Author Archives: pfh007

Getting caught in the traffic

Guest author @pfh007 returns today to the Stubborn Mule. Staying on the theme of Sydney transport, but moving from train lines to motorways, he once again pulls out his beer coaster calculator (perhaps one day I’ll get him onto R).

QUICK SUMMARY: The proposal to widen the M2 motorway in Sydney recently received government in principle agreement. This post examines the risk that due to a provision in the original motorway deed the widening proposal may put at risk the completion a rail link to North West Sydney until after 2046!

UPDATE – 26 October 2010 – Government announces it has now signed the deal with the operators to widen the M2!

The recent post “Playing with trains” took a stab at a cost-benefit analysis for a North-West rail link in Sydney. In the comments on the post, the question arose as to whether the construction of a rail link would require compensation payments to be made to the operators of the Hills M2 motorway, since the original agreement to build the M2 included a provision that provided protection from any government action that undermined the viability of the toll road. In this post I will dig into this “no-prejudice” provision.

Naturally, any compensation payment(s) would be an additional cost in building and/or operating the North-West rail link and thus might be a factor in decisions to build it and where to locate it.

Last week the NSW government announced that an in-principle agreement had been reached with the operators of the M2 motorway to widen certain sections of the motorway. The ASX announcement by Transurban stated that the costs of widening the road were $550 million and provided for the extension of the original concession period by 4 years to 2046.

The announcement was, however, silent as to how the no-prejudice provision in the original M2 agreement would apply to the road-widening proposal. This was surprising as the no-prejudice provision had been very controversial when first revealed in the 1990’s and it seems relevant to the recent discussions about rail or metro links to the North West.

Time for some more Google-assisted beer coaster calculations!

First stop is to find out what the original M2 no-prejudice provision actually said. Google could not produce the actual deed but it did produce this interesting old report from the NSW Auditor General.

The M2 Deed and the “no-prejudice” provision.

The Auditor General report sets out the no-prejudice provision. In summary, the provision provides that if the NSW government takes action relating to the servicing of the transport requirements of the North West of Sydney which prejudices the operational results of the M2, then it will negotiate with the trustees so that the investors in the M2 will get the lower of the base-case equity return or the equity return they would have received if the prejudicial event had not occurred.

Of great interest to rail fans is the content of a letter from the Chairman of the Hills Motorway that the Auditor General included in the report. This “side letter”, which pre-dated the M2 deed, stated:

The Hills Motorway acknowledges the announcement of the New South Wales Government proposing a mass transit route connecting Parramatta to Hornsby via Epping, utilising the Carlingford line alignment in part.

The Hills Motorway proposes to execute the M2 Motorway Project Deed, having taken into account the above proposal and its likely impact on the M2 Motorway. As a consequence, the development of the Parramatta to Hornsby Mass Transit Route would not constitute grounds for negotiation under the M2 Motorway Project Deed.

The Auditor-General noted that the letter appeared to mitigate claims by the operators for at least the Parramatta-Epping section of any Chatswood to Parramatta rail link.

On the face of it, the no-prejudice provision would therefore appear to be directly relevant to action by the government to

introduce or increase bus services to the North West
build a heavy rail link to the North West
build a metro line to the North West
improve other roads servicing the North West

if those actions might reduce the number of toll payers using the M2 and thereby “prejudice the operating results from the M2 motorway”.

There is nothing really remarkable about having a provision like the no-prejudice provision. If you were an investor and had just stumped up a lot of money to build a toll road, you would not be too happy if the government then decided to undermine your business model by providing an alternative transport option to your potential toll payers.

The question is whether the current no-prejudice provision is too wide and should, for example, be limited to certain types of government action (such as selling another competing toll road concession) and whether, while negotiating to widen the M2, now is a good time to clip its wings.

Has the “no-prejudice” provision ever flapped its wings?

The 1994 letter concerning the Parramatta to Epping rail proposal suggests that both Hills Motorway and the government of the day considered the no-prejudice provision to be a serious issue, but I have been unable to locate any information that confirms whether the existence of the provision has been a significant factor in any government decision or in the resolution of any issue relating to the M2 motorway since then.

It would be interesting to know whether there was any correspondence or discussion between the government and Hills Motorway about the Chatswood to Epping rail link before it was completed as the Auditor General notes it does not appear to be covered by the 1994 side letter to the M2 deed.

