TPS on fibre plan
October 26th, 2009 at 11:00 am by David FarrarTom Pullar-Strecker reviews the fibre investment plan:
Communications Minister Steven Joyce appears genuinely chuffed with the financial model for the ultrafast broadband initiative that he and his team of cerebral but experienced advisers have dreamt up.
The plan released on Wednesday is certainly ingenious.
The fact Steven is one of the very few MPs that has owned and run a major business, made him the ideal Minister for this portfolio.
The Government will, if necessary, foot the entire bill for rolling out fibre-to-the-street, minus any construction overruns, while private investors in local fibre companies (LFCs) will only buy back their share of the infrastructure as they connect up homes and businesses.
That could help nullify the “Catch 22″ that threatened to leave the initiative stillborn – private investors couldn’t guess their return without knowing how ubiquitous the national network would be, which would depend on other investors’ assessment of their likely return.
And Steven has first hand experience of the need for commercial investors to be able to estimate returns.
There is another reason to take the initiative more seriously.
Instead of injecting a “one-off” $1.35 billion into the public-private partnerships in the vain hope that would be enough to garner sufficient private investment to get the whole job done, the Government is now considering investing far more over time. Investment vehicle Crown Fibre Holdings will be to recycle receipts from private investors as they buy shares in LFCs, after the first fibre customers sign up.
The Government’s investment at any one time will be capped at $1.35b, but the total it commits over the life of the scheme could be double or triple that.
“$1.35b is what Crown Fibre Holdings will have access to in order to fund the infrastructure,” says Mr Joyce. “There is certainly the possibility that some or all of the money will be reinvested, but it’s simply too soon to say how much will be reinvested or how many times that might occur.”
Does this mean 75 per cent of people can be assured of getting fibre within 10 years? Hardly. But instead of scuppering the scheme, if $1.35b is not enough to get the job done, it might simply take longer.
This is the most critical part. The big question I, and others, have had, is what if the planned level of investment is not enough to get to 75% of NZ. Do you then scrap the plan, or do you accept a lower coverage target. The answer is neither – you just recycle the crown investment, so you get there eventually, even if it takes a bit longer.
I am going to be fascinated to see what offerings are made by the various telcos, ISPs, lines companies and local government.
Related posts:
- National’s $1.5 billion fibre to the home plan
- Reaction to National’s $1.5 billion fibre to the home plan
- Fibre to the Home proposal finalised
- Australian Govt matches NZ with fibre to home commitment
October 26th, 2009 at 11:56 am
David I know you are a fan of this, but this is Think Big all over again.
The essential risk here is quality, which is hard to make election promises about and harder still write a contract for. Quality is an especially big risk in public/private partnerships with specific investments – Oliver Williamson made this point in his work. If the government is willing to over-spend then the risk is gold-plating. If it is not, then the risk is underinvestment in quality, and no real improvement in services for the money.
True, Joyce’s scheme may be better than no investment at all, which is the risk when property rights are as insecure as they now are in New Zealand (thanks in part to Commerce Commission and Labour) but there are plenty of reasons to think this will be yet another failed public enterprise by the New Zealand government. Joyce may be competent and experienced, but governments do not fail because the wrong people lead them. Governments fail because centralised decisionmaking cannot succeed when information matters – and telecommunications infrastructure build is an information-rich problem.
As nice as the dream may be, this is the same dog with different fleas and New Zealand will be even poorer for it.
Vote:October 26th, 2009 at 12:24 pm
I’m puzzled. We have three sets of fibre running past the end of our street now and I’m left wondering where this is going.
Vote:I am aware of bits of fibre already installed in other places and Telecom and Trustpower and Vector and no doubt lots of others like our city council are well into the game. I wonder if anyone has actually done a stocktake at all?
October 26th, 2009 at 12:26 pm
Ben, a University salary, advancing years, a diminishing horizon and sour grapes.
Vote:October 26th, 2009 at 1:13 pm
Once exams are over i will review this with more care.
On the face of it, this looks to be a fantastic plan from a very capable minister. The internet has already become such a large part of society, both here in NZ and abroad. If our SME’s are to complete and flourish, in both traditional and emerging markets, then it will be built on the backbone of the fibre network.
Now if only we could get a ppp funding model for a second southern cross cable; or something similar. It wont be much use if we have a super fast internal network, which jams up at the international gateway. Maybe you could shed some light on that David.
Vote:October 26th, 2009 at 1:28 pm
Isn’t that shinning light of telecommunication structure in NZ involved in that cable? I refer of course to the Govt. owned Kordia.
Vote:October 26th, 2009 at 1:40 pm
The current Southern Cross cable makes a profit – why should the government help pay for a second one? I’m sure another operator could raise the funds to build one.
Vote:October 26th, 2009 at 1:56 pm
gazzmaniac: very unlikely any private operator could build a second one – there is no business case. The problem isn’t that the link is full, the problem is that the provider is using profit maximising pricing strategies (as well they might).
The link has significant unused capacity, some of that capacity can only come on stream if they make a bit of infrastruture investment.
If Southern Cross were to make that investment, there are only two options:
– reduce their prices, thereby increasing demand, and using the capacity. Their current assessment seems to be that that isn’t a profit maximising strategy
– charge the same price, demand won’t go up, so the investment is wasted.
