MARTA STEEMAN
Steve Fuller likens a telecommunications fibre-optic network to driving on a 1000-lane highway where every car has its own lane. no lunatics hogging the highway, a clear path as far as the eye can see, huge speeds possible.
This is what Fuller and the company he leads, Enable, will be immersed in for the next eight years – building a 3500-kilometre fibre network through Christchurch’s streets and those of Rangiora, Kaiapoi, Woodend, Lincoln, Rolleston and Prebbleton.
It’s the city largest infrastructure investment for a long time and the dividends to ratepayers potentially high, some $1.7 billion to $3b to the city over the next 50 years. another Orion, the city says, the electricity company its current cash cow producing almost $1b in dividends in 18 years.
Christchurch City Council-owned Enable’s bedfellow in the huge undertaking is the Crown which will be injecting a minimum of $168 million for building the fibre network. but that won’t cover it. The city itself will be contributing $271m, through debt and equity.
The council’s investment arm, Christchurch City Holdings, will raise $220m in debt to onlend to Enable and inject $51m in equity into the project as well over the eight years.
at the end of the build period, 2020, Fuller says, the city can choose to inject another $51m to own 51 per cent, or stump up with even more – about $150m, Fuller says – to buy out the Crown completely and get access to all the dividends from the company.
by that time the city should know what sort of rewards the fibre network can generate and whether it makes economic sense to own the whole company.
Christchurch has religiously retained its infrastructure ownership compared with Wellington or Auckland and regards its four infrastructure companies as critical to the city and region’s development – Orion, Lyttelton Port company, the Christchurch airport company and the newest five-year-old, Enable.
last year Enable trumped Telecom in the bid to partner with the Crown in building the Christchurch network. The pundits were betting on Telecom, or, more correctly, its network company Chorus, to win Christchurch but Enable got the nod.
Research house IDC communications analyst Glen Saunders says while Enable is highly regarded and already has a few years experience under its belt, very competently laying more than 300 kilometres of underground fibre in the city, the government’s desire to have more players in the game might have helped Enable’s bid as well as having the financial backing of the city council.
so the Crown has ended up with four partnerships in its $1.5b project to have fibre in the street and available for 75 per cent of all households in New Zealand and available to most businesses, schools and health organisations by 2020.
Chorus, a separate company from Telecom since last year, secured 70 per cent of the $1.5b programme and three regional players, including Enable, the rest.
In Christchurch Enable and the Crown have formed a joint venture company for the build, Enable Networks, called the local fibre company (LFC).
Fuller says much of the hard work and investment is in the first 10 years, typical of many infrastructure investments. The Enable fibre company won’t show a profit until year nine and dividends for Enable and the Crown won’t flow until then.
“That’s when we create another Orion and give the cashflow back to the city.”
The Crown can exit slowly and sell down before the end of the build and Enable has pre-emptive rights to buy the shares.
Fuller says the agreement with the Crown is flexible so Enable is under no obligation to buy out the Crown progressively but it has the option to.
Christchurch City Holdings has been very clear that the investment must not impact on its ability to provide dividends to the council, he says.
The Enable fibre company has just over 29 million shares, the vast majority of those owned by the city, which is payment for Enable’s existing fibre network valued at $29m.
For every dollar the Crown spends building the network it receives one share in the fibre company and Fuller expects the Crown to have more shares than the city by this time next year.
Forsyth Barr research director Guy Hallwright says despite having a government partner this is no cakewalk.
“They’ve got some part-government funding to build the network. They actually have to fund all the connection costs themselves. If the network costs more to build than they think then that’s their problem. If people don’t migrate over to fibre that’s their problem, and they don’t get any revenues.”
Chorus is the fibre company’s main competitor, but TelstraClear is also a formidable player with a cable network in parts of Christchurch capable of very high speeds.
Hallwright says Chorus will be competition, “sort of “, because it may take an investment in Enable in the future.
Enable is not free to charge what it wants either. Enable’s prices are effectively regulated because they were set by negotiations with the Crown, Hallwright says. The whole purpose of the Government’s $1.5b ultra-fast broadband programme is to build the network quickly and to entice customers on to it at affordable prices.
Fuller says the cost of connecting households to the network is between $500 and $1100 dollars. Enable’s cheapest wholesale price is $37.50 a month for an entry level broadband service. so it will take two years of revenue for a basic household connection to cover the cost of the fibre connection.
He acknowledges a critical challenge will be to persuade customers to buy the broadband services from “retail service providers” (RSPs) offering services on the fibre rather than on Chorus’s copper network or TelstraClear’s cable network.
but because Enable does not sell directly to households but to RSPs and to other wholesalers it is reliant on these players being creative and innovative in what services they offer to attract households and businesses.
Fuller says Enable has always paid a lot of attention to its relationships with these providers. He points out that one of them, Orcon, is already leading the way, saying it will charge the same price for services using fibre as for the equivalent services using copper wires so that will cancel out pricing as a barrier. Educating people about the huge possibilities that fibre offers will be very important, he says.
IDC’s Saunders says consumers can need a bit of persuasion to switch. An example is mobile phone company 2degrees. It charges 44 cents a minute on pre-pay compared with 89c with Vodafone, but how many are rushing to change? Admittedly Vodafone has a better range of handsets and broader range of offerings, but a phone user can still put a 2degrees sim card into a Vodafone phone and halve costs but how many are doing that?
“From my perspective … at the moment you have to have a compelling reason to move to fibre, ” Saunders says. ” New Zealanders are lazy overall. We could all save a lot of money if we switched power companies.”
Enable is targeting having 50 per cent of homes and most businesses and schools and health centres connected to fibre by year 10. Fuller says connecting businesses has been the focus and will continue to be for a while because they will more easily see the value of the ultra-fast internet connections but Enable expects that by year six or seven revenues from household connections will beat those from business.
on Chorus investing in Enable, Christchurch City Holdings chairman Bruce Irvine says it was not a requirement of the government in awarding the ultra-fast broadband partnership to Enable but Enable agreed to negotiate in good faith for that possibility.
Fuller says Enable is talking with Chorus and if they can find value in it for both they may do a deal.
so what is central for Enable to be successful?
Hallwright says the first thing is to build the network according to the strict timeline, as set out in the agreements with the Crown, and bring the costs on or under budget “because if the costs blow out they will be in real trouble in terms of making a reasonable return on the network”.
“The price for both the build and the pricing of fibre has been screwed down pretty hard by the Government so this is not a super profitable business for the people who are building the network. They are going to have to be smart and try to bring the build in under expected costs to get a reasonable return on it.”
LOCAL FIBRE COMPANY ENABLE
600 connections. 59 schools connected and 11 more soon.
Hospitals and major health providers connected.
Focus on connecting doctors’ surgeries, pharmacies and other health providers.
Connecting homes will start in July.
Halswell the first suburb, then Papanui.
Enable operates a fibre network.
It does not sell directly to households.
about eight years to lay fibre past homes in Christchurch, Rangiora, Kaiapoi, Woodend, Lincoln, Rolleston and Prebbleton.
a single fibre connection into the home is capable of delivering many different internet services.
– © Fairfax NZ News
