NZ Telecommunication & Investment Conference

  • John Luxton
Associate Minister of International Trade

Stamford Plaza Hotel, Auckland

Thankyou for inviting me to speak to you today. Looking at the line up of speakers that you have had this afternoon, I am sure you have had a stimulating and interesting conference.

As Minister of Commerce I have responsibility for competition policy. The telecommunications industry over the last few years has been perhaps a focal point for the debate over New Zealand's competition framework. I think it is useful to continue to have the debate, because if we don't, we fall behind. The world has changed, and continues to change at an ever increasing pace. We cannot afford to stand still.

Today I want to touch on four main areas. Firstly the success New Zealand has enjoyed to date in telecomminucations. Secondly some issues that still need work. Thirdly, I want to touch on the overall competition framework, and finally, as this is an investment conference, I want to talk briefly about the importance of investment in New Zealand.

Government's Telecommunications Policies Past present and future
First let me consider the changes of the past to look objectively at what has been achieved in the telecommunications services industry.

I believe that the regulatory policy has certainly worked. New Zealand has an up-to-date telecommunications industry which provides high quality services to customers in a timely manner, at reasonable prices which continue to decline. We have a range of measurements that tell us this is the case;

Business national call prices have reduced
International call prices continue to tumble.
Business telephone service tariffs have reduced substantially.
Business customers have a wide choice with carriers such as Clear, Telstra, Global One and call-back based service operators.
Quality of service has improved.
Cellular service, once the darling of the yuppie preserve, is now an essential business tool and looks set to become a standard residential customer item as well.
Advanced services have been introduced,
The demand for enhanced services such as 0800 freephone, 0900 service, "spot" products, ISDN, voice messaging, televote and centrex is growing fast.
Consumers can now buy a wide range of customer premises equipment.
The former telecommunications branch of New Zealand Post is the now publicly listed Telecom NZ. It is an efficient and profitable privately owned company. Its operational efficiency has improved dramatically. As at 31 March 1996 it had 250 main lines per operating company employee, compared to some 115 in March 1991.

The overall result is that the Swiss based World Economic Forum publication the Global Competitiveness Report of 1996, again ranked New Zealand first in the world overall in its annual survey of how telecommunications infrastructure meets business requirements.

Another very important issue is how New Zealand prices for telecommunications services compare with those in other countries.

These types of price comparisons are carried out by the Paris based Organisation for Economic Cooperation sand Development (OECD) which uses a basket of telecommunications services approach to compare prices internationally.

The OECD telephone services basket comparison for residential telephone service and the one for business telephone service places New Zealand in the middle group of the 26 OECD countries compared, ie we are an average performer.

The OECD national leased line charges basket comparison for leased line services places New Zealand a bit below average of the group of 26 OECD countries compared. The OECD basket of mobile tariffs for cellular service places New Zealand in the middle group of 26 OECD countries compared.

These results are encouraging particuklary given the disperesd nature of the NZ population spread over a land mass similar to the UK or Japan, but with a population similar to Singapore. It is also good example of how the introduction of competition has encouraged investment and growth and provided better results for consumers.

I don't believe anyone can seriously deny that the telecommunications regulatory environment is working. Much has been done, but we all expect to see further improvements.

Our objective, over time, should be movement towards the upper quartile of all OECD telecommunications price basket comparisons.

I am sure that as local telephone service competition develops we can achieve this as the provision of most telecommunications services becomes subject to strong competitive disciplines.

A fully competitive telecommunications services environment in New Zealand will ensure that consumers obtain maximum benefits.

Competition Policy
As you know the government has a regulatory regime for network industries in general. The core regulatory regime for most network owners comprises:

Reliance on the restrictive trade practices provisions in Part II of the Commerce Act 1986 to control anticompetitive conduct by the network owners;

Information disclosure regulations to encourage entry into related markets and, among other things in some cases, to aid the detection of contraventions of Part II of the Commerce Act and monopoly profits; and

The threat of price control under Part IV of the Commerce Act as a means of deterring monopoly pricing.
The light-handed regulatory approach has been adopted on the grounds that general competition law, on which it relies, should be sufficient to deal with potential problems from abuse of natural monopoly power.

It has also been recognised that more heavy-handed regulation, for instance involving explicit price control, can be complex, costly to administer, and may not always produce the desired result.

In addition, once regulations are in place, it is common for loopholes to appear, giving rise to a need for additional regulation. The regulatory framework can therefore become ever more complex. Such regulatory intervention can often be perverse, preventing innovation or guaranteeing price increases etc.

There are advantages in keeping new regulations as simple as possible from the start. In this context, the government has agreed that light-handed regulation be introduced and given the opportunity to demonstrate its worth. If weaknesses in light-handed regulation are identified, then carefully targeted additional measures can be introduced to overcome them.

The regulation of VINMs is inherently difficult. All of the regulatory options have disadvantages of one kind or another as well as benefits.

