"It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong." Richard P. Feynman

Tuesday, August 17, 2010

Seven reasons why the NBN will fail

Malcolm Turnbull enters the NBN debate with an sensible analysis.
It seems that no one has any problem with debunking Labor's NBN monster except Tony Abbott although he did get much more on message on the ABC's Q&A last night. Abbott at least got on the "opportunity cost " message which should have been obvious from the start.

AUSTRALIANS understand high-quality, affordable broadband is a critical part of the infrastructure we need to prosper.

As one of the founders of OzEmail, Australia's first big internet company, I believe passionately in broadband and the power of the internet. But as a businessman and member of parliament I also believe passionately in not wasting taxpayers' dollars on white elephants.
So what's the broadband debate about? On the one hand Labor is spending at least $43 billion (and maybe much more) on the most expensive network in the world.
On the other, the $6bn Coalition plan will fix those parts of Australia's broadband infrastructure where intervention is justified: increasing competition in the main networks that link towns and cities and subsidising faster connections in poorly served suburban, regional and rural areas.
The Coalition's spend is less but all Australians will have access to privately provided broadband services, most of which are virtually indistinguishable from Labor's, just at a much lower cost.
Scrutiny of the Rudd-Gillard National Broadband Network reveals no fewer than seven separate reasons why it is going to fail Australians.
First, the NBN will cost far too much to build. It will be the largest investment of taxpayer funds in the country's history. While Labor claims it will find private partners, the NBN is so risky and its likely returns so low that it will probably be entirely funded by taxes. And even the chief executive of NBN Co admits the final cost is highly uncertain.
Several countries have subsidised high-speed broadband, but not on the scale Labor proposes. The taxpayer contribution in Singapore was $200 a person and in New Zealand $330 a person. Labor's extravaganza will cost Australian taxpayers more than $2000 a person.
This vast expense is why the Rudd-Gillard government has refused to submit its plan to Treasury for cost-benefit analysis. It would show the cost of the NBN far outweighs the benefits.
Second, the NBN will increase internet costs for users. Once the government has built a white elephant utterly incapable of earning a reasonable return on capital invested but assured of a monopoly over carriage of internet services, what do you think is going to happen to user charges?
One possibility is that the monopoly provider jacks up prices. The implementation study estimates that for the NBN to earn merely the bond rate, real prices will need to increase 1 per cent each year, rather than decrease rapidly as they have in recent years. And if it doesn't, then its value won't equal the cost of investment. If the government instead decides to charge reasonable wholesale fees, the cashflows earned by NBN will not justify a value remotely near $43bn. Even if most households sign up, the NBN may be worth less than a quarter of that investment.
The trouble with the NBN is that it has been decreed by politicians, not driven by market demands.The fastest networks of today run over optical fibre and there are already many thousands of kilometres of fibre in our networks. The question is whether the huge extra cost of mandating every home in Australia be connected to fibre-optic cable is justified. Millions of Australians can already achieve fast broadband speeds over networks currently in place, and we know today's speeds will increase rapidly in coming years.
Consumer preferences often turn out to be very different from what politicians, engineers and bureaucrats anticipate. The reality is that broadband involves horses for courses: some consumers and businesses want fibre optic now; others will be fine with cheaper alternatives such as hybrid fibre-coaxial (which can already deliver 100 megabits per second) or very high speed ADSL; yet others will prefer wireless. Only bureaucrats think in terms of one size fits all.
And don't forget, Canberra is terrible at building and operating commercial services. Perhaps the most unbelievable aspect of the NBN is that a government-controlled entity can roll out a vast undertaking such as national fibre-to-the-home on budget and on schedule. This from the people who couldn't build school assembly halls without billions in rorts? Who tragically mismanaged the home insulation program? Who put less than half the computers promised in schools at double the cost?
For the past 30 years there has been a realisation that governments are better off leaving it to the private sector to run businesses. That is why Telstra (and its peers abroad such as British Telecom) were privatised in the first place.
In addition, Canberra will have a huge conflict of interest. A remarkable part of Labor's broadband fantasy is the idea that the government can even-handedly pursue the national interest when it is both owner of the monopoly broadband network and regulator of Australia's communications market.
Let's say the NBN turns out to be the dud that most business observers expect and that five years down the track an alternative emerges providing adequate service at a lesser cost; say a variant of wireless. Will the government surrender its monopoly, rendering its investment worthless? Or will it enforce laws barring households and businesses from using a cheaper and perfectly adequate substitute technology?
If you don't think this Labor government would do that, you are wrong. Its heads of agreement with Telstra requires Telstra not to offer cheaper HFC broadband of 100Mbps because it would compete with the NBN. Good for the NBN monopoly, perhaps, but terrible for consumers.
Last, money spent on the NBN can't be spent on other services. In economics, one of the most important concepts is "opportunity cost", the idea that once you spend your money on one thing, you can't spend it on something else. If tens of billions of taxpayer dollars are invested in this low-yielding yet risky venture they can't be spent on better hospitals, schools, roads or public transit. There is no benefit to taxpayers or the Australian economy from spending $43bn or more if the NBN is worth a fraction of that when sold. Such risk is better borne by the private sector so shareholders, not taxpayers, lose out if the plan goes off the rails.
Clever governments understand that you fix problems by empowering initiative and enterprise, by creating an environment where the ingenuity and flexibility of the market is best able to deliver the cheapest and most effective solutions.
An article like this makes you think that if  it wasn't for his silly ideas on the ETS Malcolm Turnbull would be PM next week.
Update: I notice that the new state-of the-art Royal Adelaide Hospital is going to cost 1.7 billion dollars - as Labor is touting the health benefits of the new broadband it should be explained that 20 major new hospitals could be built with the money saved by the Coalition proposal.

1 comment:

  1. Probably the best summation of the NBN statement that I read. I hope that Abbott can be copied before the economic debate.