When Will They Ever Learn?

Those who fail to learn the lesson of history are doomed to repeat it - or so the saying goes. The lesson of history for John Key and Amy Adams is relatively recent – it is from a mere 20 years or so.

The first lesson was dealt out to Maurice Williamson in the 1990s. Fresh from having the Privy Council in London decide the famous interconnection case in favour of Telecom, Maurice threatened to legislate - and he probably would have done so if he could. Unfortunately for Maurice, Telecom in the form of Roderick Deane had the ear of Jim Bolger. Telecom simply went over Williamson's head to the PM. The argument that Telecom successfully ran was that if Maurice legislated to improve competition they would cut their network investment. Maurice's threats became a standing joke in the media and nothing happened until the Labour Government was elected in 1999.

Paul Swain was next in line - he decided to do something about building competition to Telecom and managed to pass legislation in 2001. The legislation established the independent Telecommunications Commissioner to regulate the sector but it had one big back stop - if the Commissioner wished to introduce a new regulated broadband service such as Local Loop Unbundling (LLU) the Government also had to approve that service. To accelerate the process Swain's legislation required the Commissioner to review LLU within two years. In December 2003 - to the disbelief of almost everyone in the sector - the Commissioner, Douglas Webb, recommended that LLU not be regulated. Telecom's argument throughout the review was that it would reduce investment if LLU was regulated.

Swain was in a difficult position - legislating over the head of the independent Commissioner he had effectively appointed two years earlier may have been his personal preference but in the end he chose to recommend to Cabinet that the Commissioner be asked to reconsider one critical aspect of his review. Swain was rolled at Cabinet by Helen Clark. Subsequently Jim Anderton said that his recollection was that if a vote had been taken it would have been 19 - 1 in Swain's favour but the one won. Roderick Deane continued to have the ear of the PM of the day and the Commissioner's decision was accepted. It was effectively the end of Swain's ministerial career and David Cunliffe his Associate Minister was given the top job - but Cunliffe and Clark had both learned the lesson.

Cunliffe instigated the stock-take review of the sector in 2005 - Telecom, now under Theresa Gattung, had made several blunders, the most damaging being the failure to fulfil a requirement/promise made during the LLU review regarding wholesale broadband customers.Once again Gattung attempted to go over Cunliffe's head to Clark in an attempt to kill the review - it is rumoured she even proposed that Clark fire Cunliffe as Minister. Throughout the stocktake Telecom argued, once more, that any move by the Government to legislate or regulate LLU would result in reduced investment in the network.

Cunliffe not only recognised the Telecom bluff but understood that the opposite was true - the more he regulated for competition in the sector the greater would be Telecom's incentive to invest. The leaked Cabinet paper of May 2006 proposed not just LLU and a raft of new regulatory tools for the Commissioner, but also legislation to separate Telecom - the form of separation to be decided by the Select Committee considering the Bill. The Select Committee, which included Maurice Williamson and Paul Swain, chose operational separation. Deane, Gattung and the majority of the senior management at Telecom subsequently resigned. The incoming chief executive Paul Reynolds was in no position to argue about investment - Telecom's increased investment was mandated through a set of binding undertakings. Importantly, as well as Telecom’s rise in investment, the rest of the sector saw that a level playing field now existed and also started to invest. Competition via LLU increased - implemented by the new hard-nosed Commissioner Ross Patterson. The number of broadband customers increased and profits were maintained despite lower prices for end users. At long last politicians had learned that competition drives investment. It is not the other way around.

Steven Joyce rather than Maurice Williamson inherited Cunliffe's legacy on the change of government in 2008. He also had a $1.5 billon treasure chest of taxpayer funding to implement a pre-election promise to put fibre into 75% of New Zealand homes and businesses - the Ultra Fast Broadband (UFB) initiative. Telecom was in disarray. Reynolds had few choices - he had been brought in to make operational separation work and had little room to manoeuvre within the constraints of the undertakings. He was forced by the undertakings to invest massively in fibre to the cabinet and by competition from Vodafone and 2 Degrees to invest massively in the XT mobile network. Many of his board and senior staff were of the opinion that the supposedly more onerous structural separation was preferable to operational separation and started to use Joyce's commitment to deliver the UFB to bring about a trifecta. What did Telecom want? In order of priority:

• Structural separation, freeing as much of Telecom from regulation as possible;
• Guaranteed returns on investment for the remaining regulated rump of the business (Chorus);
• Maintenance of its fixed service monopoly status;
• As much of the Government's $1.5 billion as it could get;
• An exit strategy for Paul Reynolds.

Joyce, an experienced businessman, was no pushover and the old Telecom ploy of going over the Minister's head to the PM was not an option with Joyce being close to John Key. MBIE and Crown Fibre Holdings, both now with former Telecom executives in key positions, were easier targets for the Telecom negotiating team. The deal saw Telecom get much but not everything it wanted. The mobile network, some backhaul network and Southern Cross being included in the retail arm was a big win. The Select Committee overturning the Government's proposed regulatory holiday on fibre was a loss. Chorus maintained its current copper monopoly and a future fibre monopoly for 70% of the country – and it got over $900 million of the $1.5 billion. Reynolds left with a healthy bank balance and no hard feelings - at least not publicly.

Joyce's big win was that he had delivered on the $1.5 billion UFB - he could move on to bigger and better things. Telecom's big loss was the absence of guaranteed returns on investment for Chorus. At a conservative estimate it would mean that Chorus would have to invest $2 - 3 billion alongside the Government's $900+ million over 8 years - not a particularly difficult task given its monopoly position, profits running around $500m a year, and that it could spend the Government's money first.

The 2011 election saw Joyce promoted and Amy Adams given the job of overseeing the UFB implementation. The December 2011 decision by the Telecommunications Commissioner to do as he was instructed by the recently amended Act and base copper broadband prices on their actual cost saw those regulated copper prices fall - this was a well signalled and well understood outcome of the amended Act. It hurt Chorus as everyone, including Chorus shareholders, knew it would. Rather than take it on the chin and suck it up, rumour has it that Chorus reverted to the old Telecom strategy - they went over Amy Adams’ head to John Key and told him that it would hurt investment in the UFB.

Key came out with a statement that not only showed he did not know the lessons of the past (competition drives investment not vice versa), but also that he was unfamiliar with the legislation his government had passed previously , mandating the very changes to copper broadband prices he was now critical of.

It’s now Adams who is between a rock and a hard place - does she cover for her boss or do what's right? The good news is that she has learned one lesson already during her short tenure - when in doubt kick for touch and buy some time. Her decision to bring forward the review of the Act scheduled for 2016 can be interpreted as a pragmatic kick for touch - the bad news is the kick went out on the full so has not lessened the pressure as much as if she had simply called for a quick review of a specific problem.

More good news: the ball has every chance of getting lost in the local duck pond and never being seen again - the review, if done carefully and thoroughly, will not be a swift affair – and such a reasoned and reasonable pace would suit everyone but Chorus.

The ball will be back in play when MBIE releases a discussion document in the near future and the rest of the industry and users will get the opportunity to have their say - hopefully the Government by then will have learned the history lesson.

ENDS

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