Peter Griffin: Maori cellphone project backfires

COMMENT

In 2000 the Government gave the Maori Spectrum Trust (Te Huarahi Tika) $5 million and a 10-year right to buy 3G spectrum at 5 per cent off.

The well-intentioned but deeply flawed venture was seen as a way to increase Maori participation in the knowledge economy.

But the Maori Spectrum Trust and its commercial arm, the Hautaki Trust, wanted more - it said it also needed access to 2G spectrum so it could immediately get a commercial mobile phone network going in partnership with Zimbabwe-based "frontier" mobile network Econet.

The trust wanted the Government to give, sell or lease it 2G spectrum, advising that Econet's business case would fall apart if the spectrum was not obtained.

Trust chairman Bill Osborne, a former All Black and head of Quotable Value, warned of a danger that "Maori will once again be left in the cold".

But Communications Minister Paul Swain was not feeling so charitable any more, telling Osborne: "The trust's preferred partner may seek to acquire such spectrum through bidding" in a spectrum auction that was taking place.

In other words, Econet, headed by former financial analyst Tex Edwards, needed to stump up and buy some spectrum to show it was serious about investing in New Zealand.

Econet subsequently did buy its own chunk of 2G spectrum for $10.2 million, but it and Hautaki kept up the pressure on the Government. Now they wanted an amendment to the Telecommunications Bill to allow mandatory roaming, cell site co-location and number portability - effectively the ability to piggyback on other operators' networks.

"This is because banks believe 100 per cent coverage is necessary to commence business, based on Bell South experience," Osborne told the Government in an email.

"The returns currently being modelled suggest that the [internal rate of return] with roaming is about 40 per cent while without may be as low as 5 per cent - hence the importance of getting mandatory roaming in place."

Other letters from Osborne to the Government show he trumpeted the potential benefits of a third-entrant into the mobile space: $1 billion in investment over 15 years, at least 1000 new jobs and cellphone rates in line with those in other OECD nations.

Osborne went on to say that Vodafone and Telecom had been putting obstacles in the way of a third operator by "slowing the [spectrum] auction process" and starting "whisper campaigns to regional banking organisations (with whom they have strong relationships)".

Maori Affairs Minster Parekura Horomia and lobbying by law firm Chen and Palmer added weight to Osborne's argument.

This time it was hard for the Government to stand firm; the trust's success supposedly depended on tweaking the legislation.

Its failure would be a major embarrassment as a document from the Ministry of Maori Development dated February 2001 and commenting on the release of trust-related papers to the finance and expenditure select committee hinted: "There is the possibility for negative publicity arising from the contents of these papers ... there is enough material in the papers to indicate that the trust is in difficulty."

The mandatory roaming and cellsite co-location provisions were rubber stamped in the Telecommunications Act which was passed in December 2001. The ground seemed cleared for Maori interests to thrive.

But very little happened. The Government appeared to be waiting for Econet to raise cash and begin building its network.

Hautaki delivered plans to start paying educational and sporting scholarships to Maori valued at $60,000 a year. But by late 2002, when Hautaki had paid $4 million for a 30 per cent stake in Econet, the Government was getting nervous.

Associate Maori Affairs Minister John Tamihere wanted to meet spectrum trust chairwoman Mavis Mullins to discuss "provision of improved monitoring information from the trust".

In an email between Government officials the questions came thick and fast: "When is the Econet network likely to launch? What action has been taken to begin installation of cell sites? Have any [Resource Management Act] applications been lodged or planned?"

Tamihere requested a "re-ordering of the framework" for monitoring the trust's progress. The reports since then will have painted a sorry picture.

The money invested by Hautaki appears to have been burned up by Econet, which lost $2.3 million in the year to last June 30, and $3.5 million the year before. Econet is no nearer building a network than it was three years ago.

Which raises more questions. Why wasn't the monitoring of Hautaki's progress more rigorous from day one? And why weren't milestones put in place that Econet and Hautaki had to reach before taxpayers' money was drip-fed to them?

The answer lies in a statement from the Ministry of Maori Development early in the affair, that "the trust's actions will be guided by its trust deed, not the Government".

The hands-off approach was apparently necessary because of the "dynamic and changing nature of the telecommunications and IT industries".

Early on the Government was mindful of the fact that gifting the money to the Maori Spectrum Trust was risky, with the Ministry of Maori Development warning of a possible "loss to the Crown of $5 million in the event that the purchase price for the [3G spectrum] block is unable to be obtained".

All the while Hautaki remained bullish, giving little indication of the difficulties Econet was facing in raising capital for its New Zealand venture.

But in a letter to Horomia last March, Mullins admitted that the plan was not entirely on track: "We concede we may not have the fullness of financial capital to pull it off as soon as we desire."

In fact Hautaki and Econet are working to a business plan that is now obsolete. But they won legislative concessions based on that business plan.

Entering the mobile market with a 2G offering now seems non-sensical. Hautaki's only hope of recouping the money given by the Government appears to be jumping into bed with one of the players seriously planning for 3G, most likely TelstraClear.

The telco's chief executive, Rosemary Howard, has expressed interest in a partnership to build such a network. Vodafone wants to go it alone.

But it is not clear whether anyone would have Econet on board.

Sure, it has access to 15MHz of 3G spectrum, but it still has to stump up market value minus 5 per cent for it - some $13.5 million, according to the documents. The other potential 3G players already have their share of 3G spectrum.

The other variable is last month's news of a major joint-venture deal between Econet's parent and South African company Altech, resulting in a US$70 million cash injection for Econet. On that deal, opinions on the ground in South Africa are mixed.

"The real concern appears to be about Econet and its chief executive, Strive Masiyiwa. The dispute over Econet Wireless Nigeria has done Econet's reputation a lot of damage," a columnist in the Cape Times wrote.

Others were more optimistic.

"For Altech it's the realisation of a long-cherished objective to grow its global footprint and make it a true international player," wrote Business Day columnist Ray Faure.

But Business Day IT editor Lesley Stones outlines the real risk Econet faces in some of its markets: "There is a risk that low demand will fail to cover the cost of setting up a network."

How many years have to go by before Maori are delivered the benefits envisaged by the Maori Spectrum Trust back in 2000?

A cynical observer would say Hautaki appears to have been conned, having paid $4 million for a 30 per cent share of Econet but with no mobile network in sight. It also has rights to a chunk of 3G spectrum it will never be able to afford to buy.

Maybe Econet will deliver on its promises, but they have an increasingly hollow ring. Once again, Maori are left very much out in the cold.

* Email Peter Griffin