Monday, September 20, 2010

We're spending a fortune on new wires. In case you don't want them, we'll disconnect the ones you have

Great business model, eh? Although probably not great enough when you are pouring in $43 billion.

The overwhelminq question is why? Why spend a fortune replacing wires most people probably don't want replaced. And why not properly examine the idea first in a cost-benefit study?

We've already got wires that keep doing more than we ever imagined (20 years ago no-one could have imagined what ADSL could do, even years ago no-one could have imagined the speeds it will do now  - and they are still increasing) and much of the urban population was actually offered shiny new sets of coaxial cable wires in the 1990s (they were strung up through entire suburbs) and said no. The new NBN cables will be strung next to them.

So why? Why spend a huge sum forcing on us what most of us would scarcely pay a cent extra for of our own volition?

The responses to this post and others provide some clues:

One is the view, satirised by The Onion, that Tax Dollars Only Be Wasted On Stuff That's Awesome.

I will say this once - clearly. Being awesome isn't an argument. I know the speed of light is the fastest there is. It's awesome. Get over it. The question is whether it is worth spending billions connecting 90 per cent of the country to it.

Oh, and there's build it and they will come. Stilgherrian says:

"Of course these speeds are adequate for current interactive services. If they weren't, these services wouldn't yet exist. New services will only emerge when the speeds exist to support them."

Build it and they will come! Except they didn't come for coaxial cable, didn't come for satellite, didn't come for HD TV. Not every bet on a new technology pays off. If it costs so much wouldn't it be wise to look before leaping?

There's the related march of progress argument. Kymbos says...

"When electricity became an option to people it was largely used for lighting... After a time, electricity became a common use for powering most things in the home or business, to the point that nowadays it seems ridiculous that it would even be questioned. I see broadband in that context. I think (although of course I do not know) that over the next 10-20 years it will become so ubiquitous to our lives that we will wonder why it was ever debated that we make investments of the magnitude of the NBN."

But the truth is broadband will become ubiquitous over the next 10-20 years regardless of whether we have the NBN. Progress has a way of happening. If you doubt this, check out the screamingly funny Accenture study from 2001 arguing for tax credits in order to get broadband penetration past 10 per cent.  Gee, how did it happen without those tax credits Accenture thought were essential.

There's the argument that value for money doesn't matter because it is free money. Grogs says it isn't right to think of 'opportunity cost' - money forgone.

"This is also a favoured tactic of those who dislike the NBN – ie every billion spent on the NBN is another hospital that could be built. It is a pretty weak argument. People know another hospital isn’t going to be built instead of the NBN. The argument may sound logical, but its much like smokers who quit knowing they are never actually going to go on the round the world holiday with all the money they will save."

Sorry Grogs. Fewer hospitals and the like will be built if the NBN goes ahead. The opportunity cost is real, regardless of what "people know."

There's the copper is on its last legs argument. Possum says:

"It is a decrepit, broken thing attempting to provide something it was never designed for, whose performance has already peaked and which will become increasingly degraded and prohibitively expensive to maintain over time. The net you get over copper today is as good as it will ever be."

Fighting words, which would have seemed true 20 years ago, would have seemed true 10 years ago, would have seemed true 5 years ago. And people like Possum accuse people like me of lacking imagination. All the while we have kept coming up with new and better ways to use copper. It is indeed doing things it was never designed for, over and over again. It's an unexpectedly versatile material. It'll do even faster speeds soon, and it is already laid. Sure it costs money to maintain, but how much?  Surely we wouldn't be planning to chuck it out without knowing how much?

And anyway Possum says we don't need a cost benefit study because the answer is unknowable.

Possum, that doesn't mean we don't need a cost benefit study. Governments do cost-benefit studies about things such as this all the time.  The range of likely outcomes would tell us a lot and the process would tell us a lot. We would gather information (the real state of the copper network, which suburbs and houses would well served by what they had) and explicitly lay out assumptions. It would be worth it - essential in my view -  given the scale of the project.

