Speech notes to TUANZ Telecommunications Day, Te Papa, Wellington8 May 2008

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It is a pleasure to be here today and I thank you for the opportunity to speak with you again. When I spoke with you last year I announced the end of the old, light-handed “game” and the beginning of a new era of more intense, open, multi-modal competition.

Significant progress was made in the last year to deliver this new era, and the beginning of this year has seen no let down in the pace of change in the sector – in just the last two months alone we have seen the approval of Telecom New Zealand’s operational separation undertakings, the announcement of a new digital super group and the release of the Draft Digital Strategy 2.0.

Underlying all of this work has been a set of consistent and rock-solid principles:

• That the government has the right and the obligation, on behalf of all New Zealanders, to ensure fair market conditions for all and choice and value for consumers, in a sector that has suffered from historical dominance by a powerful vertically integrated incumbent.
• Regulatory settings must therefore be pro-competitive, robust and above all, credible. Accordingly we passed a groundbreaking Telecommunications Amendment Act in 2006 and enhanced the role of the Commerce Commission.
• Because of the fast-moving nature of the technologies, policy must be technology neutral and foster intermodal competition where practicable. Accordingly we have fast tracked broadband wireless and mobile spectrum and are working to create successful entry conditions for a third mobile player.
• Competition must operate at all levels of the stack – not just the retail level – so we have worked hard on local loop unbundling and operationally separated the incumbent to bring true equivalence at the access and wholesale layers.
• We must actively promote a rapid transition to a fast broadband future because the innovation, economic and social benefits of broadband cannot be fully captured by markets. A stimulatory and strategic role for the state is essential.
• In pursuing this, care must be taken not to crowd out private investment, to gain maximum leverage from any Crown stimulus, and – crucially – to avoid replacing the old dominance over copper with a new dominance over fibre.
• Finally, the economic and social benefits of ICT will be maximised if a holistic and coordinated approach is taken across government and the sector that integrates raw connectivity with user capability and digital content.

So let us consider the progress that has been made in recent years, and provide some insight into the opportunities and challenges we face in moving forward. I want to recognise the real sense of momentum and excitement that now exists in this sector and to acknowledge each of you here who have contributed to this dynamism.

The road travelled

In response to a poorly performing telecommunications sector, and recognising the critical importance of ICT to New Zealand, the incoming Labour-led government made a commitment to improve service performance and affordability.

A Ministerial inquiry into the sector in 2000 recommended changes to the regulatory regime, which had previously relied on general competition law and information disclosure. The recommendations of the inquiry were subsequently incorporated into the Telecommunications Act 2001, which established for the first time an industry specific regulatory regime in New Zealand, including the establishment of a Telecommunications Commissioner in the Commerce Commission.

In early 2005 the Digital Strategy was released, clearly signalling this government’s commitment to ensuring New Zealanders are well serviced with world class ICT and had the capability to make best use of it. We established a goal of reaching the top half of the OECD for broadband performance, and aim to reach the top quartile by 2015.

Through the Digital Strategy, significant funding was made available to promote ICT, with $24.0 million provided through the Broadband Challenge Fund, $17.4 million through the Community Partnership Fund, and funds to extend Project PROBE broadband from schools into community centres and rural businesses.

By the end of 2005, however, it became evident that the existing regulatory processes were not delivering at the rate required. Investment and performance levels that were predicted or promised if unbundling did not occur in 2004 were "static" at best. New Zealand languished in the bottom third of the OECD for broadband uptake and investment. New Zealanders demanded change.

These shortcomings were the subject of the 2005/6 Telecommunications Stock take review, from which we decided to:

unbundle the local loop and bitstream services;
future proof a proactive role for the Commerce Commission and accelerate their regulatory processes:

• introducing multilateral Standard Terms Determinations, Undertakings, the consumer complaints code and more;
• review the Telecommunications Service Obligations (TSO) and develop a rural broadband strategy;
• encourage investment in alternative infrastructure such as fibre, wireless and satellite networks by measures including a review of public sector investment in telecommunications infrastructure to encourage a whole-of-government approach; and
• Create a fairer and more competitive environment by requiring the operational separation of the access, wholesale and retail layers of Telecom NZ and establishing a new wholesale environment.

