Productivity Commission warns on NBN optimism

The Federal Government's Productivity Commission has warned of "optimism bias" in the application of a cost-benefit analysis to the National Broadband Network.

Referencing a 2002 UK study that looked at cost-benefit analyses of publicly funded projects, the commission found high levels of "optimism bias" towards such projects. That bias was reduced under public-private projects (PPPs), because PPPs were subjected to more rigorous risk analysis and realistic business cases.

The commission issued its warnings in a submission requested by the opposition-led Senate Select Committee on the National Broadband Network, which is due to sit for another hearing this Wednesday.

The commission, which is the government's advisor for economic issues affecting the welfare of Australians, outlined the risks and pitfalls of cost-benefit analyses, but said the forthcoming NBN implementation study would be an "ideal" time to conduct one so long as it factored in the wider community.

"Evidence needs to be gathered from the perspective of the welfare of the wider community, and not just the interests of particular sectors," it said.

The commission noted that the separate Tasmanian NBN project and the $250 million regional blackspots program would provide appropriate estimates for the expected values of costs and benefits, which could then inform the broader analysis of the NBN.

But it also warned of the dangers technological uncertainty could pose on the valuation of the NBN's costs and benefits. "The uncertainties of the evolution of technologies and of consumer demand mean no single estimate for each of the future costs or benefits can be proposed with certainty," the commission said.

While PPPs were viewed by the commission as generally better at managing a project's risks over its lifetime, the private sector may also exploit a time-constrained government.

"If there is significant political and public pressure for a rapid implementation of the project, this may lead to a non-optimal sharing of risk as the private sector exploits the government's timing constraints," the commission said.

Another problem with PPP contracts was that commercial-in-confidence restrictions have been invoked to reduce the scrutiny of the contracts.

Shadow Minister for Communications Nick Minchin has been pushing for the government to conduct such an analysis, including recently introducing a private members bill to amend the Infrastructure Australia Bill 2008, which would bring the NBN into the scope of the body's assessment.

Minchin has also seized on the Organisation for Economic Co-operation and Development's warning that governments should weigh up the cost and benefits of deploying an NBN.