NBN cost-benefit arithmetic might not add up

The panel conducting the independent cost-benefit analysis and regulatory review of the NBN is set to deliver its report to the Coalition. So what will it contain? And more importantly, what will be missing?

In about two weeks one of the biggest missing pieces of the Coalition government’s National Broadband Network (NBN) puzzle will see the light of day. The panel conducting the independent cost-benefit analysis and review of regulation of the NBN, headed by Dr Michael Vertigan, is widely expected to deliver an outcome that should be palatable to the Coalition, however, just what it intends for the long-term health of the network and NBN Co remains to be seen.

Communications Minister Malcolm Turnbull appointed the panel last December, with the express view that the report handed down by the Vertigan panel will be a critical lynchpin in driving the future of the Coalition’s multi-technology mix MTM, NBN 2.0.

The six months given to Dr Vertigan and his team to deliver their prognosis is coming to an end and with the government set to lock horns with a potentially hostile Senate, it will be up to Turnbull to smooth the waters for NBN Co in its bid to finalise a renegotiated agreement with Telstra.

So what will the report contain? And more importantly, what will be missing?

A dim view of NBN Co

The Vertigan report’s view of NBN Co will be dim, and selling the company at the earliest opportunity will be highlighted more than once.

After highlighting the need for NBN Co’s demise at the earliest opportunity, the panel’s consideration of NBN Co’s mandate to efficiently build, operate and maintain a wholesale-only access network will not be a pretty sight.

The door is wide open for the Vertigan report to cover, in some detail, all of NBN Co’s perceived failings in the analysis of the need for infrastructure-based competition and the regulatory arrangements for the future of the Australian wholesale broadband market.

What about the competition?

The report is likely to argue that infrastructure competition is an important requirement for a competitive telecommunications market.

To achieve open access competition similar to existing arrangements set by the Australian Competition and Consumer Commission for backhaul networks, the report would identify the requirement for access network infrastructure to be regulated in areas where only one or two access networks are available to connect consumers.

And what about regional and remote Australia where it is likely that without a universal service obligation there would be no infrastructure expenditure? Will the Vertigan committee include universal service and the need for industry subsidies to ensure that every Australian is guaranteed a minimum level of broadband access?

The regulatory battle ground

The panel is likely to argue that careful and limited regulation of aspects of the telecommunications market could have achieved an open competitive outcome without the need for NBN Co and the NBN.

The panel could argue strongly that market forces, with limited government regulation, would have led to infrastructure investment over time without the need for NBN Co and the NBN.

Investment in mobile network infrastructure and the rapid expansion of the mobile networks over the past decade could be the example underpinning this argument. But that would be a shallow approach that does not fully explore the reasons behind the former government’s decision to intervene.

Will there be any concern that infrastructure expenditure would concentrate on urban high value areas and that other areas might be left with existing infrastructure for decades to come? Not if the market-driven competition mantra anticipated from the Vertigan committee forms the core argument in the report.

The ACCC’s creeping regulation of every aspect of the telecommunications market has been identified by the incumbent telcos as a major battleground in their submissions to the various NBN reviews and audits, and it is likely that the Vertigan committee report’s coverage of “red tape and regulation” will call on the government to review the ACCC’s powers and to limit its role in the telecommunications market. Another review? Surely not!

Mobile networks

The Vertigan committee Terms of Reference states that the review aims to “analyse the economic and social costs and benefits (including both direct and indirect effects) arising from the availability of broadband of differing properties via various technologies”.

Will the Vertigan committee include mobile networks when considering “the availability of broadband of differing properties via various technologies?”

With the introduction of next generation mobile networks in the lead-up to 2020 that can achieve 1 Gbps download speeds, there is an argument that mobile networks should be part of the competition mix. They are access networks, after all.

Australian mobile networks are fast reaching the point where 90 per cent of the population will be covered by one or more of the mobile networks.

Or could the inclusion of mobile networks in the analysis being carried out by the Vertigan committee cause Telstra some concern?

Failure to include every form of broadband access networks available will limit the value of the cost-benefit analysis (CBA). It is important that the Vertigan committee provides a full and complete analysis, but to do this the underlying technical capabilities of the different access network technologies will need to be included in the review.

Where are the engineers?

One of the reasons why government projects flounder is the failure to include engineers in the discussion at an early stage. Has this exercise been any different?

And why carry out a cost-benefit analysis without doing a performance analysis and life cycle cost analysis? Completing a life cycle cost analysis is mandatory for large Defence projects, so why not do one for the NBN?

And to do a life cycle costing and performance analysis correctly there is a need for a technical specification. What this means is the opportunity exists to compare the former government’s NBN and Turnbull’s MTM NBN 2.0 head to head over the anticipated system lifetime.

The all-fibre access network lifetime is 50-80 years. Does Turnbull’s MTM NBN 2.0 have a similar lifetime or is it already obsolete by then? If the lifetime of the MTM NBN 2.0 is set at 10 years, is this being too generous? Would you spend $43 billion on a system with a 10-year lifetime?

One of the major criticisms of Turnbull’s earlier reviews and audits was the failure to adequately analyse what will happen beyond 2025.

How can economists alone design an analytic framework for telecommunications infrastructure without input from the people that build and operate networks and the people that utilise those networks to provide new services and applications?

What would an entrepreneur think of the suggestion that a solely economic rationalist viewpoint would be the basis for an analytic framework that is to be used by the Vertigan committee in its quest to identify how the nation will benefit or not from improved telecommunications infrastructure?

What about a review of potential changes in technology over the lifetime of the system under study that would affect the costs / benefits of alternatives?

Turnbull has stated on several occasions that it is not possible to predict future technology changes or the needs of consumers, so how is the Vertigan committee going to factor in technology and social change?

Has there been adequate analysis carried out and presented in the literature of what it would mean to move from an average of 8 Mbps download speed on a copper network to 1 Gbps on a fibre network?

There will always be those that argue for incremental change and those that look for the next step jump because it brings greater opportunity but it can also bring greater uncertainty -- something that corporate accountants and economists shy away from.

And how do you carry out a CBA that adequately takes into account the complex state of the telecommunications industry and the changing telecommunications market and legislative and regulatory environment?

What does a cost-benefit analysis add to the debate?

Turnbull is now relying on a dwindling number of countries rolling out FTTN to justify the MTM NBN 2.0, so what is the CBA actually going to contribute if it recommends the MTM NBN 2.0 and Australia is left behind by the rest of the world? Over 100 countries are now rolling out all-fibre access networks.

Telecommunications infrastructure investment is in the national interest and the government has an obligation to look beyond market economics. Will the CBA give sufficient weight to Australia’s need to be able to compete and be a leader in the global digital economy?

Can the technological and social changes that occur when people like Bill Gates, Steve Jobs and others come onto the scene be predicted by an economic model?

And what of the criticism levelled at the government by Google, other companies and eminent scientists and engineers? None of this is mentioned in any of the documents prepared to support the Vertigan committee review and it will be interesting to see if any of this criticism makes it into the final report.

As we wait for the Vertigan committee to report let us consider the following:

Budding engineers learn at an early age that an orange designed by a panel of accountants, economists and politicians will always remain a lemon. So where does this leave the CBA?