Tuesday, April 22, 2008

John Key's Thinking Big

eh heh heh heh, well done John Boy. I can almost hear Sir Robert Muldoon chortling away. National's gone back to the 1970s. Welcome back the words "subsidies"and "state socialism" all shrouded in the word "investment". It's revolting.
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For a while now I’ve hoped that given I will dance merrily when Labour loses office, I’ll relax knowing that a National government led by John Key will do a little better. This is even though the list of things that could be better has shrunk on a weekly basis.
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National was once the party of big government investment into infrastructure. Many wont remember the age when oil was at record prices and that the economy was being strangled by the threat of disrupted oil supplies and inadequate electricity.
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So came Think Big- a phrase that lives in infamy for anyone with economic rationalism in their veins.
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Taxpayers paid for a gas to gasoline plant at Motunui. I remember how Rob Muldoon and Bill Birch cheered it on, saying it would produce half of the country’s petrol. By the time it was completed, it was reportedly cheaper to convert all vehicles in NZ to CNG and LPG. The cost of building it was written off as government debt before Petrocorp was sold. The plant is no longer in operation. One wonder if the public would have paid for gas conversion kits themselves if the government of the day didn’t have marginal tax rates approaching 66%. However, central planning lost.
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Central planning lost again when, after years of badgering by the Railways Department, the National government decided to approve the Railways borrowing to electrify the central part of the North Island Main Trunk railway (Hamilton to Palmerston North). Apparently the export boom of the late 1970s had strangled the capacity of the line (which through that segment is particularly steep and windy) and electrification would allow longer and faster freight trains. NZ$350 million was the final cost of electrification. However whilst it seemed a good idea at the time of high oil prices, another move by the same government eliminated the capacity problem. You see the railways had a capacity problem whilst having a legislated monopoly on almost all freight consigned for distances of over 150km. So in 1983 that monopoly was removed, and funnily enough the railways lost about 18% of its freight tonne-kilometres carried relatively quickly. Problem solved. Furthermore having corporatised the railways (Labour didn’t start it), the newly business like Railways Corporation had a study undertaken which demonstrated it had enormous scope to cut costs and increase productivity, through measures like eliminating guards vans. So more could be carried without pouring concrete and stringing up wires. That same corporation commissioned the then Coopers and Lybrand to investigate if the electrification could be an economic investment, but it concluded it would lose money even if electricity were free.
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As a result of that the Labour government of the time bailed out the Railways Corporation (for the first time since its creation) by taking over the entire debt for the electrification. It is notable that the sale price of New Zealand Railways on privatisation roughly equated to that debt. Another failure for central planning.
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So now the National Party thinks it knows best again announcing that it is forcing YOU to pay NZ$1.5 billion to “invest” in a broadband “fibre to the kerb” network. This will be one of the biggest handouts to an industrial sector since Think Big. The term “invest” is thrown about with abandon by politicians who want to use your money, after all “spend” is honest but sounds less worthwhile, “subsidise” is more honest but it’s a bad word. So it’s invest. I’m sure we can all come up with things that we’d like to force others to “invest in”. Of course unlike roads, this network wont reach virtually every property now, will it? You'll all pay though!
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So what is this all about? Well besides all the hype about generating jobs and investment (yes heard it all about Think Big too, and Jim Anderton hyped it up about his own Ministry of Economic Subsidisation), Key says this new socialist programme (which it is) involves five principles:

- The network being open-access (like the roads, and every peak period in Auckland you see how that works);
- ensuring the investment does not see already-planned investments cut back (of course not, after all the government building a network in competition to your own, or one you could use instead of building one. Why would it? Of course it will, we’ve already seen how local loop unbundling killed Telstra Clear’s investment programme in hybrid fibre-coax broadband/cable tv networks);
- ensuring increased broadband services (meaningless. It’s like saying I hope building this road means more freight and people get moved); and
- making sure we do not end up lining the pockets of incumbent industry players (ohh the “boot into Telecom” point. No, you’ll line the pockets of the contractors who build it and whoever has the job to manage it. You see they wouldn’t have had to do it unless you’d taken money off of other people and forced them to pay for this.
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So it’s time to ask some questions:
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1. What would happen to broadband services if this DIDN’T happen? Wouldn’t those who would benefit immensely from it continue to buy existing services creating a market for new infrastructure?

