Hautaki Ltd

HAUTAKI LIMITED SUBMISSION TO MINISTRY OF ECONOMIC DEVELOPMENT: RADIO FREQUENCY AUCTION: 2.3 GHZ AND 2.5 GHZ BANDS

1. BACKGROUND

2. 2.3 & 2.5 GHZ SPECTRUM

3. CREDENTIALS

4. BENEFITS OF GRANTING HAUTAKI THE RIGHT TO PURCHASE SPECTRUM

5. COUNTER-FACTUAL

6. MANAGED SPECTRUM PARK

7. TRUST DEED

8. RESPONSE TO DISCUSSION PAPER

Summary of Submission

• In 2000, the government enabled Hautaki to purchase 3G spectrum.
• This policy has been an outstanding success, not only for Maori but for the whole of New Zealand: through prudent management, Hautaki has not only created substantial value for Maori, but has created economic benefit for the whole of New Zealand.
• 2.3 & 2.5 GHz spectrum is the next step in the wireless technology path. The government should make 30 MHz of 2.3 GHz spectrum available to Hautaki on the same terms as it made 2100 spectrum available in 2000.
• To make spectrum available to Hautaki would ensure Maori’s economic participation in the information economy into the next generation. Not to do so would jeopardise Maori’s participation in the information economy by allowing Hautaki’s existing value to dissipate as 3G services are replaced by Wimax services.
• The Hautaki Trust was established to enable Maori to participate in the knowledge economy through management and development of spectrum. This purpose is an expression of long-standing government policy. The grant of a purchase right to Hautaki is consistent with this purpose and would give effect to government policy.
• A Managed Spectrum Park could be beneficial to community groups and entrepreneurs who utilise it; however this is not a Maori issue, and a Managed Spectrum Park is an inappropriate way of dealing with Maori participation in the knowledge economy. Hautaki is already a proven mechanism to involve Maori in the knowledge economy and it should be supported. Managed Spectrum Parks, while an excellent idea, are not relevant to Maori.
• Even if Maori were to participate in a Managed Spectrum Park, the benefit to Maori would pale in comparison to the economic benefits created through a right to purchase spectrum. Such a right would consolidate and extend the substantial and growing capital base created by Hautaki’s 3G spectrum purchase. A substantial and growing capital base is the foundation of sustainable long-term economic development; this should be recognised in MED’s spectrum policy on Maori issues.
• Restrictions should apply to the way spectrum may be utilised. The government has an opportunity to use this auction to improve the competitive landscape of New Zealand’s telecommunications industry.

1. Background

This submission is made by Hautaki Limited (“Hautaki”), the Trustee for Hautaki Trust (“the Trust”).

Hautaki Trust is the commercial arm of Te Huarahi Tika Trust, a pan-Maori trust established for the benefit of all Maori. The explicit purposes of the Trust are to:

• “increase the participation of Maori in the knowledge economy, in particular the information and telecommunication sectors in New Zealand”
• “acquire spectrum management rights and to enter into successful commercial arrangements in regard to those rights for the benefit of Maori and the beneficiaries of this trust.”

Hautaki is an interested party in the 2.3 & 2.5 GHz spectrum auctions. In the 3G spectrum auctions of 2000, Hautaki was allocated 15 + 15 MHz of 2100 MHz spectrum set aside for the benefit of the Trust by the New Zealand Government, for the average price of the auction less 5% (“the 2000 Initiative”).

Using the 3G spectrum asset, Hautaki formed a joint venture with NZ Communications Limited (formerly Econet Wireless) in 2001. Hautaki continues to manage the asset on behalf of the Trust.

Hautaki has recently broadened the participation of Maori in the knowledge economy by facilitating other Maori groups to become shareholders of NZ Communications, as well as through arrangements to transfer intellectual property between Hautaki and Econet Wireless Limited, the South African-based telecommunications operator which initiated NZ Communications.

2. 2.3 & 2.5 GHz spectrum

2.3 and 2.5 GHz spectrum, suitable for Wimax applications, is the next progression in the technology path for wireless communications.

Hautaki submits that 30 MHz of 2.3 GHz spectrum should be set aside for purchase by Hautaki under similar terms as the 2000 Initiative.

