Cost benefit rationality of the false NBN dichotomy


opinion In a rather high-handed piece for Crikey, seasoned polemicist Possum Comitatus makes the case that there is simply no point to conducting a cost-benefit analysis for Labor’s vaunted National Broadband Network project.

To do so, Possum argues, would be a complete waste of time as neither a limited cost benefit analysis (which focuses on private net benefit, for example) or a much wider analysis (which focuses on societal benefits at large) would be able to adequately weigh the advantages to the nation from building the NBN, because technological and societal change is just so fast.

I’m right there with Possum right until the final closing paragraphs of his argument. I’m rooting for him, cheering from the sidelines, ready to jump up and down like the most irate father on grand final day, screaming at 12 year olds to get their dirty hands off the ball, it was a push in the back goddammit! Malcolm Turnbull, get your hands off our NBN!

Possum’s right: As countless people have pointed out over the past half-decade since the NBN proposal was first mooted in a very different form by then-Telstra chief executive Sol Trujillo (how many people can remember that far back?), fibre broadband today is like electricity a century ago. So many applications will be discovered for 1Gbps internet over the next 50 years that we will look back and wonder why the hell we even hesitated to roll it out.

And yet Possum lets himself down in the final paragraphs of his article. Instead of triumphantly waltzing off into the sunset with his cost-benefit victory, he ties the impossibility of generating a meaningful cost-benefit analysis for the NBN to the idea that the only way to solve Australia’s long-term broadband problems is for the Government to unilaterally roll out fibre itself, in a massive display of public largesse.

The copper network, Possum argues, is on its last legs. And so the nation faces a choice between letting the copper network rot or — drumroll, please, and then the chorus of angels in the background — the grand old Labor plan of massive Government investment to fix the private sector’s obvious woes.

Can’t you just hear the cries for the Government to do something about broadband, fix the problem, replace the infrastructure, it’s just like building highways, the private sector will never do it, natter, natter natter?

The difficulty with this argument is that it sets up a false dichotomy. Yes, the copper needs upgrading. But it simply doesn’t follow that the only way to upgrade Australia’s broadband infrastructure is through the Government funneling money into the sector with a gigantic firehose.

Thankfully — as with all false dichotomies — there is a third option.

The truth is — as Malcolm Turnbull has been at pains to point out, to his peril — that the private sector has stood willing and able to replace and upgrade vast chunks of Australia’s ageing yet still very functional telecommunications infrastructure for some time– as long as that ever tricky requirement falls into place – regulatory certainty.

Regulatory certainty in the context of Australian telecommunications at the moment basically means just one thing: Restraining Telstra from flexing its massive annual cashflow muscle to crush minnows like Optus, iiNet and TPG whenever they roll out their own infrastructure.

The nervousness in the industry on this issue stems from the debacle witnessed the last time someone tried to build a next-generation fibre network to replace the copper. At the time, it was common to see Telstra trucks mapping out where Optus had laid its HFC cable and then laying its own rival infrastructure in the exact same place.

The duplicated rollout meant neither could get full benefit from their HFC rollout.

And yet it does not follow in 2010 that the only way to get mythical regulatory certainty in the Australian context is for the Government to force the telecommunications industry into a negotiated ceasefire by plonking down billions of dollars of its own money to upgrade the copper – buying Telstra off in the process.

A far more elegant situation would simply to be to — as the telecommunications industry has been calling for for ten years, and is still calling for (hello Optus) — separate Telstra into wholesale and retail companies.

By truly structurally separating Telstra, the Government could create a situation where Telstra’s wholesale division is finally incentivised to best serve the needs of other telcos like Optus and iiNet – instead of playing a shadowy game where it keeps them close and its own brethren in its retail arm even closer.

Telstra has already demonstrated its interest in replacing its copper infrastructure with fibre. In fact, it was then-chief executive officer Sol Trujillo who first proposed the idea, in a rather more limited form, back shortly after he was first appointed in mid-2005.

To separate the company into divisions that do not conflict as they currently do is a logical step, and the kind of minimalist intervention in a competitive market that makes sense in a Government context.

Or, rather, it’s not a minimalist intervention at all – it’s a radical one that could only be seen to be minimalist in the context of the incredibly large NBN policy, which has already started to reshape the entire telecommunications sector, reducing the number of competitive players as companies like iiNet bulk up with acquisitions in preparation for the fibre rollout.

To be honest, I don’t know why Telstra hasn’t been split before now, but I suspect it has a lot to do with the fact that the NBN policy — which has more or less set the framework for the narrative in the sector since Labor was first elected in November 2007 — was never designed as a solution to the telecommunication sector’s woes.

It was actually designed as a populist election policy to help Kevin Rudd take power in a general election.

Since November 2007, Communications Minister Stephen Conroy has tried to shoehorn positive structural change in the telecommunications sector into the overarching NBN policy.

