Warren Moyes: Speech to Ag and Hort Outlook Summit

Speech to NZ Agricultural and Horticultural Outlook Summit

The strategic priorities for rural broadband in New Zealand: What we need to realise the benefits

Warren Moyes, Chairman, Northpower

It is something of a visual cliché from countless movies or episodes of “Doctor Who”. A small shed-like structure tucked away down a shadowy country lane is transformed at the flick of a switch into a hi-tech laboratory or control-room, with banks of flashing lights and cabinets full of sophisticated equipment, which our hero will use to save the world or at least make it a better place.

It’s a cliché that resonates with Kiwis, through the stories of dogged backyard innovators like Richard Pearse and Sir William Hamilton.

And it’s a cliché that is about to be updated for the twenty-first century.

That’s the message I take from the sessions you have heard today from Sir Peter Gluckman, Dieter Adam and Nigel Jones.

Sir Peter and his colleagues talked about the unique innovation platform we have in this country in terms of the depth of our bio-science, which extends beyond the universities and CRIs to thousands of rural business-people, who know instinctively that they need to innovate in order to claim a secure high-value niche in the world’s markets.

Dieter described our bio-tech and agri-tech industries that are positioning themselves to take on the emerging market for advanced technology in the world’s soon-to-be largest economy, China.

And Nigel talked about the challenges we face in making investments in the infrastructures which will enable these key industries to scale-up so they can become global market leaders.

My message today follows on from what we have heard. It is imperative that New Zealand fosters the development of rural intellectual property and facilitates its commercialisation and export.

With the primary sector contributing a major share of New Zealand’s export earnings, there is no positive growth scenario that does not rely to a large degree on extracting more value from our rural know-how.

That requires a strong virtual link up between all the parts of the value chain, be that the trade promotion people on the ground in emerging markets, or the scientist at Auckland University or Plant and Food Research, or – dare I say it – the venture capitalist in an office tower on Queen Street, or the farmer facing decisions about how to produce something that will delight the customer in Nanjing or Tokyo, Vancouver or New York, Berlin or Melbourne.

In the New Zealand of the very near future, there has to be a very real sense that when a man goes into his shed, that shed becomes the world.

That’s where ultra-fast broadband comes into the picture. In the decades to come broadband is the infrastructure that will enable new business models to be created and deployed to get our rural intellectual property past the farm gate and to translate it quickly to new markets that can maximise its value.

Without effective broadband service (and that means not just speed and reliability, but also flexibility, price and access to a vibrant eco-system of retail solutions providers) New Zealand’s rural IP will not reach its full potential in global markets.

So getting rural broadband investment right is essential. That means the right decisions:

- about financing (that includes getting the best leverage for the taxpayer’s contribution)

- about structure and regulation, and

- about technology choices.

I want to say at the outset that the government’s current policy is largely on the right track, with the possible exception of one area which I will expand on later.

The focus now is not so much on what we want to achieve, but how. There is a lot of devil in the detail, which will impact on whether we do indeed realise the benefits.

For rural New Zealand, the choice is between two models:

- a large national infrastructure provider, who would almost certainly take up the option of vertical integration which is permitted in rural areas under the Government’s current rural broadband policy; and

- a national network of smaller regional providers driven by community ownership and collaborative relationships with various infrastructure, technology and retail providers working to agreed national standards.

As Chairman of Northpower which is a member of the New Zealand Regional Fibre Group, it’s no secret which model I support.

I support it because I believe it is clearly the better option for rural New Zealand, for several important reasons.

First, community ownership and control is simply better at responding to what rural business people need. Any large-scale national ‘solution’ depends to some degree on a one-size fits all approach and that will inevitably be driven by the needs of urban centres and by domestic usage, which generates most of the revenue.

I am not saying national solutions are completely unresponsive to regional priorities, but any demand to vary the set menu too much is seen in head office as an irritant. And allowing a small group of customers to ‘customise’ the system to meet particular regional needs runs counter to the business model.