This policy framework represents a robust approach to overcoming the problems of dominance and, according to commentators from the OECD to Budde.com, moves New Zealand to the forefront of international telecommunications regulatory practice.

Assessing progress

Let us consider progress since we last came together at this Tuanz forum. In summarising matters from a government perspective I will briefly update the Digital Strategy context, summarise progress on a range of regulatory matters, and outline current work on the Broadband Pathway. I will then offer a few pointers to the future, without of course jumping any guns on announcements yet to be made.

Digital Strategy 2.0

The pace of change has continued to accelerate since the 2005 Digital Strategy. The internet generation is entering the workforce, bringing new ideas and different values. They will be our future innovators and leaders in the digital space. Boundaries between telecommunications and broadcasting are blurring, and business models are changing.

In response is a working draft and wiki of Digital Strategy 2.0 is now out for public comment – and MED is announcing a short extension of time for contributions.

Last November's Digital Future Summit and the draft affirm that the strategic framework laid out in Digital Strategy 1 – the now familiar three Cs of connection, confidence and content – is still relevant.

Crucially, these enablers must work together –and the sector and government must collaborate to assist this – if we are to maximise the productivity, community and sustainability benefits of broadband ICT.

Digital Strategy 2.0 reminds us that accelerating broadband rollout is not an end in itself, but a means to broader economic and social outcomes. These outcomes can only be maximised if the human ware and the software is developed alongside the bandwidth and hardware. Any investment programme that poured billions into fibre but ignored user skills or digital industries would not serve New Zealand well.

Accelerating the growth of digital businesses will drive productivity and innovation throughout the economy. The smart application of digital technologies can assist in transforming our largest export sectors, such as food and beverage.

The 2005 Digital Strategy provided opportunities through the Broadband Challenge and the Community Partnership Fund for local government, the private sector, communities and central government to collaborate in the digital space.

For partnerships to succeed, collaboration must be driven by the participants. I am pleased that a new participant-led overarching forum for the ICT sector will soon be launched, following extensive consultation across the sector, effectively replacing the Digital Strategy Advisory Group, the HiGrowth Trust and the former ICTNZ proposal.

While this will provide valuable advice to government, I am determined that it will not be bound by the apron strings of any government agency. I understand that the proposal under development now enjoys very broad support and an announcement can be expected in the near future.

Pro-Competitive Regulation

Turning to the regulatory framework, it is widely accepted now that by working together we have systematically implemented significant change in the telecommunications sector. Key elements of recent action include local loop unbundling, completion of Telecom's operational separation undertakings, work on the TSO review, mobile markets and the crucial Broadband pathway.

Unbundling the Local Loop

The Commerce Commission has worked hard over the past year to deliver local loop unbundling, unbundled bitstream, Naked DSL, number portability and several mobile sector determinations and is currently working towards sub-loop unbundling.

The Commission has issued its final determination on the standard terms and conditions for access to the unbundled local loop, and has initiated standard terms determinations processes for sub-loop unbundling.

The Telecommunications Carriers Forum (TCF) should also be acknowledged for their contribution on a range of LLU issues.

It was particularly rewarding to see Orcon take advantage of unbundling recently, with its installation of broadband equipment in five Telecom exchanges in Auckland.

Telecom’s commitment to roll out cabinetisation and a next generation network came later than many of us would have liked. Some have argued that cabinetisation can make LLU less profitable than it otherwise would be.

Around the world, cabinetisation is recognised as a necessary step towards the provision of fast broadband. The inevitable tension with LLU is managed through instruments such as transparency and minimum notice provisions such as those agreed industry-wide in New Zealand through the Telecommunications Carriers Forum.

Accordingly, I am convinced that there remain significant opportunities for other suppliers to provide broadband via LLU in our major cities. I look forward to seeing more providers following Orcon’s lead in utilising unbundling to supply more affordable, high speed broadband to users.

