The UFB initiative provides incentives to encourage competition and innovation including capped pricing for 8 and a half years, binding open access rules from day one, full regulatory scrutiny, competition from cable networks in some geographic areas, competition at the wholesale layer 2 for fibre and, over the medium term at layer 1 on the fibre network (from physical unbundling from 31 December 2019). UFB transaction documents with Telecom commit it to promoting fibre, innovating and supporting efficiency on the fibre network, and provide checks and balances to ensure these terms are being met.
UFB contracts require the partners to commit to funding their entire part of the network build - this means that they need to borrow or raise funds based on the entire construction period.
This introduces significant risk for them. It involves predicting likely demand, which is challenging in a nascent market.
It does not protect partners from the risk of end users churning off the network, or from other businesses (including variation in the cost of construction). These risks remain substantial.
Government money is paid over-time as the network is being built and not as a lump sum. This reduces the cost and risk to the Crown. The net present value of the $1.3bn investment is estimated at $600m. Telecom may return funds to CFH from 2025, with all funds likely to be returned to CFH by 2036, so the Government gets its money back.
While Telecom will get some interest, it is not the $1.8b outlined in this speech. There are incentives in the contract to drive uptake. For example, if an uptake target of 20% is not passed by 2020 then Telecom has to pay more money back to the Crown at a faster rate.