Volume II – The costs and benefits of high-speed broadband

On 26 August 2014, the Vertigan panel released its second report on the Independent Costs Benefit Analysis of Broadband and Related Regulation which sets out the costs benefits analysis (CBA) of alternative options for delivering higher broadband speeds to Australian households and businesses (Report). Unsurprisingly, this report concludes that the proposed multi-technology mix (MTM) has both lower costs and higher benefits than Labour’s planned fibre to the premises network.1

CBA scenarios considered in the Report

The CBA is conducted in relation to 4 different scenarios:2

  • No further rollout scenario - this scenario assumes there is no further investment in high‐speed broadband infrastructure beyond the investments already made and no change in speeds from those available today.  According to the Report, ‘this is a purely illustrative scenario’3 which is used as a point of comparison to allow the calculation of the overall value of high speed broadband.
  • Unsubsidised rollout scenario - this scenario models the rollout of high‐speed broadband using hybrid‐fibre coaxial (HFC) and fibre to the node (FTTN) technologies to areas where it can be undertaken without the need for any government subsidy.  It provides a reference case against which to compare other scenarios.  This scenario also assumes that fixed wireless and satellite, as currently modelled by NBN Co, would not be rolled out.  
  • MTM scenario - this scenario assumes a combination of fibre to the premises (FTTP), FTTN, HFC and fixed wireless and satellite solutions (as set out in the NBN Co Strategic Review).  This scenario assumes a single high-speed broadband network in each area.  Overlapping networks, where they exist, are assumed to be shut down.  
  • FTTP scenario - this scenario assumes delivery of FTTP to all premises in the fixed line footprint, complemented in high cost areas by fixed wireless and satellite solutions (as set out in the ‘radically redesigned’ option of the NBN Co Strategic Review).  This scenario assumes that copper and the HFC networks are not maintained as competitor networks for high speed broadband.4

The study evaluates the above scenarios over the period 2015 to 2040, a period consistent with NBN Co’s Strategic Review.5 The timing of the MTM scenario and FTTP scenario rollout is assumed to follow that modelled in NBN Co’s Strategic Review, that is, that the MTM scenario and FTTP scenario would be rolled out by 2020 and 2024 respectively, whilst the timing of the unsubsidised rollout scenario is not specified, but would be slower than the MTM scenario.

Costs

Section 5 of the Report details the cost estimates for each scenario, including information on how these costs were constructed.

Estimated costs

The Report sets out the different costs for each of the three scenarios that rollout high speed broadband (the no further rollout scenario obviously has no additional costs):6 

  • Unsubsidised rollout provides for a moderate cost upgrade to existing speeds, over a relatively short time period through the use of existing infrastructure where possible.  The estimated total cost for this scenario is $17.6 billion (in present value terms). 
  • The MTM scenario incurs an incremental cost above this because it rolls out FTTP to around 1.5 million premises at a higher cost and delivers fixed wireless and satellite services, at an additional cost which largely reflects the net costs of delivering higher speeds to rural and remote areas.  The Report does not give real insight into how these higher costs will be met other than suggesting that the substantial government contribution must be funded from taxes.7 The estimated total cost for this scenario is $24.9 billion (in present value terms).
  • The FTTP scenario incurs an incremental cost above this again, as FTTP involves replacing copper connections to each premises with fibre.  However, the Report acknowledges that these costs occur over a longer period.  Consequently, once the discount rate is applied, the cost differences are reduced.  The estimated total cost for this scenario is $35.3 billion (in present value terms).

These costs are all higher than those estimated in NBN Co’s Strategic Review, particularly the cost of the FTTP scenario which was estimated at $30.6 billion in the Strategic Review and increased to $35.3 billion in the Report.

