Thu, 19 Sep 2019 - 11:40
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Speech to CEDA's 40th State of the Nation - The NBN and Productivity

E&OE - check against delivery

Introduction

It is a pleasure to speak to this important CEDA conference – and to acknowledge CEDA’s track record of advocating for policies to make Australia’s economy stronger.

Today I want to talk about the NBN – and the way it can help boost productivity by giving businesses more bandwidth, more choice and lower prices.

Recently I saw a good example, when I visited Abode New Homes in Darwin. Their business is entirely cloud based. I was amazed as the owners Justin and Karinda Gill showed me the digital systems they use to design homes, to order the building materials required, and to schedule subcontractors. They have a 100/40 Mbps NBN connection to their head office; at the building site their staff use tablets connected over the 4G network to access the systems they need.

Abode requires all its subcontractors to use its systems for quotes, invoicing and other interactions – thus sharing the productivity benefits of this new technology with other businesses in the notoriously disaggregated building sector.

What really impressed me, though, was when Justin and Karinda told me that they are franchising their business in North Queensland – and part of what the franchisee will receive is access, over the NBN and in turn the cloud, to all of Abode’s digital business systems.

This is a powerful example of how a ubiquitously available broadband network can bring efficiency gains to small and medium businesses. Abode can use a much more efficient cloud based operating mode because they can access high speed, affordable broadband in Darwin – and they can give their franchisee access to the same efficiencies because it can access high speed, affordable broadband in North Queensland.

So today I want to start with the proposition that improving productivity growth is a key economic priority for the Morrison Government, and one way we do that is by investing to upgrade our national infrastructure – including communications infrastructure.

Next, I want to talk about the way that NBN was intended to boost our national productivity – but Labor’s mismanagement of the project made it much harder to capture the productivity benefits than it should have been.

In the final part of my remarks, I want to highlight the way our Liberal National Government has got the rollout back on track – and in turn that is allowing us to deliver the long promised benefits for Australian business, including higher bandwidth, better pricing and more choice.

The productivity rationale for infrastructure investment

Let me start, then, with the importance of productivity – and how infrastructure investment helps us boost productivity. We know that boosting productivity is key to driving economic growth, lifting wages and raising living standards.[1]

Australia is one of the world’s more productive (and affluent) economies.[2] But as Treasurer Josh Frydenberg pointed out recently, productivity growth has slowed in recent years, particularly compared to the very good years of the nineteen nineties. Our growth rate was 1.1 per cent a year over the last five years - below our long run average of 1.5 per cent.[3]

There is a clear link between infrastructure and productivity, in Australia and globally. According to the Productivity Commission, 2.5 per cent of growth in our GDP – or $20 billion – came from microeconomic reforms in key infrastructure sectors in the 1990s.[4]

A good global example is the US interstate highway system, which commenced construction in the 1950s. One economic study found that infrastructure generated 31 per cent of the annual increase in US productivity in the 1950s – at a time when the US was enjoying remarkable productivity growth of 6 per cent per annum.[5]

And a good local example is the upgrading of the Pacific Highway between Sydney and the Queensland border. When the four-lane highway is completed in 2020 it will save five hours on a return trip. That means a given truck can do more trips per week, per month or per year.

Improved communications infrastructure similarly can deliver productivity benefits – particularly because communications is a key input for other sectors. In 2016–17, around $766 billion of economic activity, or around half of the economy, relied upon services from the communications sector.[6]

It is not hard to think of the many ways that better communications networks can let businesses work more efficiently – and hence improve productivity. Good quality videoconferencing means fewer face to face meetings are needed – saving time and money on travelling to meet.

Efficient online processes to place orders, to invoice customers, to pay invoices – all of these can save time and reduce transaction costs.

And one change which is making a big difference, particularly for small and medium businesses, is using cloud based applications – just as Abode has done.

Business owners and managers can see their critical financial information in real time through cloud based accounting software such as Xero – and they are relieved of having to do lots of time consuming, manual paper-based tasks.[7]

Waiting for funds to be cleared by the bank need no longer be a part of small business life. Transaction apps such as OSKO support near real-time payments – and that means better cash flow. [8] For a small business, that can be the difference between collapsing and surviving.