Wimax spectrum in the 2.3 and 2.5 GHz bands occupy the same position today as 3G spectrum in the 2100 band occupied in 2000:

• the technologies enabled by both spectrum classes were still some years away from being commercially available for the mainstream
• both spectrum classes had been through a cycle of investment of hype and over-investment in overseas markets before such spectrum was auctioned in New Zealand; this insulated New Zealand from an investment bubble with respect to the spectrum and meant that both investors and government could have reasonable certainty that the spectrum would be utilised
• 3G was an essential upgrade path from GSM and GPRS, just as Wimax is an essential upgrade path from 3G
• competing standards can be utilised across the same spectrum (CDMA 2000 versus UMTS for 3G, and Wibro versus Wimax for 2.3 / 2.5 GHz)
• investment timelines for an infrastructure-based telecommunications enterprise can span 15 – 30 years; therefore access to future spectrum is essential to remain relevant and maintain one’s investability for the long term: this dynamic applied to both 3G and Wimax
• Wimax spectrum therefore provides an investment path for holders of 3G spectrum, just as 3G spectrum provided an investment path for holders of GSM spectrum.

Therefore, from the point of view of the value and properties of the spectrum, the dynamics that led to Hautaki being granted the right to purchase 3G spectrum also apply to Wimax spectrum. The same logic that applied to the 2000 Initiative should also be applied to the 2.3 and 2.5 GHz auctions: there should be no difference between them.

3. Credentials

Hautaki has been an exemplary manager of the spectrum asset purchased in 2000:

• This value will be augmented by the asset value of the 3G spectrum, which will crystallise upon upliftment of the spectrum
• Hautaki has management rights to a very valuable unencumbered spectrum asset, the benefit for which is reserved for all Maori through commercial deployment by NZ Communications Ltd
• Hautaki also is a shareholder in its own right of a valuable and growing telecommunications company, NZ Communications Ltd
• Hautaki’s position as shareholder and spectrum owner gives it the opportunity to develop downstream services for Maori such as content, community-based service provision, and infrastructure management
• Hautaki has negotiated the transfer of skills, training and intellectual property from its operator partners to Maori, ensuring the growth of sustainable skills for Maori in one of the world’s most dynamic and fastest growing economic sectors.

4. Benefits of granting Hautaki the right to purchase spectrum

Granting Hautaki to a right to purchase 30 MHz of 2.3 GHz spectrum would benefit New Zealand from a number of perspectives.

First, it must be noted that Maori have already benefited significantly from Hautaki’s right to purchase 3G spectrum, even before the spectrum has been utilised. This is primarily because Maori now have a stake in a significant strategic asset that is growing in value.

However, as noted above, it is not only Maori who have benefited: the whole of New Zealand stands to benefit significantly from the entry of Hautaki’s partner, NZ Communications, into the mobile market.

The effects of the threat of new entry are dramatic, particularly when entry is made on the basis of a sustainable investment in infrastructure. Consumers can look forward to:

• lower consumer prices;
• more and better consumer services;
• cost efficiencies resulting from spectrum being held by a pro-competitive infrastructure player with existing spectrum assets. These efficiencies are not available when spectrum is held by an incumbent, where the incumbent is a price-taker, not a price-maker; nor are they available when the spectrum is utilised by a player with no existing spectrum or infrastructure assets, since such a player will not be able to take advantage of sunk costs;
• for the first time, the operation of a regulatory system which promotes competitive outcomes for the mobile industry, with particular reference for the long-term benefit of end-users.
  

A right to purchase Wimax spectrum would allow Hautaki to consolidate and extend these benefits in the wireless broadband era. Consumers would see service level competition, efficient infrastructure use, lower prices, and sensible regulatory settings all become more sustainable for the longer term, and made relevant to future technology uses.

Maori in particular derive benefit from Hautaki’s ownership of 3G spectrum, as they have access to:

• direct participation in an entity which is accumulating a significant and growing asset base – both as a spectrum holder and a shareholder in NZ Communications;
• the creation of jobs, skills and wealth for Maori workers;
• the transfer of knowledge from Hautaki’s operator partners; and
• the creation of a number of initiatives on the platform provided by the technology – eg consumer relevant content and education initiatives.
  

The first bullet point needs particular emphasis: the importance of raw economic power in Maori development can hardly be overstated. Maori’s place in the economic landscape, like any other group’s, depends on access to capital. Access to capital creates negotiating power and the ability to accumulate wealth over the long term. Economic power means the ability to create services, jobs, education and sustainable skills. It gives Maori a place at the negotiating table.

Hautaki believes that the type of economic empowerment exemplified by Hautaki is the most meaningful type of economic assistance that the government can render to Maori. Enabling Maori to create its own wealth allows Maori to support its own community and grow its skills base, in financial, managerial, and communications-related fields. Investment in communications under the Hautaki model is an extremely powerful form of economic empowerment.