In evidence to the Senate Committee examining this question Dr Mark Harrison said

"The great thing about cost-benefit analysis is that it makes the methodology and the assumptions all clear and explicit and then you can argue about them."

And in any event, the people promoting the NBN undermine your argument by acting as if a cost-benefit analysis has been done!

Here's Treasurer Wayne Swan from Wednesday night:

"Access Economics forecasts that smart technologies like the National Broadband Network will add 1.5 per cent to the level of our GDP within a few years. It’s truly remarkable technology, and a truly important reform, and we can’t afford not to do it."

Err Wayne, "can't afford not to do it"? I thought the benefits were unquantifiable. And that Access Study you quoted. Have you read it? It's here. Access says there is "insufficient data to accurately quantify the full economic benefits of high speed broadband at this time," but in its view the benefits would be large. In other words it doesn't have a clue. Why on earth did you make it sound as if Access had come up with something?

And then there's Mike Quigley, the CEO of the NBN Co. You say he "is one of the most experienced and widely respected telecommunications professionals in the business, having most recently worked as Chief Operating Officer of Alcatel Lucent – one of the biggest telcos in the world".

Good. I would have more confidence in him if he didn't say stuff like:

"Recent studies have noted the substantial annual benefits that flow from broadband in terms of GDP. One such study of a fibre access network estimated a US$160 billion economic benefit over 4 years. This same study estimated an annual increase in jobs of more than 210,000."

He would have read the study he's referring to, right? It's by Navigant Economics. Much of the "benefit" it refers to is actually the cost. Its an analysis that would make the Ord River Scheme look good. The rest of the benefit comes from an "increase the number of U.S. broadband subscribers by between 216,000 and 6.0 million". That's right - an increase in the number of broadband subscribers is the important thing according to Navigant Economics, not speed for its own sake. The study was funded by the US Fibre to the Home Council.

Rather than quote fake or crappy studies, why not conduct a good one?

Otherwise, why not as one economist suggested "fund $43 billion artificial intelligence project on basis that we think robots might end up doing all the work for us?"

If there's really still something objectionable about the sort of studies that are commonplace where there are public costs and social benefits (not all of them quantifiable), why not implement Christopher Joye's alternative idea -- a randomised trial in one city to determine benefits after say 5 or 10 years. What would we have to lose? If one city (say Adelaide or Hobart) raced ahead because of the NBN we could take the idea nationwide. The rest of us would have 5 to 10 years of technology advance and the Adelaide or Hobart experience to advise us how to jump, or whether to.

Below are extras from a great column by Stephen Bartholomeusz in Business Spectator (subscription) and one from Joshua Gans who says he actually suggested a trial in Tasmania but that the government was "not interested in evidence based assessments".

So sad.

Testing Turnbull's NBN mettle

Stephen Bartholomeusz, 16 Sep 2010

"The government has committed to spending up to $43 billion of taxpayer funds, or whatever lesser or greater amount the NBN ultimately costs, without any meaningful analysis of its costs and benefits.

"The 546-page implementation study produced by McKinsey and KPMG earlier this year wasn’t a cost-benefit analysis – the firms explicitly said so in the introduction to their study. That study was a reverse-engineering exercise for a decision that had already been taken, and a rather unconvincing and rubbery one at that, built on ridiculously optimistic assessments of penetration and demand rates.

"Whatever the merits and nation-building potential of a ubiquitous fibre-to-the-premises network, the fact that a government has embarked on the single most expensive project in the nation’s history without undertaking an exhaustive analysis – indeed any, meaningful analysis – of its costs and benefits represents appalling governance. At least there was some obvious and urgent economic justification for the pink batts program.

"As Turnbull says, a case could be made that there are social and economic benefits beyond the financial value created or destroyed by the NBN, but that case hasn’t been made and, it appears, unless he can force a change of stance, won’t be made...

