Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

NBN: The long toll road to nowhere

By Geoff Dickinson - posted Wednesday, 27 October 2010


Communication economics and transport economics are virtually interchangeable.

Genghis Kahn built his empire on the fast communications of pony express to the nodes of his empire. A horse provided the speed to communicate. The road or track was the equivalent of a cable. The fixed infrastructure provided by the tracks allowed movement of horses and riders which provided communication.

This system is similar to the fixed internet infrastructure and the emails we use to communicate today.

Advertisement

I want to use the transport analogy to explore the potential downsides of the NBN as well as to look at what it might mean to government revenue in the future.

As we are all familiar with roads and traffic, let’s treat communications as a transport substitute applying the same principles to electronic infrastructure as to transport infrastructure.

There is a service delivery appropriate to an infrastructure which can be justified by a return from operating costs.

If we look at the financing of the National Broadband Network we can see that it is like a toll road. In financing a toll road the final decision always comes down to the capital financing available, market research justifying the cash flow projections, the robustness of that research and the cash flow generated by the tolls.

Unfortunately, I believe that these items are not available for scrutiny for the NBN, but I more than suspect that they do not stack-up.

We have some recent transport examples of what happens when the assumptions do not stack-up.

Advertisement

Even with the best assumptions toll roads often only become profitable when they are sold on at a capital loss. Australia has had recent history of such failures.

With transport infrastructure the capital costs and operating costs of the road, or the railway, or the airport are the basis for any major investment but a business proposal is needed to raise the finance necessary to carry out the project.

Try raising finance without providing capital costs, operating costs, marketing projections and the assumptions needed to make a long term project viable. The answer would be “great idea - but we need more information”.

You see, a banker really wants to loan money for a viable project as he will receive income for his employer (and himself) if it succeeds. However, if it is a flop the bank loses money and normally the banker loses his job.

When a transport infrastructure project goes bad the real loss falls on the original owner. The project gets broken up or on-sold at a large discount and then the new owner may make a profit based on the lower purchase price of the infrastructure compared to its original project cost. From the point of view of the first owner that is called a loss.

A loss can be caused by overestimating many factors. It can also be caused by overdesign, which is what I think is the real problem with the NBN.

Overdesign results in a product too expensive for the cashflows that can be generated so that it cannot service its debt and provide a reasonable return on the investment.

None of us imagines that we should build six lane highways to every house in Australia but that is analogous to what the government is doing with the NBN.

Not every house needs or would use a six lane highway to its door even if they had 3 cars in the family!

Or to look at it using another piece of transport logistics: there are is no justification for building a Sydney Airport equivalent in every town (or is that house) in Australia.

Some overdesign may be desirable, but how much overdesign is enough?

We have seen overdesign or underutilisation of transport infrastructure occur over recent years with the example of toll road projects being sold for far less than the project cost when the ambitious usage figures assumed for projecting cash flows did not eventuate.

We all know unhappy shareholders that got burned.

Some holders of monopoly assets have been able to rescue their situation by raising toll prices. Sydney Airport has raised monopoly prices and charges to make its business work.

This could be a strategy for government with the National Broadband Network Monopoly (NBNM). If custom is too slow, and if users are forced to use it for telephony as well as Internet, we may all be forced to pay up.

Unless the NBN plan business case is produced and justified the Government’s NBNM budget assumptions hold far less validity than the Opposition’s electoral budget which had a relatively modest hole in it of maybe $7 billion, compared to the $43 billion equity and debt that the NBNM is projected to cost.

How should the government proceed?

Build the highways where highways are needed, build smaller (or slower) side roads where they should be.

There must be appropriate infrastructure available to achieve appropriate download speeds that are applicable for ordinary folk to use.

The overdesign could makes mugs of us all if, say, Singapore Superannuation funds buy the NBN at a low price in the future due to the overdesign and the unknown business plan.

What’s more we are junking existing road systems to put this new freeway in place.

We are making obsolete the still functioning copper network and not utilising availablewireless or copper/optic hybrids.

We are not clever country at all!

Outcomes, justifications and original intent often don’t make sense when looked at retrospectively.

Could it be that we are being sold an outcome, being fed a part justification but that the true intent has been hidden from us?

And can we see the hand of self interest in the IT cheer squad’s support for the government’s plan?

Could the ultimate intent be the re-establishment of the postal monopoly in the digital age with the equivalent of an “email stamp” for each email?

Could the National Broadband Network business plan be achieved by increased prices as fee for service using monopoly power? If so we might really be bigger mugs than anyone could have imagined.

That would be the ultimate user pays. And Pays. And Pays.

Now what is the probability of that?

  1. Pages:
  2. 1
  3. 2
  4. 3
  5. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

44 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Geoff Dickinson is currently studying Creative Media Technology. He holds Master of Transport Management and Master of Management degrees from USYD and is a Former Fellow of the Australian Institute of Company Directors.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 44 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy