COMMENT:

I don't want to trash the Ultrafast Broadband (UFB) rollout.

Overall, the project has achieved good results for New Zealand. I appreciate it every time I watch Netflix or Lightbox at home, or connect to any cloud computing service at work.

It's followed a solid, consistent fibre-to-the-home strategy, compared to the ever-changing chaos of Australia's National Broadband Network. It's positioned us well for the future.

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But right now, Chorus — the main company driving the UFB — is neck-deep in controversy.

Nearly all of Chorus' subcontractors are guilty of systematic exploitation of workers, the Labour Inspectorate said on October 8.

After an investigation with Immigration NZ, the watchdog said it found 73 of 75 subcontractors had failed to meet minimum employment standards amid alleged sub-minimum-wage pay, skimped holiday pay, poor record keeping and extended trial periods or "volunteer" work. (Immigration NZ's involvement was an indicator of the change of makeup in broadband subcontractor crews between 2008 and 2018).

This week, Labour Inspectorate national manager Stu Lumsden told the Herald his agency had taken cases against two broadband subcontractors. Others cases would follow on top of 19 warning notices issued so far.

For many people, it's just more bad news about the UFB, which has often been associated with long waits for installations and shoddy workmanship.

To understand the subcontractor controversy, we have to go back to two years before the UFB even began, all the way to 2009.

At the time, Telecom's network division — Chorus — had some 2500 field staff. About half were directly employed by Telecom, the rest by contractors Transfield and Downer.

Telecom's boss at the time, Paul Reynolds, wanted a radical restructure that would see a third contractor added to the mix — Visionstream (like Transfield and Downer, an Aussie engineering company) and the outsourcing of all network maintenance and upgrades to the trio.

Telecom chief executive Paul Reynolds and ICT Minister Steven Joyce at the UFB launch in May, 2011. Photo / David Rowland.
Telecom chief executive Paul Reynolds and ICT Minister Steven Joyce at the UFB launch in May, 2011. Photo / David Rowland.

Under Reynolds' plan, all the linesmen employed by Telecom would become one-man businesses who could pitch for work being overseen by Downer, Transfield and Visionstream. Telecom would help by giving them loans to buy vans and gear.

De-unionised labour would be cheaper. But Reynolds also wanted to outsource the risk associated with capital expenditure. Downer, Transfield and Visionstream would each be paid a fixed fee over a multi-year contract.

The 1000 or so linesmen who belonged to the EPMU mounted a series of strikes over the second half of 2009, causing multi-day waits for faults to be fixed.

The linesmen had a degree of mainstream support. National's John Carter — then MP for Northland and senior whip — spoke out in their support, for example.

Then Engineering, Printing & Manufacturing Union (EPMU) boss Andrew Little addresses striking Telecom linesmen in 2009. Photo / Michael Cunningham.
Then Engineering, Printing & Manufacturing Union (EPMU) boss Andrew Little addresses striking Telecom linesmen in 2009. Photo / Michael Cunningham.

But the industrial action lost momentum as more and more engineers went solo, then signed on to work with Downer, Transfield or Visionstream — and those remaining grew nervous about the number of contracting positions left. Reynolds carried the day.

The restructure helped pave the way for the structural separation of Telecom in 2011 into two separate companies. Chorus was spun out, with the remaining operation (today called Spark) mostly focused on retail.

Reynolds would quit Telecom the same year, but not before one final hard-nosed play.
His company ignored the UFB tender's rules, instead tendering a "non-standard bid" for Chorus to be given the lion's share of the work.

If Chorus did not prevail, Reynolds said his company would cherry pick fibre work in the most commercial areas — which would imperil the whole public-private rollout.

He got his way. The UFB kicked off with Chorus in control of most of the project, and farming out most of the work to the trio of Aussie companies for whom its former linesmen were now contracting. (Three other network companies got work around the margins: NorthPower Fibre in Whangarei, Enable Networks in Christchurch and Ultrafast Fibre in the central North Island.)

Over time, a layer of small, local companies developed that in turn subcontracted to Visionstream, Downer, Transfield or Universal Communications Group (which came into the frame as a primary contractor after Downer scaled back).

"The government could have put more money in, especially since they were going to get it back in the end," Tuanz boss Craig Young says.

These smaller companies were outfits such as Sunwin Technologies and Clearvision (to name the first two to be charged by the Labour Inspectorate), typically employing half a dozen staff.

The Labour Inspectorate's investigation has been bad PR for Chorus, and the agency's Lumsden has made it clear that he has a dim view of the company's actions.

"Large companies such as Chorus need to be proactive and ensure that their contractors and subcontractors are not exploiting their workers," he says.

"It's very disappointing that a national infrastructure project of this scale which is well resourced has failed to monitor compliance with basic employment standards."

Yet Lumsden also tells the Herald, "the Labour Inspectorate has no current evidence of Chorus itself breaching employment standards."

Employment lawyer Jennifer Mills confirms that the arm's-length subcontractor arrangement keeps Chorus out of the crosshairs.

In fact, in the first two cases brought by the Labour Inspectorate, the relevant primary contractors (UCG and Visionstream) are not even in the gun.

Instead, it's the immediate employers of the linesmen (subcontractors Sunwin and Clearvision) who face claims of alleged underpayments and poor record keeping.

The situation could change if health and safety issues are brought into play, Mills says. If that happens, then Chorus or its primary contractors could potentially be held responsible.

In its 2018 annual report, Chorus says the average UFB connection cost in the year to June was $1037 — below its forecast $1050-$1200.

The pressure is on to constantly lower that cost, and it filters down the foodchain.

The owner of one small subcontracting firm, who did not want to be named, told the Herald he gets paid a standard $187 for the simplest type of UFB install, involving cable being strung from a pole to a house.

The work takes two technicians four hours, and with the technicians paid $25 an hour (equivalent to $200 for the job), it's a money loser.

The subcontractor says more complicated UFB installs pay better, but can also lead to disputes.

He says his company is still waiting for payments from Visionstream for some work carried out in November last year.

Comment was sought from Visionstream, which had not responded by the time of going to press.

In another case, the subcontractor says, Visionstream paid him $5000 for a UFB installation where ducting was blocked and a driveway had to be dug up then re-asphalted by a third party.

Visionstream then "took back" the money (by deducting from a round of payments for other work) after Chorus questioned the payment.

In other cases, Chorus had claimed, through Visionstream, that excessive hours had been billed, he says.

How did the pressure to cut costs develop? There are three factors that contributed to its buildup.

1. $1.35b was too cheap

The Government chipped in $1.35 billion for the rollout, $929 million of which went to Chorus — half through interest-free loans and half through the Crown buying equity in the network company.

Today, the Crown has a 45.72 per cent stake in Chorus — though the company likes to emphasise that the Government holds non-voting shares, and will sell them after the UFB rollout is done. Chorus pledged to chip in $1.4b-$1.6b of its own funds (it later upped that estimate to $1.7b-$1.9b).

In hindsight, the Crown was low-balling it.

Chorus passed on cost pressure to its primary contractors Downer, Transfield and Visionstream, which in turn put the squeeze on subcontractors.

"It put pressure on across the board," says Telecommunications Users Association (Tuanz) head Craig Young.

"The Government could have put more money in, especially since they were going to get it back in the end."

More money was put into the fibre rollout. National eventually earmarked more than $2b for UFB and its companion rollout, the Rural Broadband Initiative, but the increases were largely pegged to expanded reach.

2. Free installs

The UFB rollout got off to a slow start. The Ministry of Business, Innovation and Employment (MBIE) reported after the project's first year that fibre had been rolled past 76,311 premises, but only 1233 had chosen to connect over the 12-month period, and only 155 in the final quarter.

Nobody expected mass adoption from the get-go. Still, the 1.6 per cent uptake made the official target of 20 per cent by the end of 2019 look very far away.

One issue was that many people were on term contracts with their internet service provider (ISP).

But there was also a lot of confusion about the cost of a UFB install. It was free for a "standard" install, but people with homes set back a bit from the street fell into the "non-standard" category and faced a scary, open-ended bill.

Political pressure went on Chorus. After negotiations between the company and Crown Fibre Holdings, then-Communications Minister Amy Adams was able to announce in 2013 that all residential UFB installations would be free for homeowners (at least for all but 0.3 per cent, as "non-standard" was redefined as 200m back from the road) through to the end of 2015. Blocks of flats of three storeys or fewer would now get free installs for two years. The move added $29m to Chorus' costs.

More, the whole narrative changed from whether households would be willing to pay $1000 for a UFB installation or whether, say, a retail ISP could spread it over a two-month contract, to Chorus eating all the cost.

At the end of 2015, it was clear that re-imposing costs for UFB installs would be politically unsaleable. There was another round of behind the scenes arm wrestling and Chorus agreed to free installs for the remainder of the UFB, adding another $60m or so to its costs (partly mitigated by Chorus getting longer to pay back its debt) — which were duly passed on to subcontractors.

