The NBN must have a cost/benefit analysis


This article by Shadow Communications Minister Malcolm Turnbull first appeared on his site and in the Sydney Morning Herald and is re-published here with the permission of his office.

opinion Two of the biggest mistakes you can make with infrastructure are to build massive new projects on over-optimistic estimates of demand and to neglect ongoing maintenance and upgrades of your existing infrastructure assets.

Unfortunately for the taxpayer, politicians are particularly prone to making both of them. Attracted to glamorous ribbon-cutting opportunities, politicians love investing taxes in big new projects. And if anyone says “cost-benefit analysis”, it is brushed away with a call to “nation-building”.

Neglecting ongoing maintenance and investment enables governments to increase their dividends and keep the prices lower until the day of reckoning when systems start to fail and massive reinvestment is needed.

The NSW Independent Pricing and Regulatory Tribunal has noted that real household prices for electricity and water remained below their 1993 levels until 2005. And dividends remained high, too. It was a win-win. Until it wasn’t. But the upshot of these years of neglect in water and energy infrastructure is not just higher utility bills, but bills that are higher than they would have been if the infrastructure had been planned and built in a more considered manner.

So what can we say of the cost/benefit analysis-free $43 billion National Broadband Network — the largest single infrastructure project in Australia’s history?

Does the network represent the most productive possible use of these resources? Will it earn even the paltry return on taxes invested that the government forecasts? Could the underlying objective, to guarantee universal fast broadband across Australia, have been achieved far less expensively? Will it stifle competition?

And if the NBN is the answer, what was the question? Given millions of Australians already have access to high-speed broadband and the public debate has been how to ensure all Australians have that access, why has the government failed to investigate what the relative cost of upgrading our existing telecoms network would be as opposed to trashing it and building an entirely new one?

If 100Mbps of bandwidth to every home is the answer, why does the national scheme involve shutting down and overbuilding the Telstra and Optus cable network, which passes about a fifth of Australian homes and is capable of providing that speed already?

And the cost does not stop with the government. NBN Co is not able to tell us what the cost of rewiring a house will be to enable access to the new optical fibre network. It may be worth it for those who want more bandwidth and can afford it, but for many people it will be seen as either or both an unnecessary or unaffordable expense.

But right now, that fundamental question goes unanswered.

And how convincing can any business proposal be that assumes near-universal market penetration and pricing that would result in average prices increasing when, to date, they have been declining? Most importantly, how can we answer any of these questions in the absence of the detailed cost-benefit analysis the government refuses to undertake?

The most frightening aspect of the government’s approach to the NBN is that this is a notoriously difficult area of investment. The private sector has made shocking errors in forecasting costs and matching these against future demand. Consider the $5 billion or so of private money lost in Australia since the 1990s on botched investments in motorways and tunnels such as Sydney’s Cross City Tunnel.

Similarly, private telecommunications firms burned through about US$22 billion of their shareholders’ capital during the 1997-2002 speculative investment bubble in submarine communications cables — new links that were later sold for cents on the dollar.

And there are plenty of local examples. The Optus HFC network and the Nextgen fibre optic network saw investors lose billions. So why is the government so confident it can get the network right without any rigorous analysis at all?

Most infrastructure assets endure for decades. Much of the capital spending for infrastructure is ”lumpy”; at periodic intervals, large investments have to be made to replace ageing assets or to greatly increase capacity to provide for future demand growth.

The challenge is to get the timing of these lumps just right so that new capacity comes smoothly on stream just ahead of demand.

The Gillard Government must urgently undertake a thorough cost-benefit analysis of the network. Its stubborn failure to do so can only lead us to conclude that it does not want to know what that analysis will reveal.

Image credit: Office of Malcolm Turnbull


  1. I’ve bookmarked this story, but was wondering what folder to put it in. I chose comedy. In five years time I hope I remember to revisit this story (on my cheap 100mbps connection) to remind me how ignorant and out of touch the coalition were with their views on government broadband.

    Arguing for a cost benefit analysis on a project so essential to Australia’s digital economy is pointless. The opportunities with IPTV alone will generate so much money that the 43 billion estimate will seem paltry.

    I’m sick of trying to explain the benefits of the NBN to everyday Australians. As a Labor supporter and someone who believes strongly in the NBN, I admit that is one area the government has really failed. There needs to be an advertising campaign and better education about services the NBN will provide in order for people to have confidence in it’s necessity.

  2. I wonder if governments did a cost/benefit analysis before hooking houses up with electricity or water ?

    The ability of people of being able communicate with loved ones, or police/fire/ambulance is priceless.

    A cost benefit analysis can only consider things measurable in dollars and cents, and as such can only undervalue the value this new communications medium will bring.

    Not being able to justify affordable broadband where its needed most (rural/regional Australia) demonstrates a lack of vision rather than sound economic credentials.

  3. He’s still harping on about this? With all this time he’s spent whinging, he could have just done his own darn cost-benefit analysis.

  4. “NBN Co is not able to tell us what the cost of rewiring a house will be to enable access to the new optical fibre network”.

    This is the last sentence I read. Why would a house need to be rewired?

    Electricity? No change.
    Phone? No change other than to plug in an ATA between the existing “line out” and the new router. Multiple handsets? A single base with multiple “satellite:” cordless handsets already exist and are often used.
    Ethernet? Houses don’t have it now – 802.11n will suffice within the home.

  5. Simon Reidy: when you say IPTV will generate “so much money that the 43 billion estimate will seem paltry” – money for who exactly.
    Google? You Tube? Network equipment ventors?

    What is the business model for IPTV?
    The telecom networks fund the band width, and content providers pump out the content and raise revenue through advertising?
    How is this going to generate value for Australia and the Australian tax payer?
    There is no proven model here. The taxpay is funding the risk and the investment.

    And thats the point. Don’t assume or guess what the benefits are. They need to be articulated, and put into the public domain for discussion. Because lets face it politicians don’t have a good track record here.
    Looking back in 5 years, if this is not carried out, the NBN risks being a debacle.
    A huge loss leader with no proven economic benefits.

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