And yet — God bless them — many twenty first century capitalists and rational taxpayers never quite bought the policy to start with. After all, they argue, wasn’t it *shock* regulatory certainty that allowed the likes of iiNet and Internode to roll out DSLAMs around the nation to begin with, forcing Telstra to do the same to keep up?

Wasn’t it these rollouts — not Government largesse — which gave Australia it’s current broadband speeds of up to 24Mbps?

And wasn’t it the same regulatory certainty that allowed Telstra, Optus, Vodafone and Hutchison to spend billions of dollars of their own money on mobile broadband networks, which are constantly increasing in speed and decreasing in price to consumers?

It’s the logical doubt aimed at a populist policy which continues to bedevil the NBN policy and fuel calls for a cost benefit analysis — which, as Possum correctly points out — wouldn’t solve anything for anyone. It would merely be a waste of time.

People say that the cold hand of market competition is dead in Australia’s telecommunications sector. But, of course it’s not — it’s just been restrained by Telstra’s vertically integrated iron glove temporarily while the Government looks at the pretty NBN bauble it has draped around its neck.

Of course, none of this really matters. Labor has formed a Government with the Greens and independents that will allow it to implement its NBN policy, Malcolm Turnbull’s impassioned arguments notwithstanding.

The debate over whether the Government should pursue a cost benefit analysis for the NBN is now a pointless one, as is the debate about whether there were meaningful alternatives to what amounts to a stimulus package for the telecommunications sector.

Those who remember the history of this debate at all in future years will remember it through glasses coloured a distinct rose colour by the glow of the 1Gbps fibre running to their house. In the meantime, expect Conroy & Co to ignore Turnbull and all others who question the NBN policy in general. At this point, the mandate fairly intact, they can safely buckle down and just get on with the job.

Image credit: Carlos Paes, royalty free


  1. Great Article. I agree that it is a false dichotomy, this notion that the only choices are let the private sector do what they want and end up with a societally sub optimal set up versus a government-supplied system that is “good for all of us” is limited in thinking. I question just how much price-gouging we will end up with in a third option. The “roll in” approach will limit that in a sense but it will also make it easier to attack.

  2. Nice piece. But, I think Renai misses a salient point. Private enterprise has had decades to cover the country in fibre. And in a fair few places, there is an overabundance of that very thing.

    There are also a number of locations where there is no such thing. And, there will simply never, ever be a solid business case (particularly where Telstra has already hoed the road) to do so.

    I’d also suggest that, far from being a competitive wonderland, the broadband field still has a large team of quarter backs who continue to play dirty. They can afford to.

    The mantra, however, of “private industry can do it!” is also a false argument that has been proven to be problematic; you only have to look at the history of HFC rollouts to get a clear idea it is far from an efficient alternative. Two half-built roads isn’t really a stunning example of success.

    There is a balance to be struck. It is up to the voters, industry players and interested parties to keep the Federal Government honest. Pressure should be brought to bare, to ensure the project delivers what is promised.

    The NBN can deliver. The question is, whether vested interests will see it succeed or fail.

  3. I agree, but even if Telstra is split, the non-government wholesale Telstra will only upgrade its network in profitable areas, and even then, the network will take a lot longer to get to 1Gbps.

  4. There’s a few points that you’re missing when you discuss regulatory certainty. Yes, it was regulatory certainty that allowed many ISP’s to install their own equipment in telstra exchanges throughout the country because telstra was forced by regulation to provide wholesale access.

    However, the “regulatory certainty” that telstra was calling for was, simply put, a change in the regulations so that they wouldn’t be forced to wholesale their network. They already had regulatory certainty, but they didn’t like the form it was in.

  5. Good Piece Renai, but I agree with Michael and Brendan, Private Enterprises exist to make money and will therefore not install into unprofitable areas without some form of Government “largesse”.
    This is a (uniquely Australian?) challenge to overcome.

  6. I agree it is a false dichotomy.

    But you miss the entire problem with the telecommunications sector.

    Underlying infrastructure should not be privately owned. Ever. People have an almost pathological inability to see beyond 3 to 5 years. Telecomms firms run in that time frame will never spend on projects that don’t give returns within that time frame.
    You can’t tell your shareholders: over the next 8 years we will spend our entire profits building a new network for our customers. (Telstra earns about 4bill per year remember)
    Which basically tells me, that even if telstra were REALLY interested in Australia, they MIGHT build an nbn Australia wide equivalent network over 40 years. Shaving 25% off their profits each year. (napkin economics yay).

    Fact is, private enterprise will never build the kind of network the nbn promises to be. Stop pretending. Stop thinking that even half of the country’s Adsl users get even close to 12 megabits, let alone 24, get your head out of the sand. Indeed there are Blackspot exchanges all over the country, and that is with the regulatory certainty you so vainly cling to as the panacea of encouraging telstra to spend billions of dollars.

