Brian Fallow: Broadband plan raises uneasy questions

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Here are some reasons to look upon the Government's broadband policy with suspicion and foreboding.

Set aside the question of whether laying on fibre to the home - as distinct from the business or the school - ought to be a priority for the Government in these hard fiscal times.

Let's assume that regarding it as merely a subsidy to consumption is as myopic and penny wise, pound foolish as its enthusiasts claim.

Even if it is where we need to go, there are still important questions about how to get there and who pays the fare.

The fare will not be cheap. Work done for internet NZ concluded the cost of fibre to the home could be between $5 billion and $8 billion.

It is troubling that there is such a gulf between what the Australian Government expects to pay for its national broadband network and the sort of money the New Zealand Government proposes to put up.

Canberra's estimate is the equivalent of $2400 per Australian, eight times the per capita outlay of public money our Government is talking about. This does not, as they used to say, compute.

It suggests we face two risks.

One is that the cost to the taxpayer will be a whole lot higher than the $1.5 billion over 10 years the Government has indicated it will put up (to be matched by private sector partners).

It is no answer to say: "That is just the equity. The fibre companies will also be able to borrow money."

The equity the Crown puts into these ventures will be borrowed money and no one would seriously suggest that a fibre company in which the Crown was a shareholder would be allowed to default on its debts. So the equity/debt distinction is fiscally meaningless here.

The other, and greater, risk is that the terms the Government has to offer the private sector to buy into the fibre-to-the-home project will amount to a conspiracy against the consumer.

No one seems to believe there is a business case, here and now, for ultra-fast broadband down every suburban street. If there were, why not leave it to the ordinary workings of commerce?

So someone will have to pay the difference. The question at this point is how that excess cost will be divided up among taxpayers, consumers and, perhaps, shareholders of a company which opts to partner with the Government in a local fibre company.

The risk of consumers becoming captives of a new monopoly is clearly greater if Telecom - or its demerged network business, "Chorus2" - ends up as the Government's partner.

Instead of infrastructure competition between its legacy copper network and the emerging fibre one, there would be some kind of managed migration of consumers from one to the other. Whether to go that way is the central decision the Government will have to make.

And it is the Government that will have to make it, regardless of what is recommended by October by the Crown Fibre Holdings it set up.

The issue of pricing is all-important so it is troubling to see the Government blithely accepting, on July 8, that a 10-year "period of regulatory forbearance on pricing" is needed.

Is "Commerce Commission, keep out!" ever what you want to hear if you are a consumer?

"If bidders are to invest, they have a right to expect that the prices that are set in contract will not be over-ridden by regulation for an initial period," the Ministry of Economic Development says.

"The existing copper network will continue to be regulated and will exercise a significant competitive constraint on fibre pricing."

Oh really? Is the Government's blithe confidence on this point consistent with the proposal Telecom has just put to it? The proposal is secret, so we don't know.

"The Government recognises that, if Telecom were a successful partner, there is a risk that the effectiveness of the copper [network] as a competitive constraint on fibre could be weaker, as the same entity could potentially own or control both the copper and the fibre networks," MED says.

"This risk will be mitigated by the fact that copper services are regulated, with price control by the commission."

In short we face at least the possibility that Telecom's demerged network arm, Chorus, will simultaneously run a regulated, copper legacy network and partner with the Government in new local fibre companies that compete with it for the business of, among other retailers, Telecom the internet service provider.

This sounds dismally reminiscent of the quality of thinking that stuck us with a wholesale electricity market in which the same vertically integrated generator/retailers occupy the selling and the buying side of the market.

Surely, just as markets work best when the buyers and the sellers are different people, competition works best when a company is not competing with itself.

Another reason for unease is the murky and opaque process by which all of this is being decided.

It is too important a decision to delegate to a competitive tender process, which means a veil of commercial secrecy is drawn over all the relevant information and those who might have some idea what is going on are constrained from public comment.

Labour's communications spokesperson, Clare Curran, called this week for the Telecommunications Commissioner, Ross Patterson, to be given an independent oversight role in the ultra-fast broadband scheme.

Following Telecom's revised bid for the $1.5 billion of taxpayer money on offer, the goalposts had shifted to the point that the Government's original intent was now swathed in speculation about Telecom's future, she said.

"Other bidders have spent millions of dollars on bids for the UFB project in good faith. Telecom's conditional about-face, to structurally separate if it gets the UFB project, has changed the game to the point where there are now too many questions about how the decision will be made and what discussions are happening behind closed doors."

Bringing someone with Patterson's independence and credibility into the process would restore public confidence in it, Curran argues.

Telecom can hardly be blamed for trying to salvage as much value as it can for its unfortunate shareholders in this shifting policy environment. But Curran has a point.

It is hard to be confident that it is not somehow holding the country to ransom behind those closed doors.