The place occupied by Hautaki today as a long-term holder of strategic assets, and a creator of wealth for Maori, was created by the 2000 Initiative and consolidated by sensible commercial management by Hautaki. But without the right to purchase being granted, no wealth could be created, and no benefits could flow to Maori.

The grant of fresh spectrum simply extends the life cycle of the current growth of wealth. It means that Maori economic growth by means of its participation in communications can be broadened and continued into the next generation of technology and services. Based on the success to date of the 2000 Initiative, there is an overwhelming case for the purchase right to be extended to the current auction.

We believe there is an absolute need for future investment in Maori spectrum assets, in order to extend and consolidate Maori’s economic opportunities into the future. To grant Hautaki a right to purchase 2.3 and 2.5 GHz spectrum would secure economic growth for the future in a very powerful way. Therefore we believe a purchase right is imperative to ensure that the success of the last five years is locked in and extended for the next generation.

5. Counter-factual

Not to grant Hautaki a right to purchase would risk jeopardising the chances Hautaki have to make the most of the opportunities it has created. These chances have come about through Hautaki’s prudent management, smart investment strategy and exemplary governance over its assets. However, despite the progress that has been made, with no future path past 3G, Hautaki could lose its place on the playing field, destroying long-term economic value rather than creating it.

Again, the basis of Hautaki’s wealth creation is the strategic spectrum asset. Just as GSM and GPRS are now giving way to 3G, 3G services may eventually give way to Wimax-based services. Without an upgrade path, Hautaki’s commercial relevance will not be sustainable. Rather than becoming a sustainable economic powerhouse for Maori and an enabler for Maori to participate in the knowledge economy, there is a risk that the 2000 Initiative will become simply a good idea whose value disappeared with the disappearance of 3G services.

Development of Maori skills must be in a field that is relevant to people’s lives. A Maori empowerment programme that allowed Maori to participate in AMPS network services, for instance, would be of very little use. Skills development in an outdated industry is not valuable; and there is a risk that as 3G services are replaced by services enabled by Wimax spectrum and the spectrum generations that evolve following Wimax, Maori will not be able to maintain the relevance of their skills.

When it comes to the provision of services, it will not serve Maori to be locked into an outdated technology if it is trying to reach a population who is not receptive. For instance, it would be absurd if Maori culture was available on radio but not TV; or through TV but not over the internet.

Therefore, for the development of skills, jobs, and culture to be sustainable as technology changes, the only option is to ensure that the core asset which enables that development is sustainable as technology changes. This is the very basis on which the 3G purchase right was granted in 2000, since the spectrum was made available some years before services were commercially available; therefore it is appropriate that this same policy is now applied to the current auction.

We believe that the large amount of spectrum available in the current auctions gives the government every opportunity to make the purchase right available to Hautaki. In doing so it will lock in the gains that Hautaki has created for Maori, ensuring that Maori development by means of participation in the knowledge economy is sustainable into the long term.

6. Managed Spectrum Park

Hautaki supports the concept of a Managed Spectrum Park (“MSP”). It would enable entrepreneurs to provide services that would benefit communities, and would generally stimulate the growth of consumer communications services. However:

• the benefits flowing from a MSP are divorced from issues of Maori economic development and participation in the knowledge economy – therefore MSPs are not the answer to these issues; and
• even if Maori did participate in a MSP, any benefits to flow from such participation would pale in comparison to the benefits created by Maori ownership of spectrum.
• Therefore, while Hautaki supports the idea of an MSP, it is a mistake to include Maori in an MSP structure.

The rationale for including Maori in an MSP structure is the promotion of Maori language and culture, and Maori economic development.

While these are important objectives, the basis of real and sustainable Maori participation in the knowledge economy is capital and economic power. Only on this basis will Hautaki be able to maintain and extend its position as a player in this industry. It is the difference between the benefits of Maori services and the benefits of Maori capital.

Maori will certainly benefit if entrepreneurs and others provide Maori language content and other services that are relevant to Maori. But the benefits that flow from Maori ownership of capital are of a different order altogether: they extend to the ability to create one’s own economic destiny, to negotiate a sustainable position in the knowledge economy, to grow capital wealth over a long period of time and to flow those economic benefits back to the community, and to negotiate the entry of Maori benefits directly with service providers. These benefits extend not only to Maori, but to the whole of New Zealand through enhanced consumer welfare and sustainable economic efficiencies over the long term.

