Excellent OECD report on broadband and stimulus

[Here is another excellent OECD report on broadband and stimulus. As with several other reports they stress the importance that government investment should create a competitive, open access infrastructure. The choice of network topology is critical for enabling competition. Some excerpts – BSA]

http://www.oecd.org/dataoecd/4/43/42799709.pdf

At the same time, governments recognise that competitive broadband communication networks are increasingly fundamental to economic and social development. They are
viewed as a general purpose technology that will not only support critical services but are required for innovation, competitiveness and growth across economies.

When the public pays for broadband investment they should expect to benefit from improved service and greater choice in the market place. One means to accomplish this is to ensure that networks built or augmented using any public funding are available via “open access” rules, meaning network providers offer access or capacity to all market participants on cost-based, non-discriminatory terms.

The physical topology of broadband networks has a significant impact on the potential for competitive access in the future. In general, the topologies which offer the most access to competitors are the most expensive to install but may also provide more longer-term economic benefits and improved consumer surplus than other topologies. By way of contrast, some topologies may serve to strengthen existing dominant positions in the market and should be carefully considered before governments commit any public funds. Public investment in passive infrastructure may be another important way for governments to put people to work and build a platform for future economic growth without displacing private-sector investment.

Economic literature focuses on two types of government spending, “productive” and “nonproductive”. The term “productive” relates to government expenditure that can be included in the private production function and thus is the only kind of spending which has an effect on long-term economic output. In other words, productive spending would increase the productive capacity of individual firms via
externalities (Kneller et al., 1999). In terms of the current crisis “unproductive” investment can fulfil the first goal of putting people to work but will not affect the second goal of expanding productive capacity.

The focus on “productive” spending is important because it works as a positive externality to firms in the economy. Angelopoulos et al., (2007), refer to this spending as “the engine of long-term growth” and suggest that governments could improve their growth performance by reallocating public expenditure
towards productive activities. This has implications for policy makers considering government stimulus investment. Government spending should target “productive” investments whenever possible because of the dual effects they can provide. They essentially offer much better returns for the same initial investment.
Infrastructure investment can be “productive” because of its effect on long-run aggregate supply

Network investments are typically used as examples of “productive” government investment because of the positive externalities they provide. Aschauer (1988) finds that investment in core network infrastructure, including roads, airports, electrical and gas facilities, mass transit, water systems and sewers
have a strong and significant impact on economic productivity.

Government policy makers should consider four key goals when considering investment in the telecommunication sector: improving connectivity, increasing competition, stimulating innovation/growth and increasing social benefit (see Figure 4). All four elements are highlighted in the Recommendation of the OECD Council on Broadband Development.8 Successful government investment needs to address and
strike a balance of all four elements. Focusing investment on just one element could actually leave telecommunication markets worse off than before the investment. For example, money invested which creates or strengthens a monopoly provider may expand connectivity but will likely stifle competition,innovation and possibly social welfare.

Government investment in telecommunication networks must be used to foster competition and not to entrench existing operators at the expense of potential new entrants. One risk of governments investing in telecommunications is that they tend to have to choose winners in the market.

It would not be desirable for public funding to strengthen monopoly or duopoly service providers at the expense of new entrants. All investment should help promote competition for broadband access from the start. When governments do decide to intervene in markets by subsidising communication networks they should consider requiring the resulting network be available via “open access” rules. The term “open
access” refers to an arrangement where network providers offer capacity or access to all market participants under the same terms and conditions. Operators of open access networks must allow competitive access to the network on non-discriminatory terms. Open access networks play an important role promoting competition and can help offset market imbalances when certain firms receive government
funds but competitors or later entrants may not.

The level of competition possible on a network is closely tied to its topology. Any government investment in telecommunication networks must take the implications of different topologies into consideration when evaluating projects. There are benefits and drawbacks to each of these topologies. In general, topologies offering more
competition are relatively more expensive to install but will usually have more longer-term economic benefits:

Broadband networks are already an important foundation for innovation and growth in the OECD. Telecommunication networks helped improve the efficiency of virtually every sector in the economy. Their impact can be seen easily during this economic downturn as people turn to the Internet to look for jobs, gather information and shop for discounted goods. Teleconferencing over the Internet has helped
firms deal with decreasing travel budgets and environmental concerns. Finally, the Internet has become one of the leading sources for information, news and entertainment in OECD countries.