Pacific Fibre's hopes of building a US$400 million (NZ$505m) subsea communications cable to compete with the Southern Cross Cable took a step forward after it signed its first customer.

Consumers hope the cable, backed by businessmen Sam Morgan, Rod Drury and Sir Stephen Tindall, will help cut international capacity costs, resulting in more generous internet data caps.

Crown-owned company Reannz, which operates an ultra-fast broadband network linking universities and research institutes, agreed to buy capacity on the cable.

Reannz said the agreement would enable the international capacity of its research network to increase from 1 gigabit per second to 40Gbps, and eventually to 160Gbps. It would invest its own money as well as $15m from a government grant specifically set aside on condition it was used to buy capacity on a new cable.

Reannz chief executive Donald Clark said the deal would add forward momentum to Pacific Fibre. IDC Research analyst Rosie Spragg said it was a positive step that showed government confidence in the venture, but Pacific Fibre would need more customers for the cable to go ahead.

Agreements such as that signed with Reannz were necessary because they could be used as collateral to secure financing.

Pacific Fibre last month appointed ANZ Bank, Credit Suisse and First NZ Capital to help raise funds for the cable. First NZ Capital and Credit Suisse will seek equity investors, while ANZ will raise debt finance. ANZ said that as "lead arranger", it intended to provide a significant proportion of the financing itself.

Ms Spragg said it was not clear whether Reannz had agreed to buy all its bandwidth from Pacific Fibre, or whether it might still use Southern Cross as a back-up.

Cable-use agreements could be very complex to negotiate, partly because customers would want to be assured they would benefit if competition triggered a price war, she said. Because of that, Ms Spragg said it was no surprise it was taking time for deals to be done.

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