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Mr. Magoo on nation-building for $43b

$43b is a lot for a high speed broadband internet service.  That is so even if half of that is raised as debt with the residual being equity, half from the public purse. The financing approach used does not reduce this project’s cost – it is about $2000 for each Australian.  And cost is the issue – we would all like a fast broadband service if it were costless.

It looks like a questionable investment to me and one wonders how it can be priced to yield a reasonable commercial return as an excludable, rival, private good.  The cost is much more than the $4.7b Labor promised to inject into a private firm to develop such a scheme prior to the last election that would cost, in total $10b.   If it didn’t work at $10b will it at $43b? Is this a non-starter?

It doesn’t take Labor long to scale up its bets, does it? This is particularly so since the new advocated scheme uses new FTTP (fibre-to-the-premises) technology. 

Labor’s claim is that the private sector didn’t offer value-for-money proposals (Sing-Tel Optus and two other firms did make offers) because of the financial crisis. Maybe – or maybe it was just that the economics of providing a high-speed, gold-plated internet connection to the bulk of Australia’s geographically-dispersed population did not stack up.  

The scheme is claimed to boost GDP by 0.25 per cent per year and to ‘support’ 25,000 jobs over 8 years.  These are Keynesian multiplier effects that have nil to do with the benefits of the scheme itself. Moreover, even these benefits come at more than $172,000 per job which is expensive job creation – ‘more than’ since most jobs will come from elsewhere in the economy not from the ranks of the soon to be unemployed. These benefits are mostly bull.

Indeed I haven’t seen set out the benefits from the project that improve our lives and help us to do business.  Is there a cost benefit analysis showing net benefits to regional areas from this scheme? Why not only the capital cities rather than 90 per cent of the population plus high speed remote access to the rest. Joshua Gans talks about social benefits that exceed private benefits – in areas such as health and education I guess – but dollar numbers would help. If there is the opportunity of economies from offering cheaper wired phone calls and TV signals what didn’t private firms go for it? And if this whole exercise is about bringing Telstra to heel you have to wonder about the sanity of such an expensive regulatory operation.  

By the way, dropping names such as ‘Ken Henry’ is not cost-benefit analysis.

John Quiggin estimates that for the scheme to work one needs 5 million households and small businesses to subscribe $80 a month to yield a 10 per cent return.  That would be much more than half of Australia’s households many of who are using a broadband service now is cheaper than that proposed. The suggested return here is low given the substantial private involvement – a return of 14 per cent would require about $110 per month which is closer to Malcolm Turnbull’s estimate.

The danger is of course that private subscribers to broadband services may not switch to this service at prices that will ensure cost-recovery and a reasonable investment return. In that case we will all have to chip in and provide the service as a charitable contribution via Kevin Rudd.

Of course this chatter could all be pie-in-the-sky Labor talk. Maybe, this proposal won’t take off before Labor is booted out of power for wrecking the Australian economy.  Given the recent opinion polls that is wishful thinking.  Has anyone else had nightmarish dreams involving Rex Connor and Jim Cairns with that grand old blabbermouth Gough in the background dribbling on his memoirs and muttering ‘working families’ and ‘historic acts of nation-building’?  Australia would be all right if it could live on verbiage and pollie talk. But it cannot and that is the difficulty. 

13 comments to Mr. Magoo on nation-building for $43b

  • conrad

    HC — if it is $80 per month, it would surely wipe out all other forms of internet usage excluding wireless, since that’s pretty much the cost of slower ADSL now where you are forced to also get a land line too, the latter of which many and perhaps most young people would simply give up on. I agree with you that they should give up on areas that are uneconomic, but then how would you buy the country vote? Would another train line from nowhere to nowhere do? How about just giving them money instead?

  • The lack of cost-benefit details aside, the scheme is an important one which will underpin the expansion of Australian digital industry – an area sorely neglected in the Howardian era. Yes, it might be done better this way, or that way, but at least they’re getting on with it.

    Twenty years ago no-one of us had any inkling of how the WWW would transform our daily lives and ways of working. And so it is with the impact of a national BB infrastructure. A parallel might be the public building of a national telephone network last century – of profound importance for the development of the nation.

    And I’m sure those buggy whip manufacturers were convinced there was no future in automobiles either. That’s what horse and carts are for.

