Hon David Cunliffe
Minister of Communications

Address to 8th Annual Telecommunications and ICT Summit
Hyatt Regency, Auckland

This is a very opportune time to check in on where the telecommunications industry reform programme is going.

Last year, I was here the very day before the Telecommunications Amendment Bill was introduced to Parliament to give effect to the policies set out in the Telecommunications Stocktake Review paper I spoke to you about.

As you will recall, that paper among many things announced the unbundling of the local loop as part of a package of initiatives to boost broadband uptake in New Zealand.

The bill, passed in December with a massive majority in Parliament of 119 votes to 2, took the Stocktake proposals even further by mandating the operational separation of Telecom to further promote competition.

It is a very significant piece of legislation which is now well on the way to being implemented, totally changing the telecommunications regulatory framework to make up for close to two decades of inaction and under-investment.

This Labour-led government wants New Zealand to have a world class broadband performance with provisions and uptake in the top half of the OECD by 2010. That is essential for our economic transformation and for a prosperous future.

Twenty-first out of 30 in the OECD for broadband penetration and 22nd for ICT infrastructure investment per capita was simply not good enough by half.

I am very happy to say today that as a result of the work we have done over the past 12 months, we are well on track to implement the changes required to bring faster, cheaper broadband Internet to all New Zealanders.

As well as having the Telecommunications Amendment Act in place;
· the Telecommunications Commissioner is working hard to deliver local loop unbundling, unbundled bitstream and Naked DSL;
· the Telecommunications Carriers Forum pulled together industry working groups to implement LLU before the legislation was enacted;
· the draft form of operational separation has been published and;
· Telecom is offering structural separation as an alternative or possibly as a complement.
· We are driving ahead to address the next generation of issues and opportunities.

Local loop unbundling

I'm very pleased to see that the Commerce Commission has stood its ground and will be finalising the standard terms determination for LLU by 9 November.

Clearly, while the commission is independent, the government is keen to see that move ahead at the fastest possible speed. This applies not only to the commission's determination, but also Telecom's speed to get actual unbundling to the market.

Any indications of prevarication – or a less than determined push to see others can also "get it" – will not see the government stand idle.

Local loop unbundling is a critical step forward. Without it, it would be difficult to get the level of competition in the market we want to see.

And alongside it, by December we expect to see determinations on unconstrained bitstream access and naked DSL.

One of the critical features of the Stocktake Review was that it sorted a long-standing debate between those who said what was needed was open access to the local loop and others who said what we really needed was to have competition between modes.

In reality, after extensive analysis, the answer was not seen to be either or, but both.

As a result, there has been a lot of work done around investment in alternative infrastructure to the copper loop.

Wireless broadband mega-auction and radio spectrum

Last month, I announced the mega-auction of broadband wireless spectrum in the 2.3 and 2.5 GHz bands to provide, we believe, at least six nationwide blocks of spectrum plus a large managed park to accommodate regional and iwi interests.

This will facilitate the very fast rollout of WiMax and other broadband wireless applications.

Effective and efficient radio spectrum management is an essential complement to wire, fibre, mobile and satellite delivery modes.

And besides putting a massive amount of broadband wireless spectrum into the market, we are working to ensure that efficiency is maximised.

Strict acquisition limits and use-it-or-lose-it provisions will apply to prevent anti-competitive gaming and spectrum hoarding.

We are acting to improve security of tenure for radio licence holders moving from the old "administrative licences" to modern management rights, in order to support investment.

We are working closely with the commercial radio and television sectors to facilitate an orderly renewal of existing spectrum rights at fair prices.

And, working with my colleague the Minister of Broadcasting, Hon Steve Maharey, we are taking a very close look at the emerging convergence issues and interdependences that are increasingly evident between the two portfolios.

Significant work is going on in mobile. The commission has commenced a full-scale investigation of mobile roaming and co-location, with the results expected later this year.

Mobile

While fully respecting the independence of the Telecommunications Commissioner's analysis, the government is very clear that mobile market competitiveness is an essential piece of the broadband jigsaw puzzle.

Mobile prices which the OECD puts for some categories at the highest or second-highest among its 30 members is not an acceptable place to be.

Some useful progress is, however, already being made at a commercial level with recent pricing announcements. It is essential that this realignment continue.

My colleague the Hon Trevor Mallard recently made a decision on mobile termination rates that is resulting in very rapid and substantial decreases in price to consumers with a 100 per cent pass-through by Telecom.

Mobile issues will only become more important in the near future:

· With the potential entry of a third mobile player. The government is watching closely to ensure that the existing duopoly players do not engage in access-denying behaviour.

· Second, with investments by both existing players likely to bring 3G mobile broadband within reach of most, if not all, mobile customers over time.

