Could we learn from the Mongol Horde?

Splitting Telecom into two companies may be the way forward

It’s not often you hear New Zealand’s electricity sector reforms referred to in glowing terms, but I did the other day, and I’ve come to view the shambolic situation in a new light.

I spoke with John Third, managing director of Guinness Gallagher, a Wellington-based consultancy that specialises in sorting out problems with publicly-owned infrastructure. At the moment, Third is working on fully privatising and breaking up Mongolia’s telco incumbent. He has a few ideas about our own telco situation as well, which we will come to shortly.

The electricity sector in New Zealand has often been ridiculed, and, from a customer’s point of view, I have to say I agree with its detractors. The reforms have not led to cheaper electricity. Nor have they led to a reduction in the number of threatened power outages, or delivered on the promise of (pun intended) a brighter future.

Instead, they seem to have delivered four monopolies instead of one, and a blueprint on how not to break up a monopoly.

Not so fast, says Third. New Zealand’s electricity sector reforms should be the envy of the world. We have, he says, the best, most responsive electricity sector in the world, and it’s only the actions of the government-owned regional power companies that have created the mess we’re in today.

Instead of competing with each other, the companies swapped customers, so creating four regional non-competing companies, instead of four national competitive ones. That the government has allowed this to happen — and continues to tinker with the model instead of selling-off the four companies and creating a real level-playing field — shouldn’t be held against the reforms themselves, says Third.

He might be right, you know.

As far as telecommunications is concerned, Third says the solution is very simple and straightforward.

“Structural separation is the answer and it’s nowhere near as difficult as they think.” Third says the most difficult part is the willingness — or not — to engage with the issue at its most fundamental level.

“Telecom would be better off if it was split up,” he says.

Third says splitting Telecom into a network company and a services company is the way forward, as both sides of the business have competing and contradictory business plans.

“Networks are low risk and low return, and have low complexity. Service companies are higher risk, for higher return, and are far more complex. Networks have long life spans; service companies deal with shorter lifespans for products.”

Basically, Third believes that having one company trying to fulfil both roles means “destroying value” on both sides of the business.

“Networks are better [if they are] owned by pension funds that want a steady and reliable return on investment.”

That’s a telling point, I think.

Investors would be free to chose either the new network company, with its steady-as-she-goes income stream (building a network that any and all service companies could use), or the full-blooded competitive services arm that fights it out on the most level of playing fields and has to stand on its own two feet.

Telecom’s retail service arm comes in for a lot of criticism because, in many respects, it’s the only option available. Quite often that’s unfair. The directory assistance crowd do, as the ad says, go out of their way to help connect callers, and, I’ve always received good service from the JetStream helpdesk staff.

Perhaps this is the way forward? Forget the politically charged unbundling issue and focus on solving the actual problem at hand instead.

If it can work for the Mongolian telecommunications industry, perhaps it can work here?

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