2. Has Labour’s socialisation of Telecom’s local loop hindered and will it continue to hinder private sector investment in alternative broadband technologies? If so, wouldn’t it be wiser to let Telecom make money out of its own network and for competitors to build duplicate ones? (hey if its such a great investment it will happen wont it? If it’s not why are taxpayers paying?)


3. What other barriers exist to private sector roll out of broadband, such as the RMA and local authority preciousness about overhead wiring?

4. Who would run this broadband network, what happens if it goes wrong? Will it charge to make a commercial return on investment?

5. Why is telecommunications so special it needs a massive subsidy from the rest of the productive sector?

6. Are those who will benefit from faster broadband willing to pay for this, and if not, why should everyone else do so?

7. What could the rest of the productive sector do if the money, that was their’s in the first place, was handed back to them in tax cuts?

8. Why shouldn’t software, fruit growers, painters, watchmakers, publishers, plumbers, taxi firms, pharmaceutical companies, biotechnology firms, caterers, hoteliers etc etc get a handout too?
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Finally, John Key’s claim that “One hundred and fifty years ago the government had the vision to build railways and highways to facilitate the movement of goods” is nonsense. There were no railways in New Zealand 150 years ago for starters, the first was opened in the 1860s but construction didn’t really take off till the 1890s. Some were built by private enterprise, such as the line from Wellington to Palmerston North, and much of the line through Arthurs Pass. Many of the railways built were marginal and served, well nowhere. Noticed Waikaia, Waikaka, Eyreton or Tokarahi on the list of great booming towns? No – they were all lines built for political reasons, to prop up land prices and win elections. The government funded railways were actually primarily funded by local and provincial governments, as were the roads. Central government had little to do with it. Local governments did this as they could raise money from land released for sale and developed. There was no such thing as national highways until 1922.
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So there you have it. Will ACT resist this Think Big attempt to bribe the IT sector? David Farrar, as always liberal on most things, is singing the praises of this enormous handout to the sector he is involved in, rather disappointingly.
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After all, is the telecommunications sector so strapped for cash that it can’t invest? If it is a matter of wont rather than can’t then why not ask why rather than make everyone else step in?

4 comments:

craig milmine said...

lol - I use to live beside Tokarahi - population 20. While the railway is long gone there are still two tunnels that provided childhood fun. But you are right - it was a collossal waste of money and National just don't seem to learn.

Oswald Bastable said...

Don't you LOVE the way the principles disappear when the right bauble is dangled!

john-ston said...

This was another interesting post, however, I do think that your blind view of the market system has come short once again. You may be lucky that in Britain you have fast, cheap, broadband internet, however, let us not forget that New Zealand always had slow, expensive, broadband internet - even before local-loop unbundling was considered. I'll look at each of your points

"What would happen to broadband services if this DIDN’T happen? Wouldn’t those who would benefit immensely from it continue to buy existing services creating a market for new infrastructure?"

Not necessarily; natural monopolies tend to extract as much money as they can without spending any money on new infrastructure. Rail in New Zealand was an example of this; after 1999 maintenance costs were completely pared back and the tracks were left to run down to a condition where there was wide concern about the safety of rail users (and loco engineers). Telecom hadn't invested in infrastructure either over the last decade; it wasn't until last year that the Pakuranga Exchange was upgraded to handle things such as caller ID, for example.

"Has Labour’s socialisation of Telecom’s local loop hindered and will it continue to hinder private sector investment in alternative broadband technologies? If so, wouldn’t it be wiser to let Telecom make money out of its own network and for competitors to build duplicate ones? (hey if its such a great investment it will happen wont it? If it’s not why are taxpayers paying?)"

Even prior to local loop unbundling, and its consideration as an idea, there wasn't much private sector investment. You may have had Telstra Clear build their network in Wellington, however, that was largely limited to the Wellington CBD and their attempts at taking it to the suburbs were met with extremely stiff resistance from Telecom who essentially choked them (If you want proof, look here http://www.geekzone.co.nz/sbiddle/2471; in that example, Telecom built a parallel network, killed off the competition and then abandoned the network). The government only intervened because our rankings on broadband internet were so horrible; only Mexico is below us in the OECD, and they have a similar telecommunications situation.

In terms of why are taxpayers paying; it is because taxpayers will benefit. I don't recall the research, however, it has been suggested that New Zealand's annual GDP would benefit to the tune of $10 billion per annum if our broadband was brought up to First World standards. For a mere $1.5 billion cost, you must agree that it is a good idea.

