Thursday, 24 April 2008

National's broadband plan: a guest blog

This is a guest blog from Matt Burgess. Welcome Matt.

National's plan to spend $1.5 billion building fibre to the homes of 75% New Zealanders has received widespread praise, but I join Not PC and Liberty Scott in condemning the plan. This is Think Big 21st century style.

The objection is not that better broadband is a bad thing. In the 1980s, more electricity was a good thing but Clyde Dam was a disaster. The problem with National's plan is that it's likely to give New Zealanders less broadband at higher cost and lower quality than might otherwise have been achieved, much as Clyde Dam did for electricity.

There are several reasons for this pessimism. The most important is that this is a nationalisation of New Zealand's phone and data access infrastructure, and as such it will crowd out competing investment. No competitor who is or might be considering investment in phone and data access will continue now that its competitor is the New Zealand government. A standard insight from the public choice literature is that governments generally measure success not by profits but by the size of the asset. Making access investment pay is hard enough without a behemoth competitor that is willing to bear unlimited losses for the alleged greater good.

This loss of competition is crucial, for two reasons. First there are many ways to deliver data into homes. Without National's plan, the incumbent Telecom might have faced competition from cable (Telstra-Clear), wireless (Vodafone, Woosh) and satellite, as well as from other promising technologies not yet in commercial use. It is not obvious which mix of technologies is best, and this is where competition is most valuable. National's plan substitutes central planning for the competition that might have otherwise produced an asset of the size, type and cost that would have created the most value for the country. It risks locking New Zealand into the wrong

This loss of competition is important for a second reason. Without it, New Zealanders will probably have no alternative provider if delays occur or there are problems with service quality when it is built. And experience strongly suggests that there will be delays and quality problems. Building an access network is technically and, these days, legally challenging. Elected officials are the very last people we want to be ultimately responsible for a project of this magnitude. While these delays are worked through, New Zealand gets inferior broadband.

Another objection is that any government will find it hard to commit to National's plan. National wants to roll out fibre to 75% of homes, but it will be politically difficult to ignore the wave of complaints coming from the other 25% who see fibre rolled out to smaller towns than theirs or to the next block over but not their own. Ultimately, National's plan will see fibre rolled out to Milford Sound, or perhaps satellite bandwidth being purchased on the taxpayers' dime. This will cost much, much more than $1.5 billion.

New Zealand cannot help but be made poorer by this. Afterall, if broadband really is that valuable this network would have been built already. Or would it?

It is possible that this is an investment that is worth the cost to the country, but investment in this asset has been delayed by two government-produced distortions. First, price caps on residential voice and now business and residential data via bitstream and unbundling regimes undermine incentives for investment. It is hard to earn a return that justifies investment if you are forced to share your assets with competitors at a price that does not properly account for risk. A case of regulation begets regulation.

Second, property rights in New Zealand are not strong. A fibre asset is particularly vulnerable to expropriation by governments because it is a sunk, long-lived asset which delivers services which will draw the attention of politicians for the foreseeable future. An investor considering their return on building fibre must consider the likelihood that the rules will be changed on them by an opportunistic government, as has already occurred to investors in Telecom and Auckland Airport.

This is a nationalisation of a large part of NZ's communications access infrastructure. As a nationalisation, I confidently predict it will crowd out all competing investment. It will be late. It will cost much more than $1.5 billion. It will not perform as promised. It will be a political football for the 25% of households who miss out. The government that finally caves to their demands will pay billions more to lay fiber to Milford Sound or buy enough satellite bandwidth. And it stands a good chance of locking New Zealand into the wrong access technology.

Otherwise, a sound plan.


Tory Ted said...

Do you support public-private partnerships in the development of roads and other key infrastructure projects, or is that just more 'think big' meddling in your mind?

Would you support PPPs in health, or would that just be the Government picking winners?

Matt Burgess said...

Tory, I honestly don't know. Telecommunications is a field I have worked in for years, not road or health.

From my casual observation, the main problem in roads and health, from the perspective of healing people and transporting them, is non-price rationing. Both systems ration service by queuing, which makes it harder (not impossible) to do sensible things like heal the most sick or quickly move those most in need of transport.

This is an efficiency argument, but health delivery and possibly transport are more about concepts of fairness in most people's minds I think and I am not really equipped to deal with that sort of argument.

I am troubled by the fact that public funding of health has nearly doubled in New Zealand in the last 8 years yet I understand hospitals are now doing fewer operations and still not meeting a market wage for medical professionals, as evidenced by the exodus of trained staff overseas. From an outsider's perspective that looks like $6 billion squandered each year, around $4000 per household in the country.

I cannot offer an alternative plan but under the present system there appears to be no relationship between funding and performance, which strongly suggests a fundamental change is required.

Anonymous said...

I agree with the plan mainly because the private sector has done little in fibre, and as far as I can see it won't change.

If National can lay fibre and open up competition at the same time to all competitors plus new ones I think NZ will benefit with lower prices.

One of the problems of nerw companies starting in NZ is the initial costs of start up.

If National can provide an opportunity to lower the cost of start ups for new and existing players with improved technology the benefits to all should be good to customers.

Eric Crampton said...

I can imagine a second-best argument for a lot of public investment in fibre. Simply put, the government cannot credibly commit to refraining from expropriating the returns to private investment in this area, either via nationalization or regulation of access. Consequently, there's been no real investment in the area in some time. Telstra stopped laying new fibre to home about the time that the government started making noises about requiring access to Telecom's lines.

A first best would of course be private investment with a credible guarantee from the government that it will leave well enough alone on price or access regulation. But the government can't promise that.

Which is worse: no investment because of government crowding out, or no investment because of fear of nationalization by regulation?

Paul Walker said...

But Eric, simply put, the government cannot credibly commit to refraining from expropriating the returns to ANY private investment either via nationalization or regulation and thus by your argument doesn't the government end up owning everything?

Matt Burgess said...

Eric (Crampton) is right, I think. It is quite possible that investment in new broadband infrastructure would never have happened in the current environment, so National's plan is possibly an improvement on that.

His post underlines how important property rights are, however, and how damaging the disrespect for property shown by administrators will have some serious consequences. New Zealand will find it hard to attract private investment in long lived assets that are at risk of hold up.

With no political consensus whatsoever on protecting property owners from public taking, it is easy to imagine a vicious circle emerging in which New Zealand falls far enough behind benchmark service levels in any given industry for it to become a political matter, and then for this industry to be nationalised in the way National is proposing for broadband. The end result is a centralised economy, which is what Paul pointed out.

Under this model the expropriation of Telecom and AIAL shareholders has strongly negative and far-reaching consequences for NZ.