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EY's Chorus report will be made public Monday - Adams

UPDATE / Dec 12: A spokesman for ICT Minister Amy Adams tells NBR the written EY report will not arrive today, as expected, but "is likely to arrive tomorrow. At this stage, we will be looking at releasing it publicly early next week, probably Monday."

Ms Adams was given a preliminary verbal report last week (below).

Her office was not able to give a reason for the report not landing today as scheduled.

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Govt could tap taxpayers for more UFB funds - Adams

UPDATE / Dec 5: Completing the national ultra-fast broadband network rollout could yet require more taxpayer funding, despite Communications Minister Amy Adams's insistence there should be a deal possible to get the project back on track within its current $1.35 billion funding.

Chorus will hold its first discussions with Crown Fibre holdings about how to rollout the UFB more cheaply tomorrow.

Chorus CEO Mark Ratcliffe said he felt vindicated, saying "Ernst & Young have confirmed the size of the [UFB fibre] funding gap we've experienced is around about $1 billion," if Commerce Commission-mandated price cuts to copper lines go ahead from December next year.

Speaking to journalists at Parliament, Adams said she believed there were a number of options for shoring up the "sizable shortfall" identified in a report by Ernst & Young Australia in Chorus's ability to fund its portion of the government-assisted UFB rollout.

"There are changes within that fiscal envelope that won't affect the timing (of the rollout)," said Adams. That includes "timing of payments, structuring of payments, some of the specifics of the build requirements that don't affect service provision or the timeframe."

However, she would not rule out the possibility that the exhaustion of all such avenues, the government's agent in the UFB build, Crown Fibre Holdings, could come looking for a top-up from government coffers.

"At this stage, our expectation is the CFH will work through a solution within those parameters," said Adams. "If something changes, they can back to us and we can address that at that time, but that's not my expectation."

Adams would not be drawn on telecommunication infrastructure company Chorus's options for meeting the majority of the shortfall, which appear to include raising new capital or foregoing dividends.

"We asked Ernst & Young to give advice about the steps they (Chorus) can and should be looking at to address that gap. I'm optimistic they will be able to meet all of that themselves."

Adams took the opportunity to take a poke at the "Axe the Copper Tax" campaign, which successfully closed off the political option for the government to legislate to over-rule the Commerce Commission decision to slash the price copper-based broadband services, which lies at the heart of Chorus's difficulties in completing the UFB build.

Acknowledging that the campaign had "won" the argument, Adams invited the telecom retailers who had quietly backed the campaign, including Vodafone, to admit they would not pass on the decreased price of copper broadband to consumers (read Telecom and Vodafone's response here).

Although Mr Ratcliffe welcomed today's report, investors reacted negatively to the ongoing uncertainty about how the UFB funding shortfall will be met.

Chorus shares [NZX:CNU] closed down 3.83% to a new all-time low of $1.38

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Preliminary EY report on Chorus says UFB at risk

EARLIER: An independent report by EY Australia has backed up the government's theory that Commerce Commission copper price cuts would hurt Chorus' finances to the degree that the UFB rollout would be put at risk.

Ms Adams, who received a verbal briefing from EY this morning, says the government must act within the $1.35 billion fiscal envelope of taxpayer funds ear-marked for the 10-year rollout ($929 millon of which is allocated to Chorus).

Chorus says the Commerce Commission-mandated price-cuts will blow a billion hole in its revenue between December 2014 (when they kick in) and 2020, and imperil its ability to borrow to fund further UFB work (Chorus expects to spend $1.7 billion to $1.9 billion on UFB work).

Ms Adams did not specify financial impact in a statement this morning, but did say, “The government expects Chorus to meet a significant part of the shortfall."

The minister statement suggests more pain for Chorus shareholders - which could come in the form of canceled dividends, a cheaper rollout, or another party taking on some of Chorus' leg of the UFB rollout, and perhaps a slice of future profits in the process. Ms Adams was not specific about how the rest of the shortfall would be made up - especially given the government has apparently ruled out putting any more money into the rollout.

“While the quantum of the shortfall is still being finalised and will be outlined in its final report, Ernst & Young has indicated it is unlikely to alter the high-level findings, and that the Government can act with confidence on the information Ernst & Young has supplied," Ms Adams says.

“As a result of this information, and because the Government remains strongly committed to the UFB roll-out, the government expects that the next step will be for Chorus to approach Crown Fibre Holdings (CFH) to discuss specific provisions within the UFB contract."

“The Government supports CFH entering into discussions with Chorus to help manage this issue," Ms Adams says.

“The Government expects to know the outcome of the discussions between CFH and Chorus in a few months’ time.”