Therefore the government’s objectives for Maori economic development would not be satisfied by Hautaki participating in a managed spectrum park, since a managed spectrum park is based on common ownership of spectrum; whereas the benefits that Hautaki can bring to New Zealand and Maori are based on private ownership of spectrum.

Under a model of common ownership, the only value that can be created is in the content that is transmitted over the spectrum. While Maori language and other Maori content would have value, it is a very different kind of value from that value created by spectrum ownership. Ownership is a powerful economic growth engine which is a different category in terms of economic development from a right to transmit community-based content.

It should also be borne in mind that Maori spectrum ownership – and the shareholding opportunities for Maori groups facilitated by such ownership – opens up a wealth of possibilities for the provision of Maori content, language initiatives, and education. In fact, Hautaki negotiated initiatives to support Maori skills, education and training in the initial commercial negotiations between Hautaki and Econet in 2000 – and Maori groups have seen the benefits of this. Into the future, Hautaki sees a range of commercial-community partnerships to be introduced through Iwis’ participation in the companies formed through Hautaki’s ownership of spectrum.

Therefore, the Maori spectrum ownership model that the government has already committed to is working, growing, and creating both value and benefits to all of Maori. It should not be replaced by an MSP structure. Such an approach would waste the opportunity to create real and sustainable economic value over the long term. Instead, the government should signal its recognition of the success of the 2000 Initiative by extending this model to the current auction process.

In summary, the current model of Maori spectrum ownership creates sustainable wealth for Maori by means of a valuable and growing capital base. This is the very foundation of sustainable economic development. An MSP, while a valuable idea, is not an appropriate vehicle for dealing with issues of Maori economic development – particularly when a very successful model already exists. Maori economic development issues should be dealt with by the grant of a purchase right to Hautaki, as exemplified by the 2000 Initiative.

7. Trust Deed

As set out in Section 1, the Trust has two purposes under its governing documents:

1. to “increase the participation of Maori in the knowledge economy, in particular the information and telecommunication sectors in New Zealand”
2. to “acquire spectrum management rights and to enter into successful commercial arrangements in regard to those rights for the benefit of Maori and the beneficiaries of this trust.”
   

The beneficiary of the Trust is the Maori Spectrum Charitable Trust (“MSC Trust”). The Trustees of the MSC Trust are appointed by an electoral college made up of Maori elders from across the spectrum of Iwi. These appointments are made for the benefit of all Maori, and not for any partisan benefit. The Trustees can make distributions to Maori identities on a charitable basis for purposes such as scholarships, education including skills training and general economic development.

Therefore, the Trust exists in order to invest, manage and develop spectrum assets so as to create benefits for all Maori, and to increase their participation in the knowledge economy.

To extend the Trust’s ownership of spectrum to include 2.3 or 2GHz spectrum would be to act in accordance with those purposes. Conversely, if the Trust were not able to obtain this spectrum, it would jeopardise the Trust’s ability to act in accordance with the Trust Deed, since the level of its participation, and the value of such participation, would go into decline.

On this basis alone, the government would be justified in extending the purchase right to Wimax spectrum. It has long been government policy to promote and encourage Maori economic development, and the Trust is an expression of this policy. The Trust’s success over the last 5 years is a powerful vindication of this policy. To enable the Trust’s purchase of Wimax spectrum would be consistent with both government policy and the purposes for which the Trust was established. It would also allow the government to maintain a consistent position on Maori issues, and extend and increase the benefits it has enabled Maori to create.

Not to do so would be inconsistent with government policy on Maori issues, and a retrograde step in the government’s efforts to build sustainable Maori economic development. It would also be inconsistent with the purposes for which the Trust was established, and therefore would defeat the investment that government has made in establishing and supporting the Trust since 2000.

8. Response to Discussion Paper

Question 1: Considerations Relating to Lot Design

b. Size and Location of the Managed Spectrum Park or Parks

The government has indicated that each MSP could be 25MHz, up to a limit of 75MHz. We have no comment, other than to point out that if these numbers are based on an assumption that the MSP will facilitate Maori economic development, then the economic development initiative should be replaced by a grant of a purchase right to Hautaki, and the size of the MSP reduced accordingly.

c. Acquisition Limits

We believe strongly in spectrum caps: spectrum is the economic foundation of the industry, and caps are an essential tool to prevent incumbent domination of spectrum. The problems created by the incumbents’ total ownership of 900 spectrum is a very instructive case in point.

We would be happy with a spectrum acquisition limit of 35 MHz.

Question 3: Maori Interests

What provision should be made regarding allocation of spectrum in the 2.3 GHz and 2.5 GHz bands for use by Māori (i.e. Māori service providers)?