The Ministry of Commerce considers that the Commerce Act's prohibitions are sound but that there are enforcement problems.

These arise because penalty and remedy orders are not always sufficiently high or strong to deter anticompetitive behaviour. My officials will report to me on this issue by December 1997.

Electricity sector
In energy, light-handed regulation focuses particularly on the natural monopoly components of the two industries (ie the wire and pipeline components of transmission and local distribution) where concerns relating to dominance are greatest. Requirements on components where competition is possible (energy retailing, electricity generation and gas wholesaling) are much less stringent.

The information disclosure requirements in energy are considerably more wide ranging than in telecommunications.

As you know, the Government's general policy in telecommunications has been for many years to seek efficient markets in telecommunications goods and services.

To this end, Government has adopted policies and promoted statutory measures to facilitate competitive entry into those markets and to maintain the conditions for effective competition.

In short, the Government sees competition as the best regulator of telecommunications markets.

As you know, this policy is underpinned by the Commerce Act 1986, the Fair Trading Act 1986, the Telecommunications Disclosure Regulations 1990, Government Policy statements on telecommunications markets, and the New Zealand Telecommunications Numbering Advisory Group (NZTNAG).

Coalition Government Policy Statement
The Coalition Statement of General Direction reinforced these messages.

Effective competition in telecommunications remains paramount. Another theme in the statement referred to a range of possible actions by Government to ensure that effective competition develops, if other methods did not ensure this.

In essence the statement spells out possible approaches that the Government may take in telecommunications if users interests are not adequately met by the existing policy setting.

We have said we will amend the Commerce Act to provide for penalties when actions are brought by parties other than the Commerce Commission.

We will ensure that penalties are examined, to provide real sanctions against anti-competitive conduct, as mentioned previously.

Our preference is for core elements of our existing approach to continue, that is, reliance on the Commerce Act to support competition.

Finally we have said Government must be prepared to ensure there is effective competition.

If necessary we will produce guidelines on interconnection including number portability.

If necessary legislative changes will be contemplated. However, before considering any particular measure the Government must ensure that the proposed measure will deliver net benefits to consumers and take into account all relevant circumstances.

We will not be interested in doing nothing more than shifting profits from one carrier to another, without seeing real user benefits.

Owners of natural monopoly telecommunications facilities are expected to provide interconnection at terms that promote efficiency and deliver the benefits of competition to consumers.

The Government still expects owners and potential competitors to negotiate in good faith to arrive at commercial solutions in a timely manner.

Where the Government is not satisfied that both parties are negotiating in good faith, within the framework, it can and will consider additional regulatory action.

Current Issues in Telecommunications Interconnection
As mentioned, Government policy is to regulate telecommunications by way of effective competition. Interconnection is a critical issue in such a policy as Telecom is still dominant in many telecommunications services markets.

The current main interconnection issues are;

0800 Number Portability The objective of 0800 portability is to enable 0800 service customers to take their number with them if they decide to change service provider. The benefits to customers is clearly one of improved choice and the competitive benefits that typically flow from it.
The NZTNAG has been coordinating technical work on this issue and I am informed that 0800 number portability will most likely be introduced early in 1998.

Local Number Portability The objective is to enable telephone customers to take their telephone number with them if they decide to change local telephone service provider within a free calling area.
Again, the NZTNAG has been coordinating technical work on this issue.

Operators have agreed on the technical method of providing the service and now need to finalise commercial terms and conditions.

I am informed that local number portability could be introduced within six months of operators finalising agreement on commercial terms and conditions.

Cellular Number Portability The objective is to enable cellular customers to take their number with them if they decide to change cellular service provider.
Operators have agreed on the technical method of providing the service and now need to finalise commercial terms and conditions.

Network Interconnect Negotiations BellSouth and Telecom are currently negotiating a new interconnect agreement.
Saturn and Telecom are currently negotiating an interconnect agreement.

As mentioned, Saturn has said it expects to conclude a satisfactory agreement in the near future.

Number Portability Issues Last year the Government expressed concern with slow progress of number portability negotiations between the carriers.
Telecom made a number portability pricing offer to other operators in December last.

Bilateral negotiations on number portability pricing terms and conditions are currently proceeding but no agreements have been reached.

I emphasise the Government's desire to ensure that the users obtain the benefits of number portability and strongly urge operators to negotiate arrangements in a timely matter which will ensure this.

The Minister of Communications recently urged all concerned to take a fresh look at their approach to interconnection matters.

He said ``I expect the parties to interconnect negotiations to proceed in good faith. I will not promote further Government intervention if it is plain that the issues being raised with me are not of substance or are not the subject of serious negotiations.''

He warned operators that should it be necessary for Government to become involved each could lose out to some degree.

The Government expects all operators to adopt realistic positions in negotiations with the objective of securing commercial terms and conditions which will maximise the benefits to users and operators.

