KEY POINTS:
Knowing where to invest capital is a complex decision at the best of times.
But when the world's largest bank is on the cusp of collapse, a 150-basis-point drop in the OCR is just another day at the office, and our currency has dropped by 35 per cent in six months, investment decision-making starts to look downright impossible.
For example, take investment in the highly complex and rapidly evolving fixed-line telecommunications space.
Last month a new 800-pound gorilla (government) stepped in and made the incumbent gorilla (Telecom) look like an angry squirrel.
The new gorilla has $1.5 billion to spend and the regulatory clout to materially change the game. The way this money is spent, and any regulatory changes, will have a massive effect on suppliers, current participants and new market entrants.
The game plan is yet to be determined, and as such it is very difficult for industry participants to assign capital and resources to ensure maximum impact.
Should CEOs, boards and shareholders throw their hands in the air and give up?
No. Now is the time to undertake an assessment of what the future could hold, and to position oneself to capture a disproportionate share of the upside, given the likely scenarios.
Using an option generation approach, our research suggests there are broad five paths that the industry could go down. Each path means a different outcome for consumers and suppliers, and for those who have invested capital or are considering doing so.
To position themselves well investors need to understand the investment implications of each path.
Scenario One - National reneges and Telecom continues. Some industry players are hoping the $1.5 billion will be donated to a home for disabled cats or used to plug some of the other gaps in the government books. If so Telecom could be expected to continue its current copper-based rollout, and the status quo ante will hold.
Scenario Two - National and Telecom renege. Both Telecom and government are in difficult positions. Telecom has been forced to invest in assets with limited price certainty or control, in a challenging regulatory environment with an operational separation structure widely seen as unworkable. Similarly, government sees difficult times ahead and may choose to retain this cash or invest in areas better suited to this end of the year. (The promises were first made early in 2008, when the climate was generally happier.)
Scenario Three - Government 4 Telecom 4 eva. Some believe the best path is for government to introduce 'Fibre-to-the-node (FTTN) on speed'. In other words, Telecom is given the cash to do more or do it faster. Here, cabinetization is undertaken faster and closer to the edge of the network.
Scenario Four - Fibre-to-the-premises (FTTP) with Telecom alignment. Telecom and government work out a way to play nicely together to roll out FTTP. Under this scenario the investment in copper stops overnight, and projected capital is largely reinvested in FTTP.
Scenario Five - FTTP with Telecom competition. National invests $1.5 billion with willing partners (excluding Telecom) and builds a network over the top of Telecom. Infrastructure is, at least in part, replicated and competition exists between two networks.
By fleshing out the details and forming a view on the potential role one could play and the corresponding returns, investors can ensure they understand the value of each option and are positioned to either influence the decision-makers or move quickly when decisions are made.
In these times of uncertainty and rapid change this analysis could be the difference between becoming the capital investment oracle or the 'also ran' of telecommunications in 2009.
* Dr Paul Winton is a partner at capital investment company Temple Investments
