NBN cost-benefit analysis signals the end of an era

The long-awaited cost-benefit analysis of the National Broadband Network suggests the days of politicians shooting from the hip with taxpayer dollars are numbered.

The long-awaited cost-benefit analysis of the National Broadband Network suggests the days of politicians shooting from the hip with taxpayer dollars are numbered.

As Labor’s NBN unfolds amid reviews and revelations, it’s apparent the NBN was a political move based on romantic notions of policy-making ending in Labor’s electoral defeat in 2013.

In government, the Coalition called for a strategic review of the NBN, revealing a number of problems with the project’s implementation. Malcolm Turnbull also promised to deliver an independent cost-benefit analysis of the economic and social costs and benefits of the NBN.

The cost-benefit analysis (of the NBN as it is now, not the analysis that should have been provided back in 2007) reveals the multi-technology mix (MTM) model will provide the most bang for the taxpayer’s buck. In the absence of evidence to the contrary, the analysis also shows Labor’s NBN would have been nothing short of extravagant.

But the panel of experts who conducted the cost-benefit analysis are not alone in pointing out the shortcomings of Labor’s romantic ideas about deploying infrastructure.

A recent Productivity Commission report on public infrastructure criticised the NBN for its investment in infrastructure without the use of a cost-benefit analysis. Further, NBN Co’s failure to achieve key targets suggests a lack of detailed analysis in the original proposal.

Even the authors of Labor’s implementation study were at pains to make it clear the study did not “undertake a cost benefit analysis of the macroeconomic and social benefits that would result from the implementation of a superfast broadband network”.

But what about the legacy of Kevin07 and the NBN?

Broadband since Kevin07

The promise of faster broadband played a major role in the 2007 election. The Coalition was caught on the back foot with Australia at the wrong end of the high-speed broadband stakes. Rudd’s promise to deliver ubiquitous fast broadband was clearly a political winner at the time.

An implementation study was conducted to find the best way to meet the government’s policy specifications. A “Rolls-Royce” fibre-to-the-home (FTTH) model was selected as a clear technological winner. In the absence of a cost-benefit analysis, Labor over-confidently decided the NBN should be taxpayer funded and wholly government-owned.

But by the time of the 2013 federal election, the NBN was behind schedule and the costs were mounting. And despite several years of intense policy focus, Australia had not caught up with the rest of the world in access to (Figure 1) or speed of (Figure 2) broadband services.

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Figure 1: Fixed-line access per 100 people (Source: OECD, December 2013)

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Figure 2: Broadband connection speeds of more than 15 mbps, (Source: Akamai, Q1 2014)

The move to NBN (lite)

What emerged from Communications Minister Malcolm Turnbull’s promise of a strategic review of the NBN became known as NBN (lite). Instead of FTTH, a fibre-to-the-node (FTTN) network would utilise the multi-technology model to provide consumers with fast broadband (at speeds somewhat slower than Labor’s NBN), but sooner.

The NBN cost-benefit analysis looked at three different scenarios for government action. Each scenario was tested against the net benefits of a base scenario of no further rollout of the NBN, which would result in a net cost of A$24 billion, as follows:

  1. Unsubsidised rollout of NBN. This would provide taxpayers with a net benefit of A$24 billion by avoiding the costs associated with no further rollout.
  2. Adopt the MTM model. This would provide a net cost of A$6 billion relative to the first scenario.
  3. Adopt a FTTP model. This would provide a net cost of A$22 billion relative to the first scenario.

A key finding of the cost-benefit analysis is that delivering broadband services sooner rather than later means benefits accrue while the rollout occurs. Assuming the network is upgraded at some later stage, the benefits continue to accrue while the network is developed. Yet the net benefits of the more expensive FTTH model are less likely to be realised and more likely to decline over time.

Countries such as Canada and the United States have MTM broadband networks and the figures indicate the approach is working. But what rarely appears in the debate about broadband in Australia is a simple fact: some broadband is better than no broadband.

The NBN cost-benefit analysis is long overdue. Although the net cost of the MTM model is some A$6 billion, most of this cost is to serve rural and remote regions with satellite and wireless services in place of fibre.

Taxpayers expect that government will support the bush, and A$6 billion in net costs is hardly a bitter pill to swallow. But taxpayers may well change their tune when ultimately they fund a net cost of A$22 billion for a FTTH model, which in most places won’t be operational for years to come.

Labor’s NBN was a big idea. But without a cost-benefit analysis, it was a reckless use of taxpayer funds made by politicians with no idea. Given the recent findings about how NBN was conceived and implemented, it would take a particularly brave (or foolhardy) politician to ever again implement infrastructure policy on the basis of romantic ideas of what can and cannot be achieved in politics.

While some may lament the end of Labor’s NBN, the cost-benefit analysis reveals the shortcomings of its romanticism. Economics may not be all that romantic, but taxpayers may well be glad the NBN romance is over.

The Conversation

Michael de Percy does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.

