NBN – The wrong policy for Australia

All Australians understand that high-quality, reliable and affordable broadband is a critical part of the infrastructure our nation needs to prosper in coming years.

As one of the founders of OzEmail, Australia’s first big internet company I believe passionately in broadband and the power of the internet.

But as a businessman and Member of Parliament I also believe passionately in not wasting billions of taxpayers’ dollars on white elephants. Remember, every dollar of revenue diverted to Labor’s National Broadband Network (NBN) is a dollar that can’t be spent on hospitals, schools, roads or public transport – let alone returned to you in lower taxes!

So what’s the 2010 broadband debate about?

On the one hand we have Labor, which claims spending at least $43 billion (and maybe much more) of public money on the most expensive network in the world represents ‘nation-building’ and will deliver value for money for taxpayers and users. 

On the other is the far more affordable $6 billion Coalition plan.  It will fix those parts of Australia’s broadband infrastructure where Government intervention is justified  – by increasing competition in ‘backhaul’ (the main network routes that link towns and cities) and subsidising fast connections in poorly-served suburban, regional and rural areas.

Just because the Coalition’s total spend is less doesn’t mean the vast majority of users will be worse off.  On the contrary, most will have access to privately-provided broadband services virtually indistinguishable from Labor’s – but at a much lower cost.   

When politicians offer you something for nothing, or something that sounds too good to be true, it’s always worth taking a careful second look.  This is emphatically the case for Labor’s outsize broadband claims.

While lofty rhetoric about vision, imagination and the digital future is all very well, close scrutiny of the Rudd/Gillard NBN reveals no fewer than eight separate reasons why it is going to fail Australians:

The NBN will cost far too much to build.

The NBN will be the largest single investment of taxpayers’ funds in Australia’s history.  While Labor claims it will find private partners to share the cost, the NBN is so risky and its likely returns so low that it will probably be entirely funded by your taxes.

While the KPMG-McKinsey implementation study confirmed it was possible the NBN might be built for ‘only’ $43 billion, even the CEO of NBN Co admits the final cost is highly uncertain. 

A handful of countries have gone down the path of publicly subsidising high-speed broadband.  But most have much higher population density than Australia (making it vastly cheaper to roll out an expensive approach such as Labor’s fibre-to-the-home).

And none has ever contemplated a taxpayer-funded spree on the scale Labor is proposing.  According to industry expert Grahame Lynch, the taxpayer contribution to fast broadband in Singapore was around $200 per person. In New Zealand it will be about $330 per person.  In contrast, Labor’s extravagant plans will cost Australian taxpayers at least $4000 per household (or roughly $2000 per person).

The sheer magnitude of this expense (and implausibility that it will ever be recoverable from users) is why the Rudd/Gillard Government has been so secretive about the details of the NBN, and has consistently refused to allow its plan to be exposed to cost-benefit analysis by Treasury or the private sector.

Instead, from the moment ex-Prime Minister Rudd and Communications Minister Conroy designed the NBN on the back of a drink coaster on an RAAF VIP jet, Labor has been determined to press ahead regardless of cost.  As economist Joshua Gans recently wrote: “You only want a comprehensive cost-benefit analysis if it is going to change your decision.”

The NBN will increase internet costs for users.

Once the Government has built a vast white elephant of a network, utterly incapable of earning a reasonable return on capital invested but legislatively assured of a monopoly over carriage of internet and telephony services, what do you think is going to happen to user charges?

One possibility is that the monopoly provider, protected against all competitors, jacks up prices as far as it can.  The Implementation Study estimates that for the NBN to earn merely the bond rate, real prices will need to increase by 1 per cent a year rather than decrease rapidly as they have in recent years and will continue to do in other countries. Industry experts anticipate monthly bills that could be in the hundreds of dollars.

And if it doesn’t, then its value won’t equal the cost of investment

If the Government instead decides to charge reasonable wholesale carriage fees, comparable to those currently paid for internet access, the cashflows earned by NBN will not justify a value remotely near $43 billion.  Even if a majority of households sign up, the NBN may be worth less than a quarter of that investment.

The NBN has been decreed by politicians, not driven by market demands.  

There is no doubt that the fastest networks of today run over optical fibre – and there are already many thousands of kilometres of fibre optic cable in our telecoms networks. The question is whether the huge extra cost of mandating that every home in Australia be connected to fibre optic cable is justified. 

Millions of Australians can already achieve fast broadband speeds over networks currently in place, and we know today’s speeds will increase rapidly over coming years.

