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Are Chorus and UFB now a political football?
Posted on 15-Sep-2013 18:42 by Bill Bennett. | Tags Filed under: News.

Suddenly New Zealand’s plans to build a fibre network is politicised.

If the government’s misjudged interfering in the Commerce Commission’s ruling set the ball rolling, incoming Labour Party leader David Cunliffe knows how to kick it through the goal posts.

Meanwhile a wide-ranging coalition of businesses, lobbyists, consumer and community groups from right across the political spectrum will be barracking from the sidelines.

No rerun of Australia’s feral NBN debate

New Zealand’s telecommunications sector has watched with horror the politicisation of Australia’s NBN project. It featured strongly in two federal elections where the electorate was treated to the spectacle of  politicians on both sides making pronouncements about the merits of technologies. In many cases they clearly didn’t understand what they were talking about.

Luckily our debate isn’t about the technologies. Here the issue is about how the government deals with Chorus. Fairly or unfairly this has been turned into an issue of the corporate welfare for John Key’s mates.

It just so happens this is a subject Cunliffe has mastery over. He was the communications minister responsible for rebooting telecommunications industry competition.

The fact that today’s prices and services are better than ever is a direct result of what happened on Cunliffe’s watch. He knows the arguments. What better way to prove his worth as the prime minister in waiting than to nail John Key to the floor over this?

Timing is everything

Cunliffe’s ascendency comes just days after the Coalition for Fair Internet Pricing lashed government’s plan to override the Commerce Commission. The same government gave New Zealand’s competition watchdog the job of setting the price consumers are charged for broadband over copper wires.

The Commerce Commission wants copper broadband prices to fall 25 percent. Chorus says this will hurt its revenue, money which it is using to fund building 70 percent of the UFB network. The change amounts to around $100 million a year.

The Coalition for Fair Internet Pricing says overruling the Commerce Commission means Chorus gets an extra $600 million. It’s unlikely much of that money will end up in consumer pockets. Chorus charges internet service providers who sell services to business and consumers. At least some of that money will end up making the ISP richer.

Enter the “Copper Tax”

Yet’s that’s not really the point here. The Coalition describes the extra money as a “Copper Tax” which is marvellously emotive if not entirely accurate. In other words, it’s a political slogan – one that’s instantly recognisable and almost impossible for the government and Chorus to defend with using far more words and running the risk of listeners zoning out.

It won’t be lost on anybody that the government is both the largest investor in Chorus, politically dependent on the company building its network and, at the same time, is its regulator. Apart from anything else this cuts across international trade treaties New Zealand has signed.

While some delight in painting Chorus as the villain of this piece, that’s not entirely fair. As the background to this story (see below) points out, the company had little choice but to be in this position. If the Coalition wasn’t up in arms about the government’s relationship with Chorus at this point, the same people would probably be just as annoyed with who ever else has substantial UFB contracts.

Background: a potted history of the UFB

Until now both sides of politics have been behind the plan to build a fibre network. What changed and how did we get to this point?

The story starts in 1990 when Telecom NZ was privatised. For the decade or so following privatisation there was a lot of rhetoric about free markets in telecommunications, but a light-handed approach to competition policy meant that a privately owned Telecom NZ had monopoly control of the market.

With communications moving centre stage, this became a threat to the wider New Zealand economy. In 2001 the government of the day passed the Telecommunications Act was passed and appointed a Telecommunications Commissioner.

Cunliff unbundles Telecom NZ

Little changed until 2006 when the communications minister, David Cunliff moved to unbundle the local loop. That’s a technical term for “introducing competition by allowing other telcos to sell products and services using Telecom NZ’s network”. Later in 2006 Telecom NZ voluntarily split into two business units covering wholesale and retail telecommunications.

Although these changes triggered telecommunications industry competition in New Zealand, there was still a problem with Telecom NZ’s ownership of the copper network. The company had little commercial incentive to invest in a modern fibre-based network.

During campaigning for the 2008 election both major parties promised a fibre network. In 2009 the first John Key-lead government announced plans to spend $1.5 billion on an ultra-fast broadband network.

Hobson’s choice at Telecom NZ

A National Party-lead government was never going to build a state-controlled telecommunications network. Although that model was chosen by the Australian Labor government with its NBN project.

Instead New Zealand’s government turned to the public-private partnership model. Interested parties were invited to pitch for contracts building an owning a national fibre network serving cities and towns. The government committed funds to ease the financial burden.

At that time Chorus was still part of Telecom NZ. The corporation faced two effective choices: compete or co-operate. Competing would not only mean dealing with a government-funded competitor. That would be bad enough – but if the company successfully defending its market share, there was a strong likelihood of further crippling regulation.

UFB the least worst option

As a senior Telecom NZ insider told me at the time, offering to spin-off the Chorus unit in a comprehensive pitch for the UFB project was “the least damaging” option.

However, winning the bid was easier said than done. Government had designed the bidding process for the UFB project in a way that tilted the playing field in favour of Telecom NZ’s rivals. You only have to look at how the regional structure of the local fibre areas defined in the bidding documents aligned with New Zealand’s power companies to see that. This structure also made it difficult for Telecom to reap economies of scale.

In the event there were only ever two serious UFB bidders: Telecom NZ and the regional power companies.    To cut a long story short, Telecom NZ sharpened its pencil to win about 70 percent of UFB contracts. Its management and board decided demerging Chorus and taking this business was less awful than competing.

Chorus: demerged but debt-loaded

A fresh Telecommunications Act was needed to smooth the path for the UFB project and Telecom NZ’s demerger.

The demerger left Chorus with most of Telecom NZ’s debt. That was bad enough. It gets worse. The government squeezed Chorus on its fibre network contract. Now the company admits the cost of building the network is greater than it expected.

At the weekend Prime Minister John Key said in a media interview there’s a chance Chorus could go broke. That would be a huge problem for government. First it means trouble for the UFB project. Picking up the pieces would be difficult.

Then there’s the risk of negotiating future contracts with private companies. Investors and shareholders in private companies will be less willing to get too close to government contracts. On top of those considerations, the government is, or soon will be, the largest investor in Chorus.

There’s a lot at stake for the government. It can’t afford to let Chorus fail.

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