The National Broadband Network (NBN) – back to the future for Australia

Posted by on October 28, 2018 in General, Issue 89 Oct 2018

The National Broadband Network (NBN) - back to the future for Australia

Lee Ridge

The National Broadband Network (NBN) was one of the policies that contributed to Labor’s national election victory over John Howard’s Liberal-National Party (LNP) government in 2007. The NBN, was Australia’s largest ever infrastructure project. It aimed to connect 98 per cent of Australians to the Internet via a national optical fibre network known as fibre-to-the-home (FTTH). This would be at much higher speeds than the existing copper-based networks, predominantly owned by Telstra and Optus. It is salutary to compare those aims with the subsequent experience.

The original ambition for the NBN was admirable. Upgrading Australia’s telecommunications infrastructure is crucial to enabling all Australians to conduct their daily lives – including healthcare, interacting with government services, online banking, education, entertainment and keeping in contact with family and friends regardless of where they live and whether in cities or rural and remote communities. According to the most recent figures from the Australian Bureau of Statistics (ABS), more than 97 per cent of data downloaded used fixed line broadband (as opposed to mobile phone networks) and this has increased by more than 50 per cent per year since 2012.

The initial estimates were that the increased connectivity enabled by the NBN would cost $43 billion nationally, funded by a $21 billion government loan and with the balance raised from private investors at no net cost to government. Importantly, the NBN would eliminate Telstra’s dominance of both the wholesale and retail communications sectors. The NBN would provide a level playing field for all retail telecommunications providers to sell their retail services to consumers.

LNP opposition to the NBN at the 2007 election was not surprising. Building a government-owned telecommunications network was contrary to more than three decades of privatisation policies by both the LNP and Labor. Opposition Leader Tony Abbott, questioned the need ‘to spend $50 billion of hard earned taxpayers money in what is essentially a video entertainment system’. Yet the NBN remained popular with the electorate. As noted by former LNP Minister, Peter Reith, in his review of the LNP’s 2010 federal election defeat, ‘Labor's only real policy advantage was on the NBN.' However, the NBN also had a wider circle of critics – from conservative think tanks, such as the Institute for Public Affairs (IPA) and big business (who already had their own fast networks). The critics often appeared in the mainstream media.

The ‘takeover’ of the NBN
Labor came under increasing criticism for its role in the economy during and after the Global Financial Crisis and also for resisting calls for a comprehensive cost-benefit analysis of the NBN. Newspaper articles and editorials in The Age and The Australian between 2008 and 2013 were ‘overwhelmingly negative’ about the NBN, according to a study undertaken by Swinburne University researchers. The main criticisms were its potential impacts on Telstra, the lack of a business plan and cost-benefit analysis, problems with its rollout, the total cost to the federal budget and its implications for business stakeholders.

The LNP government under Howard had privatised Telstra. After winning the 2013 election the new LNP government led by Tony Abbott was faced with building a national telecommunications’ network, rather than Abbott’s preferred ‘roads and highways.' The government quickly announced that the NBN would abandon its FTTP rollout in favour of the LNP’s Multi-Technology-Mix (MTM) solution, based upon using existing infrastructure such as Telstra’s ageing copper network.

The first stage of the downgrading and change of technology direction of the NBN was the five-week Strategic Review by NBN Co. Limited (NBN Co.), the company responsible for building the NBN. This review favoured the MTM strategy. This outcome was never in doubt once Malcolm Turnbull, as Abbott’s Minister for Communications, had effectively engineered the ‘takeover’ of NBN Co. via his former colleagues from Ozemail (which he co-founded and from the sale of which he made his $50 million fortune). Justin Milne and J.B. Rousselot were former colleagues of Turnbull at Ozemail and later became senior executives with Telstra. Turnbull also appointed Dr. Ziggy Switkowski (former CEO of both Optus and Telstra) as Chair and Greg Adcock, who had spent 20 years at Telstra, became Chief Operating Officer of NBN Co.

Having achieved the desired change in the NBN’s technology direction, what remained to complete the triumph of the MTM solution was ‘common sense economics’ to also endorse the MTM solution as the most cost-effective.

Turnbull picks the not so “Independent’ Panel of Experts
Turnbull announced on 12 December 2013, the same day the Strategic Review of the NBN was published, that a Panel of Experts would undertake an ‘independent’ cost-benefit analysis of the NBN. The Chair of the four-person panel of experts was Dr Michael Vertigan, formerly head of the Victorian Treasury during Premier Jeff Kennett’s privatisation spree of state assets in the 1990’s. The ‘telecommunications expert’ selected for the four-person panel was Dr Henry Ergas, a long-time consultant to Telstra. Ergas had written numerous newspaper articles criticizing Labor’s NBN and, together with Dr Alex Robson, had published a cost-benefit analysis which was critical of it. Robson, who had previously been an economic advisor to Malcolm Turnbull, was engaged to undertake economic modelling for the panel. After overseeing the NBN cost-benefit analysis, he was appointed to Turnbull’s staff. A long-time employee of Ergas was also engaged by the panel to review the constructions costs of the NBN.

Turnbull evidently followed the two rules of government stated by Sir Humphrey Appleby from “Yes Minister”– ‘Never look into anything you don’t have to; and never set up an enquiry unless you know in advance what its findings will be’.

