Opinion: Fibre birthing pains - it might get loud

Rosemay Spragg predicts a harder ride for UFB with public input

The New Zealand government has had a relatively easy ride to date with its populist Ultra Fast Broadband initiative.

The Telecommunications Amendment Bill, currently before the Finance and Expenditure Select Committee, presents the first opportunity for the government’s recent UFB decisions to be formally debated in a public forum. IDC expects many network operators to strongly oppose (at least parts of) the Bill, particularly with regard to the regulatory concessions being afforded to the Local Fibre Companies that will build and own the UFB network.

In July 2010, the government amended the UFB tender in three key areas. For the first 10 years: LFCs no longer have to offer mass market dark fibre; pricing will be agreed with the government with no independent review by the regulator; and LFCs will not have to meet equivalence requirements — meaning that they will be able to discriminate against competitors in favour of themselves when supplying any dark fibre services. These amendments, as a whole, significantly limit the scope for infrastructure-based competition.

There is real industry concern that these concessions will undermine years of hard-fought regulatory change that spurred competitive investment, innovation and consumer choice. And with the government acting as both an investor in and quasi-regulator of the new fibre network, suspicion surrounding the government’s approach is heightened. This is particularly so, as it enters into detailed negotiations with Telecom regarding that company’s potential participation in the UFB initiative and consequent structural separation.

It may be argued that the government should not be concerned with preserving the legacy business cases of the industry today, to build a fibre future for tomorrow. Not everyone will be satisfied. But we need to be cognisant of the sovereign risk that exists for this country as an investment destination.

If a government is seen to overbuild (at a lower cost of capital) private investment that regulation has sought to stimulate, or redefines competition policy to support its taxpayer funded investment, then it is not hard to see investment priorities shifting elsewhere.

But we can at least take some comfort in knowing we are not alone. The Australian government is taking relatively extreme measures to ensure the commercial viability of its National Broadband Network (NBN) programme. Legislative changes are being introduced so that any private entity that invests in competing high-speed broadband infrastructure must provide wholesale access to its competitors on the same terms and conditions as the NBN.

Furthermore, the Australian government is indicating it will consider introducing a levy to prevent what it terms “opportunistic cherry picking”, that is, private investment in fibre infrastructure in commercially attractive areas. Try that here, and the industry backlash would be swift and noisy.

IDC believes robust debate about the implementation model and approach of the UFB Initiative is long overdue, and this year it might get loud.

Nonetheless, with a change of government looking unlikely and a steadfast commitment by the government to make the UFB Initiative work in its current form, IDC believes that the legislative changes proposed to date will proceed largely unchanged.

The only factor that might ultimately derail the process is a decision by Telecom to walk away from the UFB process — an outcome that looks increasingly unlikely with Telecom now officially prioritised for negotiations.

We are unlikely to ever see a cost-benefit analysis for the UFB Initiative and the related regulatory changes.

It is a political rather than economic initiative, although the scope for economic benefit is significant (if unquantified). This should not be taken as a criticism of the intent or vision of the initiative — IDC believes that it is a great opportunity to deliver fibre on a scale and within a timeframe that would otherwise be uneconomic.

It is a bold vision that represents a broadband step-change for New Zealand.

However without robust debate regarding the risks of the intervention model, the long term impact on the telecommunications industry and a clear strategy for realising the benefits of an open access ubiquitous fibre network, we are at risk of becoming the international model for how not to invest in fibre, not to mention missing an opportunity to establish a sustainable high-speed broadband network platform and regulatory regime that will drive economic growth and social development

Spragg is an IDC NZ Telecommunications market analyst

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