I have a hazy recollection that the initial introduction of bus services on the M2 was not all plain sailing. I think there may have been an argument at some stage between the government, the M2 operator and Hills buses about the terms of commuter bus access to the M2. As that debate occurred in the era of human history now known as the pre-Googlassic, I was unable to locate any online references. It would be interesting to find out if, in the course of those negotiations, there were discussions about the extent to which public bus services might prejudice the operating results of the M2.

One immediate question that comes to mind is whether the public bus services that use the M2 pay a special toll or whether the government pays the M2 operator some sort of compensatory payment that reflects the fact that 17,000 public bus trips each day might be considered to result in a certain number of individual M2 car/toll trips avoided.

Presumably, there was some discussion about the provision before the Metro link was announced but as the link was initially only going as far as Rozelle perhaps not.

Missing in Action – The “no-prejudice” provision

Despite its relevance to both a proposal to widen the M2 and to building a metro line or heavy rail link to the North West of Sydney, the no-prejudice provision has been keeping a low profile lately.

I am more than happy to be directed to some information on discussion of the application of the no-prejudice provision to the M2 widening proposal, but I was unable to find any reference or discussion of it on the RTA website, the Hills Motorway website or the 277 page RTA “Submissions and Preferred Project Report (August 2010)”.

The closest I found were some submission questions on pages 123‒133 of that document, but the responses to those questions did not touch on the no-prejudice provisions in the original M2 Deed.

Does it really matter?

If you read the RTA Submissions and Preferred Project Report (August 2010), the impression given is that the North West region of Sydney is generating a swelling sea of cars and that buses and new rail links do not reduce the need to increase the capacity of the M2. This might suggest that we can sleep easily and not worry about dusty old provisions from 1994 that require the government to guarantee the returns of investors.

But it might also suggest that there is no good reason to retain the no-prejudice provision in its present form. At the very least, it might suggest that in coming to an in-principle agreement with the M2 operator to widen the current motorway, now is a good time to modify the provision to explicitly exclude the impact of new bus services, new rail links and other public transport options as events that may trigger the no-prejudice provision.

Finally, one last reason for caution. Traffic forecasting appears to be a very challenging science. The history of Sydney’s toll road projects has been remarkable in the regular disconnect between the estimates of traffic flow contained in the glossy prospectus documents and the number of toll payers who actually turn up when the red ribbon has been snipped and they have to start paying.

I am no expert in this area and the forecasts underpinning the M2 widening proposal may prove 100% accurate, but I would feel more comfortable if the tax payer was not exposed to the risk that they do not.

On page 129 of the RTA document, response (b) notes that the tolls from the increase in usage after widening would not be sufficient to fund the project and that is why the widening deal involves an increase in the toll of 8% and an extension of the concession period by 4 years. That suggests that a failure to hit usage targets will readily prejudice the operating results of the M2.

Finally, it is also worth noting that a large chunk of the Auditor General report on the M2 that I referred to earlier was concerned with the forecasts of traffic numbers contained in the original prospectus. More on that below.

Calculating the Prejudice

Leaving to one side what a flock of lawyers and judges might decide the words of the no-prejudice provision actually mean, how might we go about calculating the prejudice?

Time to turn over the beer coaster!

According to the RTA, approximately 100,000 vehicles currently use the M2 every day. That is an interesting figure because the Auditor-General’s report in 2000 set out the original base case projection of traffic numbers by 2010 to be 94,659, but only 76,289 under the then proposed financial restructuring. Transurban’s figures report that in the Sept 2010 quarter 96,983 trips per day were made on average, or 105,068 trips on the average workday.

The vehicle figures (whichever you prefer) suggest that the M2 is currently going gang-busters and exceeding the traffic projections made when the original deed was entered in 1994. That, of course, is entirely consistent with a proposal to widen the roadway.

If the M2 is currently at or exceeding capacity, minor government action would seem unlikely to prejudice the operating results of the M2. A few additional bus services to the North West are unlikely to trigger the no-prejudice provision.

The Transurban ASX announcement states that one of the objectives of the M2 widening project return is to achieve by 2016 an increase in average daily trips of 17,300.