Politics meets economics
Cost-benefit analysis is often held to be a sensible economic approach to calculating the future benefits and costs, expressed in current dollar values, resulting from public investment projects. In practice, it has been used increasingly since the 1980’s, especially from the early days of Ronald Reagan’s presidency of the United States, to justify reducing government regulation and expenditure. Similarly, in Australia, the Business Council of Australia, the lobby group representing the largest 100 companies in Australia, argued that cost-benefit analysis promoted market-based ‘economic reform' and funding for the ‘right' public infrastructure projects, representing value for money.

The report on the NBN cost-benefit analysis concluded with ‘98 per cent certainty’ that the LNP government’s MTM solution would cost a net $16 billion less than the FTTP solution – comprising $10 billion less to build the network and $6 billion more in benefits than Labor’s FTTP solution. The lower estimated MTM costs were due to many factors, such as reliance on using existing network infrastructure and a shorter construction period resulting in the ‘benefits’ of the project flowing sooner than the FTTP option. The fact that the MTM is significantly slower and has less capacity than a FTTP network was not factored into the calculations of the costs or benefits of each type of network, despite being in the panel’s Terms of Reference.

Critics of the analysis have pointed out that the MTM calculations were based on Telstra’s ageing copper network, the same network that Telstra management admitted to the Australian Senate in 2003 was ‘at five minutes to midnight’. It appears there was also an underestimation of construction costs. NBN Co. subsequently announced that the MTM solution would cost $15 billion more than estimated in the cost-benefit analysis. It also assumed a shorter construction period for the MTM (which has failed to eventuate). On the other hand, it overestimated FTTP costs, failing to take into account evidence of significantly reduced rollout costs per premises achieved in fibre rollouts in New Zealand and the US.

Many of the cost figures have been redacted in the reports (as ‘commercial in confidence’ and therefore something unsuitable for the public to know), so it is difficult to be more precise. However, one important calculation in the cost-benefit analysis that can be tested against publicly available data is the ‘demand' for high-speed broadband.

The economic modelling of the NBN’s benefits focused on calculating consumers' ‘demand for speed,' by their ‘willingness to pay' for it. This willingness-to-pay methodology does not consider consumers' ability to pay. The calculation of willingness to pay was based on a ‘bottom-up' approach, to determine what representative households would pay to access various apps such as Skype, Netflix, Facebook, and other applications. These households were asked to state their preference based on current apps. National or community benefits of the NBN were not considered. This approach would be similar to determining the benefits of the Snowy Mountains Hydro Scheme by asking Sydney residents of the 1960s what they would pay for their electricity to make their toast for breakfast.

With such a disruptive technology as fast broadband, and considering the iPhone was only launched 11 years ago, the applications that may be developed in the next twenty to forty years are unknowable. The problem is how to realistically and credibly undertake a cost-benefit analysis that will do justice to such technologies. The benefits that a fast NBN will unlock are fundamentally unpredictable but this was held to have been ‘calculated’ in the benefits of the two competing technologies.

The NBN cost-benefit analysis determined that the median Australian household would require a bandwidth of 15 megabits per second (Mbps) by the year 2023. However, according to the ABS data on internet subscribers by advertised download speed, as set out in the figure below, the majority of consumers were already paying for more than 24 Mbps by early 2016, some nine years sooner than predicted by the NBN cost-benefit analysis calculations. Abbott pronounced that ‘we are absolutely confident that 25 megs is going to be enough, more than enough, for the average household’.

The calculations of the cost-benefit analysis significantly underestimated the demand for fast broadband. As a consequence, The LNP’s NBN is already out of date. Singapore and South Korea are building networks 40 times faster. The UK is building a FTTH network. Australia is rapidly falling down world rankings in terms of internet connectivity.

A win for Telstra’s Shareholders
The decision to change to the MTM network favoured existing network owners such as Telstra and Optus. As noted above, Telstra's copper network was at ‘end of life' in 2003. Now Telstra will receive payments over $40 billion in nominal terms over the next 20 years, or $11 billion in present dollar values. Thus, the FTTP sees Telstra being paid $11 billion in current dollars for access to its ducts and pits under footpaths and exchanges. This was a cost saving for the NBN as this infrastructure is expensive and time-consuming to build: Telstra would also have to remediate the asbestos in these ducts.

The revised agreement with Telstra, negotiated by Turnbull, results in Telstra's shareholders being paid for a copper network that is at ‘end of life’ and has already been paid for by the public when Telstra was wholly owned by the government. Telstra and Optus are also to be paid $1.2 billion and $0.8 billion, respectively, for access to their ageing Pay-TV infrastructure, which is not fit for a fast broadband network. Moreover, the cost to Telstra of the asbestos remediation is capped, with NBN paying for cost over-runs to an undeclared amount.

How has Telstra used this windfall from the NBN? In the 2017 financial year, Telstra received $1.25 billion from the NBN and paid $1.5 billion to its shareholders through a share buy-back in addition to cash dividends.

Conclusion
The NBN is a story of a bold vision for Australia’s future that has been thwarted by politics and economic interests. Faulty economics has also been part of the process because a seriously flawed cost-benefit analysis was effective in stopping Australia’s high speed, connected future. Given that an increasing majority of the population are demanding and paying for fast broadband, it is time to revisit the original vision of connecting 98 per cent of Australians at high speed.

Lee Ridge is currently doing a Masters research degree in Political Economy at the University of Sydney, following many years of professional experience in the telecommunications sector.

Further reading:
For more about this sorry saga, including details of the NBN review panel, its consultants and their interrelationships, see the chapter by Lee Ridge in the new book Wrong Way, edited by Damien Cahill and Phil Toner and published in 2018.

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