HK firm alleges separation views not considered

There's more to the latest round of submissions on Telecom New Zealand's operational separation than concern about how executive pay-packets are structured.

One submission, from Hong Kong-based investment firm Elliot Advisers, which says it has significant interests in Telecom, insists the current separation plan is unworkable, expensive and will fail in its efforts to promote broadband investment and competition.

Titled "Improving Telecom through true separation," the submission lays out an alternative separation proposal involving a structural split into two units rather than an operational split into three, as currently planned. The two units would be a network and wholesale business, dubbed Netco, and a retail unit, dubbed Newco.

Elliot has made this proposal before, in earlier rounds of submissions, and suggests these and other submissions on the separation have not been given due consideration.

"We believe that many of the criticisms of the Original TCNZ separation plan raised by ourselves and other submitters have not been satisfactorily addressed (if at all addressed) in the revised TCNZ separation plan," the submission, dated January 25 says.

It goes on to say "The fact that amendments contained in the revised TCNZ separation plan appear to closely follow the Telecommunications (Operational Separation) Amendment Determination 2007 seems to indicate that discussions between the government and TCNZ have been incorporated into the revised separation plan above the comments of submitters."

Calls to James Smith, managing director of Elliot Advisers, were not returned by deadline.

New South Wales-based telecommunications analyst Paul Budde backs Elliot Advisers' analysis, saying he has always favored a two-way structural split.

"I can't see any reason why the wholesale and network units can't remain together as long as the whole thing functions," he says.

"It's in the interests of the network company to offer the best possible wholesale. The network is nothing without wholesale."

In a section titled "Summary of concerns", Elliot says the problems with the original separation plan continue and that means the government's stated goals in separating Telecom -- basically improved competition, non-discrimination and investment -- may not be achieved.

The submission says Elliot cannot see how the units created under the current three-way operational separation plan can operate at arms-length, as there is common ownership, a common CEO and a common board, among other aspects of the plan.

Given that, it says the high costs of separation can't be justified, especially when these funds could be used for investment.

Budde agrees, saying the current plan is not a real separation. He says the fact Telecom has suggested the wholesale division be rewarded based on the overall performance of Telecom is "totally unacceptable" and throws into question Telecom's genuine acceptance of separation.

Elliot says its two-way separation proposal, involving full structural separation, would allow the network and wholesale unit to focus on delivering "21st century performance" while the retail unit focuses on customer needs.

Ownership separation would enhance the credibility of the regulatory framework and avoid complex governance issues, the submission says.

Elliot Advisers goes on to say that conflicts of interest within the new structure as currently planned will create decision-making uncertainty and undermine arms-length separation. Telecom remains incentivized to engage in discriminatory conduct and exploit loopholes in the undertakings, the submission says.

These loopholes include vague definition of the "equivalence of inputs" for resold retail services (such as unbundled bitstream), the ability to use contractors to avoid equivalence standards and information sharing, and the active involvement of the CEO in day-to-day management of the three units.

Communications and information technology minister David Cunliffe is currently considering the submissions. In a statement he says they have raised a number of outstanding issues.

"While I am conscious of the need to progress the operational separation process as quickly as possible, I am carefully considering all options available to me," he says. "Accordingly, at this stage I am not ruling out any options, including potential rejection of the Amended Plan."

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