National broadband network: fact or fiction

Now with the size of the numbers involved it’s clear that the Federal Government is taking an enormous risk in pressing ahead with the NBN. If Senator Conroy fails he will have blown tens of billions of dollars for little or no financial return to taxpayers. That makes the home insulation fiasco look like a frolic in the park compared to the potentially never ending struggle to recoup the taxpayer’s investment in the NBN.

So will the NBN be built? Yes, so long as Labor and Senator Conroy remain in government they will stop at nothing to build it. They have invested far too much political capital to ever let it go. Big talk is a hallmark of this Federal Government. Fuelwatch, GroceryChoice, home insulation were all big promises which turned into big failures. Will the NBN “promise” be different? Let’s hope so.

Now there is nothing wrong with being visionary. The Harbour Bridge and Snowy Mountains scheme were visionary. They added to the productive capacity of the nation and there were no real viable alternatives at the time. Sydney urgently needed a harbour crossing and the eastern states needed electricity to prosper. Importantly, the Sydney Harbour Bridge and the Snowy scheme were great projects for their time.

Is the NBN visionary? Well, that depends on whether it delivers a viable high speed communications network at the right price and financial return. Anything can be built so long as there is a bottomless pit of money. We can land a person on the moon because of the gigantic investment that the US made during the space race. Sadly, we don’t have a bottomless pit of taxpayer’s dollars. The Federal Government has already boosted our nation’s debt levels to worrying levels.

The NBN will be another call on taxpayers’ money and one that will take years to repay. How quickly it’s repaid will very much depend on firstly, how quickly and cost effectively the NBN can be built, and more critically, on the all important “take up” rate for the NBN. It’s one thing to build something, but it’s another thing entirely to be able to convince enough people to use it.

Take, for example, the sorry saga of Sydney cross city tunnel, as well as the Lane Cove tunnel. Huge sums of money were invested in the tunnels, but both went under because they were not financially viable given that not enough motorists were paying to use the tunnels. In other words, there was insufficient “take up” of the tunnels by motorists.

Now that’s precisely the challenge for the NBN. Yes, it may be built, but there may be an insufficient number of people taking up the high speed broadband and other services to be provided through the NBN.

To understand the financial challenges facing the NBN, it is important to understand that the NBN proposes to connect up to 93% of Australian premises to a fibre optic cable network. That requires running the fibre optic cable the length and breadth of Australia. That means digging trenches, stringing cables across telegraph poles and then running the cable into individual premises. Leaving to one side the considerable physical challenges involved, all that effort requires a lot of time and money.

Importantly, all the money needs to be repaid sometime. Unless enough people “take up” the services offered by NBN, it’s clear that the NBN will not be financially viable. The financial failures of Sydney’s cross city and Lane Cove tunnels amply demonstrate what happens when glowing estimates of potential usage fall well short in practice.

Interestingly, we are again seeing glowing estimates of potential take up rates for the NBN. What’s the problem with any estimate? Quite simply, they are only estimates based on particular assumptions. Of course, if the assumptions are wrong, so will be the estimates and, dangerously for taxpayers, the NBN would then be a financial failure.

Again, the experience with Sydney’s two road tunnels is eye opening. In both instances it was “assumed” that a certain number of motorists would use the tunnels. So long as the number of “assumed” motorists ended up paying the toll, the tunnels would be viable. But, if those “assumed” motorists did not materialise then the tunnels would be in financial trouble. In practice, assumptions are dangerous and when the assumptions are wrong, as in the case of the tunnels, there are financial losers.

It should also be remembered that the usage rates will in practice depend on the level of competition in the market place. With the two Sydney tunnels there were alternatives. Those alternatives remained despite the NSW State Government narrowing roads and putting other obstacles in the way of motorists trying to use the alternatives.

Significantly, there will, in the absence of a deal with Telstra, be alternatives to NBN. Simply put, Telstra and a new generation of wireless broadband are those alternatives. That explains why the Federal Government has tried so hard to get Telstra to sell its existing network to NBN Co, the company building the NBN.

By doing a deal with Telstra, the Federal Government would be removing a competitor to the NBN. If Senator Conroy fails to take out Telstra, then his NBN will look financially shaky. Why? Simply because Telstra could aggressively price it broadband and other services so as to try to take away a significant number of potential subscribers to the NBN. That would leave the NBN with a very expensive fibre optic cable network that is just too costly for the average consumer to use.

As for the “speed” of the NBN broadband, the average consumer may be very happy with the already fast speeds available with existing technologies. Not everyone wants or needs the superfast speed that Senator Conroy is promising under the NBN. Similarly, wireless broadband speeds are also increasing and can offer the convenience and flexibility of fast internet services anywhere in the wireless coverage area.

So, Senator Conroy, let’s hope your vision doesn’t leave taxpayers with a white elephant that may never truly be financially viable.