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The answer to why Malcolm Turnbull is so keen to have a cost-benefit analysis for the NBN is that the NBN cannot possibly pass that cost-benefit analysis, if he defines cost-benefit in a certain way. (Equally, of course, the Government could define cost-benefit as marginal benefit>marginal cost excluding opportunity costs, in which case the NBN will probably be ‘cost-effective’, so defined).

Firstly, and most obviously, it is and never will be cost-effective to deliver wired internet to rural areas. These areas require ten or twenty times (and sometimes a hundred times) as many wires to be put into place whilst having far fewer economic benefits than urban areas for the same internet speeds. Yes, yes, internet is an essential service and the country needs to be upgraded to at least workable speeds but what I am saying is that the argument for expanding broadband internet to the country is not an economic argument, it is an argument based wholly on equity and parity between regional and urban areas. It cannot pass a cost-benefit analysis phrased in wholly economic terms because opportunity costs must be taken into account (and that includes comparing an NBN that extends to both country/urban areas and one which only extends to urban areas).

Secondly, as I have previously argued, the NBN connects to every single household, regardless of whether they need super-speeds or whether even they want internet at all. When Stephen Conroy speaks of the wonderful things that can be done with internet, such as e-learning and remote-controlled hospital operations, that is clearly an economically beneficial thing. But the vast majority of those things do not require internet to be connected to every single household. They only require the hospital to be connected to the internet – and can’t that simply be done with a satellite internet connection for half the cost? Another vast chunk of those potential uses are for businesses. And again, why does that require fibre to be rolled out down every residential street? It only requires that it be rolled down to where businesses are likely to be – main roads of larger suburbs (both urban and rural).

For these two crucial conceptual reasons, the NBN cannot possibly pass a cost-benefit analysis which is defined in strictly economic terms. That is even before considering whether the NBN Co is run inefficiently (which it invariably will be with so many businesses slurping at the trough). Therefore, Turnbull is on very solid political ground for criticising the NBN for wanton waste. Once you recognise these two intuitive concepts, the mathematics simply flows logically to the conclusion that the NBN is not cost-effective, so defined. Add that to Stephen Conroy’s perpetual incompetence at justifying why Australia needs an NBN and then mix that into the ALP’s inexplicable fear of being labelled economically incompetent and wasteful, and you can clearly see why the Coalition has targetted the NBN as a key policy with which to undermine the Government.

The difficulty for the Coalition is making this argument without offending country voters. The easiest way, would possibly to split the NBN policy in twain (as suggested by Business Spectator) – an NBN to deliver equitable internet to the country and an NBN to deliver faster and (supposedly) cheaper internet to urban areas. For reasons already explained, the latter is inefficient even without the huge subsidy required for country areas.

[PS: Of course, this post doesn’t address the merits of the NBN policy; despite the occasional tone of this blog, there are wider considerations beyond economic policy.]

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