I would emphasise that even the presence of relatively small amounts of unbundled lines can have a powerful galvanising effect on wholesale telecommunications markets – incumbents are incentivised to provide workable wholesale terms rather than face higher levels of bypass from competitors through their own networks.

Operational Separation of Telecom NZ

While local-loop unbundling was a significant step towards greater competition in the sector, it is significantly more powerful now in the context of an operationally separated incumbent.

Operational separation will deliver non-discrimination at a deep wholesale level and an access layer that is open to entrants and competitors on an equivalence of inputs basis.

On Separation Day New Zealand’s regulatory regime was brought right up with the leaders in international best practice.

The robust operational separation of Telecom has been a high priority, and is expected to foster increased competition and access to a wider range of new and improved broadband-based services at better prices.

This is important because offering competing facilities based services over the existing infrastructure was only going to take us so far up the international ladder – we also need increased investment in that infrastructure – beginning with shortening loops in order to make fibre to the premise a viable prospect for the future.

Separation will also increase the transparency of Telecom’s business operations, and substantially limit their incentives and ability to engage in discriminatory behaviours that weaken damage or exclude competition in downstream markets.

Along with the Commerce Commission, an independent oversight group has been appointed to closely monitor the independence of the three units.

Telecom has committed its cabinetisation plans as part of the separation undertakings ensuring the accelerated rollout of high speed broadband that will deliver advanced broadband services to all cities and towns with more than 500 lines by 2012.

Telecom has also committed to supplying key regulated services to an Equivalence of Inputs (EOI) standard, and that Access Network Services (ANS) – including fibre and access to the NGN core – be developed EOI ready to underpin future non-discriminatory access.

Equivalence of Inputs is one of the cornerstones of operational separation as it removes the ability of Telecom to discriminate in favour of itself. Telecom must provide relevant regulated services at the same price, on the same technical and commercial terms, using the same operational support systems and processes, to all market participants including itself. Provision of relevant non-regulated services to other providers, if offered, must be non-discriminatory.

It is worth noting that as the Undertakings process came to a conclusion the number and significance of the initiatives that Telecom accepted and included increased markedly, and I want to thank Telecom CEO, Dr Paul Reynolds, for his commitment to this process. We eventually agreed to:

• Reduce the level of group based incentives for Wholesale Division Managers to no more than 30 percent of their total income.
• Enhance the milestones for NGN rollout to clarify expectations that by 2012 84 percent of fixed voice customer lines in operation will be technically capable of achieving 10 Mbps broadband speed and 89 percent will be capable of achieving 5 Mbps.
• Strengthen provisions around IP interconnection to provide the strongest possible assurances of non-discrimination given the current level of technology uncertainty, and provide for a robust and transparent process for resolving any future definitional or access issues.
• Further protect confidentiality of customer and commercial information, and provide a role for the Commerce Commission in overseeing this process.

Dr Reynolds has also written to me to underline Telecom’s commitment to ensuring that Telecom’s level of investment in Zone 4 rural lines will not be less than (but may be greater than) the gross contributions that Telecom receives through the TSO subsidy, and transparently spending all TSO contributions from other companies on Capex in Zone 4 rural areas.

By 1 July this year the remaining organisational implementation requirements are to be completed by Telecom and the Independent Oversight Group is to be finalised. Telecom is to migrate to self-consumption of LLU and UBA products and prices as soon as possible.

By the beginning of 2009 the undertakings for IP Interconnection are to be finalised, and by 2011 all LLU and UBA services are to be fully EOI complaint.

So what does all this mean for New Zealand businesses, communities and households?

Operational separation will encourage competition and innovation in the telecommunications sector, resulting in greater availability of higher speed broadband at more competitive prices.

Improved broadband will offer Kiwi families new ways of connecting with people, the ability to strengthen communities, enhanced participation in the democratic process, and new opportunities by breaking down the barrier of distance.

Broadband is also a key driver of productivity and innovation in knowledge based economies like New Zealand. Firms will be better able to compete internationally through the use of new technologies that allow them to operate more effectively through smarter processes, new products and services.

