A new cost-benefit analysis of the Federal government’s proposed National Broadband Network suggests that its costs might outweigh its benefits by a factor of between $14 and $20 billion. It also suggests that the NBN should not proceed if its total costs exceed between $10 billion and $17 billion.

The analysis was prepared by Concept Economics’ economists Henry Ergas and Alex Robson for a Productivity Commission annual roundtable that also featured Australian and international academia along with officials from the Department of Prime Minister and Cabinet.

Concept’s analysis models the likely costs of the government’s proposed FTTP network covering 90% of the population and then compares it to the cost of incrementally upgrading existing HFC and copper assets to support 20-40Mbps speeds and installing high-speed wireless at up to 30Mbps in regional areas. It estimates that the NBN will cost three times as much as a more incremental upgrade option.

It also found that the NBN proposal would lead to likely end retail charges per month of $133 in metro areas and $380 per month in non-metro areas, averaging out at around $170 nationally. By contrast, the cheaper option works out at between $50-70 in metro areas and $80-100 in non-metro areas. The paper also suggests that as the NBN would take longer to build than upgrades to existing networks, its benefits would be delayed.

The paper works from the assumption that virtually all services possible over 100Mbps are also serviceable at 20-40Mbps rates, with the exception of niche high-res videoconferencing applications.

“The question ...  is whether the valuation of the incremental speed associated with the NBN outweighs the incremental costs. In considering this, it is important to remember that most currently envisaged applications function reasonably efficiently at speeds well below those contemplated,” the paper says. “Thus, over time, advances in compression and coding tend to reduce bit rate requirements, to some extent offsetting the tendency for applications to become ever more ‘content rich’.”

“As a result, even high definition broadcasting and high definition video-on-demand have peak transmission requirements of less than 20 Mbit/s. While there are some symmetric services (such as very high quality  videoconferencing) that could benefit from higher speeds, the difference in delay and overall service quality between (say) 30 Mbit/s and 60 Mbit/s would only rarely be discernible.”

TELEMEDICINE WON’T BENEFIT: The paper is specifically critical of claims that FTTP will prompt a surge in e-health applications and usage.

“Claimed wider benefits such as the promotion of telemedicine seem very difficult to credit. With respect to telemedicine, it is not clear what residential medical applications require access to residential fibre optics, short of a future being projected in which individuals will have CAT scanners in their homes. As for GPs and medical centres, there is no evidence that network access costs and speeds have any effect on their use of tele-medicine: Finally, hospitals are generally already connected to high speed access networks and would be so under the (lower speed scenario)”.

The paper is also extremely critical of the assumptions that have driven the NBN policy.

Concept says that an Access Economics paper cited by Communications Minister Stephen Conroy that suggested pervasive high speed broadband would drive a 1.1% productivity improvement after ten years—or 0.1% a year—was based on a comparison to an economy without broadband. But in reality, 70% of households are already using broadband, Concept says. Concept also criticises another cost-benefit analysis from Professor Joshua Gans that found positive benefits for the NBN—claiming he excluded all opex costs from his analysis, as well as confusing wholesale and retail prices and suggesting that a reduction in profits constitutes a net economic benefit when it is merely a transfer from producers to consumers.

Concept also suggests that the problem driving the NBN policy has been misstated—the government is primarily concerned with broadband take-up and price, but has misinterpreted the problem as one of availability. According to Concept, about half the copper lines in Australia can already support highest-speed ADSL2+ services, HFC can also be upgraded, while fibre is connected to most business districts and parks as well as around half of Australian schools. Pointing to nearly four billion dollars of government subsidies for rural and regional telecoms under both the Howard and Rudd governments, the analysis also says the case is weak that there is a supply problem, more one of demand.

CommsDay was unable to obtain comment from Concept Economics last night but the firm’s principal Henry Ergas has previously been criticised for his analysis of government policy on the basis that he has performed consultancy work for Telstra and the Federal Opposition in the past.

But this paper appears to dissent from those two parties: it criticises an Access Economics paper that was commissioned and promoted by Telstra and is also critical of the former Coalition government’s telecommunications policy. The paper is also critical of the lack of cost-benefit analysis of the East-West rail project aimed at linking Melbourne, Geelong and western Victoria.

It concludes: “Infrastructure investment is a cost, not a benefit: a means, not an end. This proposition, which is obvious to economists, is as utterly alien to contemporary Australian politicians as the notion of comparative advantage was to their predecessors.”

The paper can be downloaded at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1465226