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Vertigan shows the NBN is worth doing

The Vertigan report on cost-benefit equations for various broadband rollout options gives Labor's aborted fibre to the home project the dunce's cap. It reaches that conclusion after making assumptions about the future, however, and that's a fraught exercise.

The Vertigan report on cost-benefit equations for various broadband rollout options gives Labor's aborted fibre to the home project the dunce's cap. It reaches that conclusion after making assumptions about the future, however, and that's a fraught exercise.

Vertigan says that if government does nothing and the private sector rolls out broadband in high population density areas where it sees the strongest demand and the best revenue and earnings potential, the net benefit will be biggest, at $24 billion.

It says the Coalition's plan to roll out a "multi-technology" hybrid network that matches population densities with fibre to the premises, fibre to the neighbourhood node, wireless connections and satellite coverage produces a benefit of $18 billion. The benefit is lower than the one an unsubsidised rollout generates because the Coalition will still directly connect 1.5 million premises to broadband fibre, and extend to areas outside the cities that cost more to connect and generate less user activity.

The fibre to the premises rollout that Labor began and the Coalition killed off after it took power would also have delivered a benefit, Vertigan concludes, but a much lower one, only $2 billion. The report says this reflects the cost of rolling much more fibre, and a more extended construction phase and revenue ramp-up.

My first conclusion is that Malcolm Turnbull was right to argue patiently inside the Coalition when it was in opposition that while Labor's gold plated network should be scrapped, the concept of a national network should be retained.

Its hybrid rollout will create $6 billion less value between 2015 and 2040 than an unsubsidised, undirected private sector rollout would on Vertigan's calculation, but it will deliver a national network instead of an urban one.


Passing up a gain of $6 billion or $240 million a year between now and 2040 to achieve that outcome is politically acceptable, even if Labor had not signed watertight contracts with Telstra for its fibre to the home rollout. That locked in value for Telstra that will be preserved in the Coalition's modified project, and would spark multi-billion dollar claims for compensation if it were not.

As for whether the report conclusively condemns Labor's fibre to the home project, it is trite to say so, but only time will tell.

The report is lengthy and thorough, but it pivots on estimates of future demand for broadband capacity that are rooted in our understanding of what Broadband is today.

It says for example that video downloading and streaming is going to a key driver of broadband capacity demand in future. That's an obvious trend: the more interesting questions are how obvious it would have been 10 years  ago, or 20 years ago, and what technologies and applications will be new demand in 10 or 20 years.

We can speculate, but we can't know: or as Sydney University associate professor and digital technology commentator Kai Riemer put it yesterday, we can make a reasonable fist of extrapolating the cost of building a new broadband network, but "the benefits it will unlock are fundamentally unknowable and unpredictable."

It cuts both ways, of course. The same unpredictability makes it impossible to assert that a fibre to the home rollout would have made a better fist of "future-proofing" Australia against communications technology developments.

Fibre still offers the best upload speeds, and unlike wireless it doesn't slow down as the number of users rises. For long haul, it appears to be unassailable. Wireless is increasingly competitive over shorter distances, however, and as the Vertigan report also points out, the lower cost, less ambitious hybrid network is less of an all-or nothing technological bet than the network Labor was building.

Reserve chips in

The big message in the Reserve Bank's first submission to the Murray inquiry into the financial system was that Australia's regulatory structure worked, and didn't need to be changed. In its interim report, the Murray inquiry agreed.

In its second submission the Reserve elaborates on the theme, and throws the big banks and their lenders a bone in the process.

It is again luke warm at best about bail-ins that would expose local big bank creditors to losses in a bank rescue. Creditor "bail-ins" are occurring in Europe, but national balance sheets there were stretched by the cost of bank bailouts during the global crisis. No government-funded bank bailouts occurred here.

Its response to the Murray inquiry's request for feedback about whether Australia should follow the US and Europe and force the banks to structurally separate in-house trading activities also has a local context.

Banks that have significant trading businesses are being forced to quarantine them in the northern hemisphere, but the Reserve says Australia's big banks are not big traders. 

In a global sample of 100 banking groups close to half have more than 30 per cent of their assets in trading portfolios. The big four Australian are at the bottom of the list, with average trading assets of less than 15 per  cent.

Less costly approaches "could address the objectives that ring-fencing is designed to achieve," the Reserve says. The active supervision our bank regulator, APRA, conducts arguably already fits the bill.