A spokeswoman for the Coalition for Fair Internet Pricing, Sue Chetwin, also chief executive of Consumer NZ, said the coalition would make a detailed response later in the day.  But she told NBR that "transparency in this matter is going to be vital to get the best outcome for Kiwi families and businesses, and we urge the minister to commit up the highest standards of transparency. The UFB is too important to get wrong".

ISP CallPlus is a retail customer of Chorus, and a member of the coalition.

CallPlus CEO Mark Callander told NBR, "The timeframe of a few months is concerning, but hopefully the details of the report are disclosed in a transparent manner to all relevant parties. 

"The government needs to focus on other options to ensure the delivery of the UFB network and move away from the proposed copper tax and the options outlined in their Discussion Document. 

"Chorus was always facing the prospect of managing the business with lower copper margins than they have today, but that is clearly not reflected in their current business plans.  Chorus and the Government need to find a solution to deliver UFB that does not artificially raise prices for consumers."

Orcon boss Greg McAlister says, "It’s disappointing that the UFB project could be mismanaged to this extent. At the end of the day, this is taxpayer money being spent, and suggestions that the project could be in jeopardy are very worrying.

"Also, for ISPs such as ourselves, we need certainty around what is happening in the market – whether this is wholesale pricing or roll-out schedules.

"Surely the winning Chorus bid should have been able to stand on it’s own merits, without cross-subsidy from other parts of the business. That’s what other bidders for that contract needed to contend with.

"Serious questions need to be asked as to why CFH and Chorus have found themselves in this position."

ckeall@nbr.co.nz

 

Comments and questions
63

If Telecom had not secured the UFB contract, then the group would have gone broke some years ago due to the $2.6bn of debt. By offloading Chorus 2.0, it managed to salvage the group, but simply defer the inevitable, that a Chorus unable to change its structure and corporate attitude, would go broke some years later.

Underbidding UFB by $400 million is the root of the problem. Receivership would be a good outcome here as it would force a necessary corporate restructuring.

The issue is without taking action. Are we to assume that Chorus will just sit there and do nothing - if that is the case sack the board and management today, they are incompetent.

Options:

(1) renegotiate covenants with the bank so they do not breach.
(2) cut costs
(3) sell more fibre to generate revenue
(4) raise equity
(5) sell the business to someone with the ability to deliver on this contract.
(6) walk away from the contract
(7) go cap in hand to the government - obviously their and the Governments preferred choice by the looks of things. With a lot of other options open if the government goes down this track then this just adds to their corporate welfare policies.

If the government is to make concessions then if should be on terms that make it absolutely the last options. Maybe an additional $400m or something for 75 - 95% of the business. Then lets see if other shareholders might be willing to step up.

Tell me how the government can sack the board & management of a public company? This is not Zimbabwe!

Who said the government should sack them?

The shareholders should, they aare the ones watching their investment disappear. Or do they just sit there and do nothing also.

Fact is Gale got it all wrong. he listened to a vocal self interested group who want UFB for nothing. These people are corporate welfare bludgers who expect Chorus investors to put up Billions get no return abd see there investment destroyed, Why would Gen X/Y invest in NZX when Com Com can destroy their investment on a whim.
NZ doesn't deserve UFB. It deserves a third world country comms system because that's all the retail players want to pay for.
Disclosure. A vindicated Chorus investor.

Boo Hoo. Chorus knew the risk going into this.

That Gale 'got it wrong' is clearly not a fact.

Nor has it been suggested that any Chorus investor is to get 'no return'.

Nor is ComCom responsible for destroying value in Chorus - that is down to the greed of people, possibly like yourself, who unloaded the stock before the price fell too far. Chorus' share price will recover because the ROI on the UFB build makes the investment attractive in the medium term.

I have held my Chorus shares and intend to continue holding them. Unlike those who didn't invest in the company and put their monety where their mouth is but always want something for nothing and someone else to pay for it.. They are just corporate welfare bludgers who want UFB but aren't prepared to pay for it. Gale is a commercial hazard and only one step removed from the company directors now doing time for fleecing their investors.

I can not get UFB, if i could I would decide if I pay for it, I do not need to by shares in Chorus to pay for UFB.

If I do not want to buy UFB why should I pay for others who do - higher cooper costs to subsidies those on UFB. Given I do not even have a choice this makes it worth. Are you wanting those on cooper to subsidies those of UFB? who is asking for the welfare.

Doesn't matter if you don't want new power generation - profit form your current power bill helps pay for it.

Doesn't matter if you don't want to use new roads - tax on your petrol helps pay for them.