"If, as Kohler said in his response to Turnbull’s response to his column, the politics of the NBN were really about creating a new regional subsidy to replace the existing universal service obligation, why are we spending $43 billion, or whatever it ends up costing?

"Just give the bush subsidised high-speed broadband, whether fibre, satellite or wireless – at a cost of perhaps $5 billion or $6 billion – and save a few tens of billions of dollars to spend on health, education, transport infrastructure and other more obviously and more urgently vital services...

"In fact it would seem the politics are more complicated than simply supplying broadband to the bush. There is a large element of the urban population which just likes the idea of very high speed broadband. They may not have any idea of what they will do with it when they have access to it, but that’s part of its appeal.

"The US author and columnist, Michael Lewis, at the height of the dot-com bubble, wrote about the "state of pure possibility" in relation to the inflated value of the dot-com stocks. In a bubble (when emotion generally overwhelms commonsense) he argued a company had to be "ever so slightly unknowable" to be desirable. There an elements of that in much of the enthusiasm for the NBN."

NBN: A Little Summary

Joshua Gans, September 16, 2010

In the four years that I have been researching and debating broadband policy there is one thing I have learned, it is hard to take a position other than a straight “yes” or “no.” The Government and Opposition know this and have taken sides. Neither are entirely right or entirely wrong. Neither are really serious about gathering proper evidence. Anyhow, let me summarise what we know about the value of the NBN and what we still need to find out.

The NBN will be unlikely to earn a commercial return. The Cost-Benefit Analysis on this has been done but not by the Government but by Telstra and many other telecommunications companies. Telstra told us for years it was not viable. I’d be willing to bet they are right about that but they are silent now because they want it to go ahead. Given that, the Opposition’s call for a Cost-Benefit Analysis to be produced again is surely political grandstanding and a waste of time. But the Government’s continual claims without evidence that it will be commercially viable is a worse affront.

The NBN may earn a social return. This is a Cost-Benefit Analysis that might be done but the problem is that a social return depends on Government policies yet to be enacted or thought about. While the debate is off on the commercial side, the social side has been left for dead. As Peter Martin has reminded us, there is precious little evidence that there is a social return on things like eEducation, eHealth or what have you. But that does not mean the evidence can’t be gathered. The problem is there is no pressure to do so.

The largest immediate social benefit from the NBN is competition in telecommunications. As I wrote way back in 2008 when I first proposed all this, we have failed in telecommunications competition in this country. We have a monopolist and no real way of regulating it. The NBN is a way of doing so; the first real option proposed. It is expensive, to be sure, but it will do the job unless…

The biggest risk to the NBN is a bad deal with Telstra. The NBN will achieve competition by duplicating telecommunications infrastructure. Stop duplicating to save some money and you may kill the benefits from competition. That seems to be what the Government wants to do. Here is Minister Conroy from today: “And the deal we have with Telstra and the McKinsey report was based on no deal with Telstra. The debate about take-up has become completely irrelevant; the deal that we have with Telstra is that they are decommissioning, closing down the copper network. To have a fixed line in what we call the 93 per cent footprint, the only way at the end of this process you’ll have a fixed line is on the NBN’s fibre network.” This is outrageous and I hope the ACCC applies s45 properly and stops it. But the Opposition should get its act together and hold the Government to account here.

The NBN is superior to other alternatives like FTTN or some regional option but is currently being implemented in a manner that is way too costly to the taxpayer. There is no buts about it. As it stands the NBN is a massive subsidy to the rich and will likely cost the poorer half of Australia more than they get in benefits. This very fact should be an affront to any true believing Labor follower. It is to me. We can implement the NBN more cheaply if we put in a solution whereby in areas where it is commercially viable, it receives no subsidy. That is, we need an Austan Goolsbee like scheme here.

We should recognise that at the moment the Government and Opposition are just scoring political points and not really getting to the heart of the issue.

Related Posts

. The NBN is a slowly unfolding disaster

. What passes as cost-benefit analysis of the NBN

. There's only one really important concept in economics [Warning: Broadband post]