Kiwi share a juicy bone of contention

RICHARD BRADDELL looks at the outcome of the telecommunications inquiry - and its most divisive recommendation.

With all the competing interests, the outcome of the telecommunications inquiry was always going to be love-it-or-hate-it affair.

But its recommendations on the Kiwi share have drawn more than their quota of criticism, even from those who support the broad thrust.

Federated Farmers and the Employers and Manufacturers Association (Northern) can be classed in that group, although for almost opposite reasons.

Demanding that a rural telecommunications taskforce be established, Federated Farmers vice-president Tom Lambie said the inquiry's Kiwi share ideas would do nothing to resolve the "crippling lack of adequate telecommunications in rural areas."

But association chief executive Alasdair Thompson took a different tack.

"At present, town and city users of telecommunications subsidise rural New Zealand's phone use to the tune of $167 million, which is Telecom's own figure," he thundered.

Of course, the inquiry did not have the benefit of the $167 million figure to work from, since it was produced by Telecom on the very day the report was presented to Communications Minister Paul Swain.

Telecom has previously come up with a $100 million estimate of its losses in meeting the Kiwi share's obligation to provide local service, and a cynic might surmise that the higher figure was the largest the auditors would wear.

At issue is the inquiry's view that Telecom alone should foot all the costs relating to the Kiwi share.

On the face of it, the conclusion seems surprising, given that, until the recent interconnection agreements, the cost of meeting the Kiwi share was effectively recognised in the imposition of a 1c per minute tariff on every call delivered from another carrier to a customer on Telecom's network.

That charge has disappeared from new agreements signed this year with Telstra Saturn and, now, Clear Communications.

But while there is widespread support for the idea of separating the Kiwi share costs from interconnection agreements, carriers such as Newcall and Telecom itself have argued that the cost should still be recognised and potentially determined through some sort of competitive tender process for unprofitable rural services - with successful tenderers assisted by a direct subsidy from the public purse.

The inquiry decided on neither. One reason: Telecom was still free to seek low-cost solutions, and that might include contracting out delivery to other providers.

It also noted that Telecom was the dominant carrier - it still has perhaps 85 per cent of the market - and so would continue to bear most of the Kiwi share impost anyway.

Indeed, the inquiry considered that if Telecom were to be relieved of the Kiwi share obligation, it should be on the basis that it pays the Government the current net value during its lifetime, which was presumed to be in perpetuity.

Most telling, the inquiry also concluded that the Kiwi share cap on the local line rentals - they cannot rise in nominal terms faster than the increase in the consumers price index - was not only high by international standards, but "was also set before much of Telecom's significant productivity improvement and before the recent global technological advances and associated dramatic decline in the costs of an efficient operator."

Not surprisingly, Telecom has been less than pleased. To meddle with the Kiwi share without negotiated agreement, and to enshrine it in legislation as the inquiry has recommended, would be a breach of the sacred contract agreed with the Government when Telecom was privatised, the company says.

The Act party's commerce spokesman, Stephen Franks, put it even more starkly, referring to the "weird absence from the report of strong consciousness that there are serious property rights and rule-of-law issues in a decree to rewrite contracts without agreement, and to give over $300 million a year to competitors and customers by confiscation from Telecom."

Mr Franks did not identify how the $300 million was made up. But his observation that future investors would be discouraged from a country that felt free to simply decree that a facilities owner must provide them "at cost price or below" seems unlikely to cut much ice with the shareholders of Telstra Saturn, a company that has declared itself satisfied with the report and is in the midst of the largest-ever investment by a new entrant in New Zealand telecommunications.

Although not explicitly stated, the inquiry's own lack of concern about the sanctity of a purported Kiwi share contract appears to stem from a view that Telecom itself has not lived up to its obligations under the deal.

The inquiry's report seems to suggest that the production of local loop accounts is implicit in Telecom's constitution, given its requirement for separation of regional operating company accounts.

That provision remains in Telecom's constitution, despite discussions with the Government on its removal when reregistered under the new Companies Act, and even though the preparation of the accounts became impossible when the operating companies were disbanded in 1993 as part of cost-saving.

Their absence has resulted in a paucity of information on Telecom's local loop costs, not helped by the company's failure to meet the September 30 deadline for their disclosure, mandated in the dying days of the previous Government.

In the end, perhaps the most telling criticism of the inquiry's Kiwi share recommendations came from Federated Farmers' Mr Lambie, when he suggested they would do little to improve rural telecommunications.

While the inquiry has recommended that Telecom be required to upgrade its rural network to minimal internet dial-up standard, that is a second prize compared with getting broadband services into regions that, by virtue of their isolation, need them more than most.

"In a way, I thought their approach to regulation was really unimaginative," said Bruce Parkes, Telecom's Government and industry relations manager.

On this matter, he is almost in accord with one of Telecom's more trenchant critics, Australian telecommunications analyst Paul Budde.

"I am also disappointed that the report doesn't open up competition in regional New Zealand. Through its Kiwi share (universal services obligations) the country had a unique chance to invite others to participate in this market," he said, noting that in Chile regional network competition had cut universal service costs 60 per cent.