New cloud based apps are offering much more efficient ways for small businesses to operate. They can help tradespeople to automate lots of processes in their business – such as scheduling jobs with staff and customers, communicating with employees and clients about jobs, recording compliance information, preparing quotes and invoicing customers.[9]

Already we are seeing significant evidence that the rollout of the NBN is stimulating the take up of efficient new cloud based ways of doing business – and in turn boosting economic activity and productivity growth. Research by analytics firm AlphaBeta shows that in NBN connected regions the number of new businesses grew at 1 per cent – twice the national average and five times the rate in non-NBN areas.[10]

The research also found that in regions connected to the NBN, the annual growth in digital economy jobs was 4.8 per cent, versus -0.2 per cent in non-NBN connected areas.[11] So there is a clear link between the NBN and take up of digital technology – and there is in turn a clear link between the take up of digital technology and productivity improvements.

The Australian Industry Report 2016 found that business investment in digital technologies results in higher productivity.[12] And according to global consultants McKinsey, further adoption of digital technologies could see Australia’s gross domestic product (GDP) increase by $140–250 billion by 2025.[13]

In the agricultural sector alone it has been estimated that effective use of digital technologies could increase the gross value of Australian agricultural production by $20.3 billion – a 25 per cent increase over 2014-15 levels.[14]

Labor’s mismanagement made it harder to capture the promised productivity benefits

The theoretical linkage between NBN and economic and productivity improvements has, therefore, been understood for a long time. Indeed in its March 2007 broadband policy document, Labor promised benefits of up to $30 billion a year in additional economic activity from the NBN.[15]

The problem, of course, was the yawning gulf between rhetoric and reality – a gulf which increased every year until 2013. Labor’s 2007 document promised that it would complete the network roll out to 98 per cent of premises by 2013. Instead, when we came to government, barely 50,000 premises had been connected to the fixed line network.

Under Labor NBN failed to meet every significant operational target it set for itself. In its 2011-2013 Corporate Plan, NBN Co said fibre would be available to 1.2 million premises by the end of June 2013.[16] The actual outcome was 207,500 premises.

Following the 2013 election our Liberal National Government asked the new leadership of NBN Co to conduct a Strategic Review of the rollout. This revealed that the rollout was in a fundamentally worse position than the Labor Government at any time had disclosed to Parliament or the Australian public.

Rather than examining this melancholy record in detail, I want to make three observations. The first is that the slower you roll out the network, the slower you are to capture the promised productivity benefits.

Under Labor’s plan for the NBN, the rollout would not have been completed until 2024. Under our Liberal National Government, the network rollout will be complete next year – four years earlier than Labor planned. Already 88 per cent of Australian homes and businesses are able to connect.

Second, the mishandling of the rollout was very damaging to consumer and business confidence in the NBN – and in turn made it harder to capture the productivity benefits. One example is that Labor announced something called the ‘NBN interim satellite service.’ It was a poor service, using capacity leased on satellites from other operators, and did not live up to the promises.

Today the NBN Sky Muster satellite service is delivered over two wholly owned satellites and offers an impressive quality of service even in the most remote parts of our vast nation. But sadly there is still some resistance to using Sky Muster, as a hangover from the poor reputation of the interim satellite service.

We are working hard to turn this around. The recently announced Sky Muster Plus product – which guarantees internet access for non video applications like banking and general web surfing even if you have used up your monthly download cap – is an important new initiative which has been widely welcomed.

My third point is that the productivity benefits are not to be judged in a vacuum. You need to compare the benefits against what it costs to deliver them. Bizarrely, Labor never bothered to conduct a cost-benefit study. Perhaps they did not want to know what such a study would have told them.

Certainly the record is clear – Labor had no idea how much this project was going to cost or where the funds would come from. They went to the 2007 election promising to deliver the NBN for $4.7 billion; in 2009 they announced a new plan which they said would cost up to $43 billion.[17] In its 2009 announcement Labor stated that some of this would come from private sector investment - and indeed in one of the worst pieces of financial advice ever offered, Kevin Rudd urged mum and dad investors to take up bonds which he said his government would issue to help finance the NBN rollout.

Of course the subsequent 2010 Implementation Study found that private sector financing was not going to be an option for the rollout.[18] By the time Labor left office, NBN’s Corporate Plan – for the 2012-2015 period – estimated peak funding would be $44.1 billion.[19]

Getting the rollout back on track – and delivering business and productivity benefits

Let me turn away from the sorry story of what we inherited – to how we have turned this project around and what this means for the long promised productivity benefits of NBN.

