Monday, April 07, 2008

New Zealand: another Amsterdam look-alike

It didn't take the New Zealand Institute long to come up with an answer (April 2) to the question ("What investment vehicle", March 12) who should operate New Zealand's FTTH network. (In response, InterNZ calls for a debate.)

What it comes down to is a PPP (public private partnership) for a 3-layer model, that the Institute compares to the Amsterdam (Citynet) solution (page 9), which also seems to be coming to Singapore. Some questions remain, though (see below).

The highlights:
  • FibreCo: a regulated monopoly "created by the government" charged with building an FTTP network covering 75% in 10 years time.
  • "... because there is insufficient market value to build redundant fibre infrastructure and no technical reason to do so." (page 7) A peculiar way of defending this option. However (page 11) "... the value of fibre infrastructure will increase over time." This can be related to new services, rising demand and decreasing costs over time (page 15).
  • Open access: FibreCo will have to rent dark fiber capacity on an equal basis.
  • "Owners of existing (copper and fibre) networks can sell these assets to FibreCo on a commercial basis."
  • Services based competition (page 20): "FibreCo works closely with appropriate companies to light the network and provide a range of services. (...) A single provider lights the network. May be provided by a service provider or an independent third party." This hooks in to current separation plans at Telecom NZ.
  • Breakeven. Total cost of reaching 75% by 2018 is estimated to be NZD 4.0-5.0bn, of which two thirds for passive components and one third for active components (page 12). Assuming ARPU of NZD 50 per home (compared to current Telecom NZ ARPU of 80-100 NZD/mo/home) and other input, the breakeven cost per home is NZD 3,000 (page 13). The private sector would be expected to pay for such homes and the government would have to put up another NZD 1bn to cover homes that are more expensive to cover.
  • Stimulating uptake: entry level service at a comparable cost; extended period of free services (here a reference is made to Nuenen in the Netherlands); require a switch from copper to fiber in order to be able to retire the copper wire (page 16).
  • Stakeholders: government bodies (who will also be anchor tenants: today's annual spend on telecoms of NZD 200m will migrate completely) and private investors may contribute cash, existing operators contribute assets (existing fibre, ducting) and cash - all for a stake in FibreCo (page 18-19).
  • Timeline. Operational separation is underway at Telecom NZ. Chorus, the network operator, should be priced within 12 months. Within another 6 months it should be sold to FibreCo (i.e. structural separation).

My take on this:

  • Very much in line with my own preferred solution (single infrastructure, separation, 3 layers, open access).
  • A focused, regulated, natural monopoly at the passive layer should be viable (page 11), even for a life at the stock exchange. Check out tollroad stocks (page 19) in Europe, which have done very well. It remains to be seen who the government will be able to attract as passive, private investors, but I am sure FibreCo will be an interesting vehicle for investors who prefer utility style investments. In case of emergency, would the government be ready to step and nationalize FibreCo?
  • Chorus is to be sold to FibreCo, but at what price? This must be the toughest part to negotiate. The Institute says 'the value' will increase over time (see above) - whatever that means - so that assessment won't exactly help.
  • Also, incumbent telcos are very much network focused, so they may oppose the idea of a monopoly operator. Doing operational separation is one thing, but structural separation may feel like another matter entirely to such a company.
  • Some vertical integration would still be allowed (between the active layer operator and one of the the services providers). So, regulation should pertain to both the passive and the active layer, I suppose.
  • Could some form of infrastructure based competition be possible by allowing more than one player at the active layer (transmission providers)?


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