Question: Where is the public cost benefit analysis in deciding to invest $1.5b and can it be provided to the Committee?

Transcription

1 Question: Where is the public cost benefit analysis in deciding to invest $1.5b and can it be provided to the Committee? Answer The public policy case for government investment in fibre to the premise networks is based on a qualitative assessment which recognises the increasing demand for bandwidth, and the fact that this demand is not likely to be met by the private sector at a fast enough rate to enhance New Zealand's international competitiveness and to enable critical economic growth. Demand and productivity benefits of ultra-fast broadband There is growing demand for capacity in all areas of telecommunications networks. Increasingly complex applications, the use of cloud computing (for example remote storage) and the increasing use of smart devices from smart phones to smart meters means increasing demand for bandwidth. Internet traffic grows at about 30% per annum or more and international traffic grew at 60% last year 1. There is also a desire for faster and better ways to search, process and use this data, which is important for innovation. As technologies develop and increasingly countries move to ultra-fast broadband networks, more and more applications will become available which result in additional demands on the capacity of our infrastructure. It is broadly accepted both in New Zealand and internationally that broadband is critical for economic growth. For example, World Bank analysis published in 2009 suggests that investment in broadband infrastructure has a higher flow-through to nationwide productivity than other areas of telecommunications such as mobile telephony. Across a range of countries, this analysis showed that a 10 percentagepoint increase in telecommunications penetration via broadband would be expected to increase economic growth by between 1.2 and 1.4 percent 2. 1 Data from TeleGeography s Global Internet Geography study revealed that international Internet traffic grew 62% in While down slightly from the 74% growth recorded in 2009, it is well in line with previous years. Growth rates varied significantly by region. The regions experiencing the fastest growth in international Internet traffic between mid-year 2009 and mid-year 2010 were Eastern Europe and India/South Asia, where average traffic growth exceeded 100%, and the Middle East, where traffic rose just under 100%. Even relatively 'mature' markets are still growing rapidly: western European international Internet traffic increased 66%, and the US and Canada s international Internet traffic climbed 54%. See 2 See also Telstra Productivity Indicator 2010; the Boston Consulting Group Report: The Connected Kingdom- How the Internet is transforming the UK economy (October 2010); and the OECD Directorate for Science, Technology and Industry Committee for Information, Computer and Communications Policy Working Party on the Information Economy- Economic Impact of Internet/Broadband Technologies Outline (12 November 2010). MED

2 The applications arising from ultra-fast broadband have the potential to produce even greater productivity gains and economic growth. For example, some of the potential applications and benefits that could be furthered by ultra-fast broadband include: business: businesses being better able to expand and compete globally, through greater access to research and development and investment, and greater ability to collaborate with customers, supplier and partners in real time. New Zealand businesses have indicated a strong demand for fibre. CFH and TUANZ recently undertook a study of new businesses looking at potential uptake of fibre responses were received. When asked about their likelihood to connect to UFB within a year of it being available, 82% of all respondents said they were likely, highly likely or definitely would connect. Around 95% of all respondents said they would connect if UFB was available in their area. Some 58% of businesses currently without fibre would do the same. Survey respondents foresee the main benefits of UFB as including future strategy, staff productivity, staff location and customer relationship management. Around 70% of all respondents said they would consider investing in collaborative tools, Voice Over IP and cloud based applications and services to leverage the benefits of UFB. Remote working attracted an unusually high degree of interest, and indicates New Zealand s potential strength as a lifestyle location of choice for employees from abroad. Respondents also selected Voice Over IP and HD video conferencing as the two additional products for purchase; health: new telehealth applications are likely to make it easier to identify and treat people through electronic health records, to open up the ability for people to be diagnosed and treated from a distance, to allow people to better assess their personal health and know when to seek medical advice, and to ameliorate social isolation in older people and enable them to stay in their homes longer; education: broadband in schools delivers a broad curriculum regardless of where a child lives, promotes digital literacy and would assist with the implementation of the National Standards policy by allowing for greater moderation and consistency, and greater development opportunities for teachers; environment: ultra-fast broadband promotes the development of technologies which enable better monitoring of the environment to assist the agricultural sector with crop care, and development of more sustainable and environmentally friendly living practices through the use of devices which encourage smarter and more efficient use of resources (for example smart cars and smart meters/grids); and 3 Ultra Fast Broadband In Business- Seizing the Opportunity. TUANZ and CFH MED

