Sunday, August 31, 2014

And the NBN cost-benefit analysis finds...

No wonder Labor never wanted its National Broadband Network subjected to cost benefit analysis.

For all of its talk about the public benefits that would flow from fibre to the home broadband such as e-health, e-learning and working, those benefits turn out to require very little bandwidth.

The Coalition's independent cost benefit review finds that what does need high bandwidth is high-definition TV. But even that doesn't need anything like what the NBN was going to deliver.

By 2023 the typical household will need just 15 megabits per second, according to the review's bottom-up analysis. The top 5 per cent of households will need at least 43 Mbps. The top 1 per cent will need 48 Mbps. The NBN was going to deliver 100, upgrading later to 1000.

Tech-heads might think those figures are low, but the review explains that the most common household comprises just two people.

"Even if those two are each watching their own HDTV stream, each surfing the web and each having a video call all simultaneously, then (in part thanks to the impact of improving video compression) the total bandwidth in 2023 for this somewhat extreme use case for that household is just over 14 Mbps."

Bandwidth that isn't used is bandwidth that's wasted. If it costs a lot to get it it's money wasted.

The review finds the Coalition's pared-down model will cost $7.2 billion in today's dollars. Labor's fibre-to-the-premises NBN would have cost $17.6 billion. The benefit from the Coalition's model is $1 billion. The benefit from Labor's model is minus $4.7 billion. That's right, minus $4.7 billion. The minus sign is because Labor's scheme would have delayed the spread of fast broadband. The review finds that without it the market would have delivered high-speed broadband to most Australians sooner.

Australians care about speed, but not that much. The review finds we are prepared to pay an extra $1.50 per month for an extra Mbps when our speed is low, but only an extra 70¢ when it climbs to 50 Mbps and nothing when it climbs above 90 Mbps.

On the other hand, we care deeply about getting high-speed broadband quickly.

The Coalition's plan uses a mix of technologies to deliver speeds of 20 to 100 Mbps to all of Australia and does it much sooner than Labor would have delivered 20 in the bush and 100-plus in cities.

The Coalition scheme will cost a net $620 per person in today's dollars. Labor's would have cost $2200.

It's hard to fault the review panel for thoroughness. It's review goes out until 2040, and beyond that using residual value. It developed Australia's first bottom-up analysis of what Australians actually need; something Labor never did, starting instead with a solution and then assuming it was needed. It commissioned the Institute for Choice at the University of South Australia to examine what consumers were actually prepared to pay and it has submitted its work to peer review from an international panel made up of experts from the Brookings Institution and the University of Texas.

It finds that both the Coalition and Labor's NBN needlessly waste money, but that Labor's wastes more.

In The Age and Sydney Morning Herald

Cost benefit analysis shows Turnbull plan has $16b advantage

The Abbott government's pared-back broadband plan is three times more cost effective than Labor's ambitious scheme and would leave Australians $16 billion better off, according to the first independent cost-benefit analysis of the national broadband network.

In a scathing verdict on the Rudd and Gillard governments' plan to introduce fibre directly to 93 per cent of premises, the cost benefit analysis finds the policy is so expensive it would barely leave the community any better off in net terms than if broadband investment remained frozen at present levels.

The much-anticipated report finds households and businesses will benefit from quicker downloads but the much-vaunted societal benefits of fast broadband – such as improvements to health and education services – will probably be extremely limited.

The cost benefit analysis panel, led by former Victorian Treasury head Michael Vertigan, modelled the estimated costs and benefits of expanded broadband access from 2015 to 2040.

Communications Minister Malcolm Turnbull, who commissioned the analysis, will use the findings to justify his decision to pursue a "multi-technology mix" broadband network using a combination of fibre to the premises, fibre to the node, hybrid-fibre coaxial, satellite and wireless services.

Mr Turnbull regularly attacked Labor for failing to commission a cost-benefit analysis before launching the national broadband network, the biggest infrastructure project in Australia's history.

The report finds the multi-technology mix model outperforms a fibre to the premises plan in net economic benefits in 98 per cent of scenarios.

A multi-technology mix NBN would cost $24.9 billion to launch from 2015 compared with $35.3 billion for fibre to the premises (FTTP), the report finds.

A multi-technology mix would deliver download and upload speeds of 20-100 megabits a second, while FTTP would deliver speeds above 100Mbps.

