Ministers for the Department of Communications and the Arts

Cost-Benefit Analysis: Multi-technology NBN delivers $16 billion more

27 August 2014

The independent Cost-Benefit Analysis (CBA) of the National Broadband Network commissioned by the Government has found increasing nationwide access to superfast broadband will deliver total economic and social benefits to Australians worth more than $40 billion in today's dollars.[1]

Factoring in project costs, the CBA finds net benefits are $16 billion higher for a multi-technology NBN making use of existing infrastructure than for Labor's Fibre to the Premises (FTTP) version.[2]

This strongly supports the switch from FTTP to a multi-technology NBN recommended by NBN Co's Strategic Review in December 2013 and approved by the Government in April 2014.[3]

The CBA is a key part of the work of a Panel of Experts led by Dr Michael Vertigan AC. The Government released the cost-benefit volume of the Vertigan Panel's report today, and will release the Panel's remaining volume on telecommunications regulation within a few weeks.

Cost-benefit analysis is a tool which measures the costs and benefits of different policy options (including indirect costs or benefits, such as gains accruing to the community rather than individuals) on a common basis so they can be fairly compared. Governments have required CBAs for major projects since the 1980s. Labor committed to this practice in 2007 but never evaluated the NBN.

Having now undertaken this analysis, the Vertigan Panel concludes:

  • The multi-technology NBN has net economic and social benefits of about $18 billion in today's dollars, compared to a baseline with no further rollout of superfast broadband.
  • Measured on the same basis, Labor's FTTP NBN has net benefits of about $2 billion.[4]
  • This gap arises because the multi-technology NBN can be delivered more quickly (enabling benefits to be realised sooner) and requires less upfront investment (increasing net benefits).
  • The multi-technology NBN generates net benefits $6 billion lower than those for a purely market-driven superfast network. This is because of the expense of providing access to Australians who live or work in uncommercial urban fringe, rural and remote areas, and the high cost of rolling out FTTP during the transition to a multi-technology mix.[5]

The CBA indicates a multi-technology NBN is the most future-proof strategy for delivering universal access to superfast broadband, because it preserves the option of upgrading to FTTP at a later date if this is justified by consumer demand.[6] In contrast, FTTP locks in high and irreversible costs, reducing optionality and exposing consumers and taxpayers to more risk.

Superfast broadband provides download data rates (or ‘speeds’) of at least 25 Megabits per second.

In the course of undertaking the CBA, the Vertigan Panel commissioned ground-breaking research which is also being released today and represents a valuable contribution to ongoing political and community debate over broadband:

  • Communications Chambers constructed a bottom-up model of the ‘technical’ bandwidth required for the applications utilised by various types of household, and used this to estimate future demand.[7] This research finds bandwidth demand and takeup of plans with higher data rates are likely to grow far more slowly than assumed in the planning of Labor's NBN.[8]
  • The Institute for Choice at the University of South Australia undertook a large sample survey to examine the willingness of consumers to pay for higher upload and download rates and other service attributes. This work, based on the technique of choice modelling, finds households favor an increase to current data rates as soon as possible over the alternative of waiting longer for higher speeds.[9] It also confirms willingness to pay for more bandwidth declines rapidly as bandwidth available to consumers increases (so raising speeds from slow to fast is valued much more highly than the move from fast to superfast).

The Vertigan Panel's modelling of the NBN costs and benefits was assisted by the Centre for International Economics (CIE). It is important to note the CBA uses economic costs, which differ from NBN Co's financial costs because transfers such as many of the company's payments to Optus and Telstra under the Definitive Agreements are excluded. All costs and benefits in the CBA are expressed in today's dollars, with future amounts discounted to the present.

Sensitivity tests undertaken by the Panel and CIE find a multi-technology NBN provides greater net benefits than the FTTP alternative even if consumer demand grows four to five times faster than forecast by Communications Chambers and the other demand models considered. This reflects its faster deployment and lower upfront costs, and the option of future upgrades if required. Exhaustive sensitivity testing found the multi-technology NBN generated more value than FTTP in 98 per cent of simulations, rising to 100 per cent if the option of upgrading to FTTP later is factored in[10].