Current toll revenue

Currently the toll on the M2 is $4.95 for a Class 2 vehicle (cars and motorcycles) and $14.50 for everything else (trucks, etc) for the full route, or less to Pennant Hills Road ($2.20 and $7.10 respectively).

According to Transurban figures for the Sept 2010 quarter they earned approximately $36.7 million net of GST which is about $40.37 million inclusive of GST.

That equals $161.48 million per annum including GST.

Their daily average figure of approximately 97,000 trips amounts to about about 35.4 million trips per annum.

That suggests an average toll per trip inclusive of GST of $4.56.

Toll revenue in 2016

Assuming that an 8% increase in toll is applied, the average toll per trip stays constant (plus the 8%) and the 17,300 extra trips are occurring by 2016, then the toll revenue figures will have increased substantially.

114,300 car trips per day at $4.92 (the average toll per trip $4.56 + 8%) = $562,356 per day or $205.3 million per year.

That’s a tidy revenue increase of $43.8 million per annum (inclusive of GST) per year for the remainder of the now longer concession period (2016 to 2046, 30 years) for the $550 million investment to widen the road.

Needless to say the above figures are beer coaster calculations.

Could the M2 experience train pain?

How much pain could a heavy rail link to the North West cause?

As beer coaster fanciers would recall from the “Playing with trains” post, a modestly efficient heavy rail link to the North West with 15 train stations could move approximately 30,000 passengers on 25 services (at 6 minute intervals) during the morning peak period of 6.15 am‒8.45 am, or 60,000 trips assuming every person returned to their home each night.

Assuming that only 10 of the stations proposed are likely to compete with the M2, that would mean that competing stations on the North West rail link could service 40,520 commuter trips each day (once again assuming that the stations have equal passenger loads of 2,026 people per morning peak period).

As discussed in the rail post, securing that many commuters will not be easy and may require substantial re-zoning to increase population densities and perhaps other policies to build patronage on the new rail link, such as building extensive commuter car parks and connecting bus services throughout the catchment. The actions are also likely to decrease the appeal of a daily return trip on the M2.

Let’s assume that the rail link was built (and, conveniently for this exercise, that it is done by 2016—yes, optimism is good for the soul) and succeeded in achieving only 66% of capacity—attracting only 20,000 passengers each morning peak period to its 25 comfortable air-conditioned Waratah carriage (only a few months away now, fingers crossed) equipped services.

Let’s also assume that 40% of those 20,000 passengers are car users who have been attracted by the thought of relaxing and reading their iPads on the train rather than listening to honking horns and breakfast radio on the M2. Those 8,000 train converts represent 16,000 lost trips each day on the M2.

The value each day of those lost trips is 16,000 × $4.92 = $78,700 per day or $18.1 million per annum (assuming they work 230 = 46 × 5 days per year) .

Considering that the business case for the widening of the M2 has a target of 17,300 extra trips by 2016, there could be some unhappiness if the majority of those 17,300 exciting motorway trips vanished into a railway tunnel.

That unhappiness would only increase if the railway hit its target capacity of 30,000 passengers per peak period (60,000 trips) and 50% of them were lost trips on the M2. A loss of 30,000 $4.92 toll payments per day would represent an annual loss of toll revenue on the M2 of $33.95 million per annum (again assuming those train commuters only turn up to work 230 days per year).

OUCH!

That would mean that the tidy toll revenue increase of $43.8 million per year under the widening proposal might shrink to $9.85 million if there was a North West rail link that could attract 15,000 people who would otherwise be paying a toll to travel on the M2.

DOUBLE OUCH!!

As the estimated ticket revenue in my train post from approx 30,000 people paying $50 for a weekly ticket was only $70 million, it would be a nasty sting if $33.95 million of that had to be handed over to the M2 operators as compensation for loss of toll revenue.

It seems highly likely that a moderately well-patronised and well-designed new rail link to the North West (that interconnects with the Chatswood-Parramatta railway) would have the potential to prejudice, perhaps significantly, the operating results of an M2 that is widened and has a daily trip capacity increase from 97,000 trips to 114,300 trips per day. It is even possible that a well-designed and run North-West rail link could prejudice the operating results of the M2 without any widening taking place, but that is less likely as the M2 is already exceeding the capacity that formed part of the original base case for the road.

