Tender invitation kicks off Govt broadband project

The Government has fired the starting gun on its billion-dollar broadband rollout which will see it soak up the commercial risk of the fibre network build.

Tender invitation documents released yesterday by Communications and IT Minister Steven Joyce detail a business model whereby the Government will pay much of the upfront network cost from the $1.5 billion set aside for the project, with business partners chipping in as customers are connected.

Joyce said the risk-sharing model would overcome the financial hurdle faced by private companies trying to predict future commercial demand for high-speed broadband.

The model, which Joyce described as "complex", will see the Government put its hand in its pocket to fund the network build-out to premises such as offices, homes, hospitals and schools.

The Government's business partners in the fibre rollout will fund the "bricks and mortar" set-up costs of the new fibre companies and manage the network construction, repaying the network costs as it connects customers.

Any cost over-runs will be paid for by the commercial partner.

It seeks to address the concerns that many potential participants had regarding the build of a network ahead of consumer demand for ultra-fast broadband.

Vector chief executive Simon Mackenzie - a potential network builder - said the model was an improvement on what was proposed several months ago, noting the construction risks were carried by the commercial players with the Government taking on any risk associated with slow take-up of the new network.

The commercial arrangement hinges on two classes of shares - A shares with voting rights held by a Crown-owned entity and B shares with rights to the profits held by the network partners.

As customers are connected or existing fibre assets are tipped into the network, network companies buy the A shares off the Crown as well as benefiting from any profits derived from customers.

At the end of a 10-year "concession period" all shares will convert to ordinary shares with equal voting and dividend rights.

A single share will be held in perpetuity by the Crown, ostensibly to ensure the network companies maintain open and fair access to the network.

Telecommunications analyst Rosalie Nelson of IDC said that although the shape and structure of the proposal recognised some of the business risk of a new network there continued to be little commercial incentive for existing telcos to participate.

The Government has ruled out investing money into fibre companies controlled by shareholders with a retail telco arm, such as Telecom, Vodafone and TelstraClear.

A Telecom spokesperson said it would not comment on whether it would participate in the roll-out until the details had been worked through.

The deployment of ultra-fast fibre network is expected to deliver broadband at speeds 50 times what is commonly experienced in urban homes today to 75 per cent of New Zealanders.

The needs of rural communities are being addressed by a separate initiative.

Network proposals are due at the end of January next year, with a date for investment decisions not yet decided.

WHAT NEXT?

November 13: broadband network builders indicate interest in joining Government-funded fibre network construction.

January 29: deadline for proposals.

Later in 2010: shortlisting, terms negotiated and final agreements settled.