New Zealand Institute for the study of competition and regulation inc.

Abstract

Economic and policy literature on the vertical separation of incumbent telecommunications providers indicates that costs and risks of separation are high, and benefits hard to identify.  Thus, providers should only be vertically separated when there is a proven risk of discrimination, all other feasible regulatory avenues to control the risk have been eliminated, and a cost-benefit analysis indicates a favourable outcome for separation.

Contrary to this view, the New Zealand Government mandated the separation of Telecom New Zealand without either detailed empirical analysis or active debate of the issues.  Examination of the case reveals that political (rather than economic) factors best explain both the motivation to separate Telecom and the manner in which the separation was imposed.  Pursuit of competition has replaced pursuit of increased efficiency as the objective of sector policy, leading to direct political control of sector regulation.  New Zealand's separation policy process is therefore unsuitable as a model for economic-principled policy-making in other jurisdictions.