Summary

The absence of any substantial public discussion of the application of the no-prejudice provision in 1994 Deed to the M2 widening proposal and a North-West rail link and the potential for possible compensation payments to the operators of the M2 is surprising.

No doubt people with much bigger beer coasters than I have available will have performed much more sophisticated modeling of the potential impact of governments actions like a North West rail line or significantly expanded public bus services on the number of vehicles using the M2 per day. But even with my little beer coaster, it seems that there is real potential for government action servicing the transport requirements of North West Sydney to prejudice the operating results of a widened M2.

The problem is clear.

If the agreement to widen the M2 is likely to expose the government (and therefore the residents of NSW) to even greater risk of compensation should a North-West rail link go ahead, then the likelihood of a North-West rail link being approved for construction is reduced as those compensation costs would weigh heavily on the decision. Furthermore, every action taken to improve patronage by creating bus links to train stations, or commuter parking or expanding the number of services will only worsen the problem and understandably meet some resistance from the M2 operator.

Of course if the sophisticated modeling, that I am sure is on a laptop somewhere in Sydney, shows that future public transport by rail and bus to the North West will not prejudice the operating results of the M2, because the M2 when widened will have no trouble attracting 114,300 trips per day, then the agreement to widen the M2 should include a modification of the original no-prejudice provision to exclude future public transport services to North West Sydney as potential triggers for the operation of the provision.

At the very least there can be no harm in releasing the modeling that has been done on this issue so that the context of the in-principle agreement to widen the M2 and its potential implications on future public transport to North West Sydney can be fully understood by the community.

Playing with trains – a North-West rail link

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Not content with scrutinising the plan for a National Broadband Network in Australia, guest contributor @pfh007 has now turned his analytical beer coaster to a network of a different sort: a railway network.

There is a Ph.D. for the taking by any researcher who is able to unlock the evolutionary origins of the propensity of young children (and many older people) to be mesmerised by trains, even the generic suburban variety. You can see the rush of endorphins on the faces of weary commuters as an express service roars past within a metre or two of their aching feet. People seem to have a railway gene.

During the 1970s and early 1980s, the annual model train exhibition held in the Willoughby Town Hall in Chatswood was a highlight for the local kids. It took a full day to observe every detail of the elaborate models complete with green fuzz trees, fields of tiny cows and platforms full of frozen people and Hornby OO gauge recreations of famous rolling stock clattering around and around. Although remarkable as demonstrations of what can be achieved in a backyard shed, those models and their kin were probably responsible for turning large measures of the population into armchair rail network designers.

Consider this a contribution from one such Backyard Bradfield.

One of the striking features of the recent federal election was the ferocious response to the promise to complete the Epping to Parramatta section of the Chatswood to Parramatta line even though new (or finally completed) rail should be of immense appeal to residents of the area. It seems clear that the strength of the reaction was largely due to the failed rail promises of recent NSW political history. In short people were tired of having their railway gene tweaked for short term political advantage.

At one level it is hard to understand why building a new railway in Sydney is so difficult. Unlike the technological challenges facing the early railway builders in Sydney (see the ponies and pick axes in the photos at Museum Station) we have access to marvellous mole-like machines that can bore tunnels right through the Sydney sandstone. We also have advanced administrative systems for compensating people whose houses must give way to new surface track. Shanghai has been laying a new subway at a great rate over the last 15 years, so why can’t Sydney?

Could the problem be cost, even though modern technology and construction methods should have caused construction costs to fall over the last 100 years? Perhaps it is not so much the cost as the complexity of the financing arrangements, which have become too ‘elegant’. The Waratah train deal seems remarkably ‘elegant’ and yet, according to the press, it is poised for implosion.

I think the real problem is that these days we are spending too much time thinking about what we want rather than what a railway needs to be viable. That is we should decide to build a railway and then shape that part of the city to suit the railway. After all, if the majority of Sydney’s suburbs were designed around the car it is highly unlikely that they will be suited to a rail line without substantial modifications.

As the National Broadbank Network (NBN) has established back of the beer coaster calculations as a valid method of policy analysis, I will adopt that technique for some rough calculations of the North-West rail line viewed from the perspective of the needs of the railway.

Route

Using Google Maps, the following route seems reasonable in terms of not going too close to existing rail lines. The precise route is not critical as the demographics and structure of the suburbs will change to suit the new rail line by way of changes to zoning requirements.

