You can't rely on a cost-benefit analysis: Productivity Commission

The commission said the process should be used only as a tool to aid decision-making

The independent research and policy advisory body charged with conducting the cost-benefit analysis of the Gillard Government’s $43 billion National Broadband Network (NBN) has conceded the process is merely a “useful tool” and cannot be solely relied upon.

At a joint committee into the NBN, the Productivity Commission commissioner, Mike Woods, admitted that the numbers from a cost-benefit analysis are simply the product of many “complex” assumptions that have been made by the researcher and should be used only as a contributor to decision-making.

“A cost-benefit analysis can be a useful tool to shed light but it doesn’t mean there’s any certainty approaching either the cost side or the benefit side,” Woods said.

“A cost-benefit analysis in itself should not be the basis of decision-making; it’s purely a tool to help, that’s all we’ve ever claimed it to be.”

He also noted that a cost-benefit analysis, particularly on a project associated with technological infrastructure expected to be in existence for the next 50 to 60 years, has a wealth of uncertainties around the future as technology is so rapidly evolving and to predict the benefits for even ten years into the future would be impossible.

“In an area of technology especially uncertainty is probably more profound and it would be incumbent on you to be very clear that the assumptions you made could be, A, tested by others in the field, but B, taken into account by those who are making decisions in part influenced by such an analysis and I repeat, we don’t see cost-benefit as the answer but is purely a tool in identifying both the cost benefits and issues surrounding them,” Woods said.

“However, some quantification or elaboration of the uncertainties can aid in public policy judgement.”

According to Woods, “a cost-benefit analysis is only as good as what you do with it” and should it be based on assumptions which are incorrect, would result in a useless cost-benefit analysis.

Despite the need to ensure the assumptions in the analysis are correct, Woods confessed he was not an expert on cost-benefit analysis.

“I wouldn’t consider myself one of the foremost technocrats, I’m sufficiently familiar with it but there are various complex matters about discount rates, about treatment of uncertainty that about three or four people in the country explore to infinite detail.”

Commenting on the Telstra separation, Woods said the commission had included statements in reports from both 2001 and 2005 that noted significant problems with vertical integration within the telecommunications industry, despite strict instructions from the Howard Government to exclude recommendations on the subject.

“The commission had the view in its 2005 report and in fact if you go back to I think 2001 that vertical separation in whatever form ... removed the potential for a company which has a monopoly component to it to therefore exercise control in downstream markets such as retail service provisions,” he said.

“That was our view at that time and I see no reason to change that view.

“We had a term of reference which requested us not to examine the question of structural separation, therefore we didn’t report on the structural separation of Telstra in that report but we did in Chapter two, as I recall, make general reference to the policy consequences of having vertical integration.

“We raised some issues in relation to structural separation, we didn’t as per our terms of reference, make an inquiry into that issue but in a general principle we drew attention to it.”

Follow Chloe Herrick on Twitter: @chloe_CW

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