The Horrendous NBN

Catching up on my reading, and on material which I have wanted to write a post about after seeing it, I finally found these couple of pieces, from the Fin Review of June 12 this year, regarding the National Broadband Network.

First, from Jennifer Hewett: 

Time to communicate real NBN story

Remember the excitement around the idea of the national broadband network? Not only was it Labor’s big “vision” for the 2007 election, the NBN remained one of Labor’s few really popular policies after the trauma of its first term in government. Labor then proudly described its updated promise to lay fibre to every home in Australian [sic] as “future-proofing” the Australian economy.

Even by the time of the election of the Abbott government in 2013, Malcolm Turnbull was criticised for condemning Australia to a second-rate system. His insistence on a mix of technologies – including traditional copper and hybrid fibre coaxial cable – to deliver fixed high-speed broadband more quickly and more cheaply was dismissed as a totally inferior option.

These days, such talk has gone much quieter – partly silenced by the enormous shifts in technology that, as usual, no one predicted when the NBN was a glittering dream of the future.

Regular upgrades to copper and cable have made them capable of far higher speeds than anticipated just a few years ago, while wireless and mobile technology are now ubiquitous and constantly improving.

As the Communications Minister pointed out to The Australian Financial Review national infrastructure conference, the “breezy, complacent view” that wireless was only ever going to complementary [sic – the AFR really is appallingly under-edited] to fixed broadband rather than a fierce competitor has proven to be “rubbish”. Wireless may not be a 100 per cent replacement technology, he says, but it is direct competition for a significant proportion of fixed broadband use, and this will only increase …

The government enterprise was set up to build and operate Australia’s biggest and most complex infrastructure project. It became an expensive lesson in how government good intentions – and arrogance – can go wrong in predicting costs of delivery combined with fast-changing technology and consumer tastes …

Australia, Turnbull says, reversed the approach of other countries, which had telcos roll out a broadband network with government subsidies for areas where it was not commercial viable. “Instead, all the construction risk and business risk is with the government and the private operators got the cheque,” he says.

And from that day’s editorial:

The NBN glee club was no joke

While the first day of The Australian Financial Review‘s National Infrastructure Summit was largely optimistic, an update on the national broadband network brought a big dollop of reality. It was a reminder of the biggest, most poorly conceived and dreadfully executed piece of infrastructure in Australian history.

Communications Minister Malcolm Turnbull covered the mood by pointing out that, despite all the exciting state plans for productivity-enhancing infrastructure, this whale of a project is only just coming up for air.

As documented by the Financial Review‘s Jennifer Hewett Mr Turnbull aptly summarised the foundational problems of the NBN, all of which boil down to the fact that the Rudd Labor government decided to create something utterly unbelievable: a government monopoly start-up responsible for building the biggest – and arguably the most complex – piece of infrastructure ever in Australia.

The stories recounted by Mr Turnbull about the “glee club” mentality within NBN Co – where no one wanted to bring bad news within the organisation – to the equally remarkable feat of building a rigid hierarchical company within a mere four years, might be amusing, but they should not be.

The project has already consumed about $20 billion of taxpayers’ money, Mr Turnbull says. That’s equivalent to what the NSW Baird government plans to spend on new roads, rails and trams. As former Victorian premier Ted Baillieu quipped from the floor of the summit: “You could buy a desalination plant for that.”

And like most government monopolies, NBN Co was obsessed with itself, prioritising fibre-at-all-costs over customers and what they might be prepared to pay.

As a result, risks between the project going to plan, and slightly wrong, add up to literally billions of dollars.

But now it’s about making the best of a bad lot. Mr Turnbull has the right attitude in trying to make NBN as customer-focused as possible, and is doing a good job with an inherited mess. Ominously, however, his warning that “in some ways, there are now no trade-offs, only increased risks”, should rung in the ears of the project’s early defenders.

Cripes, what a clusterfrack.

Here’s a list of all the things that I can see have gone wrong here:

  1. Doomsday problem: this is the problem that I describe as resulting from a combination of moral hazard and the Esau Problem. The moral hazard arises from the then Prime Minister Rudd’s having access to a big pile of Other People’s Money which he could squander with the aim of buying votes for himself with little accountability – in this, it helped that he promised the moon to people, in the form of a fast broadband network, and making them think that ‘Someone Else’ other than themselves would pick up the tab for it. And they bought it! They bought that ‘pig in a poke’. The Esau Problem arises from the fact that the benefits for Rudd would appear instantly, in the form of electoral popularity, while the costs would emerge over a number of years, long after Rudd was gone (he is now positioning himself for a run at the top job at the UN). A diabolical combination that creates the Doomsday Problem.
  2. Myopia with regard to Opportunity Costs: No-one thought of the opportunity costs of pursuing the NBN. In the heady days of the mid-to-late noughties, revenue was flowing freely into government coffers and the general feeling appears to have been that all government spending on any project was affordable. Surpluses forever, spend away! Eight years later, with the budget in ever-deepening structural deficit, thousands of millions needing to be spent on infrastructure, and federal and state tax and spending policies in disarray, the folly of those years is obvious and evident.
  3. Linear projection: At the time the NBN was established, broadband was the technology, and everything else was a side-show. Eight years on, wireless technology has advanced to such a degree that broadband, while it still has its benefits and strengths over wireless, may not be financially viable against wireless. And that’s what all business is all about. Not just building the better mouse-trap, but the better mouse-trap that can pay its way. Instead of focussing on this, the proponents and supporters of the NBN focussed on its technical advantages to the neglect of the commercial case for and against it. Doing so blinded them to the commercial realities of a long-term project in a field known for producing innovative and disruptive technologies every few years.
  4. Shooting the messenger: As the Minister said, the bureaucracy was a ‘glee club’ where only good news was tolerated. A recipe for disaster.
  5. Sunk cost fallacy: Now, we’re told that we have to make ‘the best of a bad lot’. The ‘best’ is to stop spending any more money on it, sell what we can to the private sector, and write the rest off as a loss, to appear in the budget bottom line. But no, because people insist on throwing good money after bad, we are going to persist in the folly of building an obsolete technology that will never return its capital cost to the taxpayers who funded it. And we will also pay every day via the infrastructure – schools, hospitals, roads, submarines, planes – that we will never have.

Thank you Kevin Rudd.

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
This entry was posted in Decision-making, Esau Problem, Moral Hazard, Poor reasoning, Problems with perception intuition and judgement. Bookmark the permalink.

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