But the ‘best’ pure technologies don’t always win, and consumer preferences often turn out to be very different from what politicians, engineers and bureaucrats anticipate.  Will Gigabit fixed line speeds, for which households can’t yet envisage a use, be valued above the convenience of mobility, for instance?

Already around a quarter of Australians access the internet wirelessly.  And over the past couple of years, a host of devices have emerged that deliver value to consumers by enabling mobility – the iPhone, Android phones, the Kindle and the iPad are all examples.

Since it won’t face competition, the NBN is highly unlikely to respond as effectively to the inevitable twists and turns in business and consumer preferences over time as a less regulated marketplace.

And even if it could, the reality is that broadband involves horses for courses: some consumers and many businesses will want fibre optics now; others will be fine with cheaper fixed line alternatives such as HFC (which can already deliver 100 Mbps) or very high speed ADSL; and yet others will prefer the flexibility of wireless. Only bureaucrats think in terms of one size fits all.

Canberra is terrible at building and operating commercial services.

Perhaps the most unbelievable aspect of the NBN is the notion that a Government-controlled entity can roll out a vast and complex undertaking such as a nationwide fibre-to-the-home network on budget and on schedule.

This from the people who couldn’t build school tuck shops and assembly halls without billions lost in rorts?  Who so tragically mismanaged the home insulation program?  Who put less than half the computers they promised in schools at double the cost?

For the past 30 years, around most of the world, there has been a realisation that governments are better off leaving it to the private sector to create, own and operate businesses.

That is why Telstra (and its peers abroad such as British Telecom) were privatised.  It’s why businesses such as Qantas and the Commonwealth Bank were sold, and have performed so much better in private hands than before.

The NBN is a reversal at odds with the thinking in every other major economy on the planet.  In a way it re-creates the old Telecom: a monopolistic, publicly-funded communications provider.

Why is there any reason to think it won’t have exactly the same flaws as the old Telecom – lousy and lazy management, unresponsive service and feather-bedded work practices?  While that might make Labor’s union pals happy, it’s not in the interests of anyone else.  Does anyone remember the appalling customer service Telecom used to offer?

Canberra will have a huge conflict of interest.

One of the most remarkable parts of Labor’s broadband fantasy is the notion that the Government can be even-handed and pursue the national interest when it is both the owner of the monopoly broadband network and the regulator of Australia’s communications market.

Just think about the potential conflicts.  Let’s say the NBN turns out to be the commercial dud that most economists and business observers expect.  And let’s also imagine that five or ten years down the track an alternative technology emerges providing equally adequate service as fibre-to-the-home at a fraction of the cost – say a variant of wireless.

Will the Government of the day surrender its monopoly, rendering tens of billions of dollars it has ‘invested’ worthless?  Or will it enforce laws barring Australian households and businesses from using a cheaper and perfectly adequate substitute technology?  Conflicts of interest such as this are exactly why governments have tried to get out of the business of owning telecommunications companies over recent decades.

Money spent on the NBN can’t be spent on other services.

In economics, one of the most important concepts is ‘opportunity cost’ – the idea that once you spend your money on something, you can’t spend it again on something else.  If tens of billions of taxpayer dollars are invested in a gigantic and low-yielding yet risky venture such as the NBN, they can’t be spent anywhere else.

That means less public capital will be available for other better understood and equally or more pressing areas: new and improved hospitals and schools, upgrades and extensions to roads and railways, or better public transport.    

The NBN is simply too risky.

There are two related kinds of risk with large communications investments such as the NBN.  The first is financial – the taxes invested might end up wasted due to over-investment, poor management or shifts in market demand. The second is technological – an alternative technology or another way of leveraging existing technologies might come along and render this huge and supposedly ‘futureproof’ investment obsolete.

There is no benefit to taxpayers or the Australian economy from spending $43 billion or more on something that turns out to have a commercial value of a fraction of that when it is finished and sold.  Risks like this are better born by the private sector – so shareholders, not Australian taxpayers, lose out if the plan goes off the rails.

In the end the NBN reflects Labor’s cargo cult mentality.  Rudd/Gillard Labor thinks you can fix schools by putting computers in classrooms, you can fix climate change by putting pink batts in roofs, and you can fix telecommunications by building huge pipes.

Clever governments understand that you fix problems by empowering initiative and enterprise: by policy and regulatory settings that steer, not row. Labor thinks it can row, but it invariably sinks the boat. 

The Coalition’s broadband alternative is less risky and less costly.  Lofty talk about vision and imagination is all very well.  But Australians deserve policies that are practical, deliverable and affordable too – and nowhere is this more the case than for broadband.