Although operational separation is an important step forward for the telecommunications sector, further work is required to enhance market competition and investment. Ongoing work includes the TSO review, mobile market delivery, and the broadband pathway which I will now discuss in turn.

TSO Review

The TSO regulatory framework providing for the universal service of certain telecommunications services in New Zealand is currently under review. The review is a fundamental reconsideration of the TSO framework and is focused on the Local Service TSO for the supply of local residential telephone service.

The TSO review is addressing a range of strategic issues:

• whether the TSO has delivered on its promise to maintain and future-proof the original Kiwi Share consumer protections
• whether the TSO framework has a role in improving the supply of broadband service in rural areas; and
• whether the TSO should be available on a contestable basis or solely to the ubiquitous provider
• How changes to the rules and processes of the TSO framework can improve their effectiveness, recognising changes in technology and expectations.

A discussion document for public consultation on TSO issues was released in August 2007 and submissions closed in October. Extensive submissions have been received from the Telecommunications Carriers Forum and others, and further targeted consultation is underway.

Telecom has committed to using best endeavours to reach agreement with me on a new Local Service TSO by 30 June 2008.

While I will not pre-empt the outcome of the considerable work currently underway on the TSO, I do believe that the existing arrangements are well outdated and that significant modernisation is required. I also believe this must reflect the spirit of the original Kiwi Share and must considering how any future arrangements can best support our shared goals of fast, affordable broadband to all New Zealanders.

Mobile Market Development

Mobile telecommunications are an increasingly essential component of the broadband story. New Zealand has high mobile phone penetration – some would say saturation. Until recently prices have been generally towards the upper end of OECD benchmarks, but progress has been made.

Mobile technology is roaring ahead and the potential applications available through 3G and 4G mobile broadband are rapidly expanding. Mobile solutions are able to compete with fixed alternatives in the provision of last-mile Internet access.

The development of Mobile and Wireless broadband technologies aided by the increasing availability of spectrum (eg Wimax spectrum auction and reallocation of the 800/900 MHz spectrum to a new entrant) can bring broadband and improved voice services to those areas of New Zealand that are not well served by fixed line services.

In keeping with our bedrock principles of promoting competition and technology neutrality, the Labour-led government is driving for higher levels of competition in the country’s mobile telecommunications market.

The Commerce Commission has worked tirelessly over recent months to ensure that regulatory conditions support the entry of a third mobile operator into the New Zealand market.

I believe that the Commissioner will have more to say on this shortly, but I note that already the Commission has completed Schedule 3 investigations into mobile co-location and national roaming. We hope to see this operator launch before the end of the year.

I am announcing today my decision to now accept most of the Commerce Commission’s recommendation to amend the terms of the national roaming service. These amendments will facilitate the conclusion of national roaming agreements, to the benefit of New Zealand’s end-users.

I am also announcing that I have chosen to reserve my decision in respect of the Commission’s recommendation not to designate national roaming, in order to obtain clarification from key parties about how well national roaming agreements are functioning on the ground.

Let me be clear - this government is determined to ensure that competitive conditions exist in mobile markets such that entry by a third mobile player is not only a potential but a reality.

The Broadband Pathway

I am pleased that there is now political consensus that New Zealand needs faster, cheaper broadband. New Zealanders want it and we want it now.

That is a mantra that I have been preaching for a few years now. When I called for broadband for a dollar a day two years ago, some commentators scoffed. It is now available for about half that.

Expectations are building that a step change is underway. Completion of Telecom's separation undertakings, with its welcome and binding investment commitments and NGN rollout schedule, provide a good platform for future development, but is by no means the end of the road.

At the recent Digital Futures Summit a general understanding was reached that if we are to achieve the governments’ long term vision of fibre to the home, a joint effort is required that cuts across all sectors, business, local and central government.

While availability of basic broadband in New Zealand is high and take up has almost doubled over the past two years, our relative position internationally has improved only from 23rd to 20th in the OECD. There is no question that achieving our goals will require a substantial further increase in broadband infrastructure investment from all sectors.

