The Chorus Conundrum

Common sense has prevailed and we won’t see the government overrule the independence of the Commerce Commission any time soon.

While that’s good news for the long-term interests of both customers and the industry alike, it leaves us with the question of what to do about Chorus.

First, we have to determine whether there is a problem that needs fixing.

So far, we’ve been told that Chorus “could go broke” if the price of copper wholesale comes down.

I don’t buy that, and I’ve seen little evidence of that.

The numbers we’ve run are similar to Chorus’s own pronouncements in this area – that it will reduce profit (profit, not revenue) by about $80m to $100m a year. Coincidentally, Chorus pays out about $100m a year in dividend share.

To my mind, any infrastructure company that is rolling out a once-in-a-generation network wouldn’t expect to also pay a dividend at the same time. That money could and should be ploughed into the network in the interests of long term sustainable dividend payments in the years ahead.

My first preference, in that case, would be for Chorus to concentrate on the job at hand, get on with deploying the network and worry about dividend payments once the network is in place.

But Chorus has hinted darkly that there may be more afoot. If the final determination is allowed to stand, Chorus CEO Mark Ratcliffe says there will be two outcomes:

“We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

This is an extraordinary situation. How can Chorus have bet so heavily on little or no change in the regulated price of its copper lines? How can they, and their investors, not have seen the writing on the wall when Minister of Communications Steven Joyce gave them a three-year delay to the introduction in order to get their house in order? That they’ve not used that time wisely is shocking and surely won’t go down well at the next board meeting, let alone the annual general meeting.

If that’s the case, the government must do something because the UFB deployment is too important to New Zealand to allow it to founder at this point.

Option 1: Do nothing.

If we do nothing, Chorus fails to deliver on its contract and defaults.

The Network Infrastructure Project Agreement (NIPA) between Chorus and the Crown is quite clear on this – default and there are penalties in terms of cash and repayments and an agreement that Chorus will relinquish control of the project to Crown Fibre Holdings, the government agency charged with overseeing the UFB deployment.

CFH would take direct control of the company and its contractors in order to see the project through to completion.

Option 2: Give Chorus more money directly.

I would need to see some clear evidence of Chorus’s problem before even countenancing this. Chorus is a private company that has bid for a contract and won. If it’s underbid, if it’s failed to secure adequate funding, if it’s failed to consider the obvious regulatory impact, then that’s it’s problem.

If we are to give Chorus more money we would be rewarding it for poor performance. That money would have to come with serious caveats on spending and should include a radical change in management, dividend policy and possibly the board as well.

Option 3: Go back out to market.

Chorus isn’t the only game in town in the fibre deployment world. If Chorus can’t do the job, perhaps Vector might like another shot at the title.

Vector missed out to Chorus on the Auckland bid – perhaps taking Auckland off Chorus and giving it to another provider might be the answer.

If Vector isn’t keen, what about the other LFCs? They’re cracking on, doing the job quickly and within budget. You don’t see them complaining that they need hundreds of millions of dollars more each year. Maybe Northpower Fibre could extend its network deployment capability down country and run the project for CFH.

Option 4: Provide bank debt assurance.

Probably the easiest thing for the government to do now is to guarantee Chorus’s debt to the bankers. I’m no financial guru, to put it mildly, and have no idea how any of this works but I’m told it’s the simplest thing the government could do with the least risk to the country. If Chorus can’t continue and make things work from there, we own them.

Option 5: Nationalise Chorus.

The share price is at its lowest point – perhaps the government should buy the company and run Chorus’s network as an open access national network, delivering service far and wide and without prejudice.

Potentially we could see one network across most of the country delivering service to ISPs and then on to users without too much overhead and red tape.

What am I saying, governments live for red tape. Much as I would like New Zealand to own its own infrastructure, I just can’t see this working. It’s in the list as a potential option but I suspect it’s unworkable.

Option 6: Cancel the UFB.

It’s all too hard, nobody really wants it, let’s walk away from the commitment. There you are, you “user groups”, you’ve got what you wanted, we’ve canned the UFB. On your head be it.

This would be a catastrophe for the country and is the furthest thing from “what we want” as users.

The UFB is essential to both New Zealand’s economic future and our social well-being. In ten years’ time, when it’s built and we’re looking at extending it into rural areas, the UFB will be a glittering jewel in our national crown and all this discussion will be dismissed as teething troubles and that’s as it should be. To abandon the project now is unthinkable and besides, I’m sure the opposition parties would have a field day and would make building the UFB into an election issue all over again.

 I don’t know what the government will decide from here. Much of it rests on the Ernst and Young report which comes out next month. From there we should get a better picture of whether there is a problem to solve and if so just what that problem is.

There is another option of course. Chorus can stop wailing, get on with the project at hand and cut its costs to be in line with international best practice and the kinds of costs we’re seeing from the other fibre companies. They can get better at digging ditches and stringing fibre from poles and concentrate on driving cost out of the business.

We can help with that – a major part of the rollout cost is eaten up in consents and legal fees, not to mention the delays, inherent in seeking permission to connect the network to each property.

This is a national upgrade programme that replaces an old network. Telecom used to have rights of access to property to deploy and replace network gear – we should make it easier and quicker for all the LFCs to do the same.

Rights of way, driveways, easements, multi-dwelling units, gated communities, new subdivisions, apartment blocks, business parks. All should be accessible by default. That would strip a huge amount of cost out of the business of deploying the UFB and that’s clearly not a bad thing.

5 replies
  1. Anom
    Anom says:

    Can we be sure that if we were to give some of the UFB to the Power utilities with Fibre networks, that the UFB Fibre roll out costs are not going to be subsidised by the monolopy that the lines companies have over their exisiting power Customers? It has happened before.

    • Paul Brislen
      Paul Brislen says:

      All three LFCs are power companies and they have strict controls in place about that kind of issue. So far so good – but it’s absolutely something that needs to be considered.

    • Anon2
      Anon2 says:

      Vector as an example is already more heavily regulated than Chorus. They are allowed to earn a regulated return on their electricity assets so there is (in theory) little scope for cross subsidisation. Most likely that is why most of the power utility bidders didn’t win UFB in the first place.

      To correct Paul slightly, two LFCs are power utilities and one is a council controlled organisation (or something like that).

      • Paul Brislen
        Paul Brislen says:

        They’re all power companies in my mind. 😉

        The Vector example is an interesting one. In its submission, Vector ran Chorus’s revenue and profit through the calculations the Commerce Commission does for Vector’s regulated market. Chorus is asking for a 25% profit margin. Vector is allowed 6-7%.

        Perhaps we should allow Vector 8-9% in return for building the UFB. That might be one solution to all this noise.

  2. Anonymous
    Anonymous says:

    Nice article Paul. The reality is that there needs to be a collection of measures to get things back on track for Chorus. Some, Chorus will have to do themselves and some the Government can do for them.

    For the Government:
    1. Fix up the access rights issue properly (as you pointed out)
    2. Add aerial fibre to the National Environmental Standard – Telecommunications Facilities
    3. Amend the UFB technical requirements to lower the deployment cost whilst still delivering an appropriate open access outcome
    4. Consider changing the profile of how CFH funds the $929m to Chorus to provide more per premise in the early years and less in later years

    For Chorus to do:
    1. Consider a new CEO and Chairman – the current ones are now tainted with getting this completely wrong
    2. Cut opex by 10-15%
    3. Get rid of the culture of entitlement that has obviously carried over from Telecom
    4. Stop gold plating and build fit for purpose

    The results should be an ongoing commitment to UFB, dividends for shareholders, and reduced copper pricing for consumers.

Comments are closed.