Broadband to cost Telecom

$168 million wiped off earnings over three years

Telecom has warned that a Government-ordered splurge on rural broadband and changes to the Telecommunications Service Obligations would wipe up to $168 million off its pre-tax earnings over three years, sending Telecom shares down to a record low.

The changes would apply equally to the following three years, doubling the hit on Telecom to $336 million, an analyst said.

Telecom's shares fell 4 cents to close at new low of $2.17, yesterday.

Communications Minister Steven Joyce yesterday said the Government would press ahead with a proposal he put forward in September that would force Telecom to pay the lion's share of a new Telecommunications Development Levy, designed to achieve a "step-change in rural broadband".

From July, Telecom will also be obliged to shoulder the full cost of providing phone services, at a loss, to 58,000 customers, most of whom live in remote areas.

Joyce said the $300 million that would be raised by the new levy would be sufficient to connect 900 rural schools with fibre-optic cable and ensure 97 percent of the one million Kiwis living in the country got access to broadband at speeds of at least 5 megabits per second.

Companies including Telecom will be able to bid to build the infrastructure in any of up to 20 regions, through a tender that will be let by August.

Joyce said the rural scheme — and the Government's separate $1.5 billion UltraFast Broadband initiative targeting urban areas — would ensure New Zealanders got telecommunications services "equal or better than anywhere in the world".

Federated Farmers chief executive Conor English said the scheme was a "good first step", but he was disappointed the government had not put $500 million into the rural scheme and unveiled more ambitious speed targets.

The rural sector had a track record of productivity improvement, and broadband was the next big "enabler", he said.

"So if you are wanting a step change in the economy and to catch Australia, logic would tell us that you would be over-investing, not under-investing, in rural broadband infrastructure."

As it was, the scheme would be a "stop-gap" measure in tackling the digital divide between urban and rural New Zealand, he said.

Telecom, as the country's largest telecommunications company, would pay about two-thirds of the rural broadband levy.

It will also lose the $23 million a year it receives from other telecommunications companies as their share of the Telecommunications Service Obligations (TSO) levy.

That levy will be mothballed, unless the profitability of Telecom's fixed-line network falls to the point where it becomes wholly uneconomic.

The changes would cost Telecom $56 million a year, confirming a scenario chief executive Paul Reynolds described in November as "one extreme view of the world". Joyce said Telecom would still be obliged to provide free local calls and keep increases in phone line rental charges at or below the rate of inflation.

The new broadband levy will require a law change, and Telecom spokesman Mark Watts said that would give the company another opportunity to express its concerns and discuss details.

"This is a significant impost across the industry.

"In the meantime, we will keep investing in rural New Zealand as we have done."

A small consolation for Telecom was that the TSO levy would remain in place this year and the Telecommunications Development Levy would not be introduced until the following financial year, Watts said.

That means the rural telecommunications plan should not affect Telecom's forecast of a $400 million to $440 million net profit this financial year.

Joyce had originally proposed back-dating the levy changes to last July. Telecom had argued that would be illegal and would have amounted to "expropriation".

Craigs Investment Partners analyst Geoff Zame believed most analysts would have incorporated the rural policy into their forecasts after the proposal was unveiled in September, given it appeared unlikely to change significantly.

But he said some investors might have hoped Telecom would have been able to negotiate a better outcome.

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