Re-evaluating the NBN

internet-on-desk

There should be serious concerns about Labor proposals for a national broadband infrastructure project.

When the Rudd Labor Government first released its National Broadband Network policy my initial response was to favour the notion of seeing the whole nation wired up for lightning fast internet access, but as time wore on I grew uneasy when I started to contemplate the range of things that could and would go wrong as part of any government intervention into the market.

The Coalition’s ‘me too’ internet policy, released in the rarefied election climate, the ever widening sope of the market intervention taking shape, plus fear of a backdoor implementation of the Rudd/Conroy censorship agenda, forced me to look again more carefully at Labor’s National Broadband Network (NBN) policy.

My concerns arising from this re-examination may not be new, nor particularly more insightful than similar points raised by other observers, but I think they deserve re-stating since a half-day internet search did not find them enunciated clearly and comprehensively in any one place. These concerns can be summarised this way —

  1. Before any market intervention is contemplated there ought to be at least one concrete and credible model for return on investment (ROI), no matter how tenuous. That doesn’t mean models don’t exist, but their lack of visibility and public discussion should be grounds for concern to anyone whose taxes will fund the exercise.
  2. There does not appear to be any clear vision of how a government-owned provider will co-exist with private providers in the market. What happens to supply and demand market mechanisms when the market becomes so obviously skewed? This is not an academic question because it goes directly to my third concern.
  3. How will the stated $43 billion investment be paid for without distorting the market via cross-subsidisation and administrative bureaucracies not subject to market disciplines?
  4. If the NBN becomes a central connection point for all private providers and users, what will stop any government from imposing by stealth the kind of censorship Labor has proposed but looks to be prevented from implementing because of the checks and balances provided by Parliament (specifically the Senate)?
  5. In light of all past experiences of government intervention into the market in competition to, or as a replacement of, private providers, what mechanisms exist to curb inevitable cost blow-outs, bloating of bureaucracies and regulatory bodies, and therefore the end-user cost of the NBN?

What are the cost benefits?

The Rudd/Gillard Government’s marketing materials on the NBN offer plenty of motherhood statements about education, health and the digital economy all being major beneficiaries, but do not offer any concrete examples of how such benefits will be realised. In some ways that’s understandable, because it’s hard to quantify the effects of a tool that has no direct economic effect on learning, medical care and market activity, but has to be factored into the cost and benefit of all transactions that incorporate it. In that sense I would have expected to see at least some macroeconomic modelling, particularly in terms of the nexus between optic fiber penetration (the number of households and businesses reached by the network), market and public sector transactions therefore affected, and cost savings so resulting, or value thus added to the products or services selected for the economic modelling.

An example of this might be (and I’m pulling this one out of my hat), that over a specified period of time a specified and increasing percentage of Medicare claims will be lodged online with a specific cost saving of staff, offices and associated overheads, expressed as a tax cut, a reduced consumer cost of the NBN, or both. Another example might be a similar exercise for diverting specified contacts between pensioners and the unemployed with Centrelink and other departments to internet-based self-service functionality, again with specified administrative savings in staff numbers, offices and ancillary costs expressed either in increased benefits to pensions and the unemployed, or reduced costs of the NBN, or tax cuts, or all three.

The absence of such modelling in government propaganda is cause for concern. If the benefits can’t be stated on a level as general as I have proposed, those benefits either don’t exist or haven’t been calculated. Either eventuality should be a trigger to go back to the drawing board.

Market mechanisms

It is not entirely clear to me from the available information whether the NBN will act as a wholesaler to private providers of internet access, as a wholesaler to private providers and retailer directly to consumers, or just as another retailer.

With this uncertainty in my (simple) mind, I find it hard to understand how private providers are to gauge and therefore react to market demand, plan for their own futures effectively or compete on a product whose price may or may not be dictated to them. The confusion about planning becomes positively perplexing if NBN is to have a monopoly on infrastructure, perhaps extending to a legislated prohibition on competing cable networks even if the NBN network proves to be prohibitively expensive (uncompetitive in comparison to costed private sector alternatives) . This is not at all an unreasonable fear given the historical and continuing unresponsiveness to market pressures of Telstra, even in its pseudo-privatised state.

There is every reason, therefore, to fear significant distortion of the market even before considering consumer reaction to such distortions, which could, in itself, introduce a new layer of unforeseen and significant flow-on effects on the industry and all facets of social and economic activity it touches.

In the absence of detailed and transparent economic modelling, open to public discussion, this seems like an enormous risk to take. I would be inclined not to take it on a nod and a wink and the assurance that we should ‘trust’ a demonstrably technophobic, interventionist and ideologically motivated government. (The shambolic, barely coherent nature of Kevin Rudd’s much publicised ‘essays’ aside, they clearly announced an ideological ‘social democratic’ direction for Labor that has not been renounced by Gillard or any other member of the party.)

What will be the cost to consumers?

Given the stated aim of connecting even remote communities to reliable broadband networks, and the reality that this will be far more expensive per capita of remote communities than in cities and major towns, it is logical that there will need to be a degree of cost subsidisation, with costs raised in cities to cover extra expenses in rural areas without increasing price there. There is no question that this will have a serious effect on internet access costs if there is any model of cost-recovery at play in pricing the NBN product. Moreover, the cross-subsidisation may become opaque, depending on reporting requirements for cost recovery and pricing policies. Not only does this skew normal market forces, but it also misleads urban and rural users about the actual as opposed to ‘billed’ costs of NBN product.

internet-censorship

It seems to me that it can’t be denied that prices for internet access in urban centres will necessarily have to be higher than they would have been without a mandated requirement to recover the cost of rural access in urban prices.