Today there are 10.2 million premises able to connect, and 5.9 million connected.

In just the last four years, we have gone from 1.1 million premises being able to connect to 10.2 million. This year, in a typical week, NBN Co is enabling connections for more than 49,000 premises, and each week, nearly 40,000 premises are signing up for an NBN service.

With the rollout on track to be completed next year, our focus is very much on how we can secure the promised national economic and social benefits from NBN. If this new network is supposed to improve our productivity – where is the evidence this is happening?

Let me turn first to what NBN means for the supply of telecommunications services to large businesses – the ‘enterprise’ market. Some might think that companies at the top end of town have the negotiating power to look after themselves – and so there is no need to be concerned about increasing competition in this market.

But as ACCC Chair Rod Sims has pointed out:

Telstra has dominated the lucrative enterprise and government market as large corporates and government agencies tend to acquire services on a ‘whole of business’ basis, and historically only Telstra had ubiquitous infrastructure to meet this need.[20]

For too long Australian businesses have been burdened by the lack of choice they face in enterprise broadband services, leading to higher costs and inflexible contracts which ultimately affect the bottom line.

With NBN, that is changing – because now Telstra’s competitors are able to supply large corporates using the NBN fibre network. In particular, they can offer NBN’s Enterprise Ethernet product - which means high speeds, delivered over a reliable, high performance network and with business grade service levels.

Once a particular business location is connected to NBN, that business benefits from having a choice of service provider. It can use Telstra or it can use another provider reselling the NBN service. (Of course it also open to Telstra to resell NBN to business customers.)

This means businesses – including very large enterprises which need several thousand branches around the country to be connected – can now access a wide range of competing offers from telcos keen to serve them. In turn, stronger competition means businesses can expect lower prices, better coverage and more innovative and better tailored service offerings.

Just look at some of the deals recently announced. In March this year, Coles announced a multi-year partnership with Optus Business for digital network and telecommunications services to enable productivity improvements, innovation and better customer service. As part of this, Optus is partnering with NBN Co to deploy fibre connections to over 2,400 sites.[21]

The other big retailer, Woolworths, informed the market of a deal that will improve its connectivity by converting retail sites onto NBN fibre through its existing provider, Telstra.[22]

Last month, Australia Post announced an upgrade of its telecommunications at over 4,000 sites.[23] As part of this, Comscentre, an Australian owned company, will be running Australia Post’s internet network using the NBN for the provision of wholesale business grade services. The upgrade is expected to lead to faster parcel processing, higher service levels and improved transaction performance for services like Bank Post and passport applications.

These fibre network rollouts deliver clear benefits to large corporates. This means they can reduce their costs, use data more efficiently, and in turn deliver more competitive offerings to their customers. That is productivity in action.

Now there has been some criticism of NBN Co working with retail service providers to deliver services into the enterprise market. Certainly, the Government expects NBN to conduct itself in accordance with the competitive neutrality requirements in its legislation.

But it is important to recognise that serving business was part of the original NBN vision. For example, NBN Co’s first Corporate Plan, published in 2010, set out a product roadmap that included business services and enterprise services.[24]

I want to make it clear that the Morrison Government regards NBN’s work in serving the business market – both the enterprise market and small and medium business – as a core part of the company’s mission. The NBN is a massive national infrastructure investment – and it is very important that we maximise the economic gains to the nation from this investment. That means cheaper and faster broadband for business – as well as for households.

Just as important as the benefits NBN can deliver to big businesses is what it can do for small and medium businesses. Our Liberal National Government is determined to back small business – a sector which employs six million people[25] – and we are doing this through measures like reducing the company tax rate to 25 per cent for businesses with a turnover of up to $50 million. We see the delivery of better, cheaper telecommunication services to small business over the NBN as another important way to help small and medium businesses be more competitive, innovative and profitable.

I have already mentioned the way that Abode New Homes in Darwin is using cloud based services, delivered over the NBN, to operate much more efficiently.

Another good example is The Forge Pizzeria, a family restaurant business in Ballarat which has grown from two employees to 90 employees in six years.[26] Their growth has been underpinned by strong online systems delivered over their NBN connection – such as fingerprint logins and online timesheet management.