If another operator came into the market, it would change the calculation. The original investment in Southern Cross is almost fully amortised, so they could afford to drop their prices very substantially. To a point well below that any new operator could possibly afford. And they can also afford to bring that additional capacity on stream and flood the market, also pushing prices down to a point well below what any new operator could afford.
In short, you’d be insane to compete against them.
However, for the population of NZ as a whole, and the profitability of NZ Inc, it is entirely possible that we’d be much better off with more capacity at a lower price, even if we had to compensate Southern Cross for their loss of profits. It is quite possible that the new companies that could open up, and the increased utility that average NZers would get from being closer to the rest of the world, would more than outweigh those forgone profits.
It is, of course, also possible that there is no problem at all, and we’d just end up subsidising faster porn downloads. I don’t think there are reliable statistics that could tell us one way or the other. My best guess is we’d end up with a bit of both – some businesses able to do things they couldn’t do before, but also a lot of faster porn.
Vote:October 26th, 2009 at 2:14 pm
Paul at 1.56 seems to suggest that the NZ Government should regulate Southern Cross’s pricing.
This is an international company, based I think in Bermuda, with Telecom owning only half a share. The cable network carries data for other countries as well as for NZ? How can the Government regulate such an international company’s pricing?
NZ property rights have already been trampled in the unbundling of Telecom’s copper network without compensation to the shareholders for billions this wiped off Telecom value.
If the Government whacks overseas investors in a similar way this would damage as an investment destination, and we need foreign capital for other things than internet fibre. I’m think of wood products, meat products, wine growing and exporting, perhaps even the dairy industry.
Of course fast internet is highly desirable for as many farms, city homes and businesses, schools, universities, hospitals, and other institutions, such as the police. However, enthusiasts may be over-egging the pudding when they imply this will magically propel us into high-tech prosperity. At this stage, the main use of fibre to homes will be to carry videos that a cynic might say will stimulate mainly the development of a nation of unfit, overweight, lethargic, couch potatoes.
Kiwiblog keeps on our arses facing a computer screen for too much time as it is.
Vote:October 26th, 2009 at 2:23 pm
Jack5: the government building a link in competition to a company currently enjoying monopoly profits would probably be even less globally popular than regulating them would be. If I owned Southern Cross I know which I’d prefer. And as a taxpayer I also know which would cost me less.
Ideally (in a commercial sense) the govt would just leave it alone. However, monopolies are are one of the identified examples of market failure in which intervention can increase national wealth. If international investors were happy to overlook the actions that pushed down Auckland Airport’s share price and Telecom NZ’s share price, I’m sure they would do the same here.
Vote:October 26th, 2009 at 3:28 pm
PaulT: I’m not sure (your 2.23 post) overseas investors overlooked the Labour Government’s blocking of the Canadians from taking a minority stake in Auckland Airport when the same Labour Government was happy for a local power network to be sold to Asia. I’m not sure either why you say foreign investors overlooked the Telecom property rights confiscation.
Foreign investors aren’t exactly clamouring to get into the New Zealand sharemarket these days. You just have to look at the apparently questionable Chinese-American investment partner PGG Wrightson has been able to find. Telstra has done poorly with TelstraClear and I’m sure wished it had never bought in. According to the former ASB chief who now heads one of Australia’s big banks, the Australian banks, too, are not overenthused about their NZ investments. Some reports say they have taken hundreds of millions out of their NZ subsidiaries since the finance crisis began. The Irish have been unable to find a buyer for the NZ Herald-headed newspaper chain, and according to some commentators Fairfax would happily quit NZ’s other newspaper chain. Cadburys has slashed its NZ manufacturing, and Bridgestone-Firestone has just announced it is shutting its NZ tyre-manufacturing factory.
Paul, I think it would be wrong to assume international investors are even mildly enthusiastic about NZ. If the Government regulated and lowered Southern Cross pricing I suggest there would be bugger all chance of getting further international capital for ocean-crossing fibre networks out of NZ.
Vote:October 26th, 2009 at 3:34 pm
Jack, I’m not necessarily advocating doing that. I’m just saying that if we thought we needed more backhaul out of NZ, the right way to do it (both from the perspective of the owners of Southern Cross, and from the perspective of the NZ taxpayer) is to regulate the pricing of Southern Cross. As opposed to the alternative suggested by Jeff @ 1:13 of building a competing network.
I agree with you that in theory all those things decrease NZ’s investment attractiveness. In practice, however, all these things are relative, and plenty of countries are taking similar steps – observe Australia who are doing a very similar thing to Telstra right now.
Do I think any of this is a good idea? Not particularly. I don’t think that the pricing of Southern Cross is that egregious as to be a problem. I also don’t think it would be a large problem if the govt quietly leaned on them – governments do that all the time. Southern Cross must be massively profitable into NZ (into Australia they have competition). Even going to the extent of comparing their pricing in Aus and NZ (for a similar service) and checking we aren’t getting gouged wouldn’t cause too much international opprobrium. If they can offer that service in Aus profitably, then we are hardly killing them by asking for the same deal.
Vote:October 26th, 2009 at 5:32 pm
HMM, well I think you will find that it is either almost or is already a done deal. Think I read somewhere last week or so that the partners had secured the finance.
Vote:Someone wants to look around they will find that info. Probably Herald or stuff.