  7. The point is that this current government had the opportunity to act on separation from the word go and hasn’t. Back when it was fiddling around with FTTN (which kind of relied on Telstra just coming on board because.. what was the reason for them to come on board again? Faith hope and charity?), it had the opportunity to pursue separation. It didn’t. Back when NBN Mk II was announced, it had the opportunity. But it didn’t take it.

    Then it pushed the legislation off the docket every time to get ‘more important’ things before the senate… Surprise surprise.

    In fact, as late as May 09 Conjob was still saying the government had no intention of separating Telstra.

    I’ve always thought that separation would make the NBN a moot point. With no internal cashflow, Telstra Wholesale could innovate at the behest of the other 50+% of the market rather than telling them all to bugger off to hold up Bigpuddle’s bottom line. The NBN makes separation pointless, particularly with the deal in it’s current form. And yet the government is still doggedly trying to keep it on the agenda.

    We could have been enjoying more DSLAM’s nationwide and innovation galore at this point had Labor acted when it first had the opportunity. The NBN is nothing more than a shiny geegaw to wave in front of the masses to Labor and that’s the way it remains. Where’s the real changes 3 years on? A couple of suburbs in Tassie? Considering we’ve already spent 3 of the 8 years originally planned (you can bet they’ll push that back a bit now…), it’s a pretty sad state of affairs to have neither separation or a significant amount of NBN deployed…

  8. If the private sector was mandated to roll out fibre equally to all Australians (including regional areas), they would be unwilling to take it up. If the private sector was left to roll out however they wish, only the most profitable parts would have fibre. Is that so hard to understand?

    Imagine if the private sector was engaged to roll out roads. Do you reckon there would be asphalt to every front door in the suburbs? Of course not!

    All this hullabaloo around splitting Telstra etc. is going exactly nowhere fast, and is as stupid as asking the private sector to build the harbour bridge or similar national infrastructure. Not one will do it because it does NOT provide a meaningful enough cost-benefit analysis to justify it to their own shareholders.

  9. Sorry, I didn’t realise you were cheerleading for Crikey – that article was attrocious, and by supporting it you’ve done yourself no favours. The electricity comparison is full of holes – who here would rather faster internet over electricity?

    Let me ask you one question – what service will the NBN allow us to do that we can’t do now that is worth $43b to the country? And none of this pipedream “in the future it will do everything and change society” – as if our societal problems are all caused by slow broadband.

    Bear in mind that 100mbit is already available, and the government didn’t pay a cent (and BTW very few consumers are buying it). Also dedicated fibre connections are already present in hospitals, companies and schools.

    But you are right, the ALP will roll this out anyway. Hopefully the Coalition will get in next time and stop the madness before too much taxpayer money is wasted.

    • “what service will the NBN allow us to do that we can’t do now that is worth $43b to the country? ”

      Give everyone equal access where it is humanly possible.

      100mbit is only available to 20% of the population. 24mbit is not even achievable to everyone else (the ads say “UP TO 24mbit” whilst in reality 12mbit is the norm).

      With a 50 year lifespan of such a network, nobody in their right mind can ignore the “pipedream – do everything and change society”, because that is exactly what it is being built for.

  10. > who here would rather faster internet over electricity?

    I would. Definitely.

    I have had Solar Power for twenty years. I can provide my own power much cheaper than the privatised (!) power network.

    But I can’t provide my own “Internet”.

  11. You mention ever decreasing cost and increasing speed, but don’t mention that all those telcos listed are largely involved in deploying wireless, not fibre, in a widespread manner. History in the telecommunications sector has shown that it is simply not viable for there to be competition where copper or fibre is concerned. Take the cable rollouts as an example. The country will never get anything like fibre because it is not financially viable from a private enterprise perspective, which will never factor in community/widespread good that flows from good telecommunications in rural areas, or city areas where commercial returns are not possible.

    For those that think wireless is the answer, it is part of the answer, as is fibre. We need both long term – they are complimentary technologies.

  12. This is a great article, missing one crucial point. The moment Labor went for a real Telstra separation, Liberal hacks would block it in the Lower house, due to their nanny state policies back under Howard, when T2 and T3 were rolled out to mum and dads who wanted to invest in something “Australian”, fuelling a monopolised monster truck of the telecoms. If breaking up Telstra was so easy, I’m sure it would have been done already and we would have had no need for the NBN….wait, who’s got the money now to compete with a de fanged Telstra, or even the need? The reason we have ADSL2+ is the fact that Telstra would only ever sell higher speed Internet than a basic dial up modem via it’s cable service at ridiculous rates. That allowed smaller start ups like iiNet and Internode to get into the cracks and start providing a faster copper based service.

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