As a consumer I’m not sure whether even 1Gbps access will be worth it if it exceeds a nominal current percentage of take-home disposable income (based on, say, an economic median income and internet access offerings as of August 2010). My rational choice as a Brisbane, Sydney or Melbourne city dweller would surely be to pay lower prices for access that does not seek to recover the cost of networks outside my home city. But will I have the choice to buys someone else’s cheaper product once the NBN is active? If not, will I be prepared to pay the asking price that will have to be centrally imposed rather than determined by the normal forces of supply and demand? If there aren’t even tentative answers based on some kind of economic modeling, the government should take a step back from spending any more serious money on its policy.

Government control

If the NBN is to become the central interconnector of all fiber optic, or as yet unimagined communications networks, what will stop the government of the day from imposing at will on that network any censorship restrictions it may deem appropriate, and without having to seek a mandate for such restrictions?

The current situation, in which private providers are not subject to automatic regulations without Parliamentary approval, appears far more in keeping with democratic principles of liberty and freedom from arbitrary control than a government monopoly, which by its very nature will be legislatively mandated. The enabling legislation will inevitably carry clauses permitting governments to impose regulations at will without needing Parliamentary approval, and, as with all Commonwealth legislation, exemptions from laws applying to private providers that offer some security about ethical and conscionable conduct, freedom of information, and freedom from arbitrary discrimination (such as censorship or electronic snooping).

The Rudd/Gillard Government has already begun sounding out ‘experts’ on methods for spying on all internet transactions by all Australians, and a recent FOI application to uncover what its plans are have already been met with an arrogant, stony refusal to reveal details of its intentions (see my previous comment here). What reason can there be to trust this or any other government to refrain from such Orwellian methods of controlling the private affairs of its citizens?
A very potent reason to urge a return to the drawing board.

Bloated bureaucracies

As with all government undertakings, there will be an administrative bureaucracy exempt from all normal market pressures on performance, productivity, customer service, accountability, etc. Experience has shown that this bureaucracy will inevitably grow over time because bureaucrats will build empires based on the maximum number if staff they can appropriate funding for, thus also incrementally increasing the scope of regulated areas of activity.

This scenario can be expected to go hand in hand with government censorship and/or spying on citizens, which is a potential area for growth in bureaucracy limited only by the number of internet transactions conducted by Australian businesses and private citizens.

Before refuting this scenario as fanciful, consider the following: how much of each of the huge health and social welfare budgets are spent administering systems as opposed to delivering medical treatment or welfare benefits?

Normal market pressures tend to reduce the size of wasteful administrative overheads by means of price competition. This would not apply at all to a monopoly or oligopoly NBN organisation.

Is intervention justified at all?

With the five objections outlined above in mind, I have come to regard the notion of a nationalised broadband infrastructure as too vaguely defined and risky a proposition to be pursued in its present form by any government, but especially not the recklessly interventionist Rudd/Gillard administration.

I do not, however, believe there is no rôle for government at all. If the scope of the proposal were pared back to only apply to internet access by government controlled customers – hospitals, schools, universities, public service departments, etc – there is still room for significant investment in infrastructure to be used by public and private sector customers, but without restrictions on choice of infrastructure or service, and without government control of the traffic (the content of internet transactions) rather than just the infrastructure that carries that traffic.

Though I have not specifically addressed the Coalition policy in this critique, I would like to make it clear that everything I’ve said about Labor’s agenda applies equally to Coalition proposals.

The Flipside

Having argued market forces in my critique, it would be remiss of me not to point to a notable market failure.

censordyne

None of the private providers started to offer network speeds deserving the description ‘broadband’, nor download limits commensurate with capacity, until the Rudd Government announced its intention to intervene in the market. That announcement seems to have had an effect similar to a dozing old man being slapped in the face with a cold wet fish.

All of a sudden speeds offered doubled and trebled, and download limits increased tenfold.

I am not convinced any of the latest offerings aren’t the direct result of fear of government intervention. I think there was either collusion or complacency in allowing a comfortable, uncompetitive oligopoly market stagnation continue to drift along indefinitely, unscrupulously milking the top end of town and offering miserable table scraps to home consumers. It is true that this rather cosy arrangement would have come to an end eventually through entry into the market of either a hungrier major player or a new technology (for example, the much discussed potential to carry internet traffic over electrical wiring).

Speculation aside, however, we are now witnessing a market in which some genuine competition has occurred to shake things up a little.

If there were a case to be made for market intervention by the Commonwealth, therefore, it might be for an alternative low-cost service provider targeting the digitally challenged – low cost consumers, public institutions, remote areas, etc. A policy aimed at that market gap would be worth serious consideration to ‘keep the bastards honest’.

Conclusions

It would be unrealistic to expect politicians to learn something about internet technology before seeking to regulate it. It is not, however, unreasonable to expect them to apply the same economic prudence that applies to all other areas of economic planning to internet access also. That means its rôle ought to extend no further than identifying how market failure might adversely affect the nation as a whole, and offering an alternative, or choice, where none is presently available or likely.

In terms of any agenda to regulate the content of internet transactions or the conduct of citizens in using the internet, there should be no reason to extend the scope of existing legislation, even if enforcement methodology has to be adapted.

But until there is some sign that politicians can disentangle their confusion about the very nature of what the internet is and is not, a hands-off approach seems the safest bet for any government to take. Any other approach is bound to lead to expensive, frustrating policy failures at best, and serious threats to liberty and choice (political and economic) at worst.

1 thought on “Re-evaluating the NBN”

Leave a Reply

Your email address will not be published. Required fields are marked *