The roll-out of the NBN has been lambasted as a national tragedy. Lee Ridge looks at the players and the process behind the foundering broadband project and argues politics and ideology have set Australia back years.

THE NBN is, technically speaking, “a mess”. Too many technologies running over budget and behind schedule. This article discusses the politics and economics influencing the change of the NBN’s technology from Labor’s fibre-to the premises (FTTP) network to the Liberal-National Party Government’s “multi-technology-mix” (MTM) network.

The “independent” cost-benefit analysis of the NBN provided the economic rationale favouring the MTM network and it is argued here that this was highly political process and a flawed economic analysis which has let down an entire nation.

The NBN takeover

Within weeks of becoming Communications Minister in September 2013, Malcolm Turnbull effectively transformed NBN Co’s senior management to one which could be mistaken for that of Telstra.

The new minister appointed JB Rousselot as Head of Strategy and Transformation. Rousselet was previously Executive Director of Digital Media and IPTV at Telstra. Turnbull and Rousselet worked together at the corporate advisory firm Turnbull and Partners, founded by Turnbull as well as at Ozemail, where Turnbull made his fortune.

Greg Adcock, who spent twenty years with Telstra, was appointed NBN Co’s Chief Operating Officer while Justin Milne, who was previously CEO of Ozemail and Telstra BigPond, was appointed to the NBN Co Board in November 2013. Milne, was also appointed Chair of the ABC.

Dr. Ziggy Switkowski, the former CEO of Optus and Telstra respectively, was appointed Chair of NBN Co. One could be forgiven in thinking that NBN Co had become Telstra by another name.

Within five weeks of Milne’s appointment, the “new” NBN Co had completed its Strategic Review, a document which favoured the LNP’s MTM network. In brief, within three months of becoming Minister for Communications, Turnbull appointed his colleagues to very influential positions with NBN Co, which then abandoned Labor’s FTTP network in favour of the LNP MTM network.

The next political step was to have the long-called-for cost-benefit analysis confirm the “economics” of the MTM strategy. Indeed, on the same day that this new NBN Co strategic direction was released, Turnbull announced an “independent” cost-benefit analysis would be conducted by a panel of experts.

The not so “independent” NBN cost-benefit analysis

The panel of experts appointed by Malcolm Turnbull comprised Dr Michael Vertigan, Dr Henry Ergas, Ms Alison Deans, a board director of Westpac Banking Corporation, and Tony Shaw from the ACCC.

Dr Vertigan was formerly the head of the Victorian Treasury during Premier Jeff Kennett’s privatisation of state assets in the 1990s. Dr Vertigan has also been appointed by Labor to head other inquiries. The appointment of Dr Ergas to the panel, a long-time consultant to Telstra, as well as authoring numerous newspaper articles criticising Labor’s NBN, suggests the words “independent report” were defined rather broadly.

Dr Ergas, together with Dr Alex Robson, an economic advisor to the Minister and member of the conservative think-tank, the Institute of Public Affairs (IPA), had previously published their own cost-benefit analysis of the NBN which concluded that it would have a net social loss of between $13.9 billion and $20.4 billion.

Dr Robson provided the “analytical framework” for the NBN cost-benefit analysis and subsequently returned to Malcolm Turnbull’s staff. Further eroding confidence in the so-called “independence” of the process was that the review of the network costs for the cost-benefit analysis was performed by a long-time employee of Henry Ergas.

Other consultants engaged by the panel had extensive “privatisation credentials”. I am not aware that any of these relationships were declared in the numerous volumes of the cost-benefit analysis. There is no doubt that the panel, and the numerous consultants that were engaged by it, were strongly antithetic to the policy of the NBN as a government-owned wholesale network.

The panel noted how “unusual” it was that government was in “… creating a de facto, structurally separated, network monopoly and in reverting to government ownership and taxpayer funding of telecommunication infrastructure”.

