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Investors in Rural Infrastructure need a Reasonable Return

The Commerce Commission’s draft determination which puts the value of the Telecommunications Service Obligations (TSO) provided by Telecom at $38.84 million for the six months to June 2002 is concerning says Federated Farmers of New Zealand (Inc) President Tom Lambie.

“While Federated Farmers is supportive of the principle that any net losses associated with the TSO Deed 2001 are independently costed, failure to adequately compensate Telecom for services provided under the TSO agreement will impact adversely on Telecom's decision to invest further in upgrading the rural network.

“Rural communities are generally sparsely populated and isolated, therefore efficient and reliable telecommunications services are fundamental for basic health and safety, let alone active participation in the knowledge economy.

“Companies will only invest in infrastructure if they can obtain an adequate rate of return on their investment, taking into account the inherent risk of investment in the rapidly changing telecommunications market.

“The Commerce Commission proposes that the Weight Average Cost of Capital (WACC) be 6.0% for the purposes of estimating the net cost of the TSO in its draft determination. This is only 1 percent above the risk free rate of return on capital, and much lower than the WACC proposed by the Commission for many other utility services such as airports and electricity lines businesses.

“A low WACC is damaging to New Zealand’s future infrastructure development and is not consistent with the Government’s TSO policy or its commitment to economic growth through investment in innovation.”

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