Similarly, Mayfair Property Management, a Melbourne-based start up, says its NBN connectivity is important so it can quickly and efficiently load up listings and images - and help it to deliver excellent customer service.[27]

There are also numerous examples of technology based businesses which are now able to locate in regional areas thanks to the connectivity NBN provides. One good example is a small independent Australian game development studio called Disparity Games, based in Noosa in Queensland. High bandwidth connections are essential for a company in the online games sector – and thanks to the NBN such connections are available in Noosa.

We are also seeing more people working from home thanks to the NBN. According to research by AlphaBeta, the number of people working from home has increased by 4 per cent in NBN connected areas compared to 2.5 per cent nationally.[28]

In fact NBN is enabling new ways of working around the country. Recently I visited Dubbo where I met Jillian Kilby, Civil Engineer and Stanford MBA graduate, who has recently founded a shared working space in Dubbo called The Exchange which is based in old The Clocktower and post office on the main street of town. This is only possible because of high speed NBN services – delivered over a 100/40 service over fibre optic cable to the space.

Jillian and her team have established an online network assisting regional men and women who are starting up their businesses and also providing mentoring and advice to help established businesses grow. The Exchange is helping these rural businesses harness the potential of the NBN to increase their reach, both across Australia, and also internationally.

Let me mention another important way NBN is boosting the business sector and in turn productivity – by supporting business models which depend on being able to access customers or users over a high speed connection.

Of course that includes businesses delivering video streaming services to Australian households – which are absolutely booming. At the end of June 2019, there were more than 12 million online video content paying subscriptions in Australia, which were driven by services such as Netflix and Stan, as well as over 4.4 million sports related subscriptions.[29] Only four years ago, less than two per cent of Australians had SVOD; today around 57 per cent use SVOD services.[30]

But the impact of the NBN extends well beyond entertainment. It supports more efficient ways of operating in a whole range of sectors – distance education, telehealth and the distribution of content like books, music and information.

The data shows pretty clearly that among people who live in an NBN-connected home, the activity levels in these sectors are higher than amongst those not connected. In metropolitan areas, NBN-connected users are 1.5 times more likely to use the internet for non-formal learning compared to non-NBN-connected users; in regional areas it is even higher at 1.8 times..[31]

Already the online education sector is big business. There are more than one thousand online education providers in Australia - generating an estimated $3.3 billion in revenue.[32] As NBN take-up increases, that sector is only likely to grow.

Conclusion

Let me conclude, then, by returning to my opening observation – that a key reason for investing in NBN was to improve our productivity. While much of the focus on NBN has been the residential sector, the difference the NBN is making to the business sector is a really important part of the productivity gains it can deliver.

Thanks to the very poor execution of the NBN rollout under Labor, the benefits for the business sector remained largely theoretical for quite a few years.

But today we have over 5.9 million premises connected – and the rollout on track to complete next year.

The NBN is now making a tangible difference to the way many businesses – both large and small – operate and to the way they engage with their customers.

We want to drive this hard over coming years – because the NBN is an important part of our toolkit for improving our national productivity, and in turn our prosperity and quality of life.

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[1] https://treasury.gov.au/publication/corporate-plan-2018-19/increasing-productivity

[2] https://www.pc.gov.au/research/ongoing/productivity-bulletin/2019/productivity-bulletin-2019.pdf

[3] https://joshfrydenberg.com.au/wp-content/uploads/2019/08/Treasurer-Speech-Making-our-own-luck-Australias-productivity-challenge-26-August-2019.pdf

[4] https://www.pc.gov.au/inquiries/completed/national-competition-policy/report/ncp.pdf

[5] https://www.fhwa.dot.gov/policy/otps/060320b/

[6] BCAR calculations based on https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5209.0.55.0012016-17?OpenDocument

[7] https://www.xero.com/au/

[8] https://www.osko.com.au/home

[9] https://www.xero.com/small-business-insights/wp-content/uploads/2018/10/from-little-things-big-things-grow-how-digital-connectivity-is-helping-australian-small-businesses-thrive.pdf

[10] https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/media-centre/connecting-australia-companion-report.pdf

[11] https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/media-centre/connecting-australia-companion-report.pdf