Number of Stations: 15

Balmain, Drummoyne, Gladesville, Top Ryde, Denistone East, Eastwood (interchange with Northern Line), Carlingford (interchange with Chatswood-Parramatta Line), North Rocks, West Pennant Hills, Castle Hill, Kellyville, Rousehill, Box Hill, McGrath’s Hill and ending at Windsor.

Train Capacity

Capacity of the new Waratah trains is 896 seated (8 carriages) and, say, another 320 standing (20 in each vestibule) = 1,216 people in total per train

Peak Hour Capacity

The beer coaster is not very big so I will stick with peak hour only and peak “hour” is taken to extend from 6.15 am to 8.45 am, so 2.5 hours. We want a well-signaled, well-designed speedy network that can handle trains at 6 minute intervals. This means we can run 10 trains per hour. Thus the number of peak hour trains is limited to 25 trains.

25 trains in 2.5 hours can carry between 22,400 people (all seated) and 30,400 people (40 standing in each carriage) into the CBD.

I have assumed that during peak hour everyone gets on and travels to the city and everyone comes home by train at the end of the day. I have also assumed that every train going in the opposite direction during peak hour is empty

Station Capacity at Peak Hour

With a capacity at 30,400 people between 6.15 and 8.45 am and assuming that the load is spread equally between all 15 stations, each station will process 2,026 passengers during peak hour. Assuming they all arrive evenly spaced during peak hour, there would be no more than about 80 people on the platform at any one time.

Ticket revenue generated by Peak Hour Capacity

Assuming that everyone works about 46 weeks per year and no one uses the train for any other purpose the revenue generated by the new line (at $50 per week for a weekly ticket) is 30,400 × 46 × 50 = $69,920,000 (roughly $70 million per year)

Certainly people will use the rail line outside of peak hour, but as they will often be concession fares, etc. it is probably safer to do the sums on the basis of the peak hour capacity.

Out of that $70 million you will need to remove operating costs (say $25 million) leaving you with $45 million to pay down the debt used to construct the rail line. As $45 million would only produce a 6% return on $750 million worth of bonds and building the line would cost a lot more than that, there is quite a large shortfall to be found.

To give you an idea of how much that shortfall might be, the price tag for completing the Epping–Parramatta line is estimated at $2 billion. It seems likely that the cost for the full North-Western rail line would be well in excess of $5 billion. How do we cover the shortfall?

Remodeling the suburbs along the route

The beer coaster calculations make it quite clear that the finances of our beloved new railway are marginal even if we squeeze 1,200 people on trains running every 6 minutes non-stop between 6.15 am and 8.45 am.

That means we need a nice steady supply of warm bodies arriving at the station. Where will they come from? This is what demands the remodeling of the suburbs along the route. Unless there are sufficient people who can use the rail line we will not even get to the stage of trying to convince them to use it.

Finding 30,400 people in a Sydney of 4 million during peak hour can’t be that hard, can it?

Well yes it can.

It is worth keeping in mind that, currently, the inner West line in Sydney only runs about 4 services per hour in peak time and you can usually get a seat at Petersham, which is one of the closer stops to the city. That means that, even in the relatively densely-populated inner Western suburbs of Sydney, it would be a struggle to get anywhere near 30,400 people.

Walkers are unlikely to want to walk more than 15 minutes to the station. It may be that most people will only be willing to walk a shorter distance. A 15 minute walk at a brisk pace is only 1.5 km. That means that the walker catchment for each railway station will be a circle of radius 1.5 km.

Bus links and commuter car parks can help extend the catchment for each station, but when you are trying to get an average of 2,026 people to each station during the peak hour, that means a lot of buses or a rather large commuter car park for each station.

The only practical solution is to permit or, better still, encourage medium-high density housing for a 1.5 km radius around each of the 15 stations. Ideally this would be mixed office/housing/retail construction so that the inhabitants of the 1.5 km zone might get away without having a car at all.

On the assumption that only 20% of the people living in the 1.5 km radius will be daily commuters, we will need about 10,000 inhabitants in each 1.5 km radius to generate the 2026 passengers. That is quite a lot of houses or, more likely, apartments (say 5,000–2 people per dwelling).

