They're the main point of contact for the end customers; as a typical customer, you only interact with Chorus (the public company that provides the fibre/copper in most of NZ) when they send technicians out to work on the connection upstream from your house.
So, the ISP handles billing, tech support, DNS, email, liaising with Chorus, etc. Different ISPs offer different service tiers, billing arrangements, options for buying/leasing the modem, etc.
Our residential electricity works similarly, which leads to retail companies offering both - for example I get one bill each month to pay for both fibre and electricity.
I think a hybrid approach with the government managing and maintaining the physical lines and allowing isps to plug in and pay rent is the way to go. The ISP rent should be enough to cover the cost of physical line maintenance.
Local loop unbundling for phone and DSL service was extremely successful in the US, there's not a lot of reason to think a government bid process would have done better than CLECs did.
It seems like a government granted middleman position to me, where I'd rather just purchase service from the government or the government's selected infrastructure manager.
Presumably there's already some base price for service that this infrastructure provider is charging everyone (a controller monopolist), what are you gaining on top of that by having a second middleman that is presumably also making a profit?