OECD critical of NBN monopoly and calls for rigorous analysis of $43billion project

The OECD’s regular economic survey of Australia released today includes unusually harsh criticism of the Government’s failure to conduct a rigorous cost benefit analysis of the NBN, Australia’s largest infrastructure project.

It is unusual because the OECD rarely criticises domestic policies and this is no doubt in large measure due to the fact that the Treasury of the country being written up provides considerable assistance to the OECD in preparing their survey.

In summary the OECD emphasises the importance of rigorous cost benefit analysis of major infrastructure projects and notes the absence of such analysis in the case of the NBN. The OECD also shares the concern of the Opposition that the creation of a new Government owned telecommunications fixed line monopoly will be anti-competitive.

If the Government takes the OECD survey to heart it would support our move to refer the NBN to the Productivity Commission and support our amendment to the NBN legislation to ensure it is not exempt from the anti-monopoly provisions of the Consumer and Competition Act (formerly Trade Practices Act).

The OECD notes with approval the establishment of Infrastructure Australia which it says “has pledged to follow an objective and stringent investment selection process. It is based on a published methodology using cost/benefit analyses.”

Having extolled the virtues of rigorous cost benefit analysis of major infrastructure, the OECD then pointedly observes that no cost benefit analysis was undertaken for the NBN. It recognises an implementation study was conducted but calls for additional analysis for major infrastructure projects in which task the Productivity Commission would be of assistance – precisely as proposed by the Opposition in the Private Members Bill to be voted on this week:

“Additional efforts for rigour and transparency would, however, be welcome. Such efforts could be geared towards three objectives:

i) Enhancing transparency. Systematic publication of cost/benefit analyses for the projects evaluated would be useful. The technical quality of these evaluations should be verifiable, and the assumptions underlying investment choices should be clearly identifiable. From this standpoint, the recent transparency efforts made by IA go in the right direction, but they should be pursued and stepped up, because the information disseminated to date has been too limited.

ii) Making more frequent use of audits. Independent evaluations could be made mandatory for capital investment projects exceeding a certain amount. Regular audits after the fact would also provide useful lessons.

iii) Bolstering the technical quality of cost/benefit analyses. Such analyses make use of complex techniques which are important to fine-tune and disseminate more widely. In this area, for example, the Productivity Commission could play a useful role as a reference centre to help agencies involved in the analyses to shore up their work. ” [pp.98-99].

The OECD is also critical of the way in which the NBN will be structured so as to be the sole provider of fixed line communications to Australian households. Facilities based competition is of great value, the OECD says, and again this reflects the Opposition’s approach to the legislation before the House this week where we are seeking to amend the Bill so as to ensure the arrangements between the NBN and Telstra are subject to the provisions of the Consumer and Competition Act (formerly known as the Trade Practices Act).

The Government wants to keep the Telstra/NBN deal away from the scrutiny of the anti-monopoly provisions of the Act because, as the OECD observes, the deal with Telstra to prevent it using the HFC network to compete with the NBN is clearly anti-competitive and can only be justified as a means of enhancing the financial viability of the NBN.

The establishment of a government owned monopoly and the use of legislation to enforce that monopoly is, literally, turning a generation of economic reform back into reverse.

The OECD repeatedly emphasises the importance of facilities based competition:

“Multiple empirical studies have stressed the value of competition between technological platforms for the dissemination of broadband services (Cava-Ferreruela and Alabau-Muños, 2006; Picot and Wernick, 2007; Lee and Lee, 2010). Moreover, such a monopolistic incumbent could forestall the development of, as yet unknown, superior technological alternatives.” [p.108]

The OECD’s recommendations on infrastructure in general and telecommunications in particular are consistent with its, and the Opposition’s concerns:

“Given this uncertainty, government intervention, which would seem necessary for developing this infrastructure, ought to take a prudent approach. At the same time, it should not trigger a weakening of competition in wholesale broadband services to protect the viability of the government project. An alternative to this picking-the-winner strategy would be to let the market guide choices between the various Internet service options on the basis of prices that reflect costs, factoring in externalities that ought first to be evaluated. To that end, it would be desirable to maintain competition between technologies and, within each technology, between Internet service providers. This would be consistent with the planned vertical separation of Telstra and with other aspects of the reform that seek to promote competition. To develop fibre optic networks more gradually than under the government programme would also allow a better assessment of the new network’s costs and potential benefits and the potential positive externalities. From this standpoint, development of an NBN pilot project in Tasmania is a welcome initiative which may provide useful lessons.” [p.109].

Wayne Swan and Julia Gillard should carefully read the OECD report and in particular its recommendations in Box 3.5 at p. 112:

Box 3.5. Recommendations for promoting adequate and well-functioning infrastructure.

● Improve the co-ordination and planning of public infrastructure to meet the country’s needs

● Future audits assessing infrastructure needs should pay more attention to estimating demand for (or target of) services requested in the various infrastructure areas, and to evaluating imbalances in relation to supply on the basis of regularly updated indicators.

● Further improve infrastructure selection process:

-  Systematically publish the cost/benefit analyses with sufficient details for the projects evaluated.

- Independent evaluation should be made mandatory for investment projects exceeding a certain amount.

- Bolster the technical quality of CBAs with the creation of a reference centre able to help agencies involved in the analyses to shore up their works.  

- In the telecommunication sector, maintain competition between technologies in the broadband sector, and within each technology, between Internet service providers.” [p.112]