One rule for telecoms investors, another for Air NZ

Today the Commerce Commission released its draft decision about the 2013/14 Telecommunications Development Levy. Between them New Zealand’s top 22 telcos will have to stump up $50 million to subsidise rural services.

The government calls it a levy; it is a tax on telecommunications investors. Telcos each have to pay around 1.2 percent of revenue.

By co-incidence the Commerce Commission announced its draft decision just hours after Air New Zealand said it would scrap regional flights and drop services entirely to three small towns.

The airline says it looses $1 million a month servicing small towns with 19-seat Beech 1900D aircraft. Prime Minister John Key says he thinks this is a good move.

Telco discrimination

Nothing could be clearer. There is one rule for telecommunications investors and another rule for Air New Zealand investors. One group has to subside rural New Zealand, the other group has no obligation. In contrast Air New Zealand gets official praise for ditching rural routes.

New Zealand’s telcos as a group and Air New Zealand are roughly the same size. According to the Commerce Commission TDL draft liability allocation document there is $4.3 billion in qualified revenue from the telecommunications industry. Spark, formerly Telecom NZ, accounts for almost 40 percent of the total.

In the latest Air New Zealand Annual Report the airline says it had revenues of $4.2 billion. The Air New Zealand group made revenues of $4.6 billion. Either way the two figures are close enough.

Different, not that different

Air New Zealand and the telcos have different business models. They report figures in different ways. We’re not comparing apples with apples. Yet the numbers are not totally out of sync. Air New Zealand Group had Earnings Before Finance Costs, Depreciation, Amortisation, Rental Expenses and Taxation of just over $1 billion. Spark reported an EBITDA of $936 million. Some of the 22 telcos paying the TDL are under water or, at best, borderline profitable. Telecommunications investors have every right to be grumpy.

Things are worse for Chorus investors. They’ve been hit with a double whammy. The network provider’s share of the TDL is $11.5 million. That’s on top of the price cuts for copper services imposed the Commerce Commission.

Unlike the retail telcos, Chorus is a wholesale operation. It has little or no scope to pass the cost of its TDL obligation on to customers. It is debatable whether Chorus should pay the levy.

The levy is a simple cash grab by the government taking the funds directly from Chorus investors. Incidentally, there was no discussion of whether Chorus would be liable for the TDL when the business demerged from Telecom NZ. At the time the plan was to end the TDL.

Chorus treated poorly

Chorus investors thought they were buying a utility — that’s a type of investment with predictable capital requirements and revenue flows — they were hit with regulated price cuts. To be fair, investors knew that was coming, they just didn’t expect the regulator to cut as deep.

This isn’t an argument against the TDL. If there are good economic, practical or political reasons for the rest of New Zealand to subsidise rural telecommunications, we should come clean and do it through the tax system, not through a back door tax punishing a single industry.

Whatever logic applies to giving rural New Zealand a communications lifeline must apply equally to giving the same sector a transport lifeline. If the government can tax telcos $50 million to get broadband out to the wop wops, why not tax Air New Zealand $12 million to fly planes to rural centres?

One last thought on this. With the exception of MyRepublic, which has some local investment, there hasn’t been a rush from overseas companies to cash in on New Zealand’s brave new fibre network. Anyone wondering why there is such a lack of interest need look no further than the uneven treatment the telecommunications sector gets from government.

2 thoughts on “One rule for telecoms investors, another for Air NZ

  1. I agree that if we are to subsidise the regions then it should be through general taxation, not by forcing Air NZ to be less competitive against Jetstar on the main routes.

    But I question the assumption that NZ benefits by subsidising the regions.

    Economically, and looking at the country as a whole, the regions either have some benefit to the economy that makes people living in them worth the undeniable extra costs, or they don’t.

    If the benefit is there, then the people living and working there should pay the extra costs themselves. With regard to internet, satellite services are available as a last resort absolutely anywhere, which is a better situation than airline service.

    If the benefit is not there, then people can choose to move elsewhere, and in time we might have a few extra national parks.

    In 1984 we finally stopped 30 or 40 years of subsidising farmers to burn off native bush and spread super by air to grow grass to feed sheep to grow wool that no one wanted. Much of that marginal land has now returned to bush (not as good as what was there), or is now covered in Pinus radiata forests.

    NZ is better off for it, and I think few would deny this (least of all environmentalists).

  2. Regardless of the good or bad of the current regulatory regime, I doubt it has much to do with the lack of “rush from overseas companies to cash in on New Zealand’s brave new fibre network”. Why would they? NZ is a tiny market. There are several dominant entities with large capitalisation, okay brand perception, and management. There’s limited scope to compete, theres’s only one provider of international bandwidth which is where a big part of the companies costs will come, a bit more competition in the national network but it’s not likely to be a big factor. You can’t compete with bundling TV or mobile services very easily. The first is locked up by Sky and even big players have trouble competing. The later, since there’s limited MNO and the big players already do decent bundling (plus a chunk of the market is on prepay and difficult to wean off it), there’s not much you can do either. There are a few other areas you can try to compete but frankly, there was never any reason to expect much overseas interest whatever the regulatory regime. Oh and let’s not forget the fibre network still only covers a small percentage of the country, and AFAIK outside business areas the rollout until recently was only slightly based on demand. (Chorus is allowed to be more demand based since earlier this year.) Of course there will be a small number who will try, like MyRepublic and perhaps the regulatory regime means 1 or 2 are not entering who would have, or at least delaying, but there was never going to be a rush and anyone who said that either didn’t know what they were talking about, or were lying.

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