The government is committed to building and investing in fast broadband in our cities and rural areas, and important work is currently being undertaken in this area. This government has already intervened through regulatory reform, through stimulation of demand and demand aggregation, and through direct and indirect investment. Let me briefly recall key developments.

Wireless Broadband Spectrum

One of the ways by which the government is making an important contribution to the expansion of the broadband pathway is through the allocation of a large amount of spectrum for wireless broadband.

The auction for spectrum in the 2.3 GHz and 2.5 GHz bands successfully concluded in December last year, and we are currently in the final stages of the settlement process. Two Managed Spectrum Parks have also been set aside for regional and local use, with consultation on detailed access rules being undertaken this year.

I am confident that the auction will provide the spectrum needed to make wireless broadband rollout a reality in every region of New Zealand by a healthy array of competing providers.

National Environmental Standards

In February this year, Cabinet decided that regulations should be drafted for four proposed National Environmental Standards for telecommunications facilities.

These national standards will provide certainty across the country for permitted activities within the Resource Management Act. Later this year, we will introduce the Utilities Access Amendment Bill which will provide network operators with certainty in their engagement with multiple local authorities.

These measures will improve the processes for considering approaches from utilities to utilise motorway and rail corridors, thus reducing investment barriers.

Government Demand Aggregation

The Government is also taking a demand side approach to stimulating investment through aggregating its own demand for broadband through the KAREN network and the Government Shared Network (GSN).

Cabinet has endorsed a Common Framework that applies common principles to the purchasing and contracting for state sector broadband services. This is an important step in achieving the benefits of demand aggregation, such as increased competition and the stimulation of new capital investment in broadband network infrastructure.

This is achieved by providing investors with access to information on current and future government telecommunications demand. The State Services Commission will be going into more detail on the Common Framework this afternoon.

There is significant merit in greater co-ordination in the purchasing decisions of key government agencies to further stimulate investment and achieve efficiencies in government expenditure – particularly as the public sector is the largest national purchaser of broadband services.

Work is ongoing on the best means to aggregate government demand, and we will be announcing some exciting new initiatives in this area in the near future.

Broadband Investment Forum

In December last year I wrote an open letter to sector and business leaders asking for a consideration of options to promote increased levels of investment in broadband infrastructure. I am grateful to Stephen Tindall, as Chair of the Growth and Innovation Advisory Board and the NZ Institute, for convening an investment forum of business, finance and sector leaders in February this year.

The Forum is an important tool for maintaining dialogue on innovative solutions for addressing the key infrastructure gaps we face. I hope to continue this discussion when I meet with the Forum at the end of this month.

Work has been actively underway within government to analyse various investment vehicles and options discussed by the Forum. This work has informed future announcements.

Local Government New Zealand Broadband Forum

A Local Government Broadband Forum was also held in February this year. The forum was held to clarify local government’s role in broadband deployment and the overall digital strategy agenda within local communities.

A Know How Guide is being designed for use by local government and community groups to develop a business case for broadband connectivity in their local areas.

A Broadband Friendly Protocol is being developed which will be a set of business arrangements between territorial authorities and industry on processes to be followed in an area that would be declared broadband friendly.

Progress in this area has the potential to provide substantial benefits to telecommunications users. I would like to take this opportunity to challenge you as users to ensure your local councils are addressing these issues.

Rural Investment Issues

There has been considerable underinvestment in the rural telecommunications network, particularly in backhaul services. As I have previously noted, there has been significant analyst speculation that rural investment has fallen well below depreciation levels and nominal TSO ubiquity costs.

The government is fully aware of the needs of rural users, and their importance to New Zealand. A mix of technologies will be needed to service rural areas, and a range of policies are being considered in this area.

The government will encourage cooperation between telecommunications providers over sharing infrastructure costs, and acknowledges the commitment of Telecom and others to work with rural communities to "leave no stone unturned" to deploy broadband.

The government will continue to work with industry and rural communities to improve the coverage of rural broadband. At the Digital Futures Summit I confirmed that government see rural infrastructure as among the key areas of importance going forward.

