NBN 101: The Economic Argument

This article is part of Computerworld Australia's NBN 101 series, in which we take a look at the arguments surrounding the fibre-to-the-home (FTTH) network, and dissect them one by one. The articles are meant to be an overview of the debates central to the National Broadband Network (NBN) to give you a grounding as more and more media outlets and commentators speak out on the project. We encourage people to take the discussion further in the comments section.

In our first article we took a look at how Australia’s NBN plan compares to the rest of the world and the statistics and graphs from the OECD, and then we strapped in for a tour of speeds. Last week we had a look at wireless technologies versus fibre optic.

This time we delve into the economic argument for a high-speed national broadband network.

The Economic Argument

Arguably at the forefront in the public discourse on the National Broadband Network (NBN) is the debate around the commercial return or direct benefits of rolling out the fibre-to-the-home (FTTH) infrastructure that has been promised.

But while it is an important argument that we will address in coming articles, whether NBN Co or the Australian Government as its major shareholder writes its results in black or red ink on its profit and loss statement - and we all hope it will be black - is only one part of the story. Indeed, it is only one of the many objectives the NBN is aiming to achieve.

For many years now, telecommunications providers and private firms have evaluated the potential returns of broadband investments and have only proceeded if the market value of the investment exceeds its costs to an attractive level. To cut a potentially long story short, when they decide they can’t get a high enough rate of direct return, they don’t invest. When they can, they will likely take the plunge and try and monetise the network to generate revenue or profit.

Yet, these evaluations of market value often do not include other macro-economic and social benefits - what some academics and analysts call "spill-over effects" or indirect benefits. There is simply no imperative for the private sector to consider them, particularly those that are beholden to shareholder obligations.

However, it is because these potential indirect returns to a society or economy are thought to be so great or essential to development that governments are called on to step in to invest when the market can’t or won’t. After all, the Government has stated several times that it is fulfilling an objective with the NBN that the commercial sector refuses to do.

In one of its most recent reports on ICT, the World Bank described investments in faster broadband (with no distinction on technology platform) as "no regrets" infrastructure that carry little risk.

"We used the phrase ‘no regrets’ investment to capture the idea that, even if broadband does not immediately deliver the direct benefits expected, in terms of jobs and competitiveness, it will certainly benefit the economy as a whole and therefore the indirect benefits (for instance in terms of capacity-building, opportunity creation or speeding up the general flow of information) are substantial,” the World Bank’s lead ICT policy specialist, Dr Tim Kelly, told Computerworld Australia in a written response. “In other words, the broader, intangible benefits of investment in broadband mean that it is rarely, if ever, a bad investment.”

Quantifying the benefits

Although some observers have recently suggested a cost-benefit analysis of the NBN could be completed in three days given access to the assumptions used in the NBN Implementation Study, these statements appear to only consider the direct returns possible and not the wider socio-economic picture.

In fact, most observers note there is a need for much more detailed empirical evidence and research into higher-speed broadband networks like that being promised in Australia. That is unlikely to come quickly, despite the efforts of organisations such as the Melbourne University-based Institute for a Broadband Enabled Society (IBES), investigating both the economic and social benefits of faster broadband.

So while caution must always be taken when drawing conclusions on the existing body of research, it is noteworthy that the consensus view of organisations such as the World Bank and the Organisation for Economic Development (OECD) - two of the world’s most reputable economically-focussed intergovernmental bodies - is that faster broadband and specifically fibre optic networks are a very good thing for any economy.

For instance, one recent World Bank study of 120 countries found that for “every 10-percentage-point increase in penetrations of broadband services, there is an increase in economic growth of 1.3 percentage points”.

NBN arguments 101: The Economic Argument

Other research by McKinsey amp; Company similarly concluded a 10 per cent increase in broadband household penetration produces a rise of 0.1 to 1.4 per cent in GDP growth.

Booz amp; Company meanwhile suggested countries that have higher broadband penetration rates have achieved up to two per cent higher GDP growth than those with lower penetration rates.

In Australia, a 2002 report commissioned by the then Australia’s National Office for the Information Economy (now the Australian Government Information Management Office or AGIMO) by authors Allen Consulting Group, estimated broadband would add 0.6 per cent to Australia’s gross domestic product (GDP) growth rate each year through 2005.

In a second World Bank report, Broadband Infrastructure Investment in Stimulus Packages: Relevance for Developing Countries (PDF), author, Christine Zhen-Wei Qiang, concluded that “policy makers can wait for serious bottlenecks and areas of insufficient investment to appear before investing, or choose to invest as a way to attract economic activity”.

“In the case of broadband network, the significant time lag between identifying a bottleneck and building a network can forego large economic gains, given its positive spillover and network effects,” she wrote.

“Therefore, timely public spending in broadband infrastructure can realize immediate network effects and bring forward long-term aggregate spillover effects which improve the productivity of the entire economy.”

Commonly it is the transport, healthcare, education, and electricity sectors that are presented as being the most easily identifiable benefactors of higher speed broadband. An Australian-focussed Access Economics report commissioned at the behest of IBM, The Economic Benefits of Intelligent Technologies also added water management to this list.

It found that while it is hard to quantify the full economic benefits of using smart technologies in the electricity, irrigation, health and transport sectors on the back of a fibre-to-the-node (FTTN) broadband network, there were grounds to conclude that the significant benefits would have been greater had a FTTH network like the NBN been used.

In short, it found the net present value of benefits of smart technologies on a fibre optic network to 2018 would be between $35 billion and $80 billion.

Next: Another way of putting it...

