Tuesday, 24 September 2013

A subsidy worth paying?

Last week Amy Adams, the Minister for Communications and Information Technology, announced that $15 million was still up for grabs for anyone willing to build another high-capacity submarine fibre cable connecting New Zealand to Australia and the US (as the current monopolist incumbent, Southern Cross Cable, does).

I'm fully on board with her comment that "Building a new cable will further increase the resilience of New Zealand’s international telecommunications links and also introduce more competition on the route, as well as providing additional capacity". And maybe us consumers oughtn't look gift horses in the mouth. And governments are in the business of promoting good stuff and dissuading bad stuff all the time, and this is no different.

And yet: I'm a bit in two minds about the desirability of subsidising new entry like this. I suppose where I've got to is that I'd like to understand a bit more of the policy reasoning behind this subsidy.

Perhaps the rationale is the straightforward and uncontroversial one: there are national positive externalities from a new private sector cable project, that justify a taxpayer subsidy to see them realised. And maybe there are: that resilience point, for example, could be one of them. Or maybe we'll get faster UFB uptake (in which case, it has been argued, there could be large national positive spin-offs), if the cost of fibre connection with the rest of the world gets cheaper. Or perhaps it's a low cost way of helping to deal to whatever market power Southern Cross possesses.

The incumbent's view is that "Southern Cross' prices are effectively set by those that prevail on the internationally more competitive US-Australia route". That may be true if you're looking for a quote for US-Australia capacity from Southern Cross, but unless I'm missing something I can't see it competing away their hammerlock on the US-NZ or Australia-NZ legs. Southern Cross also said that "its prices had reduced by an average of 22 per cent year-on-year" over 2000-12. I'll accept that's true, and also that it means very large cumulative reductions: a $1 million dollar invoice in 2000 would have turned into $92,000 in 2012. But it doesn't mean that the price is yet anywhere near a workably competitive cost-based level.

If this is a market where timely entry is possible, though, and private companies, attracted by what we have to presume are attractive returns earned by Southern Cross, stand ready to build more cable networks, there's much less of a case for a subsidy. And it seems that there are: Hawaiki Cable seems to be getting traction, even if the earlier Pacific Fibre proposal fell over.

If that's so, then Southern Cross are entitled to their (temporary) high profits as the reward for being the first company to roll out a valued piece of infrastructure:  they took the risk, they spent the money, and they're entitled to full whack on it until competition takes it away from them. If that's the case, then I'm not sure they deserve to have their competition subsidised into the game against them.

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