Sunday, February 13, 2011

Australia - Attack by Prof Kerin on the Minister over the costs and performance of the NBN

[the australian] FOR years, Communications Minister Stephen Conroy has been citing South Korea to justify his National Broadband Network.

But after a report this week by The Economist's Economic Intelligence Unit ranked Conroy's NBN plan poorly against top-ranked South Korea, Conroy claimed that comparing Australia with South Korea was like comparing "apples with oranges".

This typifies that strategy that Conroy has consistently employed to defend his NBN: when comparisons (no matter how misleading) help your case, use them -- but when they don't, dump on them and anyone making those comparisons. Such hypocrisy is truly galling. This time around, Conroy is actually right on one thing: it is indeed an "apples and oranges" comparison. But that's never stopped him comparing Australian and South Korea before. Critics have pointed out many times that comparing Australia with countries like South Korea is silly (see, for example, "Scrapping NBN tender a huge waste of money", The Australian, August 4, 2009) for many reasons, particularly the enormous difference in population densities -- but he kept making them. Now, when it suits him, he has borrowed his critics' argument and bent it for his own purposes.

Conroy's continued misuse of selective, piecemeal comparisons is the very reason why a cost-benefit analysis of the NBN is required. It may sound obvious, but government policies should serve the public interest; a policy serves the public interest only if -- when implemented in Australia -- it delivers benefits that exceed the costs (and if it delivers bigger net benefits than any alternative policy). Various bits of information can help in assessing the costs and benefits, but selectively highlighting some bits and ignoring other bits is grossly misleading.

If your doctor recommended having a nose job because your mate Fred did, you wouldn't find that compelling.

If she said Fred benefited greatly from the nose job, you'd want to check out whether the benefits were real and what the job cost Fred. And you'd want to think about what benefits you'd get and how much you'd pay.

But suppose your doctor's allusions to Fred convinced you to get the nose job. Just before you're wheeled into theatre, she hands you a bill for 24 times what Fred paid. When you protest, she haughtily replies that of course it costs you more because your nose is different -- it needs much more work than Fred's.

Would you trust this doctor again? No. Would you want to reconsider whether the nose job is a good idea? Yes.

Conroy is the nose doctor of broadband. In announcing the NBN in April 2009, he led with the "Fred" tactic: we'll be joining "world leaders" in FTTH like South Korea. Of course, just because other countries "lead" in something doesn't mean we should copy them. Germany was a world leader in Zeppelin airships. Michael Jackson was a world leader in nose jobs.

Conroy later employed the "Fred benefits" tactics. For example, in a November 2009 speech, he said: "For countries targeting broadband and ICT (information and communications technology) investments to stimulate economic growth, Korea provides a significant example of the capacity to succeed."

He also said: "Although Korea was among the nations hardest hit by the Asian financial crisis in the late 1990s, the country turned a disaster into an opportunity to grow its IT sector. Spending on broadband and other high-technology equipment helped lead a transformation of the economy . . . By May 2004, about one-third of Korea's exports were from the IT sector."

Actually, South Korea's average annual GDP growth over the last decade (4.2 per cent) is less than half the 9.2 per cent it achieved in the decade preceding the Asian financial crisis. ICT exports were about one-third (33.9 per cent) of Korea's exports in 2004, but Conroy didn't mention that they were already 31.4 per cent in 1999, nor that they had dropped to 26.2 per cent -- below their level before the Asian financial crisis -- well before he gave his speech.

My point isn't that nose jobs and broadband deliver no benefits, but that claimed benefits by vested interests -- like a nose doctor or a minister whose entire credibility rests on defending the NBN -- need to be checked out.

Like the doctor, Conroy avoided cost comparisons. He happily made comparisons with South Korea on what they were doing (FTTH) and in claiming big benefits, but was silent on any comparisons of cost per capita. He only mentioned density-related costs when defending why FTTH would serve a slightly smaller proportion of premises than in Korea.

When the EIU this week said that Australia's NBN would cost taxpayers 24 times more than South Korea's fibre rollout cost its taxpayers, he tried the "your nose is different" tactic. He used population density differences to argue that "trying to compare the rollout in South Korea with the rollout in Australia is fraught with challenges".

Conroy is right that such comparisons are dangerous. Given Australia's much lower population densities, the cost per premises here will be much higher. But Conroy's response begs the key question: given the enormously greater cost in Australia, shouldn't we examine whether the costs are worth the benefits, or whether there is a better way to gain those benefits at lower cost?

Here's another comparison to highlight Conroy's hypocrisy. Conroy attempted to dismiss the EIU's report by holding up one page and saying: "For those who haven't spent the $3000 (to buy the report) I just wanted you to see the entire analysis in this document". Putting aside the fact that this gives grossly misleading impression of how much analysis the EIU did, that's still one more page than Conroy produced when he committed $43 billion of taxpayer money to the NBN with absolutely no analysis whatsoever. Thirteen months later, he produced the Implementation Study. Taxpayers were forced to pay $25m for that, which works out at $45,788 a page. The EIU report is incredibly cheap by comparison and no one is forced to buy it. The Productivity Commission could conduct a cost-benefit analysis for under $2.5m.

But selective comparisons are endemic in this government. While Ireland's economy appeared to be growing, Industry Minister Kim Carr used to it to justify state-funded "industry development" (aka handouts). He didn't present any evidence to show that state funding had caused higher economic growth, or that any benefits were worth the costs. He just hand-waved. Ireland is now one of European's biggest basket cases.

We should decide policy objectively by assessing benefits and costs of the options and choosing the one that best serves the public interest. Unfortunately, this government got it arse-up: it decided policy first and ever since has made any comparison or claim it could to defend itself. If someone makes a good argument that harms the case, the tactic is to dump on them.

Conroy claimed the EIU -- run by The Economist, the most highly respected economics magazine on the planet -- was just spouting "right-wing dogma" in its report.

Conroy does the same whenever other highly respected organisations say something he doesn't like. Last October, he said a cost-benefit analysis would be a "waste of money" because "the OECD are about to complete a major study".

The next month, he cherry-picked a statement about the benefits of broadband from an OECD report to claim that the report supported the NBN, when in fact the OECD damned the NBN as "winner-picking", competition-constraining and very costly and urged that a cost-benefit analysis be conducted.

While dumping on highly respected independent critics, he selectively chooses to cite reports written for vested interests (like IBM) to support the NBN.

Taxpayers should insist that the government ask the independent Productivity Commission to conduct a cost-benefit analysis.

Senator Conroy's hypocrisy truly galling over national broadband

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