Govt to hold stake in regional fibre companies

Get ready for Her Majesty's broadband. The Crown Fibre Investment Co (CFIC), proposed by the government this morning as the vehicle to drive its $1.5 billion in spending on fibre, would hold “A shares” for 10 years in each of up to 25 local fibre companies, and each private partner "B shares".

Communications and IT Minister Steven Joyce proposed the CFIC as the vehicle to select local partners in 25 towns and cities (see list below) and to dish out the government’s $1.5 billion investment - which Mr Joyce expects to be at least matched by private investment.

Local fibre partners will be selected from a list of contenders likely to include Vector and other power line companies, Kordia, and fibre specialists like FX Networks, CityLink, Velocity and others. Mr Joyce tells NBR he also expects local councils to bid, plus iwi and other left-field players.

Each private partner chosen by the CFIC will form a local fibre co (LFC).

It is possible that one private partner will win more than one of the 25 towns and cities – or, in theory - though in practice the CFIC seems designed to accomodate a patchwork of parners.

And regardless, such a monolithic share is not even theoretically possible for Telecom, as all retail telcos are barred from owning more than 50% of an LFC (although they may bid as a minority partner in a consortium).

According to documents posted on the Ministry of Economic Development website today, each LFC will have two classes of shares:

1. “A” shares – to be held by the CFIC, which will revert to normal shares after 10 years; and
2. “B” shares – to be held by the private partner.

50/50 joint venture
It will be up to each private partner, as they pitch for each region to propose how many "A shares" are held by the state.

Mr Joyce tells NBR he wants the CFIC's board to have flexibility on this issue and created its own "template" for LFC deals. But, when pushed, he says a 50/50 joint venture set-up is likely (the A shares would revert to normal shares when the state exits after 10 years).

Summerising developments in a note to clients, Forsyth Barr's Guy Hallwright says the government’s shareholding may be concessionary, and may be subject to a lower rate of return than the partner for an initial period (for example, up to 10 years). These provisions will be negotiable.

There will be no government commitment or guarantees regarding the rate of return that partners will receive.

The government’s financial contribution will be by way of an investment, as opposed to a grant or suspensory loan. The primary objective is to accelerate the roll-out of additional fibre, but the government also intends to take a share of the benefits in the event that any of the fibre operations become highly profitable in the future.

There will be no restrictions or requirements on pricing of any services provided by LFCs. Pricing will be determined by commercial decisions of the LFCs’ boards. The LFCs will be subject to the existing regulatory regime.

25 fibre fiefdoms?
The government says where there will only be one LFC in each of the 25 areas, they will not be able to excercise monopoly power over wholesale pricing. Telecom's copper network, due to be upgraded to VDSL2+ later this year, will provide a degree of competition (Telecom itself, like all retail telcos, will be barred from holding a majority stake in an LFC. )There will also be overlap between some of the 25 regions (more on the monopoly issue in Keallhauled).

Interim solutions
The proposal on the MED site says the government’s focus is on creating LFCs that will provide “dark fibre” or “raw fibre”; that is, wholesale broadband that can be accessed by any telco or ISP.

When two-way, 100Mbit/s fibre connections are the government’s goal, the CFIC will be open to proposals that incorporate interim copper-based solutions like ADSL2+ and VDSL2+.

Timeline
April 27: Comments on Cabinet paper due
Officials’ analysis of comments and report to Minister for ICT
Preparation of Cabinet report-back paper
end May: Report-back to Cabinet on submissions and implementation details
mid June: Appoint CFIC
end June: Report-back to Cabinet on broadband readiness in the health and education sectors
mid August: RFP released by CFIC
mid October: Proposals due
January 2010: Initial decisions by CFIC

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Government allocating large dallops of capital -- anyone would think it wasn't a viable investment

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Mr Joyce's argument is that he understands fibre is not a viable investment right now for Telecom, which wants to eek more value out of its copper network before moving to full fibre.

But to stay competitive in the international economy as a whole, NZ needs fibre. Thus, says Mr Joyce, the need for an intervention.

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StatsNZ just released its Business Operations Survey results yesterday: http://www.stats.govt.nz/products-and-services/hot-off-the-press/busines...

The interesting statistic was 89 percent of businesses used broadband to connect to the Internet already. In the appendix to the Broadband Proposal, the MED notes the biggest advantage coming from fibre-to-the-home (FTTH) was going to be the capability to add an additional 14 High Def TV Channels.

$1.5 Bill is a lot of pingers to watch 14 channels of American TV in high def. With 89% of business already accessing highspeed internet, there's not much argument that business value added generation potential is being constrained.

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