The re-modeling will not require an army of town planners. Simply change the zoning rules for the 1.5 km radius around each station to allow medium-to-high density construction of approximately 5,000 dwellings and let the builders and developers of Sydney do the rest.

If this approach was applied to the other rail lines in Sydney we may find that we can deliver an enormous supply of new dwellings (apartments) over the years ahead without any increase in the area occupied by Sydney. This would allow the preservation of the market gardens on the outskirts, which currently supply much of Sydney’s vegetables.

Needless to say, an increased supply of dwellings where people want to live will go a long way to making housing more affordable in Sydney.

What about the shortfall between construction costs and ticket revenue?

It might be possible to increase the weekly ticket price, but I think $50 is probably a price that will not cause too much “sticker shock”.

It is hard to justify making people outside the railway catchment pay the cost as they will probably have their own rail link developments to fund. It seems reasonable that the shortfall between ticket revenue and paying the construction cost should be recovered from all the property owners in the railway catchment as the rail line will increase the value of their properties.

This could be done by imposing an annual State “infrastructure” tax on houses in the catchment for as long as it takes to retire the bonds issued to raise the construction capital (perhaps 20 years). The rate of the tax could vary depending on the benefit to the taxed property of the rail line.

For example: the 75,000 dwellings (15 × 5,000) within the 1.5 km radius of each of the 15 stations might pay $3,000 per year for 20 years and the 300,000 dwellings (I have no idea how many there are!) outside the 1.5km radius but still within the railway catchment might pay $750 per year for 20 years. This ‘infrastructure’ tax would raise $450 million per year. Add in the $45 million from ticket sales and the annual total of $495 million would pay 6% interest on about $8.2 billion worth of government bonds (or less for a non-government borrower). Taking into account repayment of principal as well over, say, a 20 year period, the debt $450 million could support would be closer to $5 billion.

Not quite there, as the construction cost is probably a lot more than $5 billion but at least in the ball park!

Is it all too hard?

The numbers above are all beer coaster figures, but they do suggest that better public transport has a real cost and involves changes that cannot be imagined away.

Survey after survey reports that Sydney is sick of congestion and wants better public transport, and yet I cannot recall too many attempts by our politicians (of any shades of the political rainbow) to lead the debate as to what better public transport may require of us in terms of contributing to its cost and accepting some changes to the car-flavoured landscape of Sydney.

Perhaps that is the real obstacle to improving public transport in Sydney.

Conclusions

If we want new rail lines, we need to think more about what they require of us rather than what we require of them.
If we are serious about better public transport, we need to be serious about increasing the density of Sydney’s population (although not necessarily increasing the total population).
The main obstacle to building new rail lines in Sydney is low population density.
Building a new rail line will require substantial remodelling/re-zoning of the areas within a 1.5 km radius of each station, preferably a mix of medium-high density housing/offices and retail.
One way of funding the cost of better public transport is a state infrastructure tax on the properties that benefit from better public transport services.
The next time you catch a train in Sydney, take along a beer coaster and count the people on the platform, the density of housing around the station, the frequency of services and the price of the ticket and then start designing your own preferred extension to the City Rail network
Some suggestions—Bondi Junction to Cronulla via Kurnell (tunnel under the mouth of Botany Bay), Northern Beaches, Parramatta to Hurstville, Chatswood to Dee Why, Hornsby to Mona Vale.
It the context of the above discussion, it is perhaps unsurprising that people are raising questions about the rationale for an expenditure of $43 billion on the NBN.

Photo credit: coverling (copyright Creative Commons)

NBN in more than 140 characters

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migNow that Labor has scraped their way back into power, it looks very likely that the National Broadband Network will go ahead in some form or another. Debates on the merits of the scheme continue apace, not least on Twitter, conveniently labelled with the #nbn hashtag. One frequent twitter on this topic, @pfh007, is also a regular commenter here on the Stubborn Mule. It seems that his thoughts on “Fibre to the Home” (FTTH) can no longer be constrained to a mere 140 characters, so he has now written a guest post for the Stubborn Mule.

A friend asked me a few days ago whether I could state my position on the current NBN proposal in 140 characters or less.

Although 140 characters suits my attention span and typing speed, the FTTH NBN proposal requires a few more.

Please note I have no academic, technical or professional background in this area to give weight to my opinion. So take it for what it is – sideline commentary from my IT shed. But first an initial comment about the FTTH NBN debate.

