(Adds Telecom and more broker comments)
By Shri Navaratnam and Simon Louisson
Of DOW JONES NEWSWIRES
WELLINGTON -(Dow Jones)- Communications Minister Stephen Joyce said Tuesday the government plans to review parts of Telecom Corp. of New Zealand Ltd.'s (TEL.NZ) Telecommunication Service Obligations as part of a NZ$300 million package to help fund rural broadband.
The minister said the initiative would entail a review of the government's NZ$70 million funding for Telecom's delivery of services to rural areas under the TSO, but other provisions of the TSO, such as foreign ownership restrictions and free local calling, were not up for review.
"We're proposing to fund the NZ$300 million rural initiative through a combination of direct government funding and revenue from a more transparent and effective industry levy than the current TSO levy," Joyce said.
"I want to stress that changes to the TSO levy would not affect the TSO obligation, which includes free local calls. Likewise, there are no plans to further loosen the rules around foreign ownership of Telecom," he said.
Currently, Telecom receives approximately NZ$70 million per year largely to compensate it for supplying local service to rural customers. This money is sourced through the TSO levy, which is currently shared between a host of other telcos, including Telecom and such players as U.K.'s Vodafone Group Plc (VOD).
Telecom' stock was hurt by the news, and was down 1.1% at NZ$2.62 at 0330 GMT in a strong market where the NZX-50 Index was up 0.7% at 3151.89.
Hamilton Hindin Greene adviser Grant Williamson said it created further uncertainty for Telecom, which has been under pressure since May 2006 when the government announced its intention to break the former state-owned company's near monopoly.
"It's ongoing - all the time the government is looking into Telecom's services. It's never-ending," Williamson said.
The TSO levy has been up for much debate in recent years amid controversy on how the cost-allocation and rural service obligations should work.
Joyce said the TSO system is flawed in that it lacked transparency and doesn't account for benefits to Telecom as well as the costs.
Instead of telcos paying Telecom a portion of the costs for providing rural services, as part of the TSO, they will pay into a central fund and all telcos will be able to tender to provide rural services subsidized by the fund.
Currently, Vodafone NZ, a unit of Vodafone, is the biggest contributor to the TSO, paying around NZ$18 million annually.
Telecom Chief Executive Paul Reynolds said this reform was long overdue as was the review of TSO arrangements.
"It is ...important that any subsidies applied to fund services to uneconomic customers are borne equally by all consumers, and not just Telecom's," he said.
Craigs Investment Partners adviser Nigel Scott said the review is slightly negative for Telecom, but the company is well placed to secure most of the government rural broadband funding that would partially offset the potential loss of the net NZ$25 million it currently makes from rural services.
The government will also provide a direct contribution of NZ$48 million and further interim funding of up to NZ$52 million to fund rural broadband, Joyce said.
-By Shri Navaratnam and Simon Louisson, Dow Jones Newswires; 64-4-471-5990; shri.navaratnam@dowjones.com