Economic surplus

Economic surplus

Let’s have a proper debate about the NBN to the bush

The cost-benefit analysis on the NBN has been released. While it “supports” the government’s multi-technology-mix (MTM) scenario over Fibre-to-the-Premises (FTTP), the best case is the ‘unsubsidised rollout’ scenario. So the real message of the report is that the NBN needs a complete rethink.

And, as noted in today’s Australian, this means we need an urgent debate about the future of the NBN.

The unsubsidised rollout scenario considers a single broadband provider that can charge a price up to 70 per cent of consumer value. It rolls out the network where it is profitable. Up to 93 per cent of premises get covered using a range of high-speed technologies. It is a proxy for the likely outcome if the former government had not dreamt up the NBN in the first place. The details are on pages 48 and 49 of Volume 2 of the report.

The 7 per cent that miss out under the unsubsidised rollout are outside the current fixed line footprint; about 700,000 premises in rural and regional Australia. Under the other NBN scenarios, these are premises that will be served by wireless or satellite broadband services.

It will cost about $4.8 billion, plus any tax ‘deadweight loss’ to bring broadband services to the last 7 per cent (table 3). This is about $7000 for each of the premises (p.12). The report calculates that this is well above the likely average willingness-to-pay for many households and businesses in these rural and regional areas. So any scenario that tries to bring broadband to the bush will literally burn a lot of money. The bush will get broadband but only at a price that it wouldn’t want to pay.

The willingness-to-pay figures will be disputed. But the cost-benefit analysis means that there are now a series of questions that the coalition government must answer before it continues the NBN folly.

First, is Australia happy to spend an extra $4.8b on the bush?

Second, if we are happy to spend this money, is it best spent on high-speed broadband? In particular, what would the residents of rural and regional Australia like, faster internet or something else?

Third, if the money is to be spent, how will it be funded?

There are no unambiguous right or wrong answers to these questions. But it is a debate that Australia needs to have.

I have no problem with spending an extra $4.8b in rural and regional areas if it creates valuable services. One of the principles that underpinned Australia’s federation was that rural and regional areas would not be left behind.

But the cost-benefit analysis shows that the current NBN proposal will channel $4.8b into services that cost more than the value they create. Better schools, hospitals, roads and community centres in rural Australia may provide better value for money.

But suppose the cost-benefit study is wrong?

Well, one way to find out is to ask the people in the bush. If, as a society, we want to spend an extra $4.8b on the bush, how would they like it spent? At its crudest, would each rural and regional household and business prefer the NBN to continue or to receive a once off payment of $7000 each from the federal government? It would be interesting to see what a vote would reveal! While some would prefer faster broadband, many, I suspect, could find better uses for the money.

If we do continue to build a rural and regional broadband network, how should it be funded? The present model involves an implicit tax on city broadband to fund rural and regional broadband services. The ‘tax’ operates through uniform national pricing. As I have discussed before, implicitly taxing city internet users to pay for rural and regional internet services is economic lunacy. We should raise the revenue in a transparent, least-cost way.

Table G1 of the cost-benefit study shows that having explicit government funding for internet in rural areas or incentives to back up private investment would bring Australia in line with a range of other countries, from Europe to the US to Asia.

The real message of the cost-benefit analysis is that we need to stop the current NBN process outside the existing fixed-line regions and have a real debate on how we best provide services to rural and regional Australia and how we fund those services. The National party should lead this debate and welcome it.