Crown fibre bill passes - door open to foreign ownership of Telecom

UPDATE June 24: The bill passed its third and final reading late yesterday.

The Telecommunications Amendment Act will come into force on July 1. 

Among other provisions, the bill allows for the separation of Telecom into separate retail and network companies, each with its own chief executive, board and NZX listing.

The split is also subject to debtholder and shareholder approval. The company has said that a vote will take place before the end of this year.

The bill also allows the government to buy Telecom assets (and the Crown has already committed to investing in the Telecom network company, "Chorus2") and for Chorus to buy into local lines or fibre operators who hold ultrafast broadband (UFB) contracts without the usual level of M&A scrutiny (Telecom is already in talks with Christchurch winner Enable; a 50/50 joint venture is on the table).

And a last-minute change (see below) lifts the "Kiwishare" protection against foreign investors taking majority control of Telecom - or, at least, its retail business post-split.

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June 17: Labour claimed in Parliament this afternoon that last-minute changes to the Telecommunications Amendment Bill water-down Telecom's Kwiishare obligations - which include a prohibition on foreign ownership, the provision of a 111 emergency calling service, and free local calling for a standard monthly charge.

The party also said the changes  allowed for the foreign sale of Telecom's retail business - a claim the government acknowledged was correct.

Supplementary Order Paper 247, tacked onto the bill on Tuesday, removed all references to Kiwishare obligations, Labour communications spokeswoman Clare Curran said - and without any opportunity for public comment or industry submissions.

Among other measures, the bill lays the ground workd for Telecom to be split into two separate companies, one retail (variously referred to as Telecom2 or Telecom Retail), and taking on the company's existing wholesale business and network (known by the placeholder "Chorus2). Each company will have its own NZX listing, and its own chief executive and board. The split is a condition of Telecom's ultrafast broadband (UFB) Crown fibre deal with the government, and will take place before the end of the year, subject to shareholder and debtholder approval.

Chorus2: local ownership to be included in deed
Communications Minister Steven Joyce did not dispute Ms Curran. The minister said local ownership and other Kiwishare obligations would be part of the deed the government signed with Chorus2 (the placeholder name for the spun-off network division after Telecom splits into separate retail and network companies, later this year, as part of its Crown fibre deal).

The Kiwishare Obligation currently inicludes the provision that no single shareholder may own more than 10% of the shares without the approval of the Kiwi shareholder (who is the Minister of Finance). And no person who is not a NZ national may own more than 49.9% of the shares unless the Kiwi shareholder agrees.

Telecom2: no foreign ownership restrictions
Mr Joyce said Telecom Retail would be on the same legal footing as other retail phone companies, such as TelstraClear and Vodafone.

An MED Q&A paper, quietly slipped online on May 24, clarifies "Telecom2 [the placeholder name for Telecom Retail after the anticipated split] will not be subject to any particular foreign ownership provisions, apart from those that apply in general to all businesses."

Ms Curran said that by removing the Kiwishare from legislation, and making it part of Chorus2's ultrafast broadband (UFB) contract, the government was "watering down" the protections currently enshrined in law.

Tuanz boss relaxed
Telecommunications Users Association chief executive Paul Brislen said the Kiwishare changes were "fine by me, frankly." 

Mr Brislen said a deed with the government was a step up from a contract. He said he also appreciated the Australian tax complications. On this point, the MED Q&A says:

Under Australia’s tax code, a de-merger will result in capital gains tax being paid by shareholders unless the shareholders of the de-merged entities are identical to the parent company which is de-merging.  This would not be possible for the Kiwishare, and therefore if it were to continue, Australian resident Telecom shareholders would face paying tax as a result of the de-merger. As they represent a blocking minority of Telecom shareholders, the de-merger would most likely fail to win shareholder support.

End of free local calling?
According to the MED's Q&A, free local calling (and the requirement to serve all rural customers) will remain. "These obligations will remain. They form part of the Telecommunications Service Obligation (TSO), will be split appropriately between Chorus2 and Telecom2, and remain enforceable by the Crown." The wrinkle: it will now be in deeds or contracts rather than part of the legislation.

Like his predecessor, Ernie Newman - who saw "free" local calling as penalising those who mostly used their cellphones, and subsidising teens who spend hours in a bedroom yakking on a landline, Mr Brislen has little time for this Kiwishare provision.

Mr Brislen said he could not remember the last time he made a landline call. The coming upgrade to fibre services - and VoIP or internet calling - would mean most local calling services would be thrown in for free, like web mail today, the Tuanz boss said.

Ms Curran continues to have several issues with the bill, despite the 10-year "regulatory holiday" provision being removed in an apparent deal to shore up Maori Party support as several Act MPs balked.

Beyond the Kiwishare concerns essayed today, the Dunedin South MP issues with the legislation include its provision for "averaging" copper wholesale pricing between urban and rural areas - which, when it kicks in after three years, could have the effect of driving up the cost of copper services, by an estimated $20 per month, as a negative incentive to move people to fibre.

The bill's progress
The Telecommunications Amendment Bill passed its second reading yesterday, and was back in Parliament for a committee stage this afternoon ahead of its third and final reading.

It passed its second reading on Wednesday, with the only surprise being that the Act party was split.

The vote broke down as follows:

Act – 3 in favour (Rodney Hide, John Boscowen, Hilary Calvert), 
Maori Party – 4 in favour
National – 58 in favour
United Future – 1 in favour

Act - 2 against (Roger Douglas and Heather Roy)
Chris Carter (independent) - 1 against
Greens – 9 against
Labour – 42 against
Progressive Party – 1 against

Telecom shares (NZX: TEL), which have been on a bull run since starting the week on $2.25, were down 1.64% to $2.395 in late trading.