Broadband not like other infrastructure, argues economist

Cost-benefit analysis of investment is not straightforward

Broadband is one of the most difficult infrastructures for which to arrive at a reliable cost-benefit evaluation, says economics researcher Arthur Grimes. In fact he hesitates to describe it as infrastructure at all, or at least in the same sense as roading or water distribution.

It has many of the features of a rather different creature economists call a “general-purpose technology”, he says. The distinction, insofar as it can be drawn firmly, is that a railway or watercourse has a reasonably well-defined purpose — transport or irrigation — which is unlikely to change qualitatively over time, though its use may well increase.

A general-purpose technology, by contrast, will facilitate other technologies that build on it and could not have been imagined when the routes were first laid down.

Grimes, of the Motu Research and Education Trust (www.motufoundation.org.nz), spoke last week at Victoria University’s Institute of Policy Studies as part of a lecture series. His talk’s title was “The Role of Infrastructure in Developing New Zealand’s Economy”. He dealt chiefly with more traditional exercises such as road straightening and irrigation, with a look at the less conventional behaviour of railways and the telegraph.

The historical use profile of the telegraph in New Zealand shows initial growth levelling off in the early 1870s in terms of messages per person, but there was another steep rise in the late 1890s as new uses were found for the network.

Grimes and his colleagues are studying the question of broadband.

“We’re trying to get a handle on what are the benefits of broadband and who might they accrue to,” he says. “Give me another six months. At present I wouldn’t have any particular answers; but the conceptual answer is that there is a difference between broadband and road straightening. With broadband we just don’t know what the benefits will be.

“I suspect that under traditional cost-benefit analysis, we would say it’s hardly worth rolling out broadband. We’d look at what benefits we know about and apply appropriate discounts and consider that it’s very expensive anyway and we’d say ‘those numbers don’t add up’. But if I look at the uncertainty and its role as more of a general-purpose technology, then maybe the answers are very different.

“At the moment, there doesn’t seem to be much of a framework for thinking about it,” he says. “We’ve just got two parties saying ‘we’ll spend’ and ‘we’ll spend more’. I don’t think there’s much real thought been given to why you would do that; but maybe there is a reason that justifies that approach.”

There have, of course, been many benefits suggested, from increased trade, the local business, health service and educational benefits seen in the Digital Strategy and even those seen in TUANZ’s 2003 book Survival of the Fastest, with its suggestion of holographic images and information to accompany a tourist’s viewing of a historical building.

Equally there have been sceptics like TelstraClear’s chief, Alan Freeth, who said recently that “the main result of faster broadband links to the home may be more downloads of pornography and movies rather than improvements to productivity”.

A member of the Victoria audience pointed out that the UK’s network of canals had never provided the benefits anticipated, but Grimes countered this by referring to a study of the Erie Canal in the US which showed its benefit had far exceeded its cost.

“That shows local circumstances make a difference. You shouldn’t rely on international studies and import their results to New Zealand; the results may be entirely different,” he says.

Grimes is the chairman of the Reserve Bank’s board of directors, a senior research associate for Motu Economic and Public Policy Research Trust and an adjunct professor of economics at the University of Waikato.

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