NBN 101: The Economic Argument

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

The OECD recently took a novel approach to evaluating the costs of building FTTH networks in its Network Developments in Support of Innovation and User Needs report. Instead of estimating the benefits as in the various aforementioned reports, the OECD looked at what short-term cost savings would be needed in the electricity, healthcare, education, and transport sectors to justify an investment in a FTTH network.

On average, it found that a cost savings of between 0.5 per cent and 1.5 per cent in each sector over ten years resulting from a broadband investment would justify the cost.

"While the calculations in the paper are rough estimations they clearly highlight the fact that investments in fibre networks can be justified relatively easily through minimal cost savings in other sectors even when the savings are often discounted in investment calculations by private firms," the OECD wrote.

Notably, the organisation called for a robust cost-benefit analysis to be conducted before investing, with policy makers and networks planners urged to "focus on developing a broadband platform which easily supports capacity upgrades to match the bandwidth demand of new applications as they appear".

As discussed in a previous article, fibre optic networks best fit this requirement.

Additionally, the OECD suggested the savings realised in any one of the four sectors it chose could potentially justify the investment by itself. It also pointed to other sectors that could create savings or become benefactors such as the cloud computing industry, grid computing, and content provision (like TV, video, news, etc).

NBN arguments 101: The Economic Argument

Some more generic examples

One immediate economic benefit that can be realised from faster broadband is in increased cross-border trade in IT services and what is called IT-enabled services (ITES).

The estimated market for IT services and ITES has been put at between $US475 billion and $US700-800 billion. However, it was suggested that in 2007 less than 15 per cent of that market was being tapped, indicating a significant potential for growth.

India is one of the most often cited success stories of a country benefiting from developments in these markets. In 1995 India’s software exports jumped from $US1 billion to hit $US32 billion in 2007 and the industry now employs 1.6 million people.

Similar tales are told about China, Costa Rica, the Philippines, and Ireland, while the US city of Seattle is an example of a more localised economy benefiting from broadband.

Seattle claimed a potential saving of up to $US1 billion per year from its investment in a FTTN network due to effects in the electricity and transport sectors, along with a reduction in carbon emissions.

Then you have the emergence of companies such as Google which, at the end of 2009, had 19,000 staff on its books in 20 countries with a market capitalisation of $US168 billion.

In Australia, income derived over the Internet soared by 52 per cent in the 2008-09 financial year to reach $123 billion (up $42 billion), according to the Australian Bureau of Statistics (ABS).

This result correlated with statistics that showed an additional 25,000 businesses received orders over the Internet during the same period and the take up of broadband continued steadily. However, only 27 per cent of all businesses use the Internet to generate business, indicating greater growth is possible.

But it is South Korea that arguably provides the best reference for the economic impact higher-speed broadband investments can have. The country has the world's second highest FTTH coverage (2008) of 67 per cent but boasts the highest FTTH saturation of 46 per cent according to 2009 statistics.

The government has poured $US70 billion into the FTTH network and other broadband infrastructure there, and an additional $US1 billion provided for regional coverage.

According to one World Bank report titled Building broadband: Strategies and policies for the developing world, South Korea’s online gaming industry has benefited remarkably from this, achieving sales of $US8.3 billion in 2007.

However, it's only one example of the benefits of fast broadband to the country's economy. Concurrently, the value of homegrown content has exceeded $US3.4 billion, with online games and entertainment services the big contributors. Across the country’s economy there are other similar success stories to be told and it is commonly accepted the broadband investments have been key to South Korea’s status as a middle-income nation after years of economic despair.

Next: What’s the cost of waiting?

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