OECD report highlights strengths and flaws in NBN plan

Australia is by no means the only nation considering a taxpayer-funded investment in the construction of new broadband networks to stimulate the economy.

The Organisation for Economic Cooperation and Development (OECD), a global thinktank on economics and policy has this week released a report highlighting the best approaches to public sector investment in such infrastructure.

Yesterday, Liberal party Senator Nick Minchin zeroed in on one of the main conclusions of the report - that governments engage in cost-benefit analysis studies before rolling out national broadband networks - to criticise the Federal Government's approach to the NBN thus far.

The report, authored by American academic Taylor Reynolds and titled The role of communication infrastructure investment in economic recovery, provides a series of recommendations as to how Governments should go about networking the nation.

Is the report indeed at opposites to the Rudd Government's approach, or is Australia's NBN plan straight out of the OECD textbook? Let's take a closer look and see which recommendations match up.

• GOVERNMENT BROADBAND INVESTMENT STIMULATES DEMAND IN FLAT ECONOMIES

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Reynolds says that at any normal point in history, network investment should be led by the private sector. But today's economic environment, he says, calls for government intervention.

"Telecommunication operators historically have had strong cash flow positions during economic downturns but may face increasing difficulties raising sufficient capital to extend and upgrade their networks," his report says.

"The strongly pro-cyclical nature of communication network investment also means that skilled labour and equipment may be left idle and planned projects shelved until the economy improves."

This labour and equipment, he says, can be "quickly shifted to government-sponsored projects."

The report recommends that wherever an OECD member (government) is pumping stimulus money into a slowing economy, it should be focusing on those projects that "simultaneously increase the longer-term productive capacity of the economy."

Investment in network infrastructures such as electricity, gas, water, transport and communications, has an "immediate impact on demand and employment" as well as a "strong potential to expand future supply," the report says.

Reynolds' only disclaimer is that governments "must ensure that interventions do not interfere with properly functioning markets or displace private investment."

The potential regulatory changes announced in tandem with the NBN could certainly be considered as interference into the private sector market - but whether or not that market is "properly functioning" is another matter.

Even the regulators think Australia's telecommunication market is, well, irregular. 

• NBN'S SHOULD BE BUILT ON 'OPEN ACCESS' PRINCIPLES

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When a new network is paid for using the taxpayer's purse, the OECD rightly notes that the public should expect "improved service and greater choice" in the market.

The OECD recommends public-funded networks to be available to retailers under "open access" rules. Specifically, that means retailers can access the wholesale network on "cost-based, non-discriminatory terms."

The direction of the 'new, new NBN' announced by Prime Minister Rudd announced thus far certainly meets this criteria.

Further, the Government intends to introduce legislation to ensure that the network always operates as a wholesale-only, open access carrier into the future regardless of its ownership, ensuring that "no retail company will be able to control the network in its own interests."

• PUBLIC NETWORKS SHOULD CATER FOR PRIVATE INVESTMENT

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Reynolds' paper also recommends that "all national plans involving public investment specify a leading role for the private sector in ownership and operation of the networks receiving public investment."

Senator Conroy has on several occasions hinted that Australia's telecommunications and internet industry have the opportunity to trade their infrastructure and skills for equity in the National Broadband Network company.

The Government also intends to sell the NBN Company to the private sector after the first five years of operation.

• START WITH SMALL WINS

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The OECD recommends that Government's considering an NBN build should try and get some early runs on the board to make sure their plans no longer fit market conditions.

The direct benefits of network investment are "extremely time sensitive", Reynold says, "and will not have their desired impact if the projects take too long to come online.

"As a result, policy makers may decide to assign higher priorities to projects which can be rolled out quickly - even if the secondary benefits of other projects may be higher," the report said.

The Government could easily argue that its $250m Backhaul Blackspot scheme and efforts to provide Fibre to the Home in Tasmania would constitute some 'early wins'.

In what areas does the Rudd Government's plan deviate from OECD recommendations? Read on to Page 2.

• COST-BENEFIT ANALYSIS IS REQUIRED

Ruddstra doesn't get a tick, however, when it comes to the question of Cost-Benefit Analysis.

The summary of the OECD report highlights that "policy makers need to evaluate the costs and benefits of any public investment in telecommunication infrastructure."

Opposition Senator Nick Minchin claims that this line "makes a mockery of Communications Minister Stephen Conroy's naïve and arrogant dismissal of the need for a thorough cost benefit analysis."

Senator Conroy is quoted as telling the Senate on May 12 that the Government "doesn't need any more studies [or] any more cost benefit analysis to know this is an infrastructure investment Australia is calling out for."

• GOVERNMENTS SHOULD NOT BE NETWORK OPERATORS

Dubious as this particular piece of advice is, the Rudd NBN plan also sits awkwardly with this recommendation.

The OECD says that even if Governments invest in new infrastructure, they should "avoid being telecommunication operators, given the stronger innovation incentives which come out of the private sector."

"One way for this to happen is for governments to pay to install physical infrastructure which is then rented out to any firm willing to supply services on equal terms," Reynolds writes. "In certain cases, management of the physical infrastructure could be contracted to a private company or handled by the municipality using low monthly rental fees for line usage."

