OPINION: The ultra-fast legislative subsidy

IDC analyst Rosalie Nelson asks if it is time for a rethink

At times we all want things we can’t afford. Most of us defer or scale back our ambitions. The New Zealand government wants something it can’t afford: national rollout of ultra-fast fibre for New Zealand, to which it is contributing just $1.35 billion dollars — roughly a third or less of the total cost. It is therefore pulling all the regulatory and policy levers at its disposal to justify its business case and attract private investment.

This was at the heart of the often acrimonious debate during the Select Committee hearing into the Telecommunications Amendment Bill this week (a process which at times bordered on the farcical). Sir Roger Douglas perhaps summarised it best when he dubbed the Bill a legislative subsidy.

Amidst all the rhetorical smoke and inevitable political posturing associated with public consultation, there was a cold hard truth to the industry’s very real concerns: within this Bill we are overriding established competition and regulatory principles and instead ceding significant power to government.

Take the contentious issue of regulatory forbearance. Wholesale fibre prices are to be contractually agreed between the private partners and government, exempt from review by the regulator for a period of 10 years. This is an explicit recognition that fibre is costly and has a long-term business case: the UFB partner requires certainty in terms of return on investment, without the rules changing. Given the cost and complexity of the proposed structural separation of Telecom, when weighed against the relatively small investment by government, it is easy to understand Telecom and other UFB participants requirement for risk reduction.

But IDC believes this is the wrong solution. We need to balance the investment incentives alongside the fact we are creating not only a fibre monopoly, but potentially a total fixed copper and fibre monopoly, if Chorus is selected as a partner. In this Bill, the government is making itself de facto regulator, whilst also being an investor, supplier and significant fibre user — and that represents a serious conflict of interest.

Under the Bill, there is little to stop amendments being made, at the expense of competition policy, to protect the government’s investment and political desire to make this an ‘election win’. Much of the challenge is not in these early stages — it is when the realities of fibre rollout begin to bite. For example, what happens if fibre adoption is not as rapid as hoped for: will the government then artificially raise copper prices to force retail service providers to migrate to fibre — just to support its investment?

This is an opportunity lost. We could have led the world in developing a robust, next-generation policy framework: one that allows for economic cost-benefit analysis of fibre investment and the need for a return, balanced alongside sound competition and regulatory principles.

To this end, we could have expanded the current competition-focussed mandate of the Commerce Commission into a wider brief that encompasses commercial incentives and economic outcomes, as we have seen in other markets. Instead these regulatory changes subvert established regulatory and competition policy principles.

That carries sovereign risk for New Zealand. We are consciously removing the incentives for alternative investment and, given our short three-year political term, committing ourselves to a regime that becomes prey to political interference, outside established principles of independent regulatory scrutiny for the next decade — a critical period of development for the sector.

Is this really what we want? New Zealand faces immense infrastructure and economic challenges in the wake of the Christchurch earthquake, along with a $10 billion quake-related taxpayer bill. There is a rational argument right now for a shift in government strategy that prioritises the reconstruction of Christchurch, focusing on fibre to schools, businesses, universities, public sector institutions and greenfields developments.

The programme could push ahead with rural broadband for under-served rural communities, and expand backhaul and international network links to drive growth in new access technologies, particularly mobile.

A national fibre-to-the-home network would remain a target, but be deferred for a defined period. Instead the focus might be on an interim consumer boost with a more rapid rollout of VDSL2, with its speeds of up to 50Mbps, capitalising on completion of Telecom’s fibre-to-the-node programme.

After all, this was originally a politically-driven initiative to drive better broadband for New Zealanders — it just never had time to play out. New Zealand would then have time to develop demand drivers for fibre, and address bottlenecks in the delivery of fibre-dependent content and services.

To change course now wouldn’t be easy: but neither are the economic circumstances confronting New Zealand. Is it time for a rethink?

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