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Jul 14, 2010

One poll-driven economic disaster -- NBN -- remains from horrific Rudd era

With virtually every major policy initiative of Kevin Rudd very publicly abandoned, there is one almighty policy that is not only surviving, but thriving: the $43 billion National Broadband Network.

Carbon Pollution Reduction Scheme: dead. Resources Super Profits Tax: dead. Home insulation scheme: dead. Rudd bank: Dead. Internet filter: dying. With virtually every one of the major policy initiatives of Kevin Rudd very publicly abandoned, there is one almighty policy that is not only surviving, but thriving. The $43 billion National Broadband Network — a testament to big government and small accountability.

It appears to have been forgotten that the NBN was not a policy spurred by any great technological need, but rather, it was a very political beast, announced in April 2009 at the height of the global financial crisis. For the federal government, the primary goals of the project were to sideline a recalcitrant Telstra and to enhance its economic credentials. Australia would spend its way out of recession — not only that, but we would get a shiny new broadband network. The fiber-to-the-premises network was of a far greater scope than any of the previous models being considered — more than 15 times quicker than the previous Telstra proposal.

This much was confirmed in its announcement launching the NBN where the Prime Minister stated:

This is a major nation-building project that will support 25,000 jobs every year, on average, over the life of the project. At its peak, it will support 37,000 jobs. Given the productivity gains associated with this investment, the full benefits will continue to flow for decades beyond the completion of the project.

The government has never undertaken a cost-benefits calculation on the broadband network — Australia’s most costly infrastructure project ever. McKinsey, who were paid $25 million by the government to prepare an “implementation study” expressly noted that “the purpose of [its] study is to advise the government on how best to implement its stated policy objectives, not to evaluate those objectives, given that the policies have already been agreed by the government”. The study explicitly did not “undertake a cost-benefit analysis of the macroeconomic and social benefits that would result from the implementation of a super-fast broadband network.”

While McKinsey found that the project can be implemented with the $43 billion estimate (that was before the government was able to reach agreement with Telstra), it didn’t proffer an opinion on whether the $43 billion is money well spent.

Aside from the jobs aspect, another key selling point used by the federal government was along the lines of — “there may not be many uses for high speed broadband now, but like electricity or the phone, we need to build the infrastructure first.” The problem with that principle is that the internet is very different to, say, electricity. This is primarily because many Australian homes and businesses already have broadband internet connected. Australia’s ADSL2+ services that (while far from world leading) are able to provide a satisfactory speed for most uses. By contrast, you either have electricity or you don’t, so the benefits of being connected to a power grid, even if unknown, had substantially more scope than the benefits of a faster internet service.

As for some of the mooted advantages of a 100 Mps service — including business benefiting from video conferencing or eHealth, that ignores a couple of pertinent points. First, most businesses (operating in CBD areas) already have very high-speed broadband connections. Second, it is arguable that in many instances, meetings generate minimal economic benefits anyway, so spending billions to encourage them isn’t the makings of sound policy.

One of the other key benefits that Rudd (before his sacking) referred to was the nascent area of eHealth — that is, the ability for doctors to diagnose and treat patients remotely using video connections. While such a function has some use, instead of spending billions of dollars of taxpayer funds on a project rejected by the private sector, perhaps Rudd would have been better off hiring a some more rural doctors — you could probably get a few for $43 billion. There is also the fact that the main users of eHealth will be in rural areas, and those users will be covered by the NBNs wireless service, rather than its FTTP network.

The NBN plan is substantially different to what the private sector had earlier proposed. Unlike the government, private businesses concern themselves with pesky things such as “return on investment” and “cost versus benefit”. Telstra has initially proposed a 6 Mps scheme, which would have required an outlay of $6 billion, this was then replaced by a suggested 12 Mps scheme that would have required only $4 billion (about 10% of the cost of the NBN).

Former Optus executive and Liberal MP Paul Fletcher, who (despite his conflicts) is well versed to comment on the NBN, stated in the Financial Review that:

In two fundamental ways, Labor is merrily taking on risks that Telstra, with its vastly greater experience of telecommunications — has chosen to steer clear of. First, there is the physical executive risk of building such a network. It is a huge and complex text. But the second risk is even bigger: that labour will squander many billions of taxpayers’ money …

The network uses a hugely expensive technology that drives the massive capital cost. No cost benefit study was done to justify this technology choice rather than cheaper options.

In total, each Australian taxpayer is spending almost $4000 on the NBN (assuming the project costs $43 billion). This money will be spent on “creating jobs” for engineers’ consultants and public servants. In return, Australians will then need to spend upwards of $100 a month on a high-speed internet service that most don’t really want (for that price) and almost all don’t really need.

