Henry Ergas
Conroy's ignoring sound economics
Senator Conroy's announcement on Telstra gives an entirely new meaning to the term 'voluntary’. Additionally, punishing Telstra for its success in 3G by denying it access to additional spectrum unless it does what the government wants, seems an extremely odd way to promote competition.
As for the notion of structural separation, no country has attempted it since the failed (and since reversed) US experiment with the break-up of the Bell system.
There are other reasons to question this policy announcement, particularly given its direct relationship with the national broadband network. I notice that Conroy has criticised my cost-benefit study of the NBN for only valuing benefits 20 years out. He seems to think that much of the benefits will lie some 20 to 50 years out and that we should have paid more attention to those years.
But even at a discount rate of only 6.5 per cent, the average dollar in net benefit earned during the period from year 20 to year 50 is worth 11 cents. With higher discount rates, it is obviously worth even less, and rapidly approaches zero – at a 12 percent discount rate, which is hardly high for a very risky project, on average, a dollar in net benefits in those years is worth all of 3 cents today.
Given those figures, and given that very large losses are incurred in the project’s early years, will extending the evaluation period alter the fundamentals? Only if you believe in magic.
As for his criticism that I used a commercial rate of return in that study, the Commonwealth government’s own guidelines on cost-benefit evaluation are clear: “Most common international practice is that a producer rate of discount is the appropriate rate of discount to employ. This ensures that resources are used efficiently. Consumer rates of discount should be used only in exceptional cases, where for some reason resources have no opportunity cost and a program involves only a comparison of consumption streams.”
Of course, the government could change its guidelines, but to the best of my knowledge, it hasn’t done so. Senator Conroy has some explaining to do in relation to the economic fundamentals of this policy move.
Henry Ergas is chairman of Concept Economics which previously consulted extensively to Telstra on issues of telecommunications regulation, including the implications of the national broadband network.