  • Uncle Milton

    Harry, it wouldn’t just be broadband. It would be telephony and pay TV as well. This is the so called ‘triple play’ that is widely available in many countries but not here because the cosy monopolist Telstra won’t deliver it. It’s not hard to see people paying $110 per month for all three together. They’re probably paying more than that now, bought separately.

    The Telstra monopoly has to be busted and regrettably this appears to be the only way to do it. It would have been a lot simpler and cheaper if the policy mistakes of the past 18 years had not been made, but they were.

  • I have to confess I’m not bursting with optimism here; the whole thing may never get off the ground and/or there could be huge cost over-runs. It seems very expensive in raw dollar terms, but not as expensive as it sounds if one considers the compensation costs that would have had to be paid to Telstra, estimated by some as between $20 and $30m, under the original Labor FTTN scheme. I won’t buy into an argument about how it or Labor might ‘wreck’ the economy, but I think it reasonable to argue that Australia has been served very poorly by the Telstra-monopolistic arrangements and pathetic do-nothing approach of the former government.

    In terms of the possible cost of the services to citizens, I’m with Uncle Milton. Broadband may be available more cheaply today, but the value is appalling, especially at the cheaper end, where $30 pm may get one only 1 gb, maybe less. Add exorbitant phone line rental and call costs to that and the $30 becomes $100 for a lot of households. Pay TV is at least $50 pm for a load of rubbish. If under the proposed fibre to the home scheme a household could get fast broadband, high download limits, VOIP phone service at minimal or nil call costs, a flexible pay tv service, and other services, most people would find even $150 pm CHEAP. Presently, broadband is NOT getting cheaper; except for ‘naked ADSL’ services quite the opposite is occurring. I agree with those who argue that most households simply don’t need such fast broadband, but they do need and want a unified and efficient service at a reasonable price.

    Some are claiming that wireless will make the FFTH scheme obsolete before it is built. I say wait a year or so and see. Wireless is also, presently, a rip-off, and wholly unreliable. A median wage household would have to see dramatic improvements in service and price to consider wireless as their mainstay internet service.

  • Sir Henry Casingbroke

    I do not think 80 bucks a month is at all unreasonable if it includes telephony. Indeed it would be less than what I pay now for a service that is arguably the best value plan available for a heavy user like our household but is not even half-way satisfactory. it is too slow and yet it is the fastest there is and most bang for the buck.

    We are on an Optus bundled plan (it includes all telephone calls including ones to all mobiles, STD etc in Oz) that gives us 30 gigs and if we exceed that – it happens but rarely – it’s throttled down to 256k for the reminder of the month. The speed is through a catenary cable connection that gives me a theoretical 10 Mbps (approx. 1.25MB/sec) downstream and 256Kbps (32KB/sec) upstream which only exists in Optus’s glossy brochures. In sweaty real life, the speed varies due to the traffic in my node between 500KB/s and 1MB/sec. Sunday nights are pointless to even get on because everyone else around here is on and the speed drops to something akin to pedal radio.

    I currently pay $129 for the pleasure. This is still excellent value on what is currently available from the other rip-off merchants, chief among them Solstra. Consequently, 80 smackers is a bargain and I would sign up immediately.

    Minchin’s claim, if I understood it correctly, is that fibre-optic to the premises is likely be superseded by wireless any day now, or at least come into serious competition from it, thus bleeding away take-up business, because “that’s where the trend is going”. Oh yeah? It is obvious even to a gifted amateur like me that Minchin like his predecessor Richard Alston, is merely jawing about communications without any clue whatsoever trying to scare the horses.

    While wireless is fine for road warriors who want to get their sales orders through their Blackberry smart phone or micro laptop while crossing Pitt Street, this is not a serious tool for the net, for, say, downloading a season’s worth of the Wire or Curb Your Enthusiasm. The wireless G3 caper goes through towers which are already hemorrhaging under the load of ordinary phone traffic. Satellite suggestion is even more laughable because you would need some sort of duplex system whereby the mouseclicks and keyboard signal would still have to travel via some sort of telephone network.

    Fibre at 80 bucks sounds good. I’m even willing to pay a spot so there can be some cross-subsidy there for the no-hopers and pensioners, like is done with gas and electricity. Take out the stupid party politics out of this and you know it makes sense.