The report does not clarify whether it means Governments should only resist becoming retail network operators, or resist becoming network operators altogether. The Australian Government certainly has no plans to offer retail services over the National Broadband Network - but it does plan to be a major shareholder in the wholesale operator.

Conroy and company no doubt recognise the challenge its NBN investment may create down the line in terms of stifling wholesale competition.

A spokesperson for Conroy told iTnews that the Government "intends to sell down its interest in the [NBN] company within five years after the network is built and fully operational, consistent with market conditions."

• THE PRIVATE SECTOR SHOULD HANDLE THE LAST MILE

Reynolds' report says that it is understandable Governments will wish to "address potential market failure" in their stimulus packages. In the case of an NBN, this sees Governments attempting to reach "underserved" areas with the new network.

The motives are understandable, says the report, but not always economically justifiable.

"Policy makers may need to evaluate the impact of network rollouts on areas connected to new telecommunication networks and those which may be bypassed or underserved," the report reads. "In some cases the marginal cost of extending a backbone connection to an additional community could be much lower than the benefit it could potentially provide."

The Australian Government's NBN plan includes rolling out fibre to 90 per cent of Australian homes and businesses - which considering the country's geography, is ambitious.

Reynolds says policy makers "will need to balance economic and social objectives when evaluating projects."

In the case of Australia, ubiquitous access among population would have to be considered a "social objective" rather than purely an "economic" one - particularly in those remote areas where both short-term and long-term economics can't justify a fibre roll-out.

"Projects focusing on extending access in rural and remote areas will deliver the intended effects on aggregate demand but may have a relatively low impact on aggregate productivity growth per unit invested because of the limited number of users who would be added to the network," the OECD report reads.

"From an equitable viewpoint though, these investments may achieve strong social objectives by bringing significant benefits to these communities. Left without the necessary communication infrastructure these regions will be disadvantaged in participating in the economic and social development that will take place in areas that have superior connectivity." 

Reynolds believes he has the answer to meeting both economic and social objectives around access in regional and remote communities. The OECD report recommends that National Broadband Networks would serve both goals if backhaul links stretch to regional towns to connect schools, hospitals and public institutions as 'anchor points' - but from there, last-mile access being left to the private sector.

"Investments which bring high-speed backbone networks to a large number of rural communities may be more efficient than projects which pay for last-kilometre connections to homes in a limited number of areas," the report says.

"Policy makers who have committed to investing in markets may decide to invest in high-capacity backbone infrastructure to some rural and remote areas as a way to extend affordable, high-bandwidth connections to the largest number of inhabitants in these areas as possible and leave the last-kilometre connectivity to the private sector."

It is a recommendation that is at odds with the Ruddstra FttH (fibre to the home) plan.

WAIT AND SEE:

• GOVERNMENTS SHOULD NOT RESTRICT PRIVATE COMPETITION

Telstra may well have taken note of this recommendation.

Reynolds is very careful not to get too involved in regulatory politics in the OECD report.

"This paper does not seek to enter into the debate surrounding the structural separation of existing providers," Reynolds qualifies.

But he does say this:

"Public investment should not limit the ability of other operators to install their own networks in the same roads, conduit, or over the same poles. Any installed conduit or network infrastructure must be open for others to use and other providers must still be granted rights of way and permits to dig in streets to install their own networks."

There has been much speculation as to whether other wholesale providers will have access to the roads, conduits, pits and poles of the NBN in Australia. It is an issue of particular significance to Telstra should it choose not to become an equity partner in the NBN.

"We have always said that the National Broadband Network will operate on wholesale-only, open access arrangements," a spokesperson for Senator Conroy told iTnews. "The fine details of these arrangements will be considered as part of implementation planning."

It'll have to be a matter of 'wait and see' on this one.

WAIT AND SEE

• GOVERNMENTS SHOULD ALLOCATE DIGITAL DIVIDEND TO MOBILE BROADBAND

While fibre is the preferred 'future proof' networking technology referenced most often in the OECD report, wireless broadband also gets a mention.

Governments are advised to "promote wireless development by making spectrum available which could be used for broadband access (e.g. the spectrum dividend from the switch to digital television signals)."

In Australia, the 'digital dividend' is the 700MhZ spectrum, which won't be made available until analogue television signals are switched off in 2013.

But even when the spectrum is made available, there are no guarantees yet being made by Government as to how bigger chunk of this spectrum will be allocated to mobile broadband, nor by what process.

There are some trepidation in the mobile industry that the Government might allocate this spectrum via an auction process to gain the best return possible - a scenario the industry is cautious of after the expensive mess of the Alston-era 3G spectrum auctions.

IN SUMMARY

It may not validate Senator Conroy's refusal to engage in any further cost-benefit analysis, but the OECD report does line up snug with the Rudd Government's plans to build a National Broadband Network.

Even in those areas where the Government didn't get a tick, they tend to relate to areas in which the Government's plans might not necessarily slot perfectly into the OECD model, but at least adhere to its guiding principles.

We should be mindful however, that its only the plans that match.

We'll only know if this very expensive piece of 'nation building' was to the nation's benefit eight years from now - and beyond.