The report finds the most cost-effective option would be an unsubsidised launch in which the free market delivers high-speed broadband to 93 per cent of homes. This would have a net economic benefit of $24 billion, but would leave 7 per cent of premises in regional and rural areas without fast broadband.

Providing fast broadband to the bush through wireless and satellite services – as envisaged under both Labor and the Coalition's plans – will cost nearly $5 billion but produce only $600 million in economic benefits.

This suggests an alternative model for a government committed to fast broadband for all Australians at a low cost: subsidising the introduction to the bush while leaving private providers to serve metropolitan areas.

Compared with the unsubsidised launch scenario, the multi-technology mix model has a net cost of $6 billion ($620 a household) and fibre to the premises has a net cost of $22 billion ($2220 a household).

Australians would be only $2 billion better off, in net terms, than if there was no further launch> of broadband under a fibre to the premises model. They would be $18 billion better off under a multi-technology mix.

The report finds a multi-technology mix is more "future proof" because it can be upgraded to fibre to the premises later if demand for fast broadband booms.

"The [multi-technology mix] scenario leaves open more options for the future because it avoids high up-front costs while still allowing the capture of benefits if, and when, they emerge," the report finds.

The cost benefit analysis finds most of the benefits of fast broadband – most notably video downloads – will accrue to private users within households and businesses. By contrast, hospitals and schools require relatively low bandwidth to deliver services. 

As well as Mr Vertigan, the expert panel members were economist Henry Ergas, former Australian Communications Authority chairman Tony Shaw and former eBay Australia managing director Alison Deans.

Mr Vertigan said the findings of his report show that cost benefit analyses should be mandatory before construction begins on major public infrastructure projects.

Labor communications spokesman Jason Clare said the cost-benefit analysis was "tainted" by the involvement of figures such as longstanding NBN critic Henry Ergas.

"It's hard to take the report seriously when three weeks before the last election Malcolm Turnbull said he would get this report done by the government body Infrastructure Australia and instead what he has done is got some of the most vociferous critics of the NBN, as well as former staff, to write this report," he said.

Mr Clare said the government had a "myopic" view that fast broadband was just about video games.

This is about setting us and Australia up for the future. That is why Japan, South Korea and China and New Zealand are doing it and even in Indonesia." 

In The Age and Sydney Morning Herald SUNDAY EXPLAINER

It was going to be bigger than the Snowy Mountains Scheme and it was going to revolutionise our lives. Four years ago Labor began an audacious program of connecting every house and business in the country to the internet, all over again. It was to cost $43 billion and it commenced without a cost benefit analysis. This week the Coalition released the results of a cost benefit analysis into Labor's NBN, the first. It finds the benefits would never have approached the cost. Who's right, and who's offering the best plan now? Peter Martin runs the numbers.


Every address in every city and reasonable sized town was to be offered the chance to be wired up to an optical fibre cable. Remote locations were to be connected by satellite and wireless. As of June this year NBN Co had connected 210,000 locations and had millions to go. The promised speed for the fibre links was 100 megabits per second, with the whole system upgradable later to 1000 Mbps, each far faster anything that was available at the time.


The cost benefit study finds most uses don't require anything like 100 Mbps. Ultra high definition TV comes closest. The government's advertising stressed instead the unknowable nature of its uses saying the NBN would be used "in ways we only dream of".


Labor might have felt there was no point after it had given the go ahead. But it was big on claims. The NBN would "boost our economy", it would "open up a world of interactive health care never thought possible". It might have felt these claims couldn't be tested. After all if its uses are unknowable, how can we know what it will be used for?


A cut-down version. Instead of costing $73 billion (the revised figure for Labor's scheme determined by the strategic review in December, 2013) the Coalition's scheme would cost $41 billion. Instead of connecting every house and business in every city to an optical fibre, it would use a mix of technologies. One quarter of city addresses would get fibre, 44 per cent would get fibre to the basement in apartment buildings, or fibre to a node (a shared connection housed in a street cabinet), with the last link to the residence or business by existing copper wire and 33 per cent would be serviced by Foxtel and Optus Vision cables re-engineered to deliver high speeds.  

The Coalition would deliver 43 per cent of the nation 25 Mbps or more by 2016 and 91 per cent 50 Mbps or more by 2019 (two thirds would get 100 Mbps). By then Labor would have wired up only 57 per cent of the nation.


It can certainly deliver speed more quickly than could have fibre to each home. NBN Co says fibre to the apartment test sites in Victoria have delivered download speeds in excess of 100 Mbps and upload speeds in excess of 45 Mbps. Fibre to the node test sites at Woy Woy in NSW have delivered download speeds of 95-97 Mbps and upload speeds of 28-34 Mbps.


