KEY POINTS:
For several years New Zealand has languished down the bottom of the league tables for broadband penetration and quality. This year the world changed.
In early 2008 both Labour and National admitted that, for communications, 'the market' just wasn't going to get us there. In March, National trumped Labour by announcing an ambitious $1.5 billion investment into fibre-to-the-premise broadband to 75 per cent of premises over the next six years. About a month later, Labour announced a smaller investment of $325 million into broadband infrastructure.
Neither plan is perfect. Relative to National, Labour's plan lacks scale and clarity of outcomes. Conversely, the National plan could significantly change the landscape if designed well, but equally, if done poorly could scare away investment.
Whilst there have been detractors of both models, the important thing is that both parties are behind change at faster than market rate.
Telecom's slow rollout using copper technology is perfectly reasonable for them. They're going as fast as shareholders will allow them to and there's no reason for them to accelerate it.
Sadly for New Zealand, if we continue to roll out fibre at this rate we won't get the sort of capabilities our close Asian neighbours like South Korea have until about 2040. Many in New Zealand think a thirty-year lag is a bit much to swallow.
In spite of this there is some concern that the National programme might simply lead to ongoing dominance by Telecom. If National does its job well this won't happen, for three reasons:
First, Telecom's current capital structure isn't suited for investment by government, and Telecom has demonstrated a reluctance to address this. National has intimated that it wants a public-private partnership (PPP). To receive the $1.5 billion Telecom will need to be properly separated - the structural separation that has been discussed at length in the media. New Zealand can then be assured the money and returns flow to and from the network rather than to offshore shareholders.
National wants a PPP with a network company, not with Gen-i. This is the problem with telcos around the world. All the capital needs to go into the wires, but the returns from doing this are uncertain. For that reason, we're increasingly seeing a trend to telco models that separate the network owner and the retailer.
Networks are the monopoly, often supported by governments or communities, and will generate infrastructure returns from long-life monopoly assets for those who want this.
Meanwhile, the higher-risk retail businesses generate higher returns for those who want higher risk-return balance. Telecom needs to move to complete separation if it wants to be a meaningful part of a network consortium.
Second, Telecom is committed to a copper-based rollout. While there are some common elements, shifting to a FTTP model would be a big change that goes against its current strategy, and it has publicly stated a disinterest in FTTP.
Moreover, Telecom is committed to a copper-based rollout through its operational separation agreement. This could be undone but would require alignment between government and Telecom, and a significant change in strategy from Telecom.
Last, Telecom is the highest-cost player in town. If Telecom was to undertake this work it would be obliged to dig up the streets to tunnel fibre to every premise served.
Conversely, lines companies like Vector and Orion have deployment costs half those of Telecom by their use of unobtrusive overhead cables. On a bang-per-buck basis, lines companies win hands down.
We're talking about kingmakers in politics. Is it Winston, is it the Maori Party? The kingmaker in communications is the lines company. In a decade, if they play their cards right, lines companies will be the owner of the communications network in New Zealand. We're already seeing that with the leading edge companies like Vector and Northpower.
So what happens first under, say, a National-led government?
The first thing is to get people around the table. Those people would probably be Telecom, perhaps a consortium of lines companies and a group from overseas. There will need to be some form of RFP process, development of a long-term regulatory framework, and finally a clear assessment of what the government dollar is investing in and what returns it will get.
If designed well, with the good of the country in mind, the National programme will launch New Zealand to the front of the pack globally and create a competitive, world-class communications sector.
If done poorly we will continue to lag behind our peers and suffer the consequences of living in a nation with communications asthma.
* Dr Paul Winton is a partner at capital investment company Temple.