Doesn't matter if you didn't want broadband - profit from your dial-up bill helped pay for it.

EVERY business in the country reinvests it's profits into new capital expenditure.

But for some reason you don't think Chorus should be allowed to do what EVERY other company does.

Happy fir Chorus to invest profits wherever they like. Not happy to have a monopoly service provider gauge me to pay for something I don't want.

The electricity company does not charge me for the gas infrastructure because I don't use it. Chorus want to charge me for a service they cannot provide me by overcharging on copper.

Your lack of understanding about how stock markets work is breath taking. Gale confiscated Chorus earnings and past them on to retail telcos who will pass these onto their investors by way of dividends. Gale is like a shonky casino operator. When a player ( Chorus) is beating the House the House changes the rules and takes the winnings of the winner and passes them to the losers and in this case they really are a bunch of losers.

you said Gale got it wrong - fact. not necessarily he interpreted the rules set out by parliament, then impact on the market should and was not an issue that he needed to consider.

If he got it wrong the court will decide and if he did then Chorus will recover the costs of the price change. The share price will go up. Assuming you are so convinced that the decision is wrong no doubt you are buying every Chorus share you can, the price has to go back up.

Of course if the court says Gale is not wrong then the share price probably falls further.

The rules were in place before Chorus bid for the UFB project, then only thing that is now being decided is the correct interpretation. Even Chorus's documents said that the price may fall etc.

Typical of many people if you lose you blame the referee.

So the Board of Chorus will resign because of their incompetance???
Glad I don't hold Chorus shares!

.....yeah right.

Who said being competent was a pre-requisite to be on the board, especially of near monopolies.

Heard the PM on the radio say that Solid Energy got into trouble because it was not being monitored by the market ----- what the heck were the directors and shareholders doing?

NZ can move forward only once it gets directors that are accountable for at least showing some level of competency.

I think Ms Chetwin speaks with two many hats on. It behoves her in her position with ComCom to only deal on that front or resign and push the Coalition for Fair Internet Pricing barrow.
She cannot be seen to be impartial when making decision for ComCom when her heart lies in getting a cheaper price from Chorus. There is of course the point in how much of this cheaper price the retail companies will pass on.

how can she promote a group of people that are not passing on the savings? I thought she was meant to be a consumers champion lol

The alternative to wholesale price regulation, which is what we have today, is retail price regulation.

I for one think that's a step too far. I don't want to see a government official deciding what price we pay for phone calls, emails, broadband, TXT messages, video content and the like. It's far too dynamic an industry for that.

If you look at the Commerce Commission's broadband monitoring report you'll see the price of broadband has fallen dramatically since regulation came into effect at a time when the cost of living has increased.

These savings are indeed passed on to customers.

Would you object then if all parties passed legislation requiring ISPs to fully pass through the $10 drop in wholesale prices?

I'm all in favour of parties passing on savings but I doubt you could write a law that would require that without going down the path of regulating price at a retail level.

If you look at the past few years since the introduction of telecommunications regulation in 2001 you'll see prices have fallen dramatically - by over a third.

Competition is the answer to retail prices, not specific acts of parliament requiring specific dollar amounts be handed over.

Once again we are watching the apparently "smart" people of this country get it all wrong again.

The UFB should be owned by the govt anyway
Total monoply in the hands of corporates
Not a good senario

So far not one single ISP has stepped up and guaranteed that they will pass on 100% of their reduced wholesale broadband charge to their end customers. This "copper tax" rant is a fabrication aimed at fattening the margins of the ISPs by using TUANZ, Consumer NZ and a right-wing political lobbyist as their megaphone.

Sue Chetwin and Consumer NZ now need to turn an equivalent amount of attention to naming and shaming those ISPs who will not be passing on the reduced pricing to consumers. If they fail to do this then the lobbying efforts of the last several months will have amounted to nothing for "oridinary NZers" as they have so frequently touted.

Something as simple and unchanging as an internet connection should not need to be the subject of so much hostile political and commercial volatility which has resulted from the shonky application of inadequate legislation. Yet those simple internet connections along with electricity supply are the lifeblood of NZs entire econonmy. Despite this, Chorus and their investors now find themselves to be a poltical football at the mercy of the vagaries of Commerce Commission rulings and political lobbyists.

The Full Pricing Principle review will shed the proper and fully illuminating light of what copper really costs to deliver in NZ.

We have always said this isn't about moving money from one part of the industry to the other, it's about making sure consumers benefit.

We will be watching to see who passes on the savings and who does not and reporting on that. The savings start in a year's time (December 1, 2014).

