearing all about this 'transparent' government we were getting.

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