Construction of costs

The cost of each of scenario has been estimated using cost data provided by NBN Co.  Notably, the costs have not been adjusted to include any costs outside of NBN Co, such as those borne by retailers.  The report acknowledges that in practice, retailers may also incur some costs, but does not consider that these costs will differ significantly between the scenarios.8 Appendix F of the Report contains further details of the relevant NBN Co’s costs.9

The Report does include the cost of maintaining existing infrastructure although it doesn’t explicitly detail these costs.  However, the FTTN model does not include any additional payments to Telstra with regard to the use of sub‐loops (that is, the copper loop between the customer premises and the node) that would be required to provide FTTN services.  The CBA does allow for an additional cost to maintain parts of the copper network used for FTTN compared to areas where HFC or FTTP is used.10

Benefits

Section 6 of the Report analyses the benefits of the scenarios as follows:11

  • No further rollout scenario has no further benefit.
  • Unsubsidised rollout has a total benefit of $41.7 billion.
  • MTM Scenario has a total benefit of $42.7 billion.
  • FTTP Scenario has a total benefit of $37.0 billion.

The key input into this analysis is willingness to pay (WTP) for higher speed which seeks to measure the value that households or businesses place on additional internet speeds to those currently available.  To calculate this, the Report relies upon choice modelling surveys, analysis of market data and the current uptake of NBN services in addition to a study done by Communications Chambers into the average Australian household’s usage by 2023.  The Communication Chambers study predicts that in ten years time around half of Australian households will only need 15 megabits per second, which can already be delivered by many internet services today.  It also claims only 5 per cent of Australian homes will demand internet speeds of 43Mbps or more.12   Using this data, the Report concludes that users of broadband would prefer an increase to their current speeds quickly, rather than to wait longer to gain a higher level of speed and submits that consumers place a greater value on the early deployment of high speeds rather than on the slower deployment of very high speeds using FTTP.13

Net benefit

The simplest way to compare the alternative scenarios presented in the Report is the net present value of their benefits less the net present value of their costs, using the unsubsidised rollout scenario as the reference case: 

Click here to view the table.

In light of the above analysis:

  • An unsubsidised rollout of high‐speed broadband has net benefits relative to no further rollout of $24 billion.  This shows the value of high‐speed broadband. 
  • The MTM scenario has a net cost relative to an unsubsidised rollout of approximately $6 billion.  According to the Report, this reflects:18
    • the substantial net cost of fixed wireless and satellite rollout; and
    • the higher cost of continuing with FTTP for 1.5 million premises.
  • The FTTP scenario has net costs of $22 billion compared to the unsubsidised rollout.  According to the Report, this reflects:19
    • the high cost of providing FTTP;
    • the slower rollout and hence slower delivery of benefits (as well as costs); and
    • the substantial net cost of fixed wireless and satellite rollout.

Summary

The key findings of the Report are:

  • continued investment through an unsubsidised rollout of high-speed broadband has a net benefit of $24 billion;20
  • unsubsidised rollout delivers improved high‐speed broadband to most Australian premises (93%), while the MTM scenario and FTTP scenario deliver higher speeds to all premises.  Unsubsidised rollout would not provide coverage to the areas covered by fixed wireless and satellite in other investment scenarios;21
  • the MTM scenario has a net cost of $6 billion relative to the unsubsidised rollout.  This largely reflects the net costs of delivering higher speeds to rural and remote areas.22
  • unsubsidised rollout and the MTM scenario provide a similar technology mix in the fixed line area, except that the MTM scenario allows for rollout of FTTP to about 1.5 million premises, while unsubsidised rollout discontinues the delivery of any further FTTP;23
  • the FTTP scenario has a net cost of $22 billion relative to the unsubsidised rollout scenario.  It delivers higher download and upload speeds than the MTM scenario but takes a longer time to rollout and is significantly more costly;24 and
  • Allowing for upgrades, the MTM scenario has significantly greater option value than the FTTP scenario because it avoids high up‐front costs while still allowing the capture of benefits if, and when they emerge.25

The Report concludes that the MTM scenario has net benefits relative to the FTTP scenario of $16 billion.  This is comprised of lower costs (around $10 billion) and higher benefits (around $6 billion). The benefits are primarily higher because this scenario delivers higher speeds to consumers earlier. 26