Posted by: karisyd | August 29, 2014

NBN cost-benefit analysis fails the imagination test

We now have our long-overdue cost-benefit analysis for the NBN.

The current government and many in the business community have long asked how an infrastructure project such as the NBN could possibly have been launched without a thorough cost-benefit analysis – common sense, really.

The analysis, commissioned by Communications Minister Malcolm Turnbull, has found the cheaper mixed-technology model (MTM) proposed by the government emerges as the cost-effective winner. 

The former government’s Fibre-to-the-Premise (FTTP) model was found to deliver essentially the same benefits at much higher cost and later, and has subsequently been decried as the result of technological romanticism and reckless spending. Again, common sense, many people would say.

And so we move on and miss a crucial opportunity to unlock the next wave of technological innovation, all because of a fundamental lack of understanding of the nature of infrastructure technologies, and because of common sense.

Drop your tools

Unfortunately, common sense is not always a good adviser. The organisational theorist Karl Weick famously called on the management community to “Drop your tools!” in order to effectively deal with unforeseen situations.

My point is that our established management tools, such as business plans and cost-benefit analyses, might well work for decisions about everyday technology that provide incremental change, but they fail when applied to potentially game-changing infrastructure technology.

According to Weick the problem is that these management tools are “tools of rationality” that “presume that the world is stable, knowable, and predictable.” But the world is not stable and the role of an infrastructure technology such as FTTP is precisely to unlock innovation and bring about change.

It is inherently impossible to undertake a cost-benefit analysis in any credible way that will do justice to such technologies. The problem is that, while we are well able to extrapolate the cost of building the NBN, the benefits it will unlock are fundamentally unknowable and unpredictable.

Think about it. The current analysis purports to envision cost and benefits until the year 2040. Now think back 25 years to 1989, to what was the pre-world wide web era, would we have been able to predict in any way how the internet and all the services and products that were built on top of it would have enabled the world we live in today? Just 8 years back, could anyone have been able to predict how the iPhone’s touch screen platform would unlock the current spur in technological innovation? If the answer to both is no, we have the answer to the question of whether the current analysis can in any credible way predict the benefits of FTTP.

One might object that the above technologies were not built by governments but by the business community. Correct, but irrelevant. The issue is that FTTP would not be built by the business community, because of an inherent “chicken and egg” problem: Users will only demand FTTP if there are services using it, but it will only be economical to build such services once a large enough installed base of FTTP exists.

We need Imagination, not Rationality

The problem in making decisions about game-changing technology is that our economic tools are tools of rationality, not imagination. They predict the future on the basis of our past. They are thus always biased towards the more conservative solution.

This is evident in the way the promises of the NBN are typically discussed in both the report and the wider debate: mostly in terms of higher download speeds with associated benefits for industries such as media and entertainment. Both MTM and FTTP will provide higher download speeds. But the promise of FTTP lies in the way it is able to provide each user with the same high upload as download speeds. While the report outlines quite well the much higher upload speed, it does not explicitly discriminate its analysis in this way. This is not surprising, because we have no way of knowing what users and small businesses might possibly do with such upload speeds. And so it is not part of the conversation. But that is precisely the point – we have no way of knowing.

Yet, we might begin to imagine far reaching innovations in health and education, new ways of organising work and changes to the ways we live, with flow-on changes to the make-up of our suburbs, and maybe even ways to relieve our congested city centres. Yet, not surprisingly, the current analysis comes to the conclusion that the benefits for health and education “will probably be extremely limited” as these sectors do not require much higher download speeds to deliver their services. Again, common sense, but missing the point.

There was much wrong with Labor’s NBN, such as the political nature of picking electorates for roll-out, blunders in setting up NBN Co and the failure to sell its ideas convincingly, but it wasn’t the lack of a cost-benefit analysis or the choice of technology.

We need to drop our tools and start imagining, rather than extrapolating. True innovation has always been a product of romanticism, not rationality.



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