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5 Comments

Greg

1

Well what a joke this is. Back in 2003 the Liberals had a Internet future meetings and looked at different mix of technologies. The FTTN was not taken up by the then government but instead preferred FTTP as it was more future proof and cost effective to build. However it appears this bunch of techies has decided to go with a 2002 policy.
Today the Minister now states 15 Mbps is perfect for us all. So much for 2013 policy of min 25 Mbps and by 2019 50 Mbps speeds. So we now have a ADSL2++ Internet as ADSL 2 is meant to be 12 Mbps.
How can it be cost effective to waste 19 billion $ on a network that only delivers 3 Mbps speed increase?
Yesterday 26/8/14 the Minister stated that cable connections were becoming cheaper to connect, so FTTP could have easily been the better option as the cost of connecting to homes is cheaper.
Also not reported is the fact that Germany is now building a FTTP Internet and will have the job completed by 2019. They only started to build their FTTP in July 2014.
So with all this fight over the CBA, written by opponents of the FTTP points to us being a back water again.
You can not even stream 4k TV as it needs at least a 20 Mbps connection I hope no one has gone and bought one to hook up to their home Internet connection. Just like 3d and curved TV a waste of money.

Also no one keeps talking about COO (Cost Of Ownership) this means the on going maintenance for these nodes. How much has the minister set aside each year to repair / replace broken units. Not to mention the 80 million $ a year power bill just to run electricity to them. Oh if they had a trading emission scheme they could have planted trees to off set any green house gasses they would have made from sucking vast amounts of electricity.

This is just like the ANZAC frigate dilemma again. The navy has a frigate that was cheaper to construct however the running and on going cost were more expensive.

I was so looking forward to having a decent high speed Internet at home but as our area will be that last one connected I will be glad with two cans and a long string.

Greg

2

Well what a joke this is. Back in 2003 the Liberals had a Internet future meetings and looked at different mix of technologies. The FTTN was not taken up by the then government but instead preferred FTTP as it was more future proof and cost effective to build. However it appears this bunch of techies has decided to go with a 2002 policy.
Today the Minister now states 15 Mbps is perfect for us all. So much for 2013 policy of min 25 Mbps and by 2019 50 Mbps speeds. So we now have a ADSL2++ Internet as ADSL 2 is meant to be 12 Mbps.
How can it be cost effective to waste 19 billion $ on a network that only delivers 3 Mbps speed increase?
Yesterday 26/8/14 the Minister stated that cable connections were becoming cheaper to connect, so FTTP could have easily been the better option as the cost of connecting to homes is cheaper.
Also not reported is the fact that Germany is now building a FTTP Internet and will have the job completed by 2019. They only started to build their FTTP in July 2014.
So with all this fight over the CBA, written by opponents of the FTTP points to us being a back water again.
You can not even stream 4k TV as it needs at least a 20 Mbps connection I hope no one has gone and bought one to hook up to their home Internet connection. Just like 3d and curved TV a waste of money.

Also no one keeps talking about COO (Cost Of Ownership) this means the on going maintenance for these nodes. How much has the minister set aside each year to repair / replace broken units. Not to mention the 80 million $ a year power bill just to run electricity to them. Oh if they had a trading emission scheme they could have planted trees to off set any green house gasses they would have made from sucking vast amounts of electricity.

This is just like the ANZAC frigate dilemma again. The navy has a frigate that was cheaper to construct however the running and on going cost were more expensive.

I was so looking forward to having a decent high speed Internet at home but as our area will be that last one connected I will be glad with two cans and a long string.

DJ

3

People keep comparing Australia & its NBN with countries in Europe or the high tech asian countries (Japan, S. Korea, Tiawan, Singapore etc). You can't do this. Germany is mentioned by the commenter above. Australia is over 20 x times larger in physical size & almost 4 x smaller in population. S. Korea has more than 2 x population of Australia but is not that much larger than Tasmania. You need to be comparing Australia with countries like USA & Canada. In Europe you would be hard pressed to lay a cable 10km in a straight line anywhere (they even have towns within national parks) & not have it go past at least 100 people. In Australia its pretty easy to do the reverse (100km & not even 10 people). Please note also, while the cost of connecting the fibre may be becoming cheaper, the cost of laying it isn't.

Frank

4

Hmmm, if people like Dr de Percy were in charge of this nation there would be no copper phone network, no Snowy Mountains scheme, no Indian-Pacific Railway, no locking system on the Murray, there never would have been a car industry or a QANTAS and several other "failures". It matters not what you think about these things now, they were classic nation building decisions that have had profound implications for this country and who we are. All of them and the NBN are a fair bit beyond the boundaries of a typical cost/benefit analysis. Sure, politicians make mistakes, but I just hope visionaries are not washed out by wowsers, naysayers, bean counters, "academics", vested interests/large corporations, the media and people who generally have their heads firmly implanted in the sand. Just try to run a corporation and get decent communications in regional SA Dr de Percy. You can't. MTM is no panacea (if it ever happens!).

GN

5

Hi DJ Australia is actually one of the most urbanised countries in the world with the vast majority of our populations in urban centres. South Korea is 16 and Australia is 17, yes we have less population but the population we do have is concentrated. The argument you advance is a bit of a furphy.

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