Thursday, 2 May 2013

NBN: Why? What economic value?

The Productivity Commission is looking forward to doing the Abbot/Turnbull NBN Cost-Benefit Analysis in 60 days. I'm wondering what they'll be doing after morning tea one on day one...

The problem for the Coalition is that the market places a very high value on the current FTTP plan while not regarding the FTTP/FTTN hybrid "as anything". We know this from the Telstra (ASX:TLS) share price: It didn't ripple when the Turnbull/Abbot roadshow launched.

Telstra is up 70% in the last 24 months, compared to 8% for the ASX200 and 37% for CommBank. You have to wonder how poorly the rest of the ASX200 are doing...

Since it's low-point, $2.55, those 17.17M 12.44B TLS shares are up $43 billion $31.72 billion, and from $2.98 in May 2011, $26.25 billion. Alan Kohler points out that even the T2 ($7.20) shareholders are now no longer "underwater", if you include the dividends since 1999.  Thodey & Livingstone should be sending bouquets & gift-baskets to Conroy & Quigley, or maybe not. [Thanks to Grahame Lynch for the correction. My misread.]

We can now almost trivially show that the economy will achieve tangible benefits far greater than the $37.4-$44 billion currently expected. Buffet throws around a quote about the Stock Market "in the long-trem, it's a weighing machine". This means that the share price represents the Net Present Value (NPV) of a business: the sum over time of future profits.

The stock market has just signalled that the future economic activity of Telstra will increase more than it might cost to build a full-Fibre NBN.

QED, at least I like to think so. A much bigger job to rattle through all the ASX200 and large overseas companies, like Singtel-Optus.

I've read some papers that have tried to calculate the value of The Internet to the Australian Economy, something the Productivity Commission is well placed to do. The usual approach is to attempt to identify the value-add to the economy, usually via Multi-Factor Productivity.

I suggest the usual MFP approach needs to be augmented by two other calculations:
  • Removing "disrupted" sectors and businesses from the historic/current MFP calculations for comparison.
    • Fairfax and other print media are prime examples. Their negative results since 1996 may skew the figures. Unsure about Retail "bricks and mortar" Sector.
  • Value can also be computed by "opportunity cost".
    • What if the Internet was turned off for a day or a week?
    • Since around 2005, the front-office functions of all large businesses and most SME's have been dependent on computing devices, which including local servers (on LAN) and Internet accessed services, like email, Web pages and Supplier systems.
    • We can confidently suppose that 75% of our total economic activity is affected by front-office I.T. systems, connected to the Internet.
The Australian Economy turns over in excess of A$1 trillion/year, or $2.75 billion a day, or $110-$300 million per hour.

The converse of that is Average Earnings: around 10 million workers average $73,000/year, or $40.50/hour each for a 37.5hour week (1800hrs), excluding on-costs.

75% of them earn $304 million per hour worked and conservatively cost employers 125% of that, or $380 million/hour.

There are three figures of interest in an Economic Impact analysis based on Opportunity Loss:
  • A 1-day "outage", slow-down or effective takedown/denial of service of Australian Internt.
  • A 5-day outage, nowhere for the Banks and Just-in-Time businesses to hide.
  • A 5% work-rate loss, due to "slow links".
    • This is 3 minutes spread over an hour, or 3 seconds a minute
    • or waiting just one extra second for a page-load.
My Really Rough First-order figures for these impacts:
  • 1-day outage:
    • 10% loss of productivity: $38 million per hour for 6 hours.
    • No loss of production. Banking accommodates delays.
    • $250 million (rounded up). Peanuts? Not to the people suffering the loss!
  • 5-day outage:
    • 20% loss of productivity, $76 million per hour for 6 hours.
      • $2.25 billion.
    • Loss of 3 days of production/sales for 25% of businesses reliant on Internet bank transfers and automatic ordering/delivery systems.
      • Banks do badly as business customers overwhelm branches.
      • Remember the effect on European economy of just one volcano in Greenland.
    • 3 * $2.75 billion * 25% =
      • $2 billion.
    • Total: $4.25 billion. Enough to cause a public outcry.
  • "slow-links", 5% work-rate loss for 50% of work-force:
    • 5% of 6 hours/day * $380 million * 50% =
    • 5% of $1.114 billion =
      • $57 million/day.
      • $1.14 billion/month (20 wrk-days/mth/employee)
      • $14 billion/year (rounded)  making a $3 billion saving look highly questionable.
You might think at first pass, that a single Big Event, a 5-day failure of the Internet, would crush all other scenarios, but it doesn't.

The effect of imperceptibly slower Internet download speeds as a drag on the Economy, each and every day of every year, is massive and incontrovertible.

I hope the Productivity Commission can find the studies to support examining this area.
And yes, they may just be able to present a slam-dunk 2-page report by noon on the first day...

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