The cost benefit review panel headed by the former head of the Victorian Treasury Michael Vertigan> finds we won't need that much.

It says by 2023 the typical household will need 15 Mbps, the top 5 per cent will need 43 Mbps, the top 1 per cent 45 Mbps and the top 0.01 per cent 48 Mbps.

It says the biggest user of bandwidth is high definition video. Even a household watching two HD video streams at once, simultaneously searching the web twice and conducting two video calls will need "just over 14 Mbps".


Too right. But high definition video is the biggest hogger of bandwidth. The review finds other uses including e-health need much less. Hospitals and associated institutions that need serious bandwidth for e-health can connect directly to the internet via fibre.


Yes, even for fridges and air conditioners. But those sort of uses don't require high speeds, and extra use of things that do require high speed doesn't necessitate even higher speed. The panel explains it this way: If a household that previously watched one hour of high definition video a day ramped up its usage to four hours a day the amount of data it needed would have quadrupled, but the speed it needed would have not.


You can connect directly to the internet by fibre, but it'll cost you a few thousand dollars. The review believes few households will bother. It finds that after speed reaches 90 Mbps our willingness to pay for even more flattens to zero.


Yes. Around 18 per cent of the NBN's first customers have signed up for the top speed. But most, three quarters, want 50 Mbps or less. One third want only 12 Mbps.


That's Labor's argument, that the future is unknowable. But it cuts both ways. One response to an unknowable future is to build something very expensive in case it will be needed, the other is to build something cheaper which can be expanded later where needed.


Converted to present day dollars the panel says the Coalition scheme will cost $7.2 billion. The Labor scheme would have cost $17.6 billion. It says the Coalition scheme will deliver a (disturbingly low) benefit of $1 billion. In contrast Labor's scheme would have delivered a benefit of minus $4.7 billion. The minus sign is because it would have delivered high speed broadband slower than would the market itself. The review found that beyond a certain point we don't much value the extra speed we would get in return for the delay.


By 2020 under the Coalition's scheme. By 2024 under Labor's.

Peter Martin is economics editor of The Age

In The Age and Sydney Morning Herald

Sunday, August 17, 2014

Penalty rates: Fair pay or job killer?


Fair compensation or job killer? The government has penalty rates in its sights, with one minister claiming it has become impossible to dine at his favourite restaurant on New Year’s Eve.  An impost on your weekend latte and economic handbreak or fair compensation for unsociable hours? Peter Martin blows the froth off a hot topic.

Why do we even have penalty rates?

To penalise employers for making their staff work unsociable hours.

"The norm remains for evenings, weekends and public holidays to be the time when friends, families and social groupings, however constructed, are able to get together,” the Industrial Relations Commission explained in a landmark ruling.

Penalising employers makes work at unsociable hours less likely and compensates staff who have to work at times when their family and friends are not.

Who sets penalty rates?

Fair Work Australia when it approves awards, or employers and employees they make enterprise agreements.

How big are the penalties?

In the restaurant industry they are typically an extra 12 per cent for working after normal business hours, an extra 25 per cent for working Saturday, an extra 50 per cent for working Sunday, and two and a half times the normal salary for working on public holidays.

Health professionals typically get an extra 50 per cent for working on the weekend. Retail workers typically get 25 per cent for Saturdays, double for Sundays and two and a half times for public holidays.

Can employers afford them?

Celebrity chef George Calombaris is one of many restaurateurs who say penalty rates are making their businesses uneconomic, but the restaurant industry keeps growing. Over the past five years spending at restaurants and cafes has climbed at twice the rate of spending in supermarkets.

Employment in the restaurant industry climbed 9 per cent during five years in which overall employment climbed 7.5 per cent.

And restaurants make money. When the Bureau of Statistics examined the accommodation and food service industry it found gross operating profits amounted to 11 per cent of total sales, almost twice that of retail industry (6 per cent) and a good deal more than the construction (8 per cent) and manufacturing (7 per cent).

The industry is twice as profitable as it was 15 years ago.

But aren’t restaurants closing down?

All the time. But new ones are opening in their place. The Bureau says in any one year roughly 15 per cent of accommodation and food service businesses close down and another 15 per cent open. We are spending far more at restaurants than we used to. More than enough are opening.

Aren’t some no longer trading on Sundays?