Progress on the Broadband Pathway

The recently released Telecommunications Market Monitoring Report by the Commerce Commission shows that the 2006 reforms are already having a positive effect on telecommunications markets, and are likely to show further gains in 2008 with the implementation of local loop unbundling, enhanced bitstream access, and the entry of a third mobile network operator.

Competition increased in many telecommunications markets during 2007, with average retail prices falling over all sectors except for monthly line rentals.

There are, however, key markets that remain limited by competition. An area of particular concern is wholesale pricing of fixed-to-mobile termination. The Commission will be monitoring this closely.

It was particularly gratifying to see the results for the broadband market, with prices for residential broadband services ranking in the top third for value of all the plans surveyed, comparing favourably with other similarly developed countries.

The broadband market has grown strongly over the past year and now surpasses dial-up as the most common means of connecting to the internet. Much of this growth can be attributed to Telecom’s competitors, with their share of growth in retail broadband connections provided over phone lines exceeding 70 percent in the final quarter of 2007.

Overseas commentators such as Paul Budde have noted that “New Zealand is clearly showing the way here" and suggests that a key lesson from the Kiwi experience is "get your house in order first before you start throwing your money around.”

The Washington-based Information Technology and Innovation Foundation's recently noted that key broadband success factors are, on the supply side, freeing up spectrum for wireless broadband and co-funding state broadband support programs. On the demand side were measures such as promoting broadband usage and digital literacy, and encouraging government leadership through improving e-government, teleworking, and other public functions.

These are of course all measures currently being undertaken by this Government.

The Future of Broadband

While we are confident that the regulatory action taken thus far will help to reduce these infrastructure gaps through incentivising new investment, we recognise that a significant gap remains between our level of aspiration for New Zealand as a centre of innovation and technology, and the existing commitments of market participants.

Our shared commitment to FTTH within a decade must be implemented with a sober assessment of current conditions.

Widespread fibre-to-the-home in ‘brown field’ residential locations in New Zealand is uneconomic at present for a number of well documented reasons – the scale of the investment needed, uncertainty of future revenue streams, cannibalisation of existing revenue streams and the ability to meet consumer demand through more incremental upgrades to the network (i.e. fibre-to-the-node) and to technology (i.e. moves to VDSL2 and other technologies).

We must be laying the groundwork now for incentivising investment in fibre-to-the-home. As I signalled at the Digital Summit, there are a number of areas where the government has concerns and will be taking steps to address them.

The particular areas identified by the government as requiring further investment are:

• extending fibre-to-the-node (FTTN) further than is currently planned by Telecom, as a key step toward a long term vision of fibre to the home(FTTH)
• improving the availability of very high speed services to businesses and major users in major cities and provincial centres;
• improving rural broadband infrastructure; and
• Improving international connections.

The government will soon outline an ambitious action plan that builds on recent regulatory changes and investment commitments secured from Telecom, and that puts New Zealand on a pathway to the widespread deployment of FTTH in the future.

However, investment in FTTH should not be made at any cost - particularly if the cost of such investment is higher prices for all end-users, reduced competition, and the entrenchment of monopoly practices.

The key lesson that New Zealand should take from overseas experience is that promoting investment must be done in a manner that promotes competition.

While government can have a role in bringing forward the timeframe in which key broadband investment will occur, any co-investment should not be to the exclusion of competition and should not be coupled with regulatory concessions that lock-in an incumbent’s market position.

‘Competition’ has been the driving tenet behind the recent regulatory reforms and the unpicking of Telecom’s monopoly – and it is important that we do not throw away the gains of recent years.

The government has considered a wide range of mechanisms for facilitating targeted investment over the past twelve months and I am satisfied that the package we will soon be announcing will be the most effective means of providing long-lasting benefits to end-users.

It is important to point out that I concur on the goal for broadband to New Zealand (FTTH), but I profoundly disagree on a recently proposed mechanism for achieving this goal.