More issues will arise in the area of interconnection.

Continuing demands for intervention by the Government is not a good way of dealing with these ongoing issues. The Industry must start taking responsibility for developing processes which will deal effectively with their interconnect commercial relationships.

Overseas Investment
I want to talk a little about investment. To drive our telecommunications and our economic progress, New Zealand needs continued high levels of investment, both domestic and from overseas. Generally, access to international capital markets allows investment to occur at a greater rate than domestic savings could finance.

Overseas investment is so important for New Zealand's growth is because it contributes to international integration and is a channel for the transfer of new technology, management expertise, marketing skills, market linkages and access to distribution networks.

This is especially true of Foreign Direct Investment (FDI). Our telecommunications industry is a very good example of the gains that can be made. The reality is that as a small trading nation we must be open and outwards looking if we are going to be successful.

The Coalition Agreement recognises the need for overseas capital, but also recognises the desire to retain local ownership of six key state assets - ECNZ, Contact, Trans Power, NZ Post, TV1 and Radio NZ - and requires prospective foreign purchasers of farm land to more clearly demonstrate that their purchase will make a material contribution to the New Zealand economy.

My personal view is that in New Zealand the size and cost of Government is still too big. I believe it is important that we continue privatising non core assets and getting government out of the provision and ownership of non core areas.

With such rapid changes taking place in the world we cannot afford to hold back change by having Government, who by nature must be risk adverse, involved in any areas that it doesn't absolutely need to be in. I think that there may still be opportunity to make progress on privatisation within the current political constraints.

I am in the camp of thought that there are very few services that Government ultimately must provide. The cost of these may perhaps be less than 20% of our existing Government spending. The remainder could be purchased from the private sector either by Government or the users directly.

Telecom is a very good example of the benefits of privatisation. In 1987 Terlecom employed 26,500 employess. Now it is just over 9000, however I undersatnd that the employement level in the total telecommiunications industry which now consists of hundreds of companies is now greater than 26,500.

Capital investment in telecommunications scince 1987 has exceeded $5.9 billion, a sum that New Zealands taxpayers have not had to find.

Foreign investment has flowed into New Zealand at high levels in the 1990s, reaching levels of around 6% of GDP in 1993. As a percentage of GDP foreign investment flows to and from New Zealand have been among the highest in the OECD in recent years. Net foreign direct investment was $4.7 billion in the year to March 1994, and $4.3 billion to March 1995.

Because of our geographical remoteness, we have had to focus on becoming increasingly integrated into the world economy. At the same time, our proximity to Australia and the rapidly developing Asian markets has also been identified as a key factor in many firms' decisions to invest.

In New Zealand, investment inflows are following geographical trade patterns. While the US, Australia and the UK remain the main sources of foreign direct investment, growing investment from East Asia reflects our expanding economic and trade linkages in this region. In 1995, Hong Kong and Singapore were the 4th and 5th largest investors.

FDI from the United States, at $1.63 billion in 1995, was more than triple that of the second largest investor, Australia. This included Telecom NZ major shareholders, Bell Atlantic and Ameritech. In rail we have Wisconsin Central, and in forestry Rayonier. All these companies are providing significant benefits to New Zealand while obviously making a return for their shareholders.

It is vital for New Zealand that we maintain an open internationally competitive economy. Key platforms for this are:

deregulated, competitive and open markets
stable macroeconomic policies
continuing the current policy of tariff reductions
quality public services provided as efficiently as possible
and the lowest possible tax rates
The coalition government is committed to these key policies. New Zealand is still a good place to invest. While we have recently had some "theatre" at parliament, the Coalition Government is actually working very well. Despite what some commentators may say, I believe that this coalition Government will continue to provide the political stability that both investors and New Zealanders need.

Summary and Conclusions
Much has been done within the light-handed regulatory policy operated by the Government. Consumers have benefited and prices and services continue to improve.

Government expects continuing improvement in international price comparisons, over time. New Zealand's objective should be to move towards comparison with the upper quartile OECD price basket results.

A competitive New Zealand telecommunications services environment will ensure that consumers obtain maximum benefits.

The Government has urged operators to negotiate interconnection in good faith to arrive at commercial solutions in a timely manner. Such interconnection arrangements are critical elements of the development of telecommunications competition.

The Coalition Government is committed to ensuring that consumers obtain maximum benefit and will consider additional regulatory measures if this proves necessary.

There have been significant benefits to telecommunications consumers from regulatory reform. The Coalition Government is committed to ensuring that users continue to benefit.

New Zealand is still a good place to invest be it in telecommunications or other sectors. While some might say that more could be done in terms of privatisation and smaller government, we will continue to make progress, but perhaps not as fast as some of us would like.

I welcome the participation in the New Zealand economy of all the companies you have heard from today. I look foward to continuing progress in the telecommunications sector. Thankyou