UNSW researchers find FTTP NBN worth the extra billions

Australia would have seen stronger social benefits by sticking to a majority fibre NBN model, with UNSW researchers estimating the uplift from FTTP would have outweighed the additional outlay.

The researchers - UNSW Professor of Economics Richard Holden, UNSW Professor of Law Rosalind Dixon, and economics consultant Alex Rosenberg - launched a paper [pdf] last night that proposed a new way of calculating returns on government investment.

They propose the use of what they call ‘social return accounting’, pitched as a way to measure how much value a project generates beyond purely economic concerns.

However, what is likely to be of significant interest is the application of social return accounting to the NBN, and what Australia lost by moving away from Labor’s mostly fibre-to-the-premises (FTTP) model.

The NBN is currently expected to generate an internal rate of return (IRR) on the government’s investment of 3.2 percent.

However, this is a purely economic measure; the UNSW researchers argue there is a social multiplier effect to the investment that is much harder to calculate, but that should be pursued to show the real value that government investments can have.

In the case of the NBN, the researchers found that a majority fibre-to-the-node (FTTN) network would achieve a “social IRR” of 15.2 percent, whereas a majority FTTP network would bring a social IRR of 21.1 percent on the government’s investment.

Holden said that while that meant FTTN was still “a great thing to do, it’s just that our estimates say FTTP would [have been] even better”.

Importantly, Holden told iTnews that the monetary value of that extra six percent in social IRR would have offset the extra costs in rolling out FTTP.

“Those IRR numbers take into account the additional cost [of FTTP over FTTN],” he said.

“They fully factor in an extra $40-odd billion of cost for the faster version. You need the benefits to be big to offset that, and in this instance it seems that they do.”

Estimating a cost differential of $40 billion between a mostly FTTN and mostly FTTP network means the researchers used numbers in the Coalition-led 2013 strategic review as the basis for their calculations.

The research report confirms this: they took the FTTN cost at $44.5 billion and the FTTP cost at $72.6 billion.

The calculations also assume FTTN is capable of limited social benefits because it “is expected to be slower and impact bandwidth, and we assume that the medical, social, and skill building benefits Australians expect to enjoy are correlated to their connection speed.”

The idea that FTTP would still have trumped FTTN on social benefits - based on a cost input that is almost twice as expensive - could mean UNSW’s numbers are overly conservative, and Holden confirmed this is the case.

“Given our analysis turned out to say that FTTP was even better than FTTN we thought it was conservative to take that estimate that may be on the higher side,” he said.

“If you use different cost numbers, you can get different answers. We just tried to go with a conservative figure given where things were coming out.”

Had UNSW used a much lower figure for FTTP cost - more in line with Labor’s estimates - Holden confirmed that the 21 percent social IRR “would be higher” - making the difference with FTTN even more pronounced.

Holden said that while applying social return accounting to the NBN favoured the more expensive mostly-FTTP model, it was not always the case that a higher cost project would generate higher social returns.

“It doesn’t always mean the higher cost project is going to be better to do by any means.” he said. “It’s going to be a case-by-case thing.”

He believed that, in the case of the NBN for example, social return accounting model exposed narrow thinking in government about expected returns.

“It’s important to think broadly about what the benefits are rather than think narrowly about commercially what people will pay for,” Holden said.

Opining for The Conversation, Holden and Dixon added: “For some [big projects], such as the National Broadband Network ... it’s worth asking whether we might get better value if we spent even more.”