3 quality of Life: broadband enables other increases in quality of life through better enabling flexible working practices such as remote working, social networking, the ability to make better buying decisions online and the promotion of more sustainable living practices. Why fibre? The speeds and reliability (and the resulting applications) needed to support the educational, health, business and social benefits described above can in many cases only be reliably supported by fibre optic-based communications technology. In addition, should New Zealand wish to continue to develop or move into more data intensive industries (for example the Square Kilometre Array or the film industry), then the need to process large amounts of data quickly will be critical. The current copper network is aging, but has recently been upgraded via Telecom s fibre to the node cabinetisation programme 4. By the end of 2011, it will be capable of delivering ADSL2+ 5 (capable of 10 Mbps or better) services to 84% of lines. Some lines are capable of VDSL 6 (capable of 25Mbps or better) services. Some additional upgrade is possible (for example by bonding pairs of copper lines or using VDSL2+). TelstraClear s cable network for residential customers is able to provide download speeds of up to 100mbps and upload speeds of 10mbps with the potential to increase to 100 mbps. Neither copper nor cable networks meet the government s specifications for ultra-fast broadband. Wireless will likely be capable of speeds of 100 mbps and more in the medium term, but will always have contention, range and reliability issues and in any case is much better utilised for mobile communications and where line/cable-based terrestrial solutions are not possible. In any case, wireless networks all still rely on fibre-based transport and backhaul, so ultra-fast broadband is needed to support the backbone of ever more bandwidth-demanding wireless networks. Even with potential upgrades on copper, cable and wireless the infrastructure cannot be upgraded sufficiently to provide the speed, capacity and reliability that the Government and consumers will demand in the medium to long-term. Fibre is a more durable lasting technology with the network able to be upgraded to achieve 1000 mbps per second or more. Apart from future-proofing for speed, there are also other advantages with fibre. Latency associated with data transmission is very low (the reason power companies have been keen to install it with their networks because it allows for very fast load balancing switching) and distance from exchanges is essentially eliminated as a problem. Why the need for Government intervention? 4 Fibre to the node cabinetisation programme refers to Telecom s programmes of shortening of the length of copper cables from end-user premises to Telecom cabinets in conjunction with rolling out fibre from the cabinets back to the core network. This provides the ability to provide ADSL2+ services more widely over the existing copper network. 5 ADSL2+ is a technology for delivering broadband over copper cables. 6 VDSL is a technology for delivering faster broadband over copper cables. MED

4 While there has been some investment in fibre to the premise-capable networks in major urban centres in New Zealand, it is clear that currently the private sector is not yet ready, or may not have adequate incentives, to build the infrastructure required to deliver fibre to the premise on scale within the Government s desired timeframes. Investment in New Zealand on information and communications technology infrastructure as a percentage of GDP continues to be lower than the OECD mean. Further, the productivity gains from fibre will be realised most acutely in particular sectors (for example education and health) and so it is important that fibre is deployed early to these areas. However, they may not always be the most commercially attractive targets for privately directed investment. The Government also believes that faster and better broadband that is internationally competitive is particularly important for New Zealand given its geographic isolation and need to effectively connect with the rest of the world. Fibre to the premise is far from the norm across the western world. But it is now ubiquitous in South Korea and Hong Kong and will be in the near future in Singapore. These countries have a high emphasis on technology-led economic expansion. The Government believes that New Zealand being early in its rollout and adoption of fibre will enable us to be positioned to take early advantage of new technological developments and productivity gains. It will also mean New Zealand is in a position to potentially develop or test new innovations. In addition, the fact that Australia is developing a fibre to the premises network provides New Zealand with further opportunities to work with our key economic partner to exploit the potential competitive advantages fibre may bring to our two countries. Why was a formal quantitative analysis not done for $1.5b capital spend? As stated above there, have been a number of studies undertaken which demonstrate a link between broadband and productivity. Fewer studies have been undertaken in relation to the links between fibre and productivity, as the adoption of ultra-fast broadband is still relatively new internationally, which makes it difficult to get robust data for quantitative analysis about ultra-fast broadband uptake and productivity gains. One study undertaken by the New Zealand Institute identified national economic benefits from broadband in the range of $ billion per year with further upside potential possible 7. The Institute also concluded that there is a significant cost to waiting, and that the longer that New Zealand waits, the more economic value it will forego and so New Zealand should approach the investment in fibre with urgency. It recommended a policy shift from encouraging penetration of broadband to increasing the speed of the available networks, having concluded that investment in a new fibre 7 The New Zealand Institute, Delivering on the Broadband Aspiration: A Recommended Pathway To Fibre For New Zealand, April See MED

5 network would be necessary to achieve the predicted economic and productivity benefits 8. Beyond the New Zealand Institute study, the Government formed the view that it is reasonable to assume, given the speeds available through fibre and the other advantages of the infrastructure (i.e. low latency, durability), that the benefits from fibre would further contribute to productivity gains already seen from broadband. While it is difficult to accurately predict demand it is clear that demand is increasing at a level where it will outstrip infrastructure in the medium term. Making a more specific assessment than this would require modeling that would be necessarily subjective. Given the time it takes to build fibre networks, the Government did not want to wait until it was too late (i.e. the network could not adequately deal with demand) to begin the build. Nor did it want to miss out on the national competitive benefits discussed above that may arise from moving to fibre early. 8 The New Zealand Institute, Delivering on the Broadband Aspiration: A Recommended Pathway To Fibre For New Zealand, April See MED