To achieve 100Mps the cost is expected to at least $120 per month — more than double what most (non-Telstra) ADSL2+ users currently pay. Further, “next generation” 4G wireless services (which will form part of the NBN anyway) would most likely be able service the needs of many broadband users (with speeds of up to 12 Mps, far greater than current DSL speeds). There is no reasonable basis for a costly and complicated nationwide network connecting 93% of premises. The government most likely knows this, which is why it instructed McKinsey not to conduct a cost-benefit study of the $43 billion project.

Julia Gillard has wiped clean the horrific remnants of the Rudd era — only one poll-driven economic disaster remains.

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31 thoughts on “One poll-driven economic disaster — NBN — remains from horrific Rudd era

  1. EngineeringReality

    Sadly so many people think that the institution of government is exactly the same as the institution of business.

    If you take that view then, yes, it may seem that government is a bit redundant – is gets in the way of business because its not as good as making money as a business is. Hence the chorus for, wrongly, “the end of big government”.

    But its also a completely wrong viewpoint.

    The main issue is that government is an institution completely different to business. Its set up to govern the people. To make decisions for the benefit of its people. To increase their education, safety and well being. Its not set up to make a profit.

    So judging governments against business metrics is a nonsense. Businesses are entities with one driver – increasing the wealth of shareholders. It doesn’t give two hoots about anything else.

    Governments should look at things in terms of benefit to society – not cost-benefit or return on investment. And Governments also need to address so call “market failure” which is what free-marketeers call anything their precious answer to everything market can’t figure out or ignores because there is not a high enough “cost-benefit” to providing it.

    Its clear to anyone today that technology and access to a fast internet connection is getting increasingly important – for all aspects of our society and its never going to be the case that we’ll stop needing faster speed or higher capacity for data transfer and storage.

    Everytime new technology comes along the old guys in charge – and it is always old guys – deny that there is any need or benefit for these “new fangled” things – they say what we have now is perfectly adequate.

    The CEO of IBM said in the 40’s that “I think there is a world market for maybe five computers”
    Bill Gates got left behind in the 90’s when he dismissed the internet.

    ADSL is a dog of a technology that tries to communicate along wires never designed to carry signals of such frequency.

    Wireless is not the answer – higher and higher frequencies and power is needed for more bandwidth – and its lossy and insecure.

    So in essence the government is doing its job correctly here – looking after the welfare and education of its citizens by making up for the market failure in poor telecommunications after a previous government privatised a monopoly that has kept Australia in the 1990s in terms of telecommunications.

    Finally Australia will be able to hold its head up and show the world an internet infrastructure that is equal to the best.

  2. rpy

    Agree the NBN is probably poor value.

    The trouble is that the scalability of 4G wireless services is still unproven as an alternative to fixed network technology. Existing wireless technology have consistently proven unable to deliver high bandwidth applications like video on demand on any significant scale – 3G networks (notably Optus and AT&T) have struggled to deliver low bandwidth applications like static web content and poor quality video streams. NextG only functions well because it’s priced to discourage use. WiFi networks in dense urban areas are too congested to deliver a fraction of their theoretical throughput. And this is all against a backdrop of fixed line services still carrying the majority of our data traffic.

    4G networks might do a great job of satisfying our existing thirst for data, but every year the average amount of data each person consumes continues to grow substantially, and we haven’t even scratched the surface of high definition streaming video applications for homes and businesses yet.

    Building fibre networks may be a poor use of resources, initially prohibitively expensive, and represent a huge subsidy to content providers like News and PBL – but they probably are the network we have to have.

  3. Christopher Armstrong

    Okay, Adam might be trolling with this article, but its a poor attempt at trolling at best. If this is serious, I think it is much worse than his regular housing market articles, and rubbish at best. Those at least seem researched – this article demonstrates little evidence that Adam is familiar with the state of the art, let alone the potential for future technological development.

    He first tries to tell us that there is no cost-benefit to the NBN, just because the McKinsey report does not include the cost-benefits of the NBN in its scope. Just because the cost-benefit isn’t examined in a report that was never supposed to cover it, doesn’t mean that there is no benefit.

    He then wants us to believe that a 6Mbps would be beneficial, when Australians already have access to 8Mbps over existing cable networks and upto 24Mbps over ADSL2+. By this token, his assertion that 12Mbps is greater than what Australians currently have access to is also wrong.

    Lastly, he’s under the delusion that 4G networks can scale to handle growing bandwidth requirements and that fibre optic networks are fixed at the speeds they have when they are installed. Unfortunately, quite the opposite is true: as pointed out by previous commenters, 3G networks are struggling to deliver the promised bandwidth due to poor coverage and saturated radio spectra. 4G is only an improvement to the same technology, and is subject to the same problems once widely implemented and used. On the other hand, fibre optic networks can enjoy improvements in speed without replacing the cable, only the transmitters and receivers as the costs of faster and more complex modems become available.

