Questions and Answers
31 March 2009

If you have additional questions that are not addressed below or in the consultation document, please email your query to broadbandsubmissions@med.govt.nz.

This list will be updated as further questions are received, so we encourage you to check back from time to time. http://www.med.govt.nz/templates/Page____40496.aspx

General and process questions

1. Why is the government investing in broadband infrastructure, rather than leaving this to the private sector?

The government is getting involved in order to accelerate the provision of ultra-fast broadband services, with the ultimate goal of creating a step-change in New Zealand’s productivity and international competitiveness.

There is little doubt that the future of broadband is in fibre, and that taking it right to the home will bring significant gains for productivity, innovation and global reach. The government believes that we need to use ultra-fast broadband as a way of improving our competitive advantage.

Private sector companies have decided, on behalf of their shareholders and as a commercial decision, not to invest in a nationwide network of fibre-to-the-home at this point in time.

The government understands this, and so wishes to assist and work with the private sector in improving the business case for ultra-fast broadband, by taking the steps outlined in the enclosed proposal. The aim is that this will, in turn, improve the commercial case for increased private investment in broadband infrastructure. The network envisaged in the government’s proposal will be available to all companies on an open access basis.

The government is also getting involved in order to encourage the provision of widespread open access dark fibre services, which will facilitate the best possible competition outcomes in emerging markets and encourage innovation in wholesale and retail services.

2. Why has the government presented only one option for comment, instead of alternatives?

The Minister has considered various approaches in the light of the government’s pre-election commitments. The Minister considers, on the basis of discussions with a range of parties in various contexts, that the proposal in the Cabinet paper best matches the government’s broadband objectives.

The best approach now is to publicise the detailed proposal that the government believes will best achieve its objective. This approach provides a concrete proposal for interested parties to respond to.

3. How open is the government to approaches differing from that set out in this proposal?

The government is open to considering alternative proposals, provided that they are practical, specific and realistic and they deliver on the government’s objectives as a whole, including the key principles.

At this stage, the government is less interested in submissions setting out theoretical criticisms without providing a practical alternative approach.

4. Does the government have any preferred partners?

No.

5. Does the government expect that there will be sufficient consumer demand to make fibre-to-the-home commercially viable?

Yes, in the longer term.

6. Does the government expect that there will be sufficient private sector interest in investing in fibre networks at this time?

There have already been a number of companies which have expressed interest in the government’s broadband initiative.

Based on our initial contact with the telecommunications industry and the wider investment community, the government believes there is likely to be sufficient interest.

7. Won’t residential consumers simply use fibre-to-the-home for entertainment purposes, for example high definition television?

The services provided over the network will be determined by the retailers who use the network as an input into downstream retail services.

The government is confident that the development of an ultra-fast broadband network will provide New Zealanders with the base infrastructure that will support advanced broadband services, including high-speed, real-time Internet connections to the world. Over time, this will facilitate and encourage new enterprise and innovation and spur increased productivity.

It is important to note that the potential uses for new general purpose technology are almost never fully realised at the time of deploying that infrastructure. This is particularly the case for broadband infrastructure, and in the telecommunications industry more generally where the pace of change and innovation is rapid.

There are also network externality effects that should not be ignored. Each additional user on the network is a potential customer for a new application, so the potential for new business models to emerge increases exponentially as more users switch to fibre.

Applications developed on the top of existing internet connectivity have been numerous and many have had very widespread effects, changing the way we communicate and do business. There is no reason to expect this trend not to continue in the future.

Questions on the proposal

8. Why is the government proposal focussed on the provision of access to dark fibre?

The government anticipates that this is the level that the market will not provide at this point, and government investment at that level will facilitate the competitive commercial provision of ultra-fast broadband services over fibre, with the minimum regulatory intervention.

In very simple terms, this is the most “raw” access to the underlying infrastructure, and provides the best competition outcomes because the wholesale customer has full control and flexibility and has the ability to innovate in downstream services.

However, there may be benefits from the dark fibre provider itself also lighting some fibres and providing a managed wholesale “bitstream” type of service, to enable improved economies for its wholesale clients. Certain wholesale services such as these may be provided by Local Fibre Cos with approval from the Crown Fibre Investment Company, where it is clear that they are not being offered as exclusive arrangements designed to favour individual retailers.

9. How does the government see the likely market structure evolving around this fibre network?

The government’s proposed approach will involve the deployment of passive infrastructure and the provision of access to dark fibre. The government will have no direct involvement at any other level of the market. The following is a description of the vertical market structure which is expected to develop around the new network.

It is expected that ISPs, network providers or other service providers will purchase access to dark fibre and install their own active electronics. Local Fibre Cos themselves will have a limited ability to install their own active electronics as well, subject to Crown Fibre Investment Company approval.

In turn, these parties (except the Local Fibre Cos) may use these elements to produce a retail broadband (or other) service, which is sold to end-users. The Local Fibre Cos cannot do this due to their restriction on selling retail services.

These parties may alternatively use these elements to produce a wholesale “bitstream” type of service, which is sold to ISPs or other service providers (Local Fibre Cos can undertake this activity, but as noted above this is subject to Crown Fibre Investment Company approval). The parties that purchase these wholesale services will then use them to provide a retail service.

10. Can a party bid for the whole 75% coverage area in a single bid?

Yes. Proposals covering single regions or any combination of regions, and from single parties or a consortia of parties, will be considered.

Proposals need not be limited to the 75% coverage area nor the specified geographic locations.

11. Why have the specified regions been selected for coverage? Is the government open to a different combination of regions?

The regions for coverage were selected on the basis of the largest cities and towns making up 75% of the population (based on 2006 Statistics New Zealand Census data).

