NBN cost-benefit analysis would take just three days: Economist

A full cost-benefit analysis of the Government's $43 billion National Broadband Network (NBN) would take just three days to complete, according to economic consultants.

Speaking to a Senate select committee on the NBN, consultants, Dr Henry Ergas and Dr Mark Harrison, agreed that the NBN Implementation Study was highly optimistic in its brief analysis of rate of return compared against government bond rates. However, the lack of a proper cost-benefit appraisal, as well as the lack of details that underpinned the study prevented a proper analysis becoming available.

"That is not what the implementation team were asked to do, it's not what they have done," Ergas said, "but, it would be certainly possible, indeed readily possible based on the great detail of information they have generated, to come to a more robustly based and contestable view as to whether the benefits from this proposed NBN exceeds its opportunity costs."

While the team behind the study, made up of consultants from firms KPMG and McKinsey Company, did not explicitly produce a cost-benefit analysis, it did conduct detailed cost modelling of the network in order to analyse whether NBN Co would be a commercially viable entity.

Based on its modelling, the study projected an internal rate of return on investment in the company would exceed assumed government bond rate of six percent "under most reasonable assumptions for cost and revenue, and where returns are lower". However, Ergas called these assumptions optimistic, and in contrast to market experience in both local and international telecommunications markets.

"There are... at least two significant errors; the first is the projected return rate is the government's cost of funds - they sight no rationale for that - and second, the response seems confused in that it appears to assume that additional benefits alter the required cost of capital to the project, not its overall commercial viability."

Also speaking at the Senate select committee, spokespeople for the Australian Competition and Consumer Commission (ACCC), Mark Pearson and Sean Riordan, confirmed that the the watchdog had been consulted in the formulation of the NBN Implementation Study, but did not know about the study's assumed rate of return until the study was completed.

NBN Co chief executive officer, Mike Quigley, promised to deliver the other detail missing from the implementation study - a business case for the company - to the Department of Broadband, Communications and the Digital Economy by the end of May. However, communications minister, Stephen Conroy, refused to publicly release the case.

In calling the study a "very careful piece of work", Ergas said the cost modelling and other economic rationales underpinning it would be required in order for a party to submit a comprehensive cost-benefit analysis.

"I would urge the committee to do all it can to ensure all the details that underpin this study are made public, and are made public in a timely way," he said.

When asked whether the consultants behind the study would be capable of providing such an analysis, Ergas said that KPMG's previous experience with other clients would certainly put them in such a position.

While the consultants conceded that the social viability of ubiquitous, open access broadband across Australia may outweigh any economic concerns regarding the company or the project itself, Ergas warned that an economic analysis of a fibre-to-the-home (FTTH) network like the NBN against alternatives like fibre-to-the-node (FTTN) would be required to minimise risk to the taxpayer.


Copyright © 2010 IDG Communications, Inc.

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