"What other barriers exist to private sector roll out of broadband, such as the RMA and local authority preciousness about overhead wiring?"

How about the tendency of Telecom to choke off competition, like they did in Wellington? That is a barrier to further roll out of broadband, is it not?

"Who would run this broadband network, what happens if it goes wrong? Will it charge to make a commercial return on investment?"

Personally, I think that this network should be run by a combined private/public entity, and I do think that it will be charged to make a commercial return on investment - you must remember though, that a commercial return on investment involves lower prices than monopoly pricing, which is what Telecom engaged in.

"Why is telecommunications so special it needs a massive subsidy from the rest of the productive sector?"

When you are talking about an extra $10 billion in GDP per annum, it makes $1.5 billion look like small change.

"Are those who will benefit from faster broadband willing to pay for this, and if not, why should everyone else do so?"

We are already paying some of the highest prices in the OECD for broadband, so people are willing to pay for it. If it is faster, they would be willing to pay for it; however, if you construct the right sort of network, the prices should come down.

"What could the rest of the productive sector do if the money, that was their’s in the first place, was handed back to them in tax cuts?"

Not much, I would suspect. $1.5 billion wouldn't provide much in the way of tax cuts to business; and also remember that the $1.5 billion is a one-off, tax cuts are a stream. I do agree that tax cuts are preferable, however, I do think that there are some things that need to be done, such as infrastructure investment which has been lacking since the 1980s.

"Why shouldn’t software, fruit growers, painters, watchmakers, publishers, plumbers, taxi firms, pharmaceutical companies, biotechnology firms, caterers, hoteliers etc etc get a handout too?"

Because the return on investment wouldn't be as high. You may have brought up the story about NIMT electrification, however, you fail to recognise that broadband is the way of the future. We are at the bottom of the OECD, and to be quite frank, it is embarassing and hindering our progress.

My personal opinion is that Telecom should have been broken up like ECNZ was in the 1990s, but of course, it is too late to do that. Make the best of the situation we have, and perhaps the time will come where I can finally stream video without constant interruption.

libertyscott said...

John-ston, as always a good response to make me think, but as often is the case I'll mostly disagree.
- I don't agree railways are a natural monopoly, it faces competition from other modes albeit in only a couple of cases it is significantly more competitive. The users would ultimately have bought out TranzRail if they needed it.
- Telecom HAS invested, just not as much as many would want, and let's be fair here the KiwiShare obligation has limited profitability of upgrading local networks.
- TelstraClear's network is NOT largely CBD at all. It covers virtually all of Wellington suburbs and the Hutt Valley, excluding Tawa, and all of the Kapiti Coast. Telecom didn't stop it, it was more hindered by local whingers who didn't like the cable outside their homes. It did the same in virtually all of Christchurch! It would have done it in Auckland had councils using the RMA not made it prohibitively expensive and government policy made lobbying for access to Telecom's network more profitable!
- In fact Telecom never choked TelstraClear, TelstraClear has sustained over 30% of the local line market in Wellington and over 50% in Kapiti. Telecom shut down its HFC network, which only carried cable TV due to a lack of subscribers and because ADSL became a more economic way of rolling out broadband.
- Yes the broadband figures were bad, but what regulatory alternatives were offered? Had the RMA stopped being a barrier to rollout of new networks it may have been easier? Why do we continue to grossly cross subsidise rural telecommuniations by classing farm lines as residential and forcing Telecom to charge the same line rental as an urban dwelling?
- I disagree with "taxpayers will benefit". Would my elderly relatives benefit? Would the freezing worker relative I have who has no computer benefit? Of course not, yet they have to pay. The return you talk about sounds great, in which case who captures that return, and why wont they pay for it? If broadband is such a lifesaver for businesses then why wont they pay the cost?
- $1.5 billion is NOT a one off, what about renewals? What does that figure cover anyway? But i guess nobody minds if it is 2 or 3 billion. That's post reform New Zealand, it's like roads, the government says 1 billion then 2 billion for a motorway in Auckland, as if the money tree will grow faster.

You CAN'T say the return on investment for biotechnology will be less than broadband or for any other businesses because - funnily enough - more people invest in those than in this project. It seems odd that something so damned important is so unattractive to investors. After all, why aren't Christchurch and Wellington booming centres of progress given their networks?