Several. George Calombaris owns one. His Press Club restaurant in Flinders Street closes on Sunday. But most are open.

Could they charge more to compensate?

Many do, imposing a Sunday surcharge of 10 to 20 per cent. A few years back the Australian Competition and Consumer Commission declared the practice illegal unless the restaurants printed separate weekend menus. Last year Parliament legislated to remove the requirement, but restaurants still need to prominently display the size of the surcharge on their menus.

Would more open if penalty rates went?

Absolutely, unless the standard rates of pay climbed to compensate for the loss of penalties. The base rate for a food and beverage attendant is $17.35 ($26.03 on Sundays). It is entirely possible employers would be pressured to raise the base rate to compensate.

Would meals be cheaper if penalty rates went?

Again, that would depend on whether base rates went up to compensate. Weekend surcharges would certainly go.

Aren’t penalty rates anachronistic? Sunday is no longer a day of rest.

The most recent time use survey showed that in 2006 we only spent 1 hour per weekend socialising, down from 3 hours per weekend in the early 1990s. We spend twice as much time shopping on the weekends as we used to.

The Commission’s view that weekends are the time we “get together” has less force than it used to.

On the other hand, the rise of two-income families makes finding time to get together even more important than it was. Without penalties, couples would be split as one partner worked one set of days and the other a different set of days meaning they rarely got time off together.

Why all the fuss about restaurants? Aren’t penalties everywhere?

They are. Nurses, shop attendants, all sorts of workers get penalty pay if they are forced to work overnight or on the weekend. And almost all workers get penalty pay if they are forced to work on public holidays. The whole idea of public holidays is that the public holidays together. Restaurants and cafes are getting most of the publicity because most are small businesses and because wages constitute a big proportion of their costs.

But if they disappear in restaurants they will probably disappear elsewhere.

Is the move against penalties part of a broader industrial relations agenda?

Probably. Many of the politicians and businesspeople who have spoken out against penalties also dislike central wage fixing. Penalties may be more of a battleground rather than an endpoint.

In The Age and Sydney Morning Herald

Sunday, August 10, 2014

Unemployment. It's not as bad as you think

If you are unemployed you are entitled to feel dreadful.

A year ago you were one among 686,000. Now you are among 789,000. An extra 103,000 Australians have joined you in the past year making your chances of being re-employed a good deal worse.

But, read on, it’s probably not as bad as you think.

First, politics. Why politics? Because Tony Abbott himself committed the Coalition to “creating 1 million new jobs within five years”. So far his record is awful. All through the global financial crisis, all through the Rudd and Gillard and Rudd years, all through the political crises, Australia’s unemployment rate never reached 6 per cent. It hit 6 in January and now it’s 6.4. Appallingly, Australia’s unemployment rate is now higher than that of the United States. We’ve passed the US on the way up as it’s on the way down.

Employment minister Eric Abetz has a ready excuse: “The carbon tax was removed just in recent weeks, and it stands to reason that you won't see an immediate overnight economic recovery,” he told the ABC’s PM program.

But an immediate improvement is exactly what the Coalition expected. “I think companies will unleash their balance sheets and I think consumers will as well if there is a change of government,” Joe Hockey told business leaders in the lead-up to the election.

Business confidence did indeed jump after the election but then fell back. Consumer confidence jumped and then plunged. The budget sent it deeply into negative territory. It’s now worse than at any time under either Rudd or Gillard.

But things probably aren’t as bad as you think. I know this because unemployment is one of those unusual fields about which the people closest to it often know the least.

I’ll explain with the help of the Melbourne Institute of Applied Economic and Social Research. It has just published an eye-opening study entitled Re-employment Expectations and the Eye of Providence.

The "eye of providence" is the statistical likelihood of being re-employed based on data. "Expectations" are the predictions made by unemployed people themselves.

Sonja Kassenboehmer, of Monash University and Sonja Schatz of Germany’s University of Duisburg-Essen examined the results of a regular survey that asks unemployed Germans to estimate how likely it is that they will score a job in the next two years.

Of those who had been out of work three to five years roughly two-thirds think they are less likely to be re-employed than they actually are, some of them far less likely. Those who believed they had a zero chance of finding work within two years turned out to have a 40 per cent chance. Those who believed they had only a 35 per cent chance turned out to have a 45 per cent chance.