3. The copper price war

In the early days of the UFB, Chorus wanted to keep the cost of copper lines high, which it said would both encourage people to move to fibre connections and help pay for its leg of the UFB.

But it ran into grief in 2013 when the Commerce Commission proposed a 25 per cent cut — around $12.53 a month — to the wholesale price of the most common copper connection.

A coalition of consumer groups (including Tuanz) argued that maintaining the high price of a copper line (or only cutting it modestly) would amount to a "copper tax" or an unfair bounty going to Chorus, much of which went straight out the door as dividends.

The Crown, conflicted in its role as a major Chorus shareholder and regulator, threatened to overrule the commission with legislation, which then-Tuanz head Paul Brislen said would amount to Parliament setting the cost of broadband. The independent commission should hold sway, he argued.

The "Axe the Copper Tax" group argued that the commission had first canvassed the copper line price drop in 2010. If it was stymied, it would equate to a $660m subsidy for Chorus.

The acrimonious copper tax war continued into 2015, when the commission delivered its final determination (ultimately without the Beehive sticking its oar in — at least overtly).

The price of copper would be cut by $8 a month for most people.

It was a something of a win for Chorus, in that it was less of a copper thumping than the commission had originally proposed.

But Chorus still maintained that the copper price cut would reduce its earnings by a total $1b over the remaining years of the 10-year UFB rollout. In an NZX filing, the company called the financial hit a "regulatory black hole".

"There never was a black hole as a result of the copper pricing decision," says Paul Brislen, one of the leaders of the "Axe the Copper Tax" campaign. Photo / Paul Estcourt.

Critics said a move from "retail-minus" to "cost-plus" modelling had been flagged half a decade ago by the regulator, and was always going to result in the price of copper being chopped. Chorus' UFB bid, and its financial planning overall, should have allowed for it.

The Crown commissioned independent analysis from EY, who initially implied the UFB rollout was at risk, but eventually outlined recommendations for Chorus to trim costs.

Today, Chorus' arguments still don't wash with Brislen.

"There never was a black hole as a result of the copper pricing decision. The EY report into Chorus' finances made that clear — there were plenty of options for the company to follow that would see it manage its finances more appropriately during a period of massive investment. Chorus chose to ask for $600m more from the Government, and the Government rightly said no."

Yet the blunt reality was that Chorus faced an immediate shortfall. An austerity drive saw its dividend suspended, a halt to advertising and marketing and a cutback in copper line maintenance, among other measures.

It also took the front foot as primary contract work was re-tendered. Chorus did not disclose its new terms, but Downer decided they were too thankless and largely bailed from the UFB build.

By 2016, about 80 per cent of UFB work was being overseen by Visionstream, with the balance being held by Transfield (now re-named Broadspectrum) and a newcomer, Brisbane-based Universal Communications Group (UCG).

2015 and 2016 were dark times for the UFB.

Demand for fibre reached a tipping point and surged just as Chorus was under its most intense cost pressure and its contractors and subcontractors were struggling to hire new crews.

In February 2016, Chorus said the median time to connect a single dwelling was 22 days; a mixed dwelling 99 days; and a dwelling down a right-of-way 104 days.

It was not until late 2016 that law changes finally went through that sped up UFB consents for right-of-ways and blocks of flats and apartments — arguably something that should have been sorted before the rollout began.

Today, the situation is brighter, at least for consumers. Chorus says the average time to get a fibre connection is now seven business days.

There are now some 4000 people working on the UFB via primary contractors and subcontractors, and Chorus says it installed a record 50,000 fibre connections in the three months to September. Its backlog has fallen from 25,000 jobs to 5000.

Chorus says 950,000 customers are able to connect to fibre, with 714,000 premises passed. That lifted ultrafast broadband uptake to 50 per cent from about 40 per cent a year earlier. By December 2022 (the deadline for the extended UFB, or UFB 2) it plans to have passed 1.05 million premises with 1.36 million customers able to connect.

And people are getting good use out of that fibre. Chorus says the average Auckland household's data use jumped 25 per cent in November 2018 compared with November 2017.

On November 15, previewing Chorus' new 1 gigabit per second UFB plans, the Australian Financial Review reported that "New Zealanders will soon be getting internet speeds 20 times faster than those enjoyed by most Australians for just a few dollars more a month, further widening an already-huge gap between the two countries' broadband networks."

The grass was looking greener on this side of the ditch. And most here would agree with that view — unless you're working for a UFB subcontractor.