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By Pattrick Smellie

Sept. 15 (BusinessDesk) – Forgive me if I’m wrong, and I’m sure I’m not the only one trying to second-guess the ultra-fast broadband saga.

But when various small town electricity networks get the priority nod for negotiations with Crown Fibre Holdings for involvement in the Government’s flagship UFB programme, a suspicious person smells a rat.

In part, that’s because the whole, costly project is an article of economic policy faith that says investing in UFB infrastructure will enable a world we can’t yet see, and is part of what New Zealand needs to stay level with, let alone catch, any OECD country other than Greece.

There is no Treasury or Ministry of Economic Development analysis that shows what the payback will be on the UFB investment, and no one who talks about it can come up with uses for fibre-speed broadband to the home that don’t involve gaming or entertainment.

That hasn’t stopped the pursuit of UFB wiping billions of dollars off the value of the national telco, Telecom, which did such a good job of seeming like the enemy that it has had almost no friends while this happened. Meanwhile, the government’s $1.35 billion urban UFB roll-out fund is expected to stretch a very long way.

In such an environment, it would hardly be any wonder if Crown Fibre Holdings, headed by one of New Zealand’s smartest business leaders, Simon Allen, were trying to drive a hard bargain.

And if that’s the game, could last week’s decision to put lines companies in Whangarei, Waikato and Timaru ahead in the queue just be an elaborate way of making Telecom sharpen its pencil even sharper than it has already?

As Paul Harrison of BT Funds Management put it at the time: "Does this mean we're going to have a completely fragmented market where Telecom has to compete against small regional players with a lower cost of capital?"

While they swear black and blue it’s not so, the truth is that most regional lines companies – bizarrely, there are nearly 30 in this under-populated country – don’t face anything like the commercial disciplines of Telecom in justifying investment in UFB, which can be dressed up as a community rather than commercial investment.

Their dividends are often community slush funds, and unlike NZX-listed Vector or Powerco, their commercial performance is barely scrutinised publicly.

Granted, the Regional Fibre Group umbrella of UFB-bidding lines companies has been an inspired piece of national coordination, is well-motivated, and is helping give Vector its best shot at a chunk of the all-important Auckland UFB roll-out.

But the fact remains that its owners – the people of those regions involved – almost certainly have no idea of the commercial commitment their local lines companies are proposing to make, let alone the alternative community uses that capital could be put to.

Part of the reason for that is that the details of every single UFB bid is wrapped tight in commercial confidentiality and none of the prioritised partners is obliged to disclose material information publicly.

That being so, Telecom faces a formidably competitive set of alternative UFB builders. The ball is now in its court to come up with a bid that meets what CFH asked for – its inclusion of rural broadband roll-out may make sense, but it ignores the process – and at a better price.

The latest development in the saga is today’s release by MED of a discussion paper on the regulatory implications of Telecom’s offer to undergo structural separation in return for a role in the UFB initiative.

With submissions due by Oct. 15, it’ll be a busy month for the UFB and regulatory teams at Telecom to develop a response, in time perhaps for CFH to unveil a solution including Telecom by the end of next month, as has long been expected.

Telecom’s CEO Paul Reynolds, in his first public statement for a week, said: "There remains a long way to go in the UFB tender process and finding a solution for UFB that achieves the government’s objectives while also being sustainable and economic is challenging. It will also be complex and challenging to arrive at a solution that will receive the necessary support of Telecom shareholders."

But there’s still one thing that’s bugging me, and it’s this apparent enthusiasm from both policy-makers and Telecom to ensure that the national telco eventually does end up in the UFB tent.

Surely, if Telecom were excluded from the fibre roll-out and had to compete with its own combination of fibre to the neighbourhood (rather than the home) and its ageing but highly competitive fast broadband over copper, the result would almost certainly be lower prices for consumers?

Instead, it seems a regulated monopoly is preferred, with a period of regulatory “forbearance” lasting a decade meaning a light hand and a blind eye on UFB pricing while it remains “an immature market”, despite already receiving dollops of government funding and support from semi-subsidised lines company investors.

In its discussion paper today, the MED identifies “ensuring a sustainable industry structure” as a key policy objective, which of course is admirable, and there are valid arguments to say the fibre grid should be like the national electricity grid – open to all and with regulated prices.

Maybe. The trouble is, there are going to be two grids out there, whether we like it or not. One will be based on fibre and be new; the other based on copper and ageing, but nowhere near retirement.

If pitting them against one another meant lower broadband prices for New Zealanders, why wouldn’t we go there?


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