· Third, with cross-investments like Vodafone's purchase of Ihug (and Kordia's purchase of Orcon) implying some more complex competitive dynamics and some consolidation of the ISP "tail".

Rural telecommunications services

We are working hard on a rural telecommunications package. It is absolutely essential, given the importance of the rural economy to New Zealand, that our farmers have access to the same high-speed, high-capacity broadband we want for urban business and residential users.

I want to say that I am hearing loud and clear from farmers and rural New Zealand a great deal of disquiet about the state of the network. Quite clearly, there has been a history of under-investment in rural telecommunications, and we want to see that turned around.

The more I learn, the very much more serious I am coming to believe the problem is.

We are currently examining some pretty full research around rural strategies and I will be bringing to Cabinet a proposal to substantially revamp the Telecommunications Service Obligations, otherwise known as the Kiwi Share.

The TSO, as you know, provides for free local calling nationwide. The cost to Telecom of providing this is cross-subsidised by other members of the industry to the tune of about $20 million net a year.

We are going to have to take a very hard look at whether and to what extent a non-contestable cross-subsidy of that nature fits with the emerging evidence on the level of investment, or lack of it, in rural networks.

It will be essential going forward that proper incentives exist for market participants to lift their investment and service levels to rural New Zealand.

Future-proofing and investment

It has been important for us in the reform programme to future-proof the regulatory environment.

Everyone knows we have had to play catch-up for past actions of different governments. Previous politicians essentially privatised a public monopoly and gave it the benefit of a pretty weak regulatory framework that has not served the country well.

Telecom behaved as would be expected of a company in its position. It was within its rights to do so – the business of business is, after all, business. But the government has the responsibility to ensure that private interests align with the public good.

I hope that Telecom, and other market players too, are coming to realise that a series of short-term profit-maximising decisions must, in the end, be squared away with the long-term national interest.

I am therefore grateful for the bipartisan political support for the reforms, from the 119-2 vote in support of the legislation last December to the reception I received at Parliament's Commerce Select Committee when I appeared before it a fortnight ago to discuss the year ahead in my portfolio.

That support has sent an overwhelming signal to the sector that we are acting in the interests of all New Zealanders and that we will not go backwards or lose sight of the ball.

On the other hand, we know we have to guard against regulatory creep. We know we need investment and that investors need a fair return on the money they put in.

We recognised the importance of investment in the Stocktake paper and we have recognised it continually since then. We are very sensitive to the fact that there hasn't been enough investment.

A more competitive regime allows more competitors to come in an invest, and without giving away any market-sensitive information, I remain confident they will. The outlook is good.

It is true around the world that when you get competitive markets, incumbents have to invest to avoid losing market share.

The Stocktake exercise looked around the world at patterns of investment when unbundling took place.

Before unbundling, we observed that incumbents said it would make them stop or reduce investment. However, the evidence shows after unbundling happened, they could not avoid investing, because others moved quickly to invest and incumbents had to match them to stay competitive.

If you look at what happened in the UK after operational separation, BT has seen significant growth of its wholesale business, which in turn led to increased investment.

BT's submission also makes it clear that they see the operational separation environment as providing certainty for their own investment, as well as those of others.

If you look at what happened in France, it was the competitor that moved first and France Telecom then had to catch up.

So, the government remains optimistic that competitive pressures, combined with a balanced and prudent approach to policy settings, will see total telecommunications investment increase, not decrease, over the next few years.

Will there be gaps in the marketplace? Yes, I don't mind betting there will be. Does this mean there may be a need for government investment? Possibly. But we need to be very judicious about this.

It is not the business of government to crowd out private investment. These are big issues. They are billion dollar bets and we risk putting the cost on the taxpayer if we are injudicious about our approach.

I do not want anybody to think that means the government is not sensitive to these issues and that it will not do more for all New Zealanders, particularly rural New Zealanders.

But what this government will not do is act with undue haste, or imprudently disguise underlying market failures, before the appropriate commercial realities are clear and all the options have been carefully analysed.

As minister, I am not afraid of tough calls. But I also believe in getting the best data and analysis to ensure that they are the right calls – not just the temporarily expedient ones.

Separation of Telecom NZ Ltd

In April, we published the consultation document on the operational separation of Telecom, as provided in the Telecommunications Amendment Act.

The responses to the document were overwhelmingly positive – the main concern being that the separation work might delay the implementation of LLU, concern I have been at pains to point out was unfounded.

Telecom's submission offered voluntary structural separation in return for far- reaching concessions elsewhere. This was taken seriously by us to the point where we asked for cross submissions on it.