  • Sorry, in my comment above, the compensation figure should read $20 – $30b, ie. billions not millions!

  • conrad — for $45/month you can get a re-sold Optus ADSL2+ link with *no* phone service (aka ‘naked ADSL’) including 6GB/month peak, 60GB/month off peak: (that includes VOIP with 100 free calls per month)

    (no relation to exetel other than as a satisfied customer)

    Sir Henry — you would be better off on ADSL2 if you are a reasonable distance to the exchange.

    I’m fairly close to the exchange, so I get 19mbps down and 800kbps up — I rarely saturate this, because 99% of the time the bottleneck is somewhere else — either the server I’m talking to, the backhaul from the exchange to my ISPs POP, or their connection to the rest of the world.

    I can’t think of *any* use of the internet which is limited by having ADSL2 speeds instead of the 100mbps that FTTH provides — except *perhaps* TV.

    VOIP is fine over 3G, although it is certainly true that wide adoption will require more infrastructure to maintain speeds. 3G is a good solution for rural Australia.

    It baffles me that ‘social democrats’ seem to think that the delivery of TV to urban Australia is an important social goal and market failure which the Government should devote their scarce resources to…

  • conrad

    Thanks Tom — unfortunately where I live I can’t get that service yet (despite only living 11ks out from the city centre in Melbourne). As far as I’m aware, I have to get a landline, and this appears true of all providers, except the wireless ones which are hugely expensive for my usage.

  • Sir Henry Casingbroke

    $43 billion a year is not a lot to pay. You have a payback rate of $5.15 billion a year (67% percent of Australian households on internet, 8 million households = 5.36 mil x $ 960 {$80 pm x 12} = $5.14 bil a year to amortise the investment in less than 10 years. This does not even include business users paying a premium. This is a very conservative returns estimate because the gross number of households is set to rise to 10 million by 2020 and projected broadband penetration to over 75% of households by 2020 that did not take the FTTH option into reckoning. This is neither bad business, nor expensive, nor pie in the sky. Being done on a huge scale, the economy of scale kicks in.

    Other matters raised: the wireless high speed broadband that Minchin is trying to muddy the waters with is just bullshit.

    Tom D: Speed is not the only consideration. I can get 24Mbps adsl2+* that includes phone line rental, which i currently do not have to worry about because I use cable for telephony. The download limit is just as important for me, so a similar adsl deal would cost me $139.85.

    As far as speeds are concerned Optus has upgraded recently to a theoretical 20 Mbbs, while Big Pond offers a theoretical 30 Mbbs. This is all confidence trickery because the speeds quoted are rarely realised in practice at peak times, i.e. when normal human beings are awake and have a bit of spare time. In peak times the adsl slows down just as much if not more than cable.

    The point is that I would not be better off on any other plan because with the one off payment of $131.70 I do not pay for phone line rental nor for any telephone calls: local, long-distance STD within Australia or any mobile phone calls I make and there is no time limit on either long distance calls nor calls to mobiles.

    Having said that, $80 a month seems like an absolute bargain for anything genuine over 10 Mbbs at any time of day or night, which is what fibre-optics will deliver there being no capacity band choke.

    *I am close enough to the exchange to get adsl2+

  • Sir Henry Casingbroke

    Sorry, delete “a year” from the first line of my last post. It should read “$43 billion is not a lot to pay (for a very high speed broadband internet service). My apologies.

  • Sir Henry, Cable speeds are slower at peak times because the cable is shared by all the users connected to a particular section. This shortcoming would be addressed by FTTH. ADSL2+ slows at peak times because of congestion in the backhaul from the exchange to the ISPs POP, or in the ISPs connection to the rest of the internet (there is no congestion between your home and the exchange when using ADSL). FTTH doesn’t address that problem. Does NBN Mk2 involve bandwidth upgrades other than FTTH?

  • Sir Henry Casingbroke

    …particular section …called a node. And boy, don’t I know that. Browsing (by way of research) through blogs exchanging information about ADSL2+ speeds, regardless of why, the speeds are compromised at peak so the result is similar to cable degradation, or perhaps not quite as bad.

    But according to this paper fibre optic customers will not see any speed or capacity drop at peak.

    That $80 per month sounds yummy.

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