    The only thing that Adam rightly points out is that the technology is a solution chasing a problem – but as has been shown with previous technological innovations, the need quickly catches up to the technology as people find new and innovative ways to take advantage of it.

  4. EngineeringReality

    The physics of the electromagnetic spectrum mean that radio waves are not able to transmit as much data as laser light.

    Its pretty simple.

    Radio waves of gigahertz frequency will never carry as much data as laser light of terahertz.

    Couple this with the fact that you can put as many lasers of different colour (wavelength) into a fibre optic cable as you want – thereby multiplying the information carrying capacity of a single piece of optical fibre many millions of times above that of radio signals.

    Light of different colours doesn’t interfere with each other and can easily be separated out at the other end. Radio waves merge into an electromagnetic soup that requires sophisticated signal processing and computing power to try to extract the signal you want out of all the noise of reflections and other signals.

    So unfortunately 3G or 4G or whatever marketing term is used for radio waves its not an answer for faster and higher capacity connectivity.

  5. Graham Henderson

    Analysing the NBN as a business investment decision merely demonstrates that if left to business it would never be built.

    The delivery of 100mbps and higher to 93% of homes opens possibilities that will never exist with existing networks. Real time video imaging and document transfer will enable 10-20% of employees now schlepping to the office to work from home, permanently. That alone will payback $43 billion with public transport infrastructure savings in 10 years.

    There will be countless applications for all that data capability most of which no-one has thought of yet.

    The NBN will lay the foundation for communications for a generation or more if it gets built just as the copper wire system did for the last three generations.

  6. Tim

    Previous posts have made most of my points. Wireless is not an appropriate technology due to spectrum limitations; private industry had their chance and did nothing; and the speeds originally promised in the first tender were underwhelming at best.

    The argument though that there is no obvious reason why Australian’s need faster internet rankles me most though.

    It was once said that broadband internet was an answer waiting for a problem – and then Napster(RIP) came along, and social networking, file-sharing and almost 2 billion internet users, all depending on fast stable connections. It is the same with the NBN.

    Who knows what challenges Australian society will face in the coming decades (yes, decades, the NBN won’t be showing up as a charge on my next credit card bill) but the NBN may provide some answers to them. Cost of transport increase? Offset it by greater use of video conferencing. Fuel prices make air-travel unaffordable? Well, I’d prefer a Government owned internet network which allowed people to remain connected with their neighbours (friends and strangers) rather than allow them to retreat into the default positions of parochialism and xenophobia. And as people move between cities e-health will not just be used by rural doctors but will be demanded by all patients.

  7. Jackol

    The other point that Adam glosses over was the strategic use of the NBN process to correct the mess left over from the privatisation, without structural separation, of Telstra. Would Telstra have genuinely come to the table without the NBN proposal? I doubt it. They had too much vested interest in maintaining their private monopoly. The fact that the government can kill 2 birds with one stone just adds to the worth of the NBN.

    So, Adam, you’ve failed to note that wireless doesn’t scale. You haven’t acknowledged that the headline figure for the NBN (now substantially less than $43 billion) is largely going to become assets of the government with value for decades, rather than a one off ‘$4000 per person’ cost. Not to mention (which you didn’t) that along the way they fix the issue with structural separation of Telstra.

    What’s not to like? Oh, it doesn’t fit Adam’s dry economic theories – what a shame.

  8. MichaelT

    Yes this is a bit of a hatchet job.

    For example notice how Adam simply assumes that the original $43 billion cost will stand, whereas it will come down substantially if the deal with Telstra is consummated.

  9. John Bennetts

    Adam, you d_ckhead! I have an ADL2+ connection. It has about 96% packet loss, as checked many times during the past couple of years. It is too slow even to prevent timeouts when switching between pages on the Crikey or the ABC sites.

    As for cost-benefit studies, why are you not whinging about the lack of such a study for the RAAF’s newest acquisition, which we won’t see for years? Surely the RAAF as a whole should similarly be reviewed.

    While you are at it, do one on the AFP and the PM’s office or any of a thousand public service functions and infrastructure projects.

    Most of them simply cannot be done and are mandated by excercise of political will via elected representatives, on behalf of the nation and its communities and citizens.

    By all means, research the best way to achieve these objectives, but leave the politics to the politicians and the ballot box. In the case of the NBN, that is exactly what should have happened and did happen.

    Simply, you are barking up the wrong tree.

  10. David Johnson

    I think most of the things that annoyed me about this article have been pointed out by others, but I will say that as a well off unmarried professional with no kids, screwing telstra and giving me faster broadband may be the only thing any government has done for me personally in years. Even if it really was $4000 each I’d put it towards this rather than a baby bonus or FHOG any day.

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