What provision should be made regarding allocation of spectrum in the 2.3 GHz and 2.5 GHz bands for use for Māori (i.e. Māori as service consumers, or in the interests of Māori language and culture)?

We believe 30 MHz (+5 MHz guard band) of 2.3 GHz spectrum should be set aside for purchase by Hautaki. We do not believe any specific allocation of spectrum should be made for Maori for use in an MSP.

While the main body of our submission explains at length the reasons for this, our position can be summarized as follows:

• we support the concept of an MSP;
• however, it is an inappropriate vehicle for Maori development;
• there is no comparison in terms of Maori benefit between an MSP, and the grant of a purchase right to Hautaki. Such a grant would create a sustainable economic platform for Maori participation in the knowledge economy for many years to come, just as the 2000 Initiative has done;
• ownership of spectrum provides the basis for a range of commercial and community-based initiatives to form, including the provision of Maori content, Maori language and expression of Maori culture;
• Maori participation in a community-based MSP would not be prejudiced by the lack of a specific entitlement to spectrum. As long as Maori groups are accepted as eligible participants, they can participate just as they would if spectrum were set aside. The appropriate home for Maori spectrum is within the existing structure that Hautaki has created for the benefit of all Maori.

Question 4: Eligibility to bid

Do you agree that no restrictions should be placed on the eligibility of parties to bid for lots?

We believe that certain restrictions should be placed on the processes for both bidding for, and utilising, the spectrum licences.

Placing restrictions on bidding rights and usage allows the government to create workable spectrum policy. Given the problems the New Zealand industry has traditionally experienced over radio spectrum policy in telecommunications – particularly with respect to 900 MHz spectrum – we believe the government has a responsibility to use the current spectrum auctions to shape a pro-competitive marketplace in telecommunications generally.

Generally speaking, the policy governing this auction should be directed towards pro-competitive outcomes. This auction process is an excellent opportunity for government to shape the telecommunications landscape in a very direct and powerful way. Specifically, problems of access, behaviour and pricing may be improved by influencing incumbent behaviour through tying access to Wimax spectrum to certain pro-competitive milestones. We would encourage the direct involvement of the Commerce Commission in assisting the regulation of the auction process, so as to ensure the auction and licence conditions work in harmony with the telecommunications regulatory policy.

Specifically, we believe pro-competitive conditions – preferably in the form of binding agreements with new entrants specified by the MED, and overseen by the Commerce Commission – should be imposed on incumbents before they are able to purchase 2.3 and 2.5 GHz spectrum, in relation to:

• National roaming
• Co-location
• Access to 900 MHz spectrum

Question 6: Use or Lose Provisions

Do you prefer a date of December 2012, 2014, or 2016, for applying the use or lose test?

If not what alternative date would you prefer to implement the Cabinet decisions on use or lose? Please explain.

We do not have a view on the specific dates for use or lose provisions to be enforced. However, as a general principle we believe that use or lose provisions in the current situation are difficult, because the services enabled by the technology are not yet commercially available, and it is hard to tell when these services will become available. Therefore, any line in the sand will be arbitrary and may be more harmful than helpful. The same dynamic applied to 3G spectrum in 2000: in 2007 3G is still not fully mainstream.

The policy purpose behind use or lose provisions is to prevent spectrum being tied up by companies who have no intention or ability to use it. We believe that these concerns may be better dealt with by imposing a strong spectrum cap, so that at least the worst behaviour – ie, the hoarding of spectrum by incumbents – can easily be dealt with. For the rest, so long as the industry is appropriately regulated so that spectrum can attract investment, then commercial incentives should be sufficient to drive spectrum owners either to raise appropriate capital, or sell the spectrum to those who can develop it.

Question 7: Settlement

Do you agree with the proposed settlement terms (30 days following completion of the auction)? If not, what other factors do you see as relevant?

In relation to Hautaki’s submission on a right to purchase, settlement should follow the precedent set in the 2000 Initiative, whereby payment would be made upon upliftment of the spectrum – ie, when it was ready for commercial use. In the case of the 2000 Initiative, this policy has created economic benefit for all of New Zealand, even before the spectrum has been uplifted.

Question 8: Managed Spectrum Parks

a. Do you agree with the suggested eligibility criteria for access to a MSP?

Broadly speaking, yes. However we would re-emphasise our point that MSPs should exist for the benefit of community-based service providers, and not seen as a mechanism to create economic development for Maori. For that, the government should allow Hautaki the right to purchase spectrum under the same terms as the 2000 Initiative.