Do cost-benefit doubts strengthen NBN argument?

If Telstra had conducted a cost-benefit analysis before laying down its copper infrastructure, the network may never have been built, Green Senator Scott Ludlam argued today.

Ludlam addressed concerns raised by Melbourne Business School economist Paul Kerin, who faced the Senate Select Committee on the National Broadband Network (NBN) this morning.

Kerin argued that to account for risk, taxpayers should expect returns of at least 12 percent on their $43 billion NBN investment, rather than the six percent rate used in the KPMG-McKinsey Implementation Study.

"The Government is investing on behalf of taxpayers," he told the Committee. "The Government is like a Board [of directors] or CEO, acting on behalf of shareholders - taxpayers."

"A commercial rate of return should be at least 12 percent," he said.

But Senator Ludlam questioned whether the Commonwealth could be considered as an ordinary investor.

"We're running a country, not a company," he argued. "What we've established here is that private capital would not build an NBN. If the Government doesn't do it, then it's not going to happen."

"That's a political question," he said, "not something an economist can put on a spreadsheet and model."

How to do a cost-benefit analysis

ACT Senator Kate Lundy highlighted difficulties in conducting a cost-benefit analysis of the NBN, noting that some benefits could not yet be quantified.

"There is a raft of benefits that the Government has articulated, but there are additional benefits that are impossible to identify because they haven't been invented yet," she said.

Kerin suggested "reverse engineering" such benefits by quantifying how much taxpayers would be prepared to pay for certain capabilities.

Alternatively, he said, the Government should define what it hoped to achieve, and analyse the NBN alongside the "next best alternative".

"The issue isn't 'what's the benefit of this project' - the issue is what's the incremental benefit of this project compared to the next best alternative, and what's the incremental cost compared to the next best alternative," he explained.

"If you define two or more options to get the same benefits - such as broadband speed - then quantifying the benefits doesn't matter, because you're comparing costs."

"There are two ways to go about this [a cost-benefit analysis] and the Government has done neither," he said. "If we use fluffy words like 'vision' to justify the spending of $43 billion, then I have a problem with that."

Economist Henry Ergas also told the Committee this morning that the Implementation Study used too optimistic a rate of return.

Telecommunications consultant Reg Coutts likewise encouraged the Government to conduct a cost-benefit analysis, although he was wary of how such an analysis should be interpreted.

"I'd be cautious of putting too much faith in whether that would answer the question one way or another," he said. "But if parties want to do a cost-benefit analysis, they should be encouraged."

According to reports, the Committee heard that a full cost-benefit analysis of the NBN would take only three days to complete.