The FPP is unlikely to raise the price of UCLL or UBA - indeed, my understanding is that compared with the rest of the world our network costs are deemed to be the highest of them all.

It's far more likely that the FPP will reduce the price we pay for copper wholesale broadband even further.

Good to know TUANZ will be holding its members to account.

It's hardly surprising that NZ has the highest network costs in the world. Our landscape is mostly hilly or mountainous with the exception of Canterbury and Hawkes Bay, and our entire population is roughly the same as Sydney, yet spread across an area bigger than the UK. Comparisons with other countries is pointless.

Just to clarify - most of the telcos/ISPs aren't members of TUANZ. We represent telco users - our typical member is a large business with a big spend on telecommunications.

Paul - you say this is about benefiting consumers - what nonsense.

What I really need is to be rescued from slow broadband.

What you've delivered me is a barely noticeable $1.60 a week saving, (but not until 2015), and you've put the whole fast broadband project at risk.

That's a massive fail for consumers.

Correct:
What do we want - slightly cheaper (but still slow) copper internet!
When do we want it - sometime in 2015!

Well done TUANZ

The result that you have achieved for me seems to be you have ensured Chorus wont be in any condition to give me VDSL or Fibre any time.

Thanks heaps.

Whether they pass it on or not is up to them. There are enough companies in that part of the business that there should be sufficient competition.

You are correct and worst still Vodafone is overseas owned and I bet their shareholders will demand the directors pass the savings on to them as dividends. So these dividends will go offshore and benefit foreign investors. Well done to those taking cheap shots at those like me who have put our money where our mouth is and invested in Chorus rather than sit on the sidelines expecting something for nothing and someone else to pay. You deserve a third world comms system.

Rubbish, there is competition of sorts at the ISP end so there will be people willing to offer lower prices / better packages, the reason that Chorus is subject to regulation is it is a monopoly. no doubt if the ISP's do not respond once the price has fallen then the comCom might want to consider if the ISP market is a cartel and look to prosecute and or regulate that market.

My unbiased opinion is to give chorus millions of tax payers $$$ to save the PPP fibre roll out, just like they bailed out F&P etc.

Govermetn didnt' bail out F&P, the chinese did

correct and they made a small fortune, as did Bright Foods and synlait, as did the government with Air NZ. The government has to take equity in this if they put more money in or change the rules, then they can recover in the future once things settle down.

Also would give them something to sell or not down the track.

What I'd like to know, is how much Chorus undercut the other UFB installers by in the tender process ? If it was near 20%, why shouldn't they now be entitled to some bailout ? And were the other providers intending to strap up BIG UGLY cables on the power poles like Telstra/Vodafone in Wgtn, making it look like the third World

The other LFCs that are getting on with their UFB roll-out aren't having their sole funding source arbitrarily slashed by 23%.

Let the market dictate their fate, isn't this the much touted backbone of our market driven economy?, its a private company therefore not of the taxpayer concern

Your comment is typical of the nonsense spouted by Labour/Greens supporters who have no understanding of business. The fact is, if Chorus can't fulfill the UFB contract without going bust, then either the taxpayer has to step in or the country will be without UFB for the foreseeable future.

So every contractor that mis-quotes goes to the government to be bailed out.

Good precedent --- as someone that has done work for the government and normally ended up over investing in hours, i could use the back pay.

Chorus management and board have stuffed up big time. If as a direct result of their incompetence the company goes bust they should face the consequences. However as I am sure they know very well the most likely outcome is a government bail out. A condition of this should be replacement of the company, senior management and chairman.

It is the Commerce Commission who have stuffed up They are LEGALLY REQUIRED under the Telecommunications Act 2001 to set a price that does not deter major capital upgrades.

They even stated their price won't deter investors.

How delusional is that?

Investors have lost half their money, all their dividends, and the Commerce Commission is saying the copper price that's caused all of that, won't deter investors.

Planet Earth calling comcom - anyone there?

The comcom desperately need a fiber connection, or a copper connection - hell, even two tins and a piece of string will do - but anything that will give communications between them and the real world.

Exactly - remove the Commerce Commission order to half the copper price, and let Chorus charge what they need to upgrade copper to fibre.

I'm happy to pay what I'm paying now if the profits are being ploughed back in to upgrade copper to fibre.

If the internet providers pass on 3/4 of the ordered savings, that's only $1.60 a week.

If they don't pass it on, (and many won't) it makes zero difference at all to consumers.

spot on John!

You miss the point - This has nothing to do with the market as we are dealing with a regulated outcome here. As stated below I am more than happy to invest my $1.60 into making sure UFB is delivered and jobs are retained.

