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NBN is good for Gillard, not taxpayers

Posted : Tuesday, September 07, 2010

Michael Stutchbury's article on the issue was also published in The Australian

Labor's $43 billion National Broadband Network may be the most politically rewarding pork barrel of all if it gets Julia Gillard over the line with the country independents.

But, like most politically driven investment, it is unlikely to provide the best return for taxpayers and even telco users. Broadband Minister Stephen Conroy doesn't really contest this point in continuing to dodge the simple question of why Labor refuses to put the infrastructure project through a cost-benefit analysis.

Instead, Conroy points to the study he commissioned from McKinsey and KPMG that found the NBN could be built with the $43bn price tag and be "affordable for all Australians".

"We've got on with the job as we promised at the last election of building the national broadband network," he argued on the Sky News program Australian Agenda.

Except that the McKinsey "implementation study" was required to take the NBN as a given, not consider any less expensive alternatives and not conduct a cost-benefit study as urged by the Productivity Commission and the Organisation for Economic Co-operation and Development. And except that the advertised bill has blown out from $4.7bn at the last election to $43bn.

Shortly after the election, country independent Tony Windsor suggested the $43bn figure was "fictitious" and he wanted to see the "real trail" of numbers. But after being briefed, Windsor backed Labor's NBN on the weekend, describing the Coalition's $6bn alternative as "retrograde".

The country independents are naturally attracted to Conroy's NBN promise that "every person and business in Australia, no matter where they are located, will have access to affordable, fast broadband at their fingertips". The university town of Armidale in Windsor's New England electorate is an early release site for the NBN rollout. "It's too good an opportunity for country Australia to pass up," Windsor says.

Near-universal high-speed broadband is understandably an intoxicating prospect. For government, guarantees that everyone will win, or no one will lose, no doubt scores highly with focus groups and media sound bites.

The formula initally proved effective for Gillard in defending Labor's $16bn primary school construction stimulus. Putting building projects on school grounds would avoid the lengthy approval processes required for other sites.

A universal stimulus also delivered a political benefit: because school grounds dotted every electorate, every electorate should be grateful. Coalition backbenchers could be lampooned in soon-to-be-reformed parliamentary question time for opposing the stimulus spending but busting to be identified with new school halls in their own seat. It turned pear-shaped when the costs of fast-tracking a nationwide template building program in more than 7900 schools became apparent.

The McKinsey report describes the NBN implementation task of burying or stringing up 250,000km of optic fibre along most roads in the country and connecting 5000 premises each workday over eight years as enormous.

And, to make the numbers come close to adding up, competiton has to be suppressed in the name of micro-economic reform.

"The structural separation of Telstra is one of the most significant micro-economic reforms in this country in 20 years," Conroy said at the weekend. "It will drive productivity growth."

Vertically separating Telstra's retail and network arms would have been a big micro-economic deal 20 years ago. But technology is eroding the monopoly power of Telstra's copper network as people flock to more competitively provided mobile services.

And Labor's NBN would more likely reduce, not increase, competition by mandating a government-owned wholesale monopoly that will pay Telstra $11bn for access to the telco's ducts and pipes, to shift over its wholesale customers and to shut down its copper network.

While structurally separating Telstra in this way may increase retail competition, it is designed to suppress competition in broadband infrastructure. The deal further requires Telstra to stop supplying high-speed broadband over its coaxial pay-TV (or HFC) cable that now passes 2.5 million homes.

This effective destruction of capital is required to support the government monopoly mandate of one technology (fibre) over the existing copper or HFC networks.

While fibre is clearly the fastest technology now, Telstra's own declining fortunes show that consumers highly value the mobility provided by competitive wireless broadband. It's akin to consumers being prepared to pay many times more for water out of a bottle than out of the natural monopoly of the fixed water pipes in their homes.

Most of the IT world backs spending $43bn of other people's money on a super-duper fibre network. But a collection of telco suppliers, including AAPT's Paul Broad, two week ago issued an alternative broadband plan, based on next generation 4G mobile technology, that rejected the NBN model of "infrastructure monopolies with retail competition".

The Alliance for Affordable Broadband argues that a mix of technologies and market-based provision could include 4G coverage for 98 per cent of Australians at up to 100 megabits per second and even higher-speed fibre broadband for schools and hospitals. It would cost perhaps $3bn.

And Committee for the Economic Development of Australia research head Michael Porter argues that any benefits from Conroy's vertical separation of Telstra will be swamped by his suppression of horizontal broadband competition between fibre, the copper network and HFC.

Tellingly, the Productivity Commission backs Porter by arguing that "strong competition" between the rival broadband infrastructure "is likely to provide the best outcomes for the country".

It says the viability of any one type of broadband infrastructure should not depend on "inappropriate constraints on other modes of delivery".

Porter further suggests that Labor's NBN deal could eventually run into the Australian Competition and Consumer Commission as an illegal restraint on competition. "I would expect the ACCC to reject the decommissioning of HFC cable for broadband," he says.

If so, Labor's NBN plan could involve both a multi-billion-dollar payment to Telstra to breach competition laws and a pork barrel to the country independents that helped win their crucial votes.