Fibre birthing pains - it might get loud

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.