Unlike many commentators, I do not feel that the debate has been sterile or shallow. Certainly, there has been some partisan barracking where views expressed seem to be simply based on what position a person’s political team is taking on the issue, and some commentators have let their passions get the better of their reason, but overall I have found a broad range of thoughtful and considered thinking on the issue in both the traditional and electronic media. I am confident that a full and frank debate about the FTTH NBN proposal will eventually result in a policy that will be in the interests of all Australians.

Some important throat clearing comments first up:

I believe that Australia needs better broadband access.
I agree that optical fibre is technically the superior technical solution to supplying fast high capacity broadband.

Some other important considerations:

The attempt in Australia to regulate a private monopoly of the fixed connection network was a dismal failure. It seems clear to me that the government must resume an important controlling role in the delivery of a fixed connection network to ensure that at least some regard is given to the public interest. Accordingly, it is important that the government buy back the farm (a.k.a the wholesale fixed connection network currently owned by Telstra).

Having bought back the farm, the government should immediately sell down its interest to 51%. The remaining 49% can be sold to private investors, ideally the retail suppliers who have, or should have, an interest in the provision of a high quality fixed connection network and thus actively contribute to ensuring that the fixed connection wholesale supplier is well run. One approach might be simply to leave a 49% interest with Telstra and let them sell down their share as they see fit.

The advantage of this approach is that the new wholesale fixed connection entity would immediately have a source of cashflow and the capacity to generate a commercial rate of return. Some of that cashflow could then be allocated to the improvement of the fixed connection network – more on that below. Additional investment could be raised by debt or capital investment by the shareholders. In short this entity would be making money from wholesaling access to the existing copper network.

The 51% government stake in the new wholesale organisation must remain in public hands as regulating private monopolies does not seem to be a strong point of our public administration.

While I am not entirely convinced that, given the choice, consumers over the next decade will continue to believe that a fixed connection for telephone/ internet is necessary, for reasons set out below I have assumed that every house will want and continue to require a fixed connection.

On the assumption that a fixed connection to every house remains desirable, it seems sensible that any new connections to new houses should be via an optical fibre. While I have no statistics to back me up, the cost of laying a new fibre connection as opposed to a new copper connection to a new house should be roughly similar. To the extent that optical fibre may be more expensive, the advantages of that technology would greatly exceed the difference in cost.

Households who currently have little or no access to a decent ADSL or HFC cable connection (the stuff used by Optus and Foxtel Pay TV) should be prioritised for improved connections. These connections could be initially fibre to the node (FTTN), to allow fast ADSL access, and eventually FTTH or if it is more cost effective to skip the interim FTTN step, FTTH immediately .

Fibre connections to public buildings or commercial premises should be given high priority as these users are much more likely to benefit from and be in a position to make practical use of the faster broad band connection that FTTH allows. Most of the applications for FTTH that I have read about seem most relevant to public or commercial buildings.

Households who currently have good quality ADSL or HFC connections would be given a much lower priority and may not be converted to FTTH for a long time or at least until demand clearly requires or the proposal outlined below is implemented. Assessing demand will be quite easy as, by that time, large numbers of new houses will have acccess to FTTH and word will have spread if it proves to be a compelling proposition for residential users. We will not need to speculate whether consumers will choose to improve their existing ADSL or HFC fixed connections to optical fibre.

Where sections of the existing copper network fail or prove to be more expensive to maintain than to replace they should be replaced with fibre.

Competition by private wireless networks should continue and be encouraged.

Will there be a continuing need for fixed connections to households?

Perhaps the greatest weakness of the current FTTH NBN proposal is the assumption by its proponents that a majority of households will wish to maintain a fixed connection (for telephone or internet) of any description to their home.

Increasingly many people, particularly young people, do not bother having a fixed phone connection at all. They have a mobile number and that is that.

This trend seems highly unlikely to reverse.

What does this mean for internet access via a fixed connection, arguably the only remaining persuasive reason for a fixed connection to many houses?

This year can be regarded as the year of the smart phone/smart appliance.

Although Apple iPhone had the field much to itself over the last few years, the rise of android, improvements to Nokia’s symbion and the impending arrival of Win 7 mobile seem likely to herald the storming of the mass market by smart phones.

