Govt plans to phase out controversial Telecom levy

Vodafone, which paid $18 million last year, welcomes the proposed change. Photo / Northern Advocate

Telecommunication companies would stop paying a levy used to subsidise Telecom for providing services to unprofitable customers but would instead have to fork out for rural broadband under new Government plans.

Steven Joyce, Minister of Communications and Information Technology, yesterday released proposals to phase out the Telecommunications Service Obligations (TSO) levy and set up a new $300 million rural broadband initiative.

The TSO levy was originally set up when Telecom was privatised in 1990 to ensure people living in areas where it was not commercially viable to provide a line were catered for.

Last year $70 million was allocated to Telecom for the levy, of which $23 million came from other telecommunications providers.

But Joyce said the Government was concerned by the lack of transparency over where the money was being spent and whether rural customers were benefiting from it.

"The existing TSO levy has been in place since 2001 and has been a source of considerable controversy within the industry."

Joyce said a review of the levy had found the current methodology was flawed because it counted the costs Telecom incurred but not the benefits.

The Government wants to change the methodology to count both the costs and benefits and believes this would reduce the levy to zero. It is proposing to drop the levy to $50 million over the next six years and then phase it out completely.

Vodafone, which paid $18 million to Telecom last year for the levy, welcomed the proposed change.

"It has been a thorn in the side of the industry for many years," a spokesman for the company said.

Telecom chief executive Paul Reynolds said reform was long overdue but that any subsidies applied to fund services to uneconomic customers needed to be spread over all consumers, not just Telecom's customers.

Telecommunications Users Association chairman Chris O'Connell said the changes were not designed to favour any particular player but to open up the market and make it more competitive. He said it appeared Telecom had not yet "got its head around" the open competitive market the Government was setting up.

"The idea of funding Telecom in an incumbent model has done its day."

O'Connell said the Government's confirmation on where the money would come from for its rural broadband was good news as it brought certainty.

"People weren't sure whether that was being carved off the $1.5 billion announced in the Budget. Now it is apparent that will be separate money from a separate source and will be open and contestable."

Joyce said the $300 million rural broadband plan would be financed through a combination of direct Government funding and revenue from an industry levy. The Government would put in $48 million and interim funding of up to $52 million but the remainder would come from the industry over the next five years.

Telecommunications Industry Group (TIG) chief executive Rob Spray said the Government proposals essentially replaced one form of tax with another and the added cost would have to be passed on to the consumer.

"While the TIG supports further investment in rural New Zealand, doing it through an industry tax is not an approach that we uphold.

"The TIG will be looking into ways to evolve this tax and pass it on much as airport taxes or road taxes are passed on directly to customers."

* Breaking the levy

The Telecommunications Service Obligations (TSO) is the levy used to subsidise Telecom for providing services to unprofitable customers, including rural users.

Last year $70 million was allocated to Telecom of which $23 million came from other telecommunications providers.

The Government is proposing to drop the levy to $50 million over the next six years before phasing it out completely.

The telco industry will have to contribute to the Government's $300 million rural broadband initiative.