Skip to main content

A Failure of Ideology

There's an article in the New Zealand Herald today, highlighting the ridiculousness of the current government's intervention in the broadband market. Feel free to skip the rest of this post if you wish, but I recommend you at least read the article. It does a good job of going over the issues from a technical, legal, and governmental angle, but there is one area it doesn't cover, which journalists mostly seem to shy away from, and that is the ideological angle.

For those who don't know, a quick backstory first. Currently in New Zealand our broadband internet services are sorely lacking compared to other OECD countries, against which we always compare ourselves. The current government, led by the National party, has thus initiated a plan to roll out 100 Mbps Fibre Broadband to the majority of New Zealand by 2020. The vast majority of the tender for the work went to Chorus, which was spun off from Telecom NZ as New Zealand's main infrastructure provider. Subsequently, as part of a long running effort to reduce the costs of broadband, the Commerce Commission decided that the prices Chorus charges for use of the copper network should more accurately reflect the cost of running the network. Now the government, represented by the Minister for Communications, Amy Adams, has decided that the wholesale price for copper should reflect the price for fibre, citing concerns that if the cost of copper is lowered, then consumers won't upgrade to fibre.

The article I listed at the beginning of this post does a good job of demolishing the incredibly spurious reasoning going on behind the government's decision. However, what I find interesting is what this action says about the government's underlying ideology. The National party is generally described as a Center-Right party in political terms, with the main opposition party, Labour, being Center-Left. As you'd expect from a right-leaning party, National frequently espouses pro business and pro free market values. This then should cause National some serious ideological problems when it comes to actions such as the above.

The Pro Business angle

Lets start with the pro business angle. Commonly accepted doctrine states that monopolies are generally detrimental to smaller businesses, having the money and power to outcompete in price and features, or simply buy them out. In extreme cases, the larger companies can even lobby to get the law changed in their favour, or at least get a few nice kickbacks. This latter case seems to be the situation we are currently faced with.

In bowing to Chorus's wishes in raising the price of copper, the government is effectively providing a subsidy to Chorus at the expense of the rest of us. There are a number of smaller ISP's who would like to compete on price, but Chorus having control of the vast majority of copper and fibre backbone in New Zealand means that they can't. Keeping the price of copper high also keeps costs higher for the many small businesses here that require an internet connection, and increases the cost for those business to expand. It should also be fairly uncontroversially accepted that higher prices also retard the development of internet based businesses in New Zealand.

The government can therefore be said to be subsidising Chorus and their shareholders at the expense of the thousands more small business owners. That would seem to me to go against their stated values of supporting small business.

The Pro Free Market angle

Espousing free market values generally means that one believes that government regulation should be limited, or even removed entirely, in order to allow the market to more freely adjust to an optimum state without regulatory distortion. This is the staple of modern neo-liberal philosophy, yet this National government's actions seem to run opposite to this principle. If you believe that the free market should in most cases provide the best outcome, then why would you then make a policy that distorts prices in favour of a single monopolistic company?

Now, many people would argue that the Commerce Commission's decision to lower the price of copper is also regulatory distortion, and they would be correct. The problem we have in New Zealand is that we're so small that there simply isn't room for the market to work effectively at the scale required for major infrastructure projects. Thus you see situations here where you're practically required to be a monopoly in order to afford to roll out infrastructure. In this case the Commerce Commission's job is to ensure that in the absense of price competition, the prices these monopolistic companies are allowed to charge closer reflect the market costs of building and running the infrastructure, and not the monopoly rents they could otherwise charge. Whether you agree with regulation or not, the actions of the Commerce Commission should allow the situation to more accurately reflect a free market.

By explicity saying that the price of copper should be higher, for no other reason than that it will discourage consumers from moving to fibre, the government is effectively stating that they do not in fact believe in the free market. They don't believe that the advantages of fibre are enough to outweigh the costs in relation to copper. If they believe that the market thinks fibre isn't good enough to justify it's increased cost, then why is the government paying to roll it out in the first place? In fact, as explained in the above article, fibre uptake is proceeding as expected, and Chorus projects that it's worth the money, else they wouldn't have tendered for what is basically a long term loan.

There are many more potential examples, and it would be possible to go much deeper into the various philosophies surrounding this issue, but I think I've given a decently broad overview of why this policy represents a failure on the part of the National party to stick to it's stated ideologies. Those on the left should have no trouble explaining why they think it's bad that the government is regulating in favour of a large corporation, while I've just outlined why I think those on the right should also be against this policy.