The Vertigan Panel's analysis represents a methodical, rigorous and comprehensive approach to answering the fundamental economic questions about high-speed broadband.

This is the work Labor should have undertaken before unveiling the original NBN.

The Government thanks the Panel of Experts – which included Dr Vertigan, Ms Alison Deans, Professor Henry Ergas, and Mr Tony Shaw – for their work.

A summary of key CBA findings is attached.

Media enquiries: Jon Dart 0457 646 749

Key findings

  • The Vertigan Panel's Cost-Benefit Analysis estimates total economic and social benefits over the period 2015–2040 from increasing broadband data transfer rates (or ‘speeds’) from current levels to ‘superfast’ (25 Megabits per second or more) exceed $40 billion, measured in today's dollars.
  • Gross benefits are offset by the economic costs of the upgrade to calculate net benefits.
  • The four scenarios examined in the CBA and net benefits for each are charted below:

  • The CBA finds a multi-technology mix (or MTM) NBN—which delivers high-speed broadband by making use of the best available access technology in each locality—has net benefits of about $18 billion in current dollars compared to a no further rollout scenario.
  • This includes the net cost of providing high-speed broadband in uncommercial urban fringe, rural and remote areas via fixed wireless and satellite, where costs exceed benefits by a large margin.
  • A fibre to the premises (or FTTP) NBN—again supplemented by fixed wireless and satellite in uncommercial areas—has net benefits of about $2 billion dollars compared to no further rollout.
  • This $16 billion gap arises because FTTP costs more and takes longer to deliver than MTM.
  • Even higher net benefits would be provided by a purely commercial rollout, but this would deny Australians in urban fringe, rural and remote areas access to high-speed broadband.
  • The economic and social benefits modelled in the CBA take account of indirect value that accrues to the community rather than to individual users. But the CBA finds most benefits accrue to households and businesses – public or external benefits are a small share of overall benefits.
  • The economic costs modelled are broadly based on financial cost models used in the NBN Co Strategic Review, with minor adjustments. They exclude many financial costs actually incurred by the National Broadband Network, such as certain payments to Telstra and Optus.
  • The effects of inflation are removed by converting nominal costs into real costs, and costs and benefits which accrue over 2015–2040 are discounted back to today's dollars.
  • The CBA incorporates research estimating future bandwidth required for the applications Australian households use, and consumers’ willingness to pay for faster speeds.
  • The value to consumers of incremental gains in bandwidth declines as the bandwidth they have increases. Users prefer an increase to current speeds quickly to waiting longer for higher speeds.
  • For consumers on broadband with download speeds between 1 and 5 Megabits per second (Mbps) the value of one extra Mbps is $1.50/month. This falls to 70 cents/month if their current download speed is 50 Mbps, and to zero if their current download speed is 90 Mbps.
  • The CBA results were tested through a sensitivity analysis of all possible scenarios. This found the MTM NBN outperformed FTTP in 98 per cent of simulations. Assuming MTM is upgraded to FTTP if and when sufficient consumer demand emerges, an MTM network outperforms FTTP in 100 per cent of modelled simulations.

[1] Independent Cost-Benefit Analysis of Broadband & Review of Regulation, Vol. II, pages 17 & 60.

[2] Ibid, pages 84–85.

[3] NBN Co Strategic Review, Dec 2013, page 17. The MTM was found to mimise funding required by the NBN.

[4] Independent Cost-Benefit Analysis of Broadband & Review of Regulation, Vol. II, page 11..

[5] Ibid, page 48.

[6] Ibid, page 14.

[7] Ibid, pages 28–33. Communications Chambers estimates in 2023 the median Australian household will have ‘technical’ demand (that is, generated by actual application usage) for download bandwidth of 15 Megabits per second (Mbps) and the top 5 per cent will need 43 Mbps. Note the bandwidth consumers purchase may differ from their ‘technical’ demand.

[8] The original NBN Corporate Plan released in 2010 forecasts that by 2025 the average NBN user will purchase a service providing download bandwidth of 162 Mbps. NBN Co 2011–2013 Corporate Plan, page 129.

[9] Ibid, pages 58–62 and pages 150–173.

[10] Ibid, pages 85–86 and page 189

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