Rural plan 'will hurt Telecom'

Telecom would be $340 million worse off over six years under a proposal that would force it to fund the bulk of the Government's $300m promise to improve rural broadband and meet the full cost of providing phone services to uneconomic customers.

Chief executive Paul Reynolds indicated the company would oppose the plan, unveiled yesterday by Communications Minister Steven Joyce.

Mr Reynolds said it was important the cost of any subsidies applied to fund services to uneconomic customers were "borne equally by all consumers, and not just Telecom's customers".

ABN Amro Craig analyst Geoff Zame said the proposal was clearly negative for Telecom.

"Instead of banking a cheque, they will have to write one."

Mr Zame said the silver lining for Telecom was that it was well placed to secure the majority of the contracts that would be let to roll out fibre to rural schools. But even if the annual hit on profits was cut to $40m, that should reduce the fair value of its shares by 5 cents. Vodafone would be $48m better off over six years.

Mr Joyce announced last month that the Government would spend $300m rolling out fibre to more than 900 rural schools and fast broadband to 500,000 rural Kiwis.

It allocated $48m in the May Budget for rural broadband and proposed yesterday that the difference of $252m would be met by a "Telecommunications Development Levy" that would raise $50m a year for six years from July 2010, and $10m a year thereafter.

About two-thirds of the levy would be paid by Telecom and the rest by other telcos. The excess funds would pay for upgrades to emergency services call systems and a relay service for the deaf, currently funded by the Telecommunications Services Obligation (TSO) levy, which would be scrapped.

The Telecommunications Industry Group, comprised of major telcos, opposed the move. Chief executive Rob Spray threatened members would pass the new levy on to customers "much as airport taxes or road taxes are passed on directly to customers", making clear it was a government-ordered charge.

"The Government has just replaced one form of taxation with another," he said.

Telecom receives about $23m a year through the TSO levy, calculated each year by the Commerce Commission, that is mainly designed to ensure competitors pay their share of the losses Telecom incurs providing phone lines and unmetered local calls to 58,000 customers.

Mr Joyce said Telecom should still be obliged to provide landlines at rates capped by inflation and unmetered local calls, but should meet the entire cost of serving uneconomic customers with profits it earned from other customers.

The method used to calculate the TSO levy did not take into account the benefit Telecom derived from the arrangement, which had seen it raise landline rentals by the rate of inflation for years in most cities when the cost of providing telecommunications services had fallen.

"By counting both the costs and the benefits of the TSO it is likely that the TSO levy will reduce to zero for the foreseeable future," he said.

Telecom would be allowed to seek a contribution from rivals only if the profitability of its fixed-line network fell to the point where its whole network was uneconomic.

Federated Farmers spokesman Donald Aubrey questioned why the Telecommunications Development Levy had not been set higher, at $70m a year, to match the TSO.

"Rolling broadband out across the country is an expensive task and an extra $20 million per year would be particularly helpful." The federation was relieved the Government had guaranteed free local calls.

- © Fairfax NZ News