The New Zealand Institute proposes the creation of a new vehicle to deliver fibre to the premises
02 Apr 2008
This presentation, ‘Delivering on the broadband aspiration: A recommended pathway to fibre for New Zealand’, describes a regulatory model and a proposed funding mechanism, called Fibre Co, that we believe will deliver against the Institute’s proposed aspiration of fibre to the premises (FTTP) to 75% of the population within a decade.
Delivering against this aspiration will allow New Zealand to capture significant economic value. The Institute has previously estimated that a high-speed broadband network would generate additional economic value of $2.7-$4.4 billion a year, with further gains possible through enabling innovation. Given the rapid pace at which other countries are moving to deploy high-speed fibre-based networks, we believe that New Zealand should act with urgency to invest in fibre to build competitive advantage in the weightless economy.
However, a recently released Institute presentation noted that New Zealand’s current investment pathway with respect to the deployment of fibre does not come close to positioning New Zealand to achieve the broadband aspiration in a timely manner. New Zealand’s fibre future remains reliant on the investment decisions taken by Telecom, which faces weak incentives to invest significantly in a fibre access network.
If it is accepted that high-speed broadband is of significant economic value, and that New Zealand’s current pathway is inadequate, the challenge is to determine how best to accelerate the deployment of fibre. We believe that a new funding and regulatory model is required in order to achieve an accelerated deployment of fibre. The presentation released today describes our thinking on what this model looks like.
The key part of this model is the creation of Fibre Co, a price-regulated monopoly investor in a national FTTP network. Fibre Co would own the passive infrastructure and would grant equal and open access to the fibre access network to service providers and others at a regulated price. Fibre Co would be required to deploy fibre at a pre-determined rate, such that FTTP would be delivered to 75% of the population within a decade.
We believe that the focus should be on building a single fibre access network, with competition occurring between services providers rather than between competing fibre networks. Our estimate is that building a national FTTP network to 75% of the population will cost around $4-5 billion over the next decade.
Fibre Co will be structured so as to attract the maximum amount of private capital. This will be done in several ways. The proposed regulatory changes will make private investment in fibre more attractive than is currently the case. In addition, targeting infrastructure investors who are comfortable with the risk, return, and time horizon properties that are associated with infrastructure assets like fibre, makes it more likely that private investment will be delivered. And the early investors in Fibre Co will have a right of first refusal on subsequent rounds of capital raising. This will encourage early investment to the extent that the fibre asset is expected to increase in value over time.
Because of this, we expect that Fibre Co will attract a significant amount of private investment. Fibre Co creates a vehicle for this capital that does not currently exist.
Government funding is likely to be required as well. We estimate that the government may be required to invest around $1 billion over the next ten years to finance the portion of Fibre Co that is not fully commercial. In return, the government would obtain a proportionate ownership stake in Fibre Co. To the extent that the economics of Fibre Co improve over time – for example, if penetration rates increase – less government funding will be needed.
The final feature of the proposal is that it provides a vehicle for all of the key stakeholders, from Telecom to local and central government to utilities and other private sector investors, to be involved in Fibre Co in value-creating ways. Some of the contributions will be financial (such as investments from infrastructure investors), others such as telcos or lines companies may contribute assets or expertise, local government may be able to facilitate investment through the consenting process, and central government may contribute funding as well as acting as an anchor tenant by using Fibre Co for its communications spending. This means that a broad range of key stakeholders will have a clear incentive to work together to rapidly and efficiently roll out fibre.
An important issue to work through is the relationship between Fibre Co and the existing copper and fibre networks. We believe it is necessary to move from the operational separation of Telecom, which has just been approved, to structural separation, in which Telecom’s existing copper and fibre last mile networks would be sold into Fibre Co on an agreed commercial basis. This would enable Telecom, as well as other last mile network owners, to realise fair value from these assets, and would also enable the transition from copper to fibre to be well managed by Fibre Co.
The presentation describes a rapid pathway of action to launch Fibre Co. The next steps are for the Fibre Co shell to be created, and then for the regulatory, funding, and partner details to be confirmed
As soon as possible after this launch date, Phase 1 of the Fibre Co deployment should commence to 200,000-300,000 premises. The locations for the first deployment should be in areas where the economics look most promising, and where rapid deployment can occur. At the conclusion of Phase 1, a further round of capital raising would occur to fund Phase 2 of the deployment. Subsequent phases would occur until 75% of the country is reached.
The Institute’s proposal is commercially and fiscally realistic and involves key parties in value-creating ways. It demonstrates that achieving the Institute’s proposed aspiration is possible. Although committed leadership from both the public and private sectors will be required, moving in the proposed direction gives New Zealand the best chance of delivering the type of broadband future that we aspire to.
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For information please contact:
Dr David Skilling, Chief Executive, The New Zealand Institute, Ph: (09) 309 6230, Email: , Web site: http://www.nzinstitute.org
Notes to editors:
The Institute’s previous presentations on broadband are available on the Institute’s website at http://www.nzinstitute.org