Ian you and everyone esle that wants fibre can take their $1.60 a week savings, say for the next 5 years = $400. Only need a million of you and then Chorus has the $400m it probably needs to get things back on track.

Might be a bit hard to find 1m takers of this ---- maybe that tells you the true demand for fibre.

But "the market" is not deciding their fate.

A public servant in Wellington has come up with a magic number, that he doesnt have to live with. That is called big government interfering in the market.

How can I get a job like that.

What a complete and utter debacle. I will/am avoid any NZ share investment which has a hint of Government regulation.

Really feel for the shareholders in all this (regardless of warnings etc) as the threat of regulatory discounting provides a huge question mark as to how the analysis and subseuqent pricing is arrived at.

If we lack a supportive business environment where a company can make a fair profit and ROI then we will struggle to attract investors and create employment opportunities.

And for those that seem to relish the collapse of Chorus its an indictment on themselves and our country that large employers are seen as fair game.

In New Zealand it is far better just to invest in property. Much less government interference. And it will only get worse in 2015.

EY's findings are unsurprising. Anyone who understands network economics could have reached that conclusion in short order (no criticism of EY implied). It is disappointing that the range of potential political responses canvassed in this article address a narrow range of symptoms. Certainly incompetence has played a part (& no excuse should be offered for that) but the main problem is a convoluted, disjointed, poorly defined & designed, subjective regulatory regime which promises nothing but uncertainty & which is entirely at odds with the relatively clearly defined objectives (& associated benefits) of a UFB rollout. A holistic response is required.

Absoultey correct - if the government did not want this to happen they should have not left the door open for someone to interprete the outcome. Or they could have suggested to Chorus to include a clause that allowed the government subsidies to change if the price changed by more than x%.

The people at fault in this are the government and Chorus.

NZ just got scammed by the ISPs so they could fatten their margins with ComCom's rubber stamp. Now either the taxpayer has to pay more for the UFB or the country will be stuck in the 1990s without a UFB. The ISPs pulled a fast one on the public, left and far right, pretending the public would benefit, whereas only they have. Nats had a good working plan to make with Chorus funding the new infrastructure through charging a little extra on their old infrastructure, but have now had the rugged pulled from under them. You can change Chorus' management. The basic costs to build the infrastructure won't change. And don't count on anyone else stepping up except the taxpayer! ISPs win, NZ loses.

Once again the taxpayer will bail out the Government's rich friends who just happen to have made another bad investment decision.

What an adhocracy this government is!

If only it was as simple as that. The tax payer wouldn't have had to do anything if it wasn't for the catastrophic meddling of the commerce commission basing a pricing regime on Sweden and Denmark whose telco infrastructure, population distribution, and topography bear no resemblance to NZ whatsoever.

And who do you think told the Commerce Commission how to base it's prices? The same people that asked them to regulate; the goverment. Now I am not saying that means it is the best pricing scheme, they simply followed the process they were supposed to follow.

As for basing our pricing structure off Sweden and Denmark I have to praise the Commerce Commission, all through out UFB expectations have been made on the current state of affairs. In 5 years when 30-100Mbps speeds come to your house you aren't going to be impressed. The commerce commission looked ahead at where NZ is heading and where we want to be when the pricing scheme comes in.

ComCom said their pricing won't affect the UFB. Today's news from E&Y shows it will. So you fattened the margins of ISPs and now risk NZ being stuck in the past with no UFB. Thanks for looking out for the public interest!

EY says that if Chorus DOES NOTHING there is an issue. Chorus are just playing a game of chicken with the government. Let's hope the government has the balls to hold firm, and then the shareholders should look at management, who will destory value.

Read the whole artical;
Firstly EY has not finished it's study.
Second their taster mearly stated that the changes will effect Chorus revenue stream - an obvious statement. It was Amy Adams who said it would effect UFB.

It may turn out that she is right when the full report comes out, but for now it is just speculation.

The financial problems for Chorus will also impact on copper deployment and support. Kiwis didnt really want a modern telecommunications system after all - they just want cheaper adsl. Wish they had told us that before the government took its hard left step and "invested" billions of taxpayers money in what they decided we wanted.

Maybe Chorus should aim at getting the UFB installed in more lucrative areas first, to get some money flowing in their direction. I have looked at the install map and Karori isn't on the schedule for a few years,. Yet "Gigatown" looks like it will be Masterton !

Perhaps Chorus is really not up to scratch to stay as a NZ monopoly company.....and remain at the expense of all taxpayers.

I don't know much about the share market BUT; They can't fulfil 'their' contractual obligations to the Government yet paid out millions of dollars in dividends to their shareholders.....????