Govt's last shot at useful policy

BY ROD ORAM

OPINION: Oh, dear. Here we go again: another upheaval in telecommunications regulation; another suboptimal outcome for customers and companies; and another massive destruction of shareholder value.

Or not. Telecom's decision to split itself into separate network and retail businesses presents the government with one last chance to do the right thing for customers, country and telcos.

The government could take time to make the newly independent network the heart of the nation's telecommunications infrastructure; devise the appropriate regulation for it; incentivise all telcos to make more, better and co-ordinated investment in assets; and thus help them to be more profitable.

Or it could push on with its $1.5 billion investment in its Ultra Fast Broadband initiative before resolving all of these critical issues.

If it did, Chorus2, as Telecom is naming the independent network, could lose out on some of the initiative's funding. The country would end up with some duplication of assets and inferior co-ordination and standards across the national network. And Telecom shareholders would end up with much less value in the two separate companies created by the split.

If the government chose this reckless path, it would critically weaken telcos financially and operationally. That in turn would condemn New Zealand to bad telecommunications infrastructure, which in turn would lessen our links to the world and our opportunities to earn a bigger living in the global economy.

The stakes are that high. After five rounds of failed telecommunications policy and regulation, assets, patience and confidence are dwindling fast. This is absolutely our last chance to get it right.

Will we? History is discouraging. Over the past 25 years we have tried a state-owned monopoly; no regulation and market forces in the 1990s; light regulation from 2002; heavy regulation from 2006; and now National is returning as a government investor, triggering massive anomalies and dysfunctions.

While we got some good investment along the way in the likes of digital exchanges, fibre optics, mobiles and the internet, the efforts were often less efficient than they could have been.

Worse, the rewards often went to the wrong people. Crucially, the bounteous fruits of privatisation and regulation-free market forces went to two US telcos and other opportunistic investors in Telecom. They bled the company then quit it rather than investing in its long-term future.

To help the sector recover from this calamity, the past Labour government tried to incentivise the sector to invest in faster broadband and more competition. The best approach would have been to split Telecom into two independent and structurally separate companies, one to own and run the network and one to serve customers.

But Telecom's leaders at the time kept up a fierce, self-destructive fight to hang on to its last vestiges of dominance. As a result, Labour compromised on functional separation within Telecom ownership, enforced by complex and heavy-handed regulation.

To try to get more investment in much faster broadband, the government devised a complicated, bureaucratic fund to subsidise some projects which where not yet commercially viable for the telcos.

Then along came National with its pledge of direct government investment of $1.5b in ultra fast broadband. It seemed to pluck the idea out of the ether as a catchy way to persuade voters in the 2008 election that it was on to new technology and the fabulous world of the internet.

But it was clear from the outset that it had failed to think through how to resolve the three biggest challenges involved in pushing fibre optic cables to almost all homes by 2019: the technology; the use; and thus the investment return for the telcos.

First, the technology is economically tricky. While it gets ever cheaper and easier to lay fibre, the competition from copper wires has yet to wither away. Those wires are delivering relatively high data speeds undreamed of even a few years ago and their potential isn't exhausted yet.

Thus, copper wires, enhanced by fibre to the node, or roadside cabinet, and other technology assistance, are still valuable to telcos. Any government strategy and funding for installing more fibre has to be integrated with a sound regulatory and business case. One of the underpinning goals has to be migrating traffic away from copper in ways that won't leave the telcos with stranded copper assets and heavy write downs.

Second, the government must play a role in building use of ultra fast broadband to help make it economically viable. It can do so, for example, by vigorously driving use in education, health, government and other large areas of the public sector. It can also push digital strategies in business, the arts, libraries and many other aspects of society.

Third, it can devise an investment protocol that accelerates investment in fibre without fragmenting the market, drawing in small, weak players or otherwise undermining the national network's integrity in technical and economic terms.

So far, the National government has failed at all three.

On the first, it has no copper migration strategy or regulation in place. Worse, it is giving the new fibre investment a 10-year holiday from regulation so the builders can charge what they like, thereby accelerating the demise of copper.

Moreover, Crown Fibre Holdings has eyes for fibre only. Elsewhere around the world wireless is critical to helping build out fast broadband across a country and to providing mobile broadband.

On the second, e-anything in the public sector is a low priority with this government. And it has abandoned the useful digital nation strategy of Labour, which was building digital content and use.

On the third, CFH and Telecommunications Minister Steven Joyce have succeeded in devising a very complex and messy Ultra Fast Broadband initiative. In its current form, it will suck a lot of minor players into joint investment with the government. The end result will be more fragmentation of operators, duplication of assets and uneconomic fibre projects.

And CFH is only just waking up to the anomalies it has created. For example, TelstraClear is a dominant force in fast broadband in Wellington and Christchurch. But it is also an integrated asset owner and service provider and therefore, like Telecom in its current configuration, is banned from bidding for UFB projects.

Building out fast broadband without involving TelstraClear in those two cities or Telecom in Auckland will only create fragmentation and inefficiency.

No wonder many speakers at the telecommunications industry conference at the end of June expressed great concerns about the government's strategy.

Telecom, though, threw the government a lifeline last week. By offering to split itself into separate, independent network and service companies it is creating the opportunity for a new era in telecommunications. Sensible industry structure, economic viability, customer benefit and effective regulation would be its hallmarks.

Telecom, rightly, identifies many things that would have to happen to make that work for it and the country. In particular, it wants a large share of the government's investment in fibre across the country, particularly in Auckland and it wants much lighter regulation where it is no longer dominant.

This makes complete sense. We need a strong network owner and investor; and we need a massive shift in regulation from today's regime which is heavily focused on Telecom and copper to one which is industry wide and fibre-centric.

Unfortunately, the government seems to believe that there is nothing wrong with its Ultra Fast Broadband strategy that can't be fixed by yet another tweak of its rules or salami slicing investment among myriad parties. It might be sorely tempted, for example, to split the Auckland investment between Vector and Telecom in a misguided effort to satisfy them both.

That would be crazy. Telecom has bravely offered the entire telecommunications sector a bold new blueprint. The government should take the time to work through all the very complex regulatory, legislative and economic implications of that.

Trying to accommodate these sweeping changes within the specifics of the UFB project would botch everything. The only way is to scrap the UFB and work on an entire new model for the sector. It would be well worth the effort.

It is the very least Telecom shareholders deserve after the massive destruction of value that this and the previous government have inflicted on them. And it is the very least the rest of us deserve.

- © Fairfax NZ News