Needless to say the market for iPads, tablets and e-readers will only further expand the demand for mobile internet access.

Although the limitations of wireless broadband are obvious to the old hands of fixed broadband (myself included) it is dangerous to assume that young people whose primary experience of the internet is framed by their smart phone gadget will see things the same way.

It may be that for most of their needs their smart phone will be perfectly fine and they will see no more need for a fixed broadband connection than they do for a fixed telephone connection.

Simply put – they may settlle for second best wireless connection because second best suits what they want from the internet.

They may wish for improved wireless broadband but it is not safe to assume that they will have a need for a fixed broadband connection simply because it is technically superior.

Mobility may trump speed and capacity.

At the present time, in the midst of explosive growth in consumer demand for mobile connections, the proponents of a FTTH NBN network are simply failing to articulate a persuasive case as to why the community should spend a large amount of money replacing the existing copper and HFC cable connections to the millions of households who currently have access to adequate broadband connections using those technologies.

To the extent that it is possible to gauge consumer interest in the FTTH NBN, it is clear that there will be insufficient consumer demand for its high speed fixed connections unless the consumer is denied the current fixed connection alternatives available to many of them – copper and HFC cable.

The most compelling argument in favour of a FTTH NBN

I have read much about the exciting ways the capacity and speed of FTTH broadband can be applied, but few of them are convincing as mainstream applications for residential users.

I appreciate that this may simply reflect the limits of my imagination and the imaginations of the current crop of futurists vibing the brave new world of FTTH, so I will keep an open mind that someone will come up with something in due course.

I believe there is only one application that makes a compelling case for a FTTH fixed connection network. Broadcast TV and video on demand including Pay TV and IP TV.

If radio tramission of all television was to cease when an area is fully supplied with FTTH and all free to air TV was supplied via the FTTH then many, if not all, households would demand a connection and a device that would allow them to feed the TV signal into their TV set.

Not only would this create a genuine need for FTTH but it would allow the considerable amount of valuable radio spectrum currently used by the analogue and digitial television broadcasts to be reused for other purposes including possibly 3G and 4G wireless.

There seems little justification for continuing to use valuable radio spectrum for the purpose of delivering SD and HD video programming which could be delivered simply and effectively by an optical fibre.

It is better that as much radio spectrum as possible is available for the provision of mobile internet access particularly as it is likely that mobile internet access will be favoured by many if not most consumers.

The auction of that spectrum to telcos and other wireless internet providers would go someway to defray the cost of the FTTH roll out, particularly those sections of the FTTH network where a universal service obligation may be the only reason for construction.

The availability and universal coverage of the FTTH would also allow multiple existing and new pay TV providers to use the cable as their main method of service delivery – especially to areas not currently supplied by existing technologies.

Summary

In short the proposal is as follows:

Have the government buy back a 51% interest in the wholesale fixed network – buy back the copper (this new wholesale fixed connection supplier would generate an immediate return from the existing copper fixed telephone and ADSL connections)
Fixed connections to new housing to be optical fibre
Existing houses with no access to HFC networks or ADSL to be provided with FTTN (or possibly FTTH)
Prioritise optical fibre connections to public buildings and commercial premises
No change to FTTH for existing houses with HFC or decent ADSL until it is clear that there is consumer demand to do so
All existing free to air TV to be supplied via the optical fibre to build community acceptance for non-broadcast supply of TV
As engineering and technical resources (including labour) allow progressively convert TV broadcast regions to FTTH and when connections are complete and operating turn off the broadcast TV signal
Auction the broadcast TV digital and analogue spectrum for alternate uses – say 3G and 4G wireless

The irony inherent in the proposal set out above is that while the FTTH connection could be used for ‘internet access’ as we currently understand it, the primary objective of the FTTH would be to facilitate the provision of increasing amounts of wireless internet access to mobile devices by removing TV (analogue and digital) from the radio spectrum.

Furthermore, it also suggests that the proponents of a FTTH NBN might be better served by promoting the capacity of the FTTH to deliver TV, pay TV and other forms of video entertainment that the consumers value highly as this would allow improved wireless connections to deliver the lion’s share of the internet access that most consumers are likely to want in the future.

For remote houses that cannot be connected with FTTH – satellite delivery of free to air TV and Pay TV should be available.