Irrespective of the organisational form of Telecom, investment is required in rural areas to ensure continued delivery of TSO services; in exchanges in order to replace aging NEAX equipment; in NGN in order to ensure future delivery of services; and in fibre deployment in regional backhaul to ensure higher broadband speeds.

Whether an operationally split Telecom or a structurally split Telecom will better incentivise investment in these areas is the subject of both the Telecom submission, the BT submission and many others.

Overall it remains my expectation that significant new investment will flow as a result of the reforms, both from entrants and from Telecom, and that this will benefit consumers.

Telecom agreed in front of the Finance and Expenditure Committee to a three-way operational separation and the committee's report back to Parliament relied on this.

Telecom's proposal on structural separation did not, however, provide detailed feedback on the design of the operational separation contained in the government's discussion document. This was a courageous and interesting move, given that their unsubstantiated general criticism of unworkability flew in the face of recent UK and EU experience.

It is common ground that there is the need for urgency to remove uncertainty from the market.

I have said this before and I will say it again today. We will not go backwards and reverse the Telecommunications Amendment Act, nor be changing what is a fundamentally now a sound, best- practice regulatory framework.

I am determined to see a robust separation implemented as soon as practicable to ensure that benefits of a newly competitive environment flow through to consumers as soon as possible.

Does that rule out some form of structural separation? As I have also said before, no.

But we must be confident that any form of structural separation better meets the objectives of the act and is overall better for New Zealand. Consideration of structural separation additionally must not be allowed to derail or unduly delay the operational separation process. Accordingly, I am determined that work on both matters must be fast-tracked and will both be a top priority for my officials.

Digital Strategy and Summit

The Labour-led government's flagship Digital Strategy project was unveiled in May 2005 and provided a strategic framework for coordinating a national response to the opportunities that information and communications technologies provide for creating a digital future for all New Zealanders.

The Digital Strategy correctly noted that ICT is of fundamental importance to the transformation and productivity of the New Zealand economy.

ICT is a key determinant of the "speed limit" of our economic engine on the highway of the future. It also has vast implications for our society and national identity.

Ask the broadband-hungry "digital natives" doing their homework on the Net, or sharing stories on Myspace, or texting their friends.

Or ask the still-too-many young New Zealanders for whom – outside the state school system – computers are a foreign language for "others", the net is still used to catch fish or to whom the Digital Divide hems in like a new Berlin wall.

So the Digital Strategy said we have a lot of work to do. In government it meant getting our collective act together and consciously pointing dozens of agencies in the same direction.

To do this, the Strategy considered in depth three core enablers:

· Connection - the telecommunications infrastructure and particularly broadband infrastructure capable of supporting the exponentially increasing demands for the transmission of information – 5 MB by 2010 was seen as a good general target to aim for.

· Content - in particular digital content and the transformation of content production such as film, music and text, into digital formats that could be transmitted via broadband and stored, analysed and manipulated digitally.

· Confidence – the development and maintenance of the skills and confidence needed by individuals and businesses necessary to use the technology – and that means all Kiwis, from Oamaru to Otara and everywhere else.

We have undertaken a review of the governance arrangements for the Digital Strategy. It concluded that significant progress has been made over the past two years on implementing the many actions identified in the strategy, particularly in the individual output areas assigned to individual government departments.

The review concluded that the Strategy is still an appropriate framework to deliver the cross-cutting benefits of ICT, but its governance and coordination mechanisms need strengthening. We are calling this refresh of the strategy Digital Strategy 2.0.

The ICT sector summit first signalled by the Prime Minister in February will be the crucible of Digital Strategy 2.0. I will be convening this summit, to be held here in Auckland from October 2 to 4 this year.

The summit will be action-based and future oriented, a gathering of New Zealanders who are keen to contribute and participate in the information and communications technologies underpinning our economic, social and export growth objectives.

It will be aimed at an influential audience drawn from business and the general community, not just the ICT sector, and it will reflect the three Digital Strategy themes. A third day on 4 October will be devoted to more technical and sector specific issues and intended to attract a more specialist audience.

The summit will be preceded by web-based working groups that will pre-discuss critical issues and have input at the summit proper. It will be followed by an Action Plan that will form the heart of Digital Strategy 2.0. It will be highly influential in setting the digital agenda in New Zealand for the next two to three years at least.

Conclusion

If one sums up everything I have discussed, in the rear-view mirror we can say that we have turned a corner in respect of our regulatory regime. We are backfilling and we are catching up, and we need to keep up and move ahead.

The next 12 months will be absolutely and historically critical for New Zealand in terms of implementing the new regulatory system, bedding it in in terms of market behaviour through the commission, and essentially addressing some of the outstanding issues that have still to be addressed.

Much has happened over the past year, but much more is to come. I will look forward to discussing it with you at the next summit.

ENDS

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