Universal service reform in New Zealand

On 10 March 2010, the New Zealand government announced the results of its review of the Telecommunications Service Obligation (TSO). Until now, New Zealand has had a similar approach to most countries: the regulator has levied major industry participants on a weighted basis. The levy was passed to the incumbent, which bore the obligation to provide basic services in rural areas.

This has now changed. The government has announced that henceforth all levy funds will be applied to its Rural Broadband Initiative (RBI). Under the RBI:

* 97% of New Zealand households will have access to broadband speeds of 5Mbps or faster, and the remaining 3% to at least 1Mbps
* 97% of schools will be connected with fibre at 100Mbps, and the remaining 3% with at least 10Mbps. Nearby medical centers will also be connected.

The new Telecommunications Development Levy of NZ$42 million per annum will be levied from the industry, to be applied to the RBI over the next six years. An additional NZ$48 million will be provided directly by the government.

The funds will be allocated through a two-stage process. An expression of interest phase will inform a final request for proposal phase, which will finish by November 2010. Separate bids will be accepted for up to 20 regions, and multi-region bids will be accepted. “Future-proof” proposals that maximize the use of fibre will be favored. All infrastructure funded under the RBI must be open access.

One of the unanswered questions is whether it makes sense for Telecom New Zealand to offer TSO services where other providers are offering government-subsidized broadband services. There is no process for these new providers to shoulder the TSO where they become the dominant provider of broadband.
Another blow for the incumbent

The bad news was reserved for the incumbent. Although it has lost levy funding, Telecom New Zealand is still required to meet all of its traditional voice-centric obligations in rural areas, including unmetered local calls.

Telecom New Zealand responded with a short statement that its EBITDA guidance for 2011, 2012, and 2013 would be affected by up to NZ$56 million. Its shares hit a record low.
Policy transition only half-done

This latest announcement is a part of a major shift in the way governments are approaching universal service provision. The traditional approach, centered on basic services and industry levies, is being displaced by a much more expansive approach based on public broadband infrastructure investment. The same has occurred in Singapore and Australia, and also in Greece, the UK and the US, as well as in the EC’s consultation on the future of the Universal Service Directive

However, there has also been significant disruption, especially to the incumbents. While the change has been smooth in Singapore (at least on the surface), the process has been more contentious in New Zealand and Australia. It is clear that government intervention has damaged shareholder value. New economic value to offset these losses is slow to appear.

It is unlikely that this disruption could be eliminated; after all, structural change is precisely what these governments are trying to achieve. However, unnecessary damage is done when transition arrangements are neglected. For example, it is not obvious why the New Zealand incumbent should continue to bear the cost of providing the TSO to a shrinking number of customers when a government-funded competitor can do the job just as well. Ultimately, it makes sense for the dominant operator in a region to undertake this task, and for a transition to new TSO arrangements to be mapped out.

While keen to promote new technologies and investment, governments are less keen to map out a transition away from legacy arrangements such as traditional universal service obligations. This remains a gap in policy that, sooner or later, must be addressed.