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The OECD recently took a novel approach to evaluating the costs of building FTTH networks in its Network Developments in Support of Innovation and User Needs report. Instead of estimating the benefits as in the various aforementioned reports, the OECD looked at what short-term cost savings would be needed in the electricity, healthcare, education, and transport sectors to justify an investment in a FTTH network.

On average, it found that a cost savings of between 0.5 per cent and 1.5 per cent in each sector over ten years resulting from a broadband investment would justify the cost.

"While the calculations in the paper are rough estimations they clearly highlight the fact that investments in fibre networks can be justified relatively easily through minimal cost savings in other sectors even when the savings are often discounted in investment calculations by private firms," the OECD wrote.

Notably, the organisation called for a robust cost-benefit analysis to be conducted before investing, with policy makers and networks planners urged to "focus on developing a broadband platform which easily supports capacity upgrades to match the bandwidth demand of new applications as they appear".

As discussed in a previous article, fibre optic networks best fit this requirement.

Additionally, the OECD suggested the savings realised in any one of the four sectors it chose could potentially justify the investment by itself. It also pointed to other sectors that could create savings or become benefactors such as the cloud computing industry, grid computing, and content provision (like TV, video, news, etc).

NBN arguments 101: The Economic Argument

Some more generic examples

One immediate economic benefit that can be realised from faster broadband is in increased cross-border trade in IT services and what is called IT-enabled services (ITES).

The estimated market for IT services and ITES has been put at between $US475 billion and $US700-800 billion. However, it was suggested that in 2007 less than 15 per cent of that market was being tapped, indicating a significant potential for growth.

India is one of the most often cited success stories of a country benefiting from developments in these markets. In 1995 India’s software exports jumped from $US1 billion to hit $US32 billion in 2007 and the industry now employs 1.6 million people.

Similar tales are told about China, Costa Rica, the Philippines, and Ireland, while the US city of Seattle is an example of a more localised economy benefiting from broadband.

Seattle claimed a potential saving of up to $US1 billion per year from its investment in a FTTN network due to effects in the electricity and transport sectors, along with a reduction in carbon emissions.

Then you have the emergence of companies such as Google which, at the end of 2009, had 19,000 staff on its books in 20 countries with a market capitalisation of $US168 billion.

In Australia, income derived over the Internet soared by 52 per cent in the 2008-09 financial year to reach $123 billion (up $42 billion), according to the Australian Bureau of Statistics (ABS).

This result correlated with statistics that showed an additional 25,000 businesses received orders over the Internet during the same period and the take up of broadband continued steadily. However, only 27 per cent of all businesses use the Internet to generate business, indicating greater growth is possible.

But it is South Korea that arguably provides the best reference for the economic impact higher-speed broadband investments can have. The country has the world's second highest FTTH coverage (2008) of 67 per cent but boasts the highest FTTH saturation of 46 per cent according to 2009 statistics.

The government has poured $US70 billion into the FTTH network and other broadband infrastructure there, and an additional $US1 billion provided for regional coverage.

According to one World Bank report titled Building broadband: Strategies and policies for the developing world, South Korea’s online gaming industry has benefited remarkably from this, achieving sales of $US8.3 billion in 2007.

However, it's only one example of the benefits of fast broadband to the country's economy. Concurrently, the value of homegrown content has exceeded $US3.4 billion, with online games and entertainment services the big contributors. Across the country’s economy there are other similar success stories to be told and it is commonly accepted the broadband investments have been key to South Korea’s status as a middle-income nation after years of economic despair.

Next: What’s the cost of waiting?

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Quantifying the costs of no-investment or delay

From the above examples it is easy to understand why organisations like the World Bank and OECD along with many Governments around the world say higher-speed broadband can be a considerable contributor to economic growth and competitiveness.

They also say early adopters of broadband technologies will have significant advantages in international trade, if they are able to appropriately harness the necessary skills and adequately work through regulatory and policy issues.

The World Bank’s Tim Kelly noted, however, that it is tough to say what the impact would be of waiting to invest or not investing at all in broadband, as might happen in Australia should the Federal Government change in the upcoming election.

“It is probably worth differentiating between impacts that would be slowed and other impacts that might not be realised at all,” he said. “In terms of impacts that would be delayed, this would include the benefits related to GDP growth. World Bank research has indicated a relationship between a 10 per cent increase in the penetration of broadband and a 1.4 per cent increase in GDP. If infrastructure investment is slowed, then it would take longer to achieve the ten per cent increase in penetration, in which case the increase in GDP would also be achieved more slowly.

“Eventually, Australia would catch up, but it would clearly happen much more quickly if a public/private partnership were in place. In terms of impacts that might disappear, here one would look at commercial opportunities that might be seized by companies in other countries where broadband is already better developed.”

Conclusions

This article really just scratches the surface of the potential economic benefits to be realised on the back of faster broadband infrastructure and we encourage those interested to read about the examples in more detail in the reports referenced, particularly if you are interested in specific examples in economic sectors. Alternatively, post your own thoughts or suggestions for other areas that could be of interest in the comments below.

What we can see from the above, however, is there is an emerging body of research that clearly shows a strong link between the adoption of faster broadband - in particular fibre optic-based connections - and economic growth across a vast range of market sectors.

Indeed, the economic boost FTTH infrastructure provides across key market sectors can be enough to justify investments by governments when the private sector is unwilling to put up the cash, regardless of the debate around direct or commercial returns to the entity responsible for overseeing the network’s deployment and maintenance.

In other words, the economic benefits argument is one that should not be discounted or neglected in the public discourse on Australia’s NBN.

Copyright © 2010 IDG Communications, Inc.

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