[LINK] NBN white-elephant-to-be ..

Richard Chirgwin rchirgwin at ozemail.com.au
Wed Aug 25 07:21:20 AEST 2010

I so wish that I could find a commentator who had both the breadth (ie, 
technical and economic) and independence (both perceived and actual) as 
to give the world a truly independent assessment of the NBN.

Even people who are well-informed on other matters get important details 
wrong, as in the article below. This, combined with intractable 
partisanship, has completely polluted the NBN debate.

stephen at melbpc.org.au wrote:
> Robin writes,
>> The NBN price-tag of $43B is based on no thorough planning and
>> surely underestimates the true cost, probably by a factor of 2
>> or more.
>> Even if it was to cost "only $43B", I am not sure that this is
>> the best thing we could do with such money.  As I mentioned,
>> health, education and solar thermal power generation seem higher
>> priorities to me ..
> Many including myself hope for an R-R, but others agree with you Robin:
> A Rolls-Royce NBN is simply not commercially viable 
> Dave Stevens  The Australian  August 24, 2010 
> http://www.theaustralian.com.au/australian-it/opinion
> THE national broadband network will be a revolutionary piece of 
> infrastructure with enormous benefits. 
> It will deliver 1GB high-speed internet to 93 per cent of Australians.
1. The almost universal belief that the NBN is only about consumer 
Internet under-estimates its value. It can also connect businesses, and 
wholesale facilities; and it would carry traffic other than that 
destined for the Internet.
2. Whatever speed the port is capable of, the consumer buys what they 
want. The "headline" speed leads people to underestimate activation - 
"nobody will activate if they're happy with 24 Mbps".
> But there would also be speed and safety benefits to giving every 
> Australian a Rolls-Royce, and the government doesn't do that because it 
> would be ridiculously expensive, with many rarely leaving the garage.
RC: The spurious association of the NBN with luxury has no informational 
value; it is simply emotive.
> So too the NBN.
> The price we've been quoted is $43 billion, but that's only for the 
> initial build.
> Factor in the year-on-year running costs and the NBN rests somewhere 
> between a losing investment and a financial black hole, guaranteed never 
> to break even, let alone to turn a profit.
> Take the best-case example. Assume a budget overrun of only 10 per cent 
> of the capital cost ($47.3bn), an adoption rate for households and 
> businesses of 60 per cent (more than 100 per cent of current broadband 
> subscribers), a yearly running cost of $800 million, a 15-year lifespan 
> and a wholesale charge of $50 a month per connection, and the NBN loses 
> more than $1bn a year, costing taxpayers $64bn.
RC: "Adoption rate" is used in a sloppy fashion, given that the purpose 
of the NBN is to replace the copper entirely. And note that Mr Brennan's 
earlier assumption (that the NBN is just for Internet access) has crept 
into his financial calculations - ie, the only income from the NBN is 
for broadband access.

If, for example, we assume connection of all homes and businesses in the 
footprint (the intention of the network), carrying all traffic types 
(including mobile via connection to base stations), the equation changes.

As for the 15 year lifespan of capital equipment: this is equally true 
of DSLAMs, wireless base stations, phone switches or softswitches - 
neither operational costs nor capital equipment refresh are unique to 
the NBN.
> More likely, the budget overrun will be 15 per cent ($49.45bn), the 
> adoption rate 45 per cent (still more than 100 per cent of current 
> broadband subscribers), the running cost $900m, the wholesale price $45 
> and the lifespan 12.5 years.
> After interest and depreciation, that's a running cost of about $8bn a 
> year, $4bn of which comes back in connection fees, creating an investment 
> that loses $4bn a year, or $100bn over its life.
> In a worst-case scenario, with a capital overrun of 20 per cent, an 
> adoption rate of 30 per cent, a $40 a month wholesale price per customer 
> and a 10-year life, the network loses $7.3bn a year, or $124bn in total.
> Who does that money belong to? According to the Prime Minister, $27bn of 
> it will be the taxpayers', and the remainder private funds.
> She can only be wrong.
> The fact is there is simply no reason for any private business to invest 
> in the NBN because it is not a viable commercial proposition.
> If it were, it would have been brought to you already by the private 
> sector.
Ignoring the maths, this last sentence is critical. I agree: if it were 
"worth" supplying fibre in a business sense, it would have happened long 
ago (and we would be trying to fight a Telstra monopoly over the fibre!).