The mindset of a national provider will always be, “If you let Northland do it their way, the next thing you know Taranaki will want it their way, and so too Canterbury and Southland, and where will it all end?”

For community-owned providers, on the other hand, giving regional communities genuine choices is business as usual. We have to walk the talk. Within the Regional Fibre Group, we have a firm commitment to national standards, but our business model is firmly local.

Our customers, shareholders and neighbours are essentially the same people.

That doesn’t make things any easier. If anything it leads to more intense and more public arguments around every major decision.

But what that means is that the trade-offs are very transparent. The decisions are made here and in the open, rather than elsewhere and behind closed doors. We don’t get to hide from our failures. And I believe that leads to better decision-making over the long run.

The second reason why a regional model is better for rural innovation is that by its nature it breaks down the technology layers and barriers. We are a collaboration of infrastructure companies and solution providers, and our rural service proposals span fibre, wireless and mobile technologies. Our commitment to each other is based on delivering value through interoperability.

That extends to our rural customers, who – as we know – are often the kind of people whose first instinct when they see a complex piece of machinery is to crack it open with a spanner and see how it works, and possibly put it to a different use to what was intended.

The spread out geography and complex logistics of farming places demands on telecommunications that can only be met by a fluid combination of fibre, wireless and mobile technologies, often with a dash of DIY.

Our members seek to provide rural businesses with a seamless service. That can mean running fibre to cell towers and wireless transmitters in order to improve coverage and download speed in a remote valley. It can mean connecting our networks to self-installed fibre that small groups of farmers have paid for themselves.

It means we recognise that a lot of value our customers seek comes from having the capacity to think up their solutions and find ways of implementing them.

That is something that a single national network provider finds difficult, although they’d probably be reluctant to admit it. The tendency there is for systems that are tinker-proof to quite a high level, rather like those new Mercedes cars whose engines are locked away inside a single moulded block, and which don’t even have a dipstick.

The regional network approach keeps the technology options open, whereas nationwide operators tend to commit to what they perceive as the ‘best available’ technology.

Telecom’s 3G decision is a case in point. While the advertising shows happy-go-lucky Chorus guys travelling the countryside whistling a happy tune as they install broadband connections, we know that the Alcatel partners are on the nearest hilltop frantically trying to restore mobile coverage.

For a customer base with complex and changing needs, the best model is the one that provides maximum flexibility around technology options.

The third reason why I believe in the regional model, is that it is the only model that guarantees a truly competitive retail environment. As you may be aware, the government’s policy permits vertical integration of wholesale and retail services in rural areas. That is due to a concern that the economies of scale are not there in rural areas, and that some integration of the new fibre network with the existing copper loop may be necessary to make fibre rollout viable.

We acknowledge the argument, but we don’t think it is necessary.

It is an ‘easy option’ that brings significant long-term risks, and as a network the NZRFG doesn’t have access to this ‘easy option’.

I think it’s helpful on this point to look across the Tasman at the report recently released by the Rudd Government on Australia’s $43 billion National Broadband Network plan. The analysis was based on investing in a network of super-fast broadband to cover well over 90% of the Australian population, including large and widespread rural communities, using a mix of fibre and wireless broadband.

Telstra has long argued that the cost of building a network without ‘vended-in’ assets (that is, their own existing network) is prohibitively high for the Australian taxpayer.

The report shows that is not the case.

It calculates that the Australian taxpayer needs to contribute only $26 billion of the total project cost before the network becomes capable of self-funding, within five years. It calculates a modest, but positive financial return purely on the network investment, in addition to which of course the Australian government also gets the immense economic and social benefits that go with enabling the entire community to step up to a broadband technology that is virtually future proof.

This analysis says essentially that Australians can and should leave the incumbent out of the equation, and that they should not take on the long-term risk of a vertically integrated national system that dampens competition.

The levels of uptake needed depend upon a vibrant retail industry that uses the broadband platform to offer a range of innovative solutions for every aspect of business, healthcare, education and communications. That vibrancy would be lost if the network owner is permitted to be a retail service provider as well.