Yes, the government is open to a different combination of regions provided that they are set out in the context of practical, specific proposals and they deliver on the government’s objectives. In particular, the combination of all regions must cover 75% of the population.

12. How will the government ensure that the ultimate coverage targets are met, and in particular ensure that the Local Fibre Cos continue network roll-out to homes after the first phase of roll-out to businesses, health and education?

Achieving the government’s ultimate coverage target will be a primary task for the Crown Fibre Investment Company. This will be a focus for commercial negotiations. Any contracts entered into will also include key performance indicators, and will ensure that payment by the Crown Fibre Investment Company is tied to delivery of agreed outcomes. The Crown Fibre Investment Company will also retain flexibility to change partners following the completion of any particular phase of roll-out.

13. Is the Crown Fibre Investment Co going to require proposals that provide for deployment of fibre to the entire coverage area?

Not necessarily. Proposals can be staged over time. Initial proposals will be required to deploy fibre to priority broadband users such as businesses, schools and health services. These, plus green field developments and certain tranches of residential areas, will be the focus for the first six years.

14. Will Telecom be required to phase-out its copper access network as the fibre network is deployed?

No. Telecom’s network is its private property.

15. What is meant by the term ‘partners’ in the Cabinet paper?

The term ‘partners’ refers to any person or group of persons who enter into a shareholders agreement with the Crown Fibre Investment Company in relation to a given Local Fibre Co.

The term does not denote any sort of legal partnership. In fact, the arrangements between ‘partners’ and the Crown Fibre Investment Company will likely be more akin to joint ventures.

16. How will this proposal accommodate existing companies?

Local Fibre Cos could be created as new companies or alternatively they could be based on existing companies. For example, in some cases, there may be an existing company which could be a suitable vehicle for fibre deployment. In these cases, the Crown Fibre Investment Company and the relevant private sector investor may agree to use that existing company instead of creating a new Local Fibre Co.

17. How is the government going to ensure that the new network does not unnecessarily duplicate existing fibre networks?

A key criterion for the selection of successful proposals will be the provision of additional fibre coverage in the relevant region, including providing open access where this is not currently available.

The government recognises that, in some cases, access to existing dark fibre may not be forthcoming on commercial terms, and so a degree of duplication may be necessary, however the initiative has been designed to avoid this to the greatest extent possible. Duplication will also only be considered where there are competition or contestability benefits (for example by way of increased facilities-based competition).

18. What measures are in place to ensure that the Local Fibre Cos will not engage in monopoly pricing or anti-competitive conduct?

There are a number of structural mechanisms in place to avoid this outcome. The Local Fibre Cos will not have any direct interest in retail operations, and there is a limitation on the voting power of partner shareholders that own or operate retail operations. The aim is to ensure the Local Fibre Cos have structural incentives to maximise usage of the network, and no other competing incentives.

The Crown Fibre Investment Company will also own shares and have voting rights in the Local Fibre Cos, and so will have some control over Local Fibre Co behaviour in this way. The Local Fibre Cos’ dark fibre services will face direct competition in some areas, and downstream competition from Telecom’s copper network.

Finally, services provided by Local Fibre Cos could become subject to an investigation by the Commerce Commission under either the Telecommunications Act 2001 or the Commerce Act 1986.

19. Why is the government proposing to enter into joint venture shareholding arrangements, rather than providing grants and contracting for delivery?

The government considers that this approach will best deliver on its objectives. This approach also enables the taxpayer to share in any significant commercial gains over the long-run.

20. What rate of return does the government expect?

The government is interested to hear from stakeholders on their expectations in this regard.

The government has an open mind on this matter. The rate of return will be decided by the CFIC within an overall framework set by the government. The government is prepared to consider receiving a lower rate than the commercial partner for an initial period.

21. Will the government allow different rates of return in different regions, and/or in different roll-out phases?

Yes, taking into account the commercial factors that apply in each case. These matters will be subject to negotiation with the Crown Fibre Investment Company, again within an overall framework set by the government.

22. Is a regional approach consistent with a nationwide network, or will it result in a ‘patchwork’ with differing standards and arrangements?

The regional approach described in this proposal is expected to lead to a nationally cohesive network. All regional networks will provide open access to dark fibre. The same technical standards will apply across the regional networks, and the network will include neutral points of presence with common interconnection standards and requirements. The Crown Fibre Investment Company will have a role in ensuring nationwide consistency.

Complementary measures

23. What else is the government doing to facilitate and encourage the deployment and uptake of fibre-to-the-home?

The government will be undertaking a number of complementary initiatives to facilitate and encourage the deployment and uptake of fibre-to-the-home.

The government recognises that initiatives on the demand-side will be necessary to support the main supply-side initiative. In order to stimulate take-up of services offered over the new fibre network, the government will continue to encourage the readiness of all public sector agencies, and in particular the health and education sectors, to take full advantage of fibre network services.

In addition, the government will assess how best to facilitate access to and use of fibre cable deployment on telephone and electricity poles, local authority-owned passive infrastructure such as ducts, micro-trenching and fibre-optic cable “drops” from the street-side into customer premises. This may involve codes of practice or regulatory or legislative amendments. Relevant legislation includes the Resource Management Act, the Telecommunications Act, the Electricity Act and the Local Government Act. This will be a significant complementary work stream running alongside the main initiative.

Finally, the government will also be looking closely at the expansion of the ICT workforce, and developing digital literacy among adult New Zealanders.

24. What is the government doing to assist rural end-users?

The government made a pre-election commitment to provide $48 million to improve rural broadband. The Minister for Communications and Information Technology is currently developing options around this commitment and expects to make announcements regarding the direction of the government’s rural telecommunications policy in the near future.

ENDS

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