Chris Barton: UFB contract no surprise

Photo / Chorus

The news that Telecom has won the bulk - $929 million - of the government's $1.35b ultra fast broadband money isn't a surprise.

It's been, um, telegraphed for months in communication minister Steven Joyce's machinations over the Telecommunications (TSO, Broadband, and Other Matters) Bill which gave Telecom the inside running.

What's apparent now is that it was Joyce's cunning plan right from the start. Fast broadband was a secondary goal. Cutting Telecom down to size was always the main prize. And for that we have to be grateful. After more than 20 years of living with a rapacious monopoly that's underinvested in infrastructure, stifled competition and short-changed the New Zealand consumer at every turn, we may at last have the beast under control.

But while Joyce has finally slain the giant and dismembered it - into Telecom, the retailer and Chorus, the network owner and (apparently) a fair and open-to-all-comers wholesaler - he has missed a once in a lifetime opportunity. That was the chance to build a truly great fibre network unencumbered by the legacy of the past and to bring the benefits of real network competition to New Zealanders.

Instead, by the time the new fibre arrives over the next eight and half years, most of the country is going to get fairly average broadband. In relative terms, I suspect not much better than what we have now. It's not that I don't think Chorus can build the fibre network to our homes, just that the company carries so much baggage that it will inevitably become bogged down.

Tour one of Telecom's exchanges and you'll know what I'm talking about - a morass of ageing copper wires that we all use. Even Telecom's much vaunted roadside cabinets are still wedded to the ancient copper and the return on the cabinet investment is something Chorus will juggle and leverage against its new fibre.

Joyce did have the option of choosing network partners unencumbered by the copper legacy and the shackles of old-telco mentality. Companies not tied to the telco model of multiple layers of complex products and services shrouded in marketing confusion.

Companies that could start afresh and deliver just one thing - big bandwidth connectivity. Joyce had the chance to build a totally new fibre network - the equivalent of putting bullet train tracks alongside our inadequate narrow gauge railway lines. Such a network parallel to Telecom's existing monopoly would have introduced real network competition . What's difficult to fathom is why, in the face of such a great opportunity, Joyce mainly chose monopoly.

The prime argument for giving the money to Telecom has always been that it makes financial sense not to duplicate the network, that we are a small country, that we can't afford such infrastructure. It's an argument that's completely bogus - one look at the national broadband map shows we are a nation of multiple fibre networks.

In the greater scheme of broadband communication, multiple pathways are a good thing - bringing competition, consumer choice and network resilience.

Joyce's hidden agenda isn't new. He did much the same in the rural broadband negotiations - clearly favouring the $285 million Vodafone/Telecom deal because he decided getting mobile to rural New Zealand was more important than fast broadband. In doing so he may have given the backblocks better mobile coverage, but he has forever consigned rural New Zealand to the slow lane of 5Mbps broadband communication. There were plenty of other bids on the table that would have brought fantastic new services to farmers at ultrafast 100Mbps, yet Joyce chose duopoly.

Joyce is clearly a pragmatist who tends towards a better-the-devil-you-know view. In my book, he'll be remembered as the minister who missed the main chance. There is however another dimension to the debate that Joyce has conveniently ignored. To be fair, much of it was not of his making.

It begins in 1990 when the then Labour government sells our telecommunications network to a consortium of investors for $4.25 billion. In 1999, columnist Brian Gaynor pointed out just how bad this was for New Zealand.

Since privatisation Telecom had, by 1999, paid $5.5 billion in dividends and its total value had risen from $4.25 billion to $16.6 billion. "More than 80 per cent of this $12.3 billion increase in value has gone to overseas investors," said Gaynor.

Had the government opted for a partial sale of Telecom, similar to the Telstra sale in Australia, Gaynor noted it would have reduced "the wealth transferred to overseas shareholders by more than $8 billion and increased the wealth of New Zealand taxpayers and investors by the same amount". In other words an $8 billion to the New Zealand economy. One shudders to think what the loss is today.

It's with the knowledge of this incredible blunder that one has to ask just how wise it is to hand over $929 million of government money to a monopoly built on the primacy of shareholder value over public utility. Not to mention the fact that Telecom's underinvestment in infrastructure is what got us to this point - the government having to intervene to make Telecom build the fibre we need. By now we should know that the free market and monopolies are a disastrous mix.

Before we trundle once again down this well travelled road that has drained so much of the country's prosperity, there are two hurdles yet to negotiate. One is Telecom's shareholders - three-quarters of which are needed to support the split of the company when they vote towards the end of the year.

While a separated Chorus should curtail many of Telecom's anti-competitive ways, some shareholders may argue a Telecom intact without the UFB is better bet. As one analyst put it, shareholders should be wary of "the earnings dilution and narrowing of business mix" that will arise from the proposed separation and the loss of Telecom's "legacy copper network".

Then there are the Maori party votes. The government needs them to pass the Telecommunications (TSO, Broadband, and Other Matters) Bill next month which is essential for the agreement to go ahead. The party has already been instrumental in getting last minute changes to the legislation.

What it has gained by casting its vote with National is NgaPuWaea, an advisory group which will work with Crown Fibre Holdings and its partners "to facilitate Maori development opportunities associated with the UFB". Possibly good for Maori, but like Joyce short-sighted about the long term implications and blind to what might have been.