The concept of a nationwide ‘tender’ or a single capital-based crown investment has been previously considered, but it is fair to say it failed the ‘sniff-test’. Here's why.

We have consulted widely with industry and the investment community and their views were unanimous - no one is willing to undertake widespread fibre-to-the-home investment in competition with Telecom’s services.

The reason is obvious – Telecom has the scale, the existing infrastructure and customer base to make what is already an uneconomic investment a very high risk indeed for any other provider or consortium of providers.

In addition, problems of captive sunk investment, information asymmetry and access pricing risk mean that there is no commercial appetite to build a national-scale fibre network in competition with or in extension to Telecom's without some guaranteed return.

The New Zealand Institute proposal recognises this problem and proposes in response a legislated monopoly combined with the structural separation of Telecom's access network (at least Chorus and part of Wholesale) to form a new commercial entity called "FIbreCo".

Further legislative change of that nature, coming immediately after the successful operational separation undertakings, would be disruptive, costly and potentially time-consuming. A high bar would need to be set to justify a FibreCo model as the preferred next step on the broadband pathway; and I currently do not consider the evidence supports this.

Our political opponents appear not to have taken seriously the nature of this problem and instead blithely assume a capital tender can just be “made” fully contestable. That has all the street smarts of the 1990's all over again – under that approach the government and the market would be entirely dependent on Telecom’s co-operation.

And this brings us to the next stumbling block – what could make it in Telecom’s interest to co-operate on this project?

• What would make Telecom invest billions of dollars to overbuild their existing infrastructure?
• What would make Telecom invest billions of dollars to cannibalise their existing revenue streams (particularly toll revenue, which would dramatically decrease)?
• What would make Telecom enter a partnership with the government, who will naturally have contrasting objectives?

Under normal circumstances the potential of accessing $1.5 billion of Crown capital would hold minimal interest for Telecom. After all, this money does not appear to have been offered as a grant, but as a Crown capital injection.

In other words it is not free money, but requires a rate of return, so can not fundamentally alter the economics for fibre-to-the-home.

Unless of course a further policy "evolution" (a la the Iraq War or Climate Change) is proposed by Mr Key – sweetening the deal so that Telecom buys in by making the terms highly concessional. This scenario risks an unnecessary transfer of wealth from Kiwi taxpayers to the incumbent's majority overseas shareholders. Hence the popular scepticism in talkback and the media to our opponents proposal by a mortgage belt already under pressure that demands rigour and demonstrable value for money for the tax dollars.

Further vacillation would also compound the opposition's already prodigious regulatory credibility gap, which has taken nearly two decades to perfect. Regulatory credibility is afterall the single most important prerequisite for a competitive market framework.

The credibility gab is not helped by sidelining the spokesman (Mr Williamson) who helped design their policy, nor by appointing as infrastructure “uberguru” a man (Mr English) who openly opposed the policy just launched and has stated he sees no case for Crown investment.

So if National’s proposed capital tender is pursued, we will inevitably be in a situation where Telecom is the only provider in New Zealand able to undertake widespread FTTH. Clearly a National government would be forced to offer more than just a Crown capital contribution in order for the project to go ahead.

Unfortunately for competition and consumers in New Zealand, Any incumbent would then insist on negotiating high wholesale access prices or other sweeteners from the government to compensate it for what would otherwise be sub-par returns at the retail level.

Whereas the Labour-led government has left pricing matters to the Commerce Commission to determine in line with international best-practice, the Opposition's proposal has indicated the prospect of regulatory changes to support any negotiated investment.

Users in New Zealand deserve unequivocal answers to the following:

• Will the Commerce Commission retain its full independence in setting access pricing in New Zealand?
• Can negotiations with Telecom on wholesale pricing be ruled out?
• Can a guarantee be provided to users that they will have the option of taking a comparable service that they can get today at a comparable price?

I believe the government has found a means to promote investment in broadband infrastructure while developing the competition that is essential for a dynamic and responsive telecommunications industry in New Zealand.

