The ultra-fast legislative subsidy

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?