Our urban cousins have been looked after in this regard, with a constraint placed on network operators’ ability to retail services; but rural communities have not been so fortunate and could potentially be faced with ongoing vertical integration.

I believe the arguments put forward in the Australian case hold for New Zealand. The cost of building a fibre network is significant indeed. But the risk of building it and having its utilisation impeded by a faulty competitive model is much greater.

Importance of a change to the Government’s approach to Layer 2

This is where I come to my one area of concern with the Government’s current policy settings.

It arises from a logical flaw or oversight in the commercial model for the Government’s investment, as it applies to the boundary between wholesale and retail. In short, the model developed by the Treasury says that taxpayer funds should be invested only in so-called Layer 1; that is, the unlit fibre.

Beyond that point, the Treasury has argued, all the investment should be private. That includes the expenditure on the kit needed to ‘light’ the fibre,

My problem with this is that it places the boundary between wholesale and retail in the wrong place.

In the consultation with rural communities about delivering high speed broadband on the back of fibre it became clear that what was needed was responses that include multiple layers, although not necessarily vertically integrated.

To make a sporting analogy, the difference is between creating a flat piece of land for a playing field (that is layer 1) and adding on the turf and the goalposts and the touchlines and the other basic infrastructure that enables a game to be played (that is layer 2).

Layer 3 is everything that is built on top of that.

In our view, the taxpayer funds should be directed towards creating a fully functional platform which provides open access to a range of competing ISPs and other retailers. It should not stop short of that; nor should it go any further.

Allowing vertical integration – that is, of Layers 1-3 – means that one team gets to supply the ball and the umpire as well, and if things aren’t going their way they can call time out and change the rules or even run off with the ball and refuse to play any more.

Though it might sound strange, there is a very real risk that the current model could allow one owner to acquire the network primarily as a plank in a larger competitive strategy and then to sit on it, awaiting such time as further investment guarantees it an acceptable return. What rural communities need is a network that is fully functional and ready to carry the traffic of any number of retailers and ISPs delivering a large range of services to consumers. What they don’t need is any risk of their network becoming a pawn in a game of regulatory arbitrage.

It is my understanding that the Ministry of Economic Development and Crown Fibre Holdings are both concerned about the risks of restricting the initial network build to Layer 1, and are arguing for the necessary shift in focus. We all eagerly await the outcome of this policy debate within government, as its outcome will impact both the urban and rural broadband schemes.

Conclusion

I want to reiterate my main point, which is that there is immense potential for broadband to do for rural NZ what refrigeration did in the 1880s. Just as refrigeration enabled the opening up of vast new territories for pastoral farming, so broadband offers to open up new areas of added value by bringing to market not only the end products of our rural sector, but also the rich and varied know-how that goes into that production.

For much of the last century – at least until the 1970s – we made our living as the food producers for the British homeland. In this century, we may make our living by assisting China and India and Brazil apply agricultural technology to meet their immense food security challenges. And the good thing about selling our know-how is that it can be resold many times over to markets around the world.

This story won’t happen without an effective investment in the technology to deliver high speed broadband to farmhouses and sheds and to mobile devices that can be carried on a quad-bike.

And it would be hampered by any model that creates competitive barriers to a host of retail providers accessing the network to deliver new kinds of value to rural customers.

The decisions we are making today are crucial ones, and I am confident we will get it right.

ENDS

The NZRFG is a group of regional operators including lines companies and local fibre companies, which has come together to support the Government’s efforts to introduce ultra-fast broadband to New Zealand. Members include Alpine Energy, Aurora Energy, CityLink, Counties Power, Eastland Group, Electra, Electricity Ashburton, Enable Networks Ltd, Horizon Energy, Network Tasman, Network Waitaki, Northpower, PowerNet, Unison, Vector, Velocity, Waipa Networks, WEL Networks and Westpower. www.nzrfg.co.nz

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