The Telecommunications Users Association (TUANZ) says the way ultra-fast broadband is being built in urban and rural areas runs the risk of building a two-tier internet economy.
The Government is spending $1.35 billion on ultra-fast broadband to urban areas and $300 million on rolling it out to rural areas.
The rural initiative aims to connect 86% of rural homes and businesses with broadband at peak speeds of at least 5 megabits per second by 2016. In urban areas, the aim is for peak speeds of at least 100 megabits per second.
TUANZ chief executive Paul Brislen said the rural build is proceeding quite smoothly as Vodafone and Chorus are roll out fibre to cell towers throughout the country and deliver ahead of schedule.
"We are delivering service but it doesn't cover all of the population and the service we are delivering with the RBI project really is only entry level broadband, it's certainly not ultra-fast broadband, and certainly won't bring a step change to the way rural businesses operate."
He said the rural broadband initiative must be considered as phase one, and the next step should be to extend the reach and improve the capacity of existing networks.
Mr Brislen said rural New Zealand is still at the stage urban areas were more than a decade ago.