Politics meets economics

Cost-benefit analysis is far from a “value free” economic tool. US administrations since President Reagan’s Executive Order 12291 in 1981 have used cost-benefit analysis as the rationale to reduce government regulation and expenditure, particularly in reducing environmental legislation.

In Australia, the Business Council of Australia is a strong supporter of cost-benefit analysis for government expenditures, having commissioned two studies on this mechanism.

Proponents of modern neoclassical economics, which provides the theoretical basis for cost-benefit analysis, would argue that it is just “economics”. According to Milton Friedman, the doyen of free markets and mathematical modelling of “economic science” and much admired within right-wing think tanks, the ultimate “test” of neoclassical economics and analysis is the validity of the estimates, predictions and conclusions in combination with the presumed “certainty” of its analysis. This is also a “test” by which the validity of the NBN cost-benefit analysis can be assessed.

The NBN cost-benefit analysis concluded using the econometric model of the Centre for International Economics (CIE) that in “98 per cent of the circumstances modelled”, MTM was more cost effective. The net benefits of the MTM solution were calculated as $16 billion more than the FTTP solution.

A non-exhaustive list of “shortcomings” of the cost-benefit analyses used in the NBN evaluation include:

the failure to consider a ‘like for like’ costing with respect to the comparative speeds of FTTP v MTM technologies (FTTP is significantly faster with more capacity);

the failure to publish the consultant’s report on costs; overstating FTTP costs e.g. the use of $4,400 per FTTP connection despite evidence of up to 40 per cent reduction in FTTP costs such as those achieved by Verizon and Chorus in the US and New Zealand, respectively;

the significant underestimation of MTM costs and time to build (which according to NBN Co’s Strategic Review 2015, increased by $15 billion soon after the cost-benefit analysis was released); and

the use of an extraordinarily high and unique “high-speed broadband specific discount rate” of 8.3 per cent which significantly reduces the “benefits” of long-life term infrastructure such as an optical fibre network.

The discount rate mandated by the Australian Government is 7 per cent. The Garnaut Climate Change Review applied social discount rates of 1.35 per cent and 2.65 per cent. For a more detailed review of the NBN cost-benefit analysis see my chapter – “The NBN and ‘the Market’: Faith or Blind Faith?” in “Wrong Way – How Privatisation & Economic Reform Backfired” (Edited by Damien Cahill and Phillip Toner).

The cost-benefit analysis was neither independent or without serious flaws. However, one key finding underpinning the cost-benefit analysis can be tested, and this was that the demand for fast broadband was “low”. 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, former Prime Minister Tony Abbott pronounced:

“We are absolutely confident that 25 megs is going to be enough, more than enough, for the average household.”

However, according to the Australian Bureau of Statistics (ABS) data on Internet subscribers by advertised download speed, most consumers were actually paying for more than 24 Mbps already by early 2016. A graph of this data is set out below as Figure 1.

Figure 1

The modelling, using neoclassical economics, calculated 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. With such a disruptive technology as fast broadband, and considering that the iPhone was only launched 12 years ago, the potential applications that may be developed in the next twenty to forty years are unknowable.

Already out of date

The problem is how to realistically and credibly undertake a cost-benefit analysis that would 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 calculations of the cost-benefit analysis significantly underestimated the demand for fast broadband which brings into real doubt the “benefits” of the MTM network, and the basis for the network that is now being constructed. which 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.

It is little wonder that critics of the NBN charge that Australia is spending billions of dollars on a MTM network based on a “rigged” process — if the Strategic Review and its endorsement by the cost-benefit analysis is any guide.

To add to the mess, the government, through NBN Co, is paying Telstra for its previously government-owned copper network which has been “end of life” for more than a decade — what a “great deal” for Telstra’s shareholders.

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A Chartered Accountant, Lee Ridge has worked extensively in the telecommunications sector and the accounting profession. Lee is also a post graduate research student at the University of Sydney and is researching the National Broadband Network.

You can contact Lee on [email protected]. You can also follow him on Twitter @deepsquareleg99.