Eagerly awaiting a Coalition NBN cost/benefit study

The Federal Opposition has been demanding for years that a cost-benefit study to be undertaken for the National Broadband Network. So if it wins power at the upcoming election we can rightfully expect it to initiate such a study post-haste. In which case it might find a new report from the OECD useful.

Labor’s long-serving communications minister, Stephen Conroy repeatedly rejected the Coalition’s call for an NBN cost-benefit study arguing that it would be impossible to quantify the benefits. And it hasn’t been the government alone that has judged such a study to be impracticable. In 2011 the Institute for the Broadband Enabled Society (IBES) at the University of Melbourne looked at the problem and concluded that was it insoluble.

So when it moves expeditiously to tackle this thorny issue a new Coalition Government might want to look for guidance from this just-released OECD report ‘Measuring the Internet Economy’. Admittedly it doesn’t do exactly what an NBN cost-benefit analysis would presumably do: namely compare the benefits from a largely FTTH NBN and the bandwidth it offers with cheaper alternatives of more limited bandwidth or with the current DSL/HFC status quo. Nevertheless, a Coalition Government might expect the OECD’s work to be useful.

The Coalition is likely to be disappointed. Right up front, in the introduction, the OECD flags the difficulties “...there is no widely accepted methodology for assigning an economic value to the Internet... There is a high level of interest ... in being able to measure the size of the Internet economy as a way to understand the effects of various investment strategies, regulatory rulings and policy decisions. There have been various studies that attempt to address this issue, but the methodologies are not always consistent with statistical standards and economic concepts.”

In its search for appropriate terminology and measurement concepts the OECD held an expert roundtable in September 2011. It came up with three general approaches to measuring the impact of the Internet economy:

- direct impact - value added generated by Internet-related activities;

- dynamic impact; Net GDP growth generated by all activities related to the Internet activities and

- indirect impact - Consumer surplus and welfare gains generated by the Internet activities.

Straight away you can see the difficulties of applying any of these to an NBN cost-benefit analysis. First of all you have to choose one. Then you would have to make an estimate of the impact of the NBN as planned compared to some other broadband network. And whatever happens such a network would evolve over time to deliver higher speeds, with or without government involvement.

The nearest the OECD report comes to tackling the question of assessing the additional economic benefits that might flow from a faster network is when it examines the “broadband bonus” and attempts to estimate how much new economic value resulted from the global transition to broadband from dial-up Internet.

The OECD says there are two approaches to measuring gains from a ‘new good’ like broadband. First, what is the increase in revenue (GDP) above and beyond what would have been generated had dial-up continued to be the only means to access the Internet? Second, what is the increase in consumer surplus beyond what would have occurred had dial-up continued to be the only means to access the Internet?

Straight away, in the case of the NBN v some other inferior broadband, both these approach come up against the hurdle that the NBN is not being compared to a clearly-defined status quo. And even with the much more clearly defined case of a dial-up market the OECD acknowledges the “primary challenge” to measuring consumer surplus as being that it is “impossible to observe what the dial-up market would have looked like had broadband not diffused.”

An alternative approach, used in a US study of the economic value of broadband, looked at users’ “willingness to pay” for broadband instead of dialup. Clearly this won’t work for an NBN cost-benefit analysis: transitioning to the NBN will not be an option.

And did I forget to mention that the OECD study is trying to measure the economic benefits of the Internet as it is today and as we use it today? It is not looking at what benefits might flow from a network that is not yet fully deployed and for which many of the applications are yet to emerge.

Should the election go the Coalition’s way I shall eagerly await the early announcement of the NBN cost-benefit study, and wish them luck with it. They’ll need it.