We have ruled out a nationwide tender that only the incumbent can win, we have ruled out a process that puts a single provider in a position of massive influence over the government of the day, we have ruled out regulatory concessions. We have ruled out compromising the rigour of the Commerce Commission’s pricing process.

The government’s comprehensive digital package will be released shortly. It would not be appropriate for me to pre-empt it today.

However it follows from the consistent policy framework that this government has adopted to date that any new measures will be:

• pro-competitive, robust and above all, highly credible
• technology neutral and pro-competitive at all relevant levels and layers
• driven by the needs of consumers, including major business and public users;
• focused on areas of greatest need where a strategic role for the state is essential
• highly leveraged with private sector co-investment to generate maximum economic and social benefit

This government’s approach will:

• avoid replacing incumbent dominance over copper with a new dominance over fibre
• promote localised solutions that provide multiple providers with the opportunity to play to their strengths, build upon their existing networks and collaborate
• reduce the costs and barriers for rolling out FTTH for all providers in the market
• improve New Zealand’s international resilience
• upgrade New Zealand’s rural broadband infrastructure
• co-ordinate public sector spending to incentivise investment
• not compromise existing regulatory settings and the Commerce Commission will retain full authority for setting wholesale access prices; and
• not pursue connection goals in isolation from the other key components of the Digital Strategy

While fibre-to-the-home must remain the end goal, the means to achieving this end are critical and deserve close scrutiny. I believe we have made remarkable progress over the last couple of years and it is important that any new policy initiatives build upon rather than undermine this progress.

Summary

Let me take this opportunity to summarise:

• The government has implemented an industry specific regulatory regime for telecommunications which is in line with international best practice.
• Under this new regulatory regime we have been able to effect significant change in the sector and are continuing to make progress.
• We now have an unbundled local loop and bitstream, Naked DSL, number portability and an operationally separated incumbent.
• Significant progress has been made in developing New Zealand’s broadband pathway through regulatory reform, through stimulation of demand and demand aggregation, and through direct and indirect investment.
• In addition to this work we are currently reviewing Telecom’s Local Service TSO obligations and refreshing the Digital Strategy to reflect the challenges we are facing in today’s digital world.
• We are actively considering further substantial measures to accelerate New Zealand's trajectory along the Broadband Pathway. Extensive consultation with the business and finance sectors has been useful in that work.

No-one doubts the progress made, but this crowd is not known for sitting on its laurels.

The issue of governmental provision of and investment in telecommunications infrastructure is a hot topic in New Zealand today, and strong opinions on the issue seem to be held by all.

It is great news for this sector that its position at the vanguard of innovation and economic development is now a matter of bipartisan consensus, and I welcome that.

But no-one sensible wants the government to crowd out the private sector, or to create new problems of dominance through poorly designed interventions that rely on the support of only one commercial partner.

It is imperative that we get as much bang for our tax buck as possible. Leverage ratios matter. That means staying true to the competitive and technology neutral regulatory approach, prioritising infrastructure gaps and using the smartest tools experience and consultation can provide.

Since the Digital Summit we have been working hard on these investment issues and with my colleagues I look forward to making the results of this work known soon.

Conclusion

It has been an eventful 12 months since I last spoke with you, and no doubt the next 12 months will be equally so as we implement the operational separation of Telecom, complete the review of the Local Service TSO, and refresh the Digital Strategy.

It is an exciting time for the industry and we are being watched closely by the international community. We have high expectations and goals, and no doubt will face many challenges along the way.

We must recognise that if we are to achieve our goals then we can no longer afford to operate in isolation from each other. Achieving our digital potential will require many different groups to become involved and collaborate. This is about our shared future, our lives, our families and our prosperity as a nation.

We are a small nation with unique opportunities and advantages, and each of you plays a key role in ensuring that we achieve our digital potential.

Working together as a sector, you have helped to drive change over the last few years that would have been hitherto undreamt of. But you know – and this Labour-led government knows – that we have achieved a great beginning and not an ending. We now have new constraints of skills and capital that must be addressed. The vision and design quality of what we do next will be crucial to our economic future.

Thank you for your attention and my best wishes for a highly successful day.