Healthy competition is a key driver of efficiency gains. It forces businesses to focus on meeting customer needs better than anyone else.

Intrusive regulation is potentially the enemy of healthy competition. It forces regulators to make fundamentally arbitrary decisions and can induce businesses to focus on self-interested lobbying rather than on investing irreversibly in infrastructure.

Telecom was set up as an SOE in 1987 and obliged to face up to competition. Between 1987 and 2001, multifactor productivity in the information, media and telecommunications sectors rose at an impressive average rate of 2.9 per cent per annum.

This was achieved under a regulatory regime that relied on general competition law, the Commerce Act, Telecom’s Kiwishare obligations and the courts. 

The Telecommunications Act 2001 was a major departure from this ‘light-handed’ regime. It set up an industry-specific regulator who would be responsible for making major recommendations on the basis of limited information and mixed incentives. It naturally gave the politicians scope to set aside those recommendations.

Critical economists at the time argued that this initiative would be likely to produce disappointing outcomes. By further politicising the industry it would weaken property rights, undermine the rule of law and impair investment incentives.

The 2006 Budget made such concerns concrete. It over-turned the recommendation of the Telecommunications Commissioner against forced local loop unbundling and imposed billions of dollars of losses on Telecom’s investors.

No professional case was made that any benefits for New Zealanders would be plausibly comparable to such costs.

The next big political step was the National Government’s commitment in 2008 to oblige taxpayers to invest in a competing platform for copper wires, wireless and satellite, and fibre. They also required a commitment of political capital to achieve a good uptake. That decision created a conflict between the government’s interest as a market participant and its role as an impartial regulator of competition.

The current regulatory debacle for investors in Chorus is a direct result of the 2006 unbundling decision and National’s decision to be an industry player in fibre.

A regulatory and investment morass is not a good recipe for high productivity growth. Multifactor productivity growth in this technologically dynamic industry averaged only 1.7 per cent per annum between 2001 and 2011, well down on the 1987-2001 average.

It is easy to envisage taxpayers being forced to invest more and more heavily from here on. It is harder to envisage a path back to greater respect for private property rights and the rule of law.