But we return to the core assumption about the NBN's customers - that it 
only supplies Internet access and therefore can only obtain income from 
that part of the telecommunications market.

> Any way you look at it, the costs are simply too high.
> Although the fibre might be a 50-year asset, the bulk of the cost will be 
> in replacing its networking equipment as it ages: a capital investment 
> close to $43bn every 10 to 15 years.
This number is simply opaque: we cannot evaluate whether it's right or 
wrong, so it has to be ignored. The point is valid (but that's why NBN 
Co went to gigabit at the start - to skip one upgrade cycle), but it's 
valid of any and every telecommunications network.
> That the government has come to the table doesn't change the fundamental 
> economics for any business: the NBN would be commercial suicide.
> The government argues it will recoup some of its costs by selling all or 
> part of the NBN down the track.
> It will be a tough sell. Buyers might be willing to pay the residual 
> value of an NBN asset, after depreciation, but nobody buys anything 
> that's unprofitable without a plan for making it profitable, and reducing 
> the NBN's operating costs and increasing its revenues will be very hard.
> Spending between $64bn and $124bn on the NBN would be justified if its 
> technological benefits created sufficient cost savings and productivity 
> increases elsewhere in the economy, but this is unlikely to be the case.
> The government points to billions of dollars in savings through e-health 
> initiatives, yet none of that requires an NBN: most could be implemented 
> with less expensive technologies.
> Nor has the productivity case been made.
Here, I agree with Brennan, but with this caveat: you can't assess the 
cost of applications that don't exist today. The cost of building the 
NBN is assessable: the opportunity cost of not building it is not.
> There's no doubt the NBN will deliver substantial productivity benefits, 
> allowing organisations to subscribe to efficiency-driving platforms and 
> cloud computing services, but again, almost all this productivity 
> dividend could be delivered with a much more modest investment.
> The Coalition's alternative broadband plan, a $6bn investment with a 
> greater focus on wireless technologies, is much more cost effective, more 
> likely to attract private investment, and would still allow for the e-
> health and productivity benefits that will flow from the NBN.
As I mentioned earlier, except for the headline figure, which is smaller 
than the NBN, all of the criticisms of the NBN (replacement, 
depreciation, cost of capital, ongoing operational costs) apply to all 
> As the Coalition recognises, a fibre roll-out makes economic sense only 
> in high-density areas.
> In low-density and rural areas, the NBN's aims can be achieved using 
> cheaper wireless, satellite or copper-based connections.
> Despite what the government has suggested, the fact such connections 
> terminate over radio matters not a jot to applications the connection can 
> handle.
> A road is a road. You can drive on it whatever it's made from, so why 
> build roads that do the same job for 10 times the price?
> Without the long wait for fibre deployment, the Coalition's plan will 
> also bring greater bandwidth to the bush much faster.
> That's the essential trouble with this massive plan.
> The idea is to take fibre to 850,000 houses, yet we could bring the same 
> speeds to 800,000 houses for a fraction of the price using an efficient 
> combination of fibre, copper and wireless.
> The NBN is overkill. It's parking a Rolls-Royce in the driveway of every 
> home, which is going to be nice, but something we don't need.
> Communication needs of consumers vary considerably.
> They all have different requirements and budgets, yet the NBN will 
> deliver a premium service as standard, which most of us will have no use 
> for.
Back to the original assumption - that everybody has to buy a gigabit 
because that's what the NBN sells.

> That might be all right if those of us receiving the premium service 
> didn't also have to pay for it in our role as taxpayers.
> >From 10 hospitals apiece in five state capitals, to fast trains, to a 
> second Sydney airport, $124bn could buy many things, almost all of which 
> would have bigger economic and social benefits than the NBN.
> If Australians want fibre to the node, so be it. But it's only fair they 
> be told what it will really cost, that the cost will be a premium cost, 
> and that they'll be paying that premium again and again every 10 to 15 
> years.
> They might also bear in mind that on Thursday, Senator Stephen Conroy 
> described the idea of preparing a business case or cost-benefit analysis 
> of the NBN as a waste of time, waste of effort, waste of money.
> When assessing the NBN as a national investment, it may tell them all 
> they need to know.
> Dave Stevens is managing director of Brennan IT. He is not a member of 
> the major political parties.  www.brennanit.com.au
> --
> Cheers, Robin
> Stephen Loosley
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