Oddly, the most hopelessly pessimistic underestimaters were people who had been unemployed before. The next most chronic were married people, people who had worked as managers, technicians or clerks or in shops and then people judged as “agreeable” on a psychological questionnaire.

Underestimation matters because people who underestimate their likelihood of being re-employed accept worse job offers. They are more likely to give up searching altogether and if they do keep searching are more likely to  settle for lower-paying jobs, typically taking home $2000 less than people with realistic estimates of their chances of re-employment. And they are less satisfied with those jobs.

Kassenboehmer and Schatz propose a simple fix: "Case workers should ask individuals about their subjective re-employment expectations and inform them of any discrepancies due to underestimation”.

As they put it: “By providing employment agency clients with objective re-employment probabilities, suboptimal behaviour in the labour market such as accepting low-quality jobs or exiting the labour force may be prevented”.

At first they thought it would be complicated. The computer model used by employment agencies would have to take account of things such as personality, gender (women are more likely to underestimate than men), family circumstances, occupation and so on.

Then they examined what they could leave out and still produce a better forecast than unemployed people themselves. It was nearly everything. They usually only needed one  - the number of years an unemployed person had been in and out of work.

It’s information the agencies already have. Feeding it into a computer program could feed their clients reality and lift their spirits as well.

The government mightn’t be up for it. It might be keener on requiring then to apply for 40 jobs a month.

But even if it's not there's something job service providers can deliver - five short words: It’s better than you think.

In The Age and Sydney Morning Herald

Wednesday, August 06, 2014

Hockey said higher-income households pay half their income in tax. He really said it

The Treasurer has made a big mistake.

"Higher-income households pay half their income in tax," Mr Hockey told Channel Nine this week while defending his budget.

He said it twice: "Higher-income households pay half their income in tax".

It's a simple enough mistake. Australians on the top tax rate do indeed pay 45 cents in the dollar. The rate cuts in at $180,000. They also pay the temporary deficit reduction levy (another 2 per cent), the Medicare levy (yet another 2 per cent) and the Medicare surcharge where applicable (a further 1.5 per cent). The total comes to 50.5 cents in the dollar.

But the amount of tax actually collected from those Australians is nothing like that much, as a quick workout of the Australian Tax Office calculator makes clear.

An Australian earning $200,000 pays around 36 cents in the dollar including the Medicare levy and the deficit surcharge, far short of the claimed 50. Even an exceptionally high earner on $500,000 pays no more than 44 cents in the dollar.

Typical high earners pay much less. An Australian on $80,000 pays $19,147. An Australian on $120,000 pays $34,747.

The difference between the quoted rates and the actual rates comes about because all Australians - even the highest earners - enjoy a tax free threshold. They pay no income tax on their first $18,200 of income no matter how much they earn. And they pay just 19 cents in the dollar for the part between $18,200 and $37,000 and 32.5 cents for the slice between $37,000 and $80,000...

Only the part of their income in excess of $80,000 gets taxed at their marginal rate (for really high earners $180,000). Most high earners don't take home that many dollars above the threshold.

Bemused number crunchers on Twitter have been trying to calculate how much someone would need to earn to actually pay half of it in personal tax. One came up with $6 million, another with $3 million. Whatever the figure, it's beyond the reach of most high earners.

The Treasurer was making a broader point, that it is "wrong" to say low-income households are the biggest losers from the budget.

"That story is wrong because it fails to take into account a range of things, like the fact that higher-income households pay half their income in tax, low-income households pay virtually no tax," he said.

But those two things aren't in conflict. It would be quite possible for low-income households to be the biggest losers from the budget and for them to pay less tax than high earners.

Calculations of winners and losers - the sort carried out by the Treasury and included in every budget since 2005 until this one - are a measure of who is made better or worse off than they were, not of how well or badly off they are in absolute terms.

Mr Hockey says high-income Australians pay tax in order to support low-income Australians. This is indeed a feature of the tax system. But it is not relevant to a calculation of the change in circumstances that will result from the budget. Separate calculations released under the Freedom of Information Act show the Treasury believes the change will be negative for lower-income  households, less negative for higher-income ones.

The Treasurer's deeper point is that if you wind back benefits you'll necessarily take some away from people who would have got them. He is right. With the outrageous exceptions of the superannuation tax concessions and the negative gearing tax arrangements, high earners don't get anything like as much government support as low earners. That's the way the system is designed.

Cutting into welfare has to mean cutting into benefits. Unless you cut into high-income welfare, which the budget didn't do.

In The Age and Sydney Morning Herald

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