MEDIA RELEASE: EY report shows no need for copper tax

COALITION FOR FAIR INTERNET PRICING

MEDIA RELEASE

14 DECEMBER 2013

EY REPORT SHOWS NO NEED FOR COPPER TAX OR GOVT BAILOUT

Today’s EY Australia report vindicates the Coalition for Fair Internet Pricing’s view that neither a copper tax nor a taxpayer bailout is necessary to resolve the ultra-fast broadband (UFB) issue.

“This report is good news,” a spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ), said today.

“It proves that the government’s flagship UFB initiative can be built on time and within budget with a straightforward capital raising – and without a copper tax, barmy ideas like slowing broadband speeds to dial up, or any other old-fashioned state interventions or taxpayer bailouts.

“The report indicates that a capital raising by Chorus Ltd of around $500 million would solve all alleged problems with building the UFB after new fair prices for copper broadband and voice services come into force on 1 December 2014.

“Ms Adams is to be commended for commissioning this report and releasing it with plenty of time before the NZX and ASX open on Monday.

“It is the first solid, independent information on Chorus’s financial situation to be made available since the Commerce Commission announced last December the new fair prices it had determined under Steven Joyce’s Telecommunications Amendment Act 2011.”

Mr Brislen said the coalition would accept for the time being Chorus’s claims that the new fair copper prices would reduce its monopoly revenue by $1.07 billion through to 2020, although it remained sceptical the impact was so high.

He noted that Prime Minister John Key had previously rubbished early estimates the impact could be as high as $600 million and economists Covec had calculated the value of the copper tax to be no more than $449 million between 1 January 2015 and 31 December 2019.

EY Australia makes clear in its report it simply accepted Chorus’s claims of a $1.07 billion funding gap.

“The coalition will be studying these numbers more carefully in the days ahead, but even if the shortfall is as much as Chorus now claims, EY Australia says that much of it can be addressed through changes to dividend policies and debt headroom,” he said.

“Our initial view is that were Chorus to raise around $500 million in new equity, it could fill its alleged funding gap without recourse to the more barmy ideas to enhance revenue, such as reducing broadband speeds to that of the old dial-up services.

“Especially in the context of the booming New Zealand economy next year, raising $500 million in new equity for what is a growth stock is undoubtedly doable.”

Mr Brislen said the report not only vindicated the coalition’s arguments that a copper tax was unnecessary but also Mr Joyce’s landmark Telecommunications Amendment Act 2011, the Commerce Commission’s implementation of that Act and Ms Adams’ decision to commission EY Australia to review Chorus.

“The government has no stronger supporter of its UFB initiative than the Coalition for Fair Internet Pricing,” Mr Brislen said.

“We look forward to working with the government to play whatever constructive role we can in fast-tracking both the building and take up of the new UFB.”

9 replies
  1. Anon
    Anon says:

    To me the telling part of the EY report in Appendix 7 – Comparison with other infrastructure businesses. The observation on page 19 highlight what is wrong with the current picture.

    What this comparison fails to highlight is the high level of SG&A Chorus has by comparison to its peers. The numbers below show that Chorus’ SG&A per employee is 79% higher than Vector’s. I could accept that a large Capex programme will increase Opex somewhat but surely most increased expenditure relating to Capex would be capitalised.

    For transparency I am showing my calcs so you can pick holes in them or tell me what I am missing. All numbers are taken from the relevant company’s annual reports.

    Chorus FY13
    o Direct costs $51m
    o Network maintenance $100m
    o SG&A $243m
    o Total Opex $394m
    o Total employees 763
    o SG&A per employee $318k

    Vector FY13
    o Direct costs $415m
    o Network maintenance $83m
    o SG&A $151m
    o Total Opex $649m
    o Total employees 850
    o SG&A per employee $178k

    • ttt
      ttt says:

      Hi Avon,

      I think you are right to some extend, but I also suspect there is a difference in accounting practise as Chorus want to keep its direct cost low and indirect cost high, so less tax get raped on its income. Well, Vector on the hand want to keep direct cost high, so it appear to have more equity, since it’s profit is tied with equity so this way it generates the most profit in the long run. Since there is some legal wiggle room in accounting, that’s why the best accountant gets paid more. There is a difference between equity and value, equity is determined by accounting, value is determined by factors like replacement cost, benefits it can give etc. I suspect when chorus spend a dollar it would bring just as much value as Vector does, if the difference is too big, market force would correct this imbalance eventually.

      • Paul Brislen
        Paul Brislen says:

        Chorus needs to realise that if it gets through this initial phase and builds the network, it will then have a monopoly on the vast bulk of New Zealand’s fixed line infrastructure for the rest of the century (literally the next 70-100 years).

        It’s a licence to print money in the long term and shareholders will benefit tremendously from that.

        What it can’t do is pay a dividend that is double that of similar organisations in New Zealand and Australia at a time when it should be investing heavily in the network and migrating customers from copper to fibre as quickly as possible.

        That’s the solution to this mess, not government handouts or regulatory intervention.

  2. Tom
    Tom says:

    Labour and Vodafone showed their evil red colour when the EY report is released. It practically said how wrong Vodafone and Labour is in their lobbying process in terms of profit and dividend for Chorus. Chorus have the moral up ground now, as sometimes the best thing to do is to say nothing as Chorus did for so long. To Vodafone and Labour, being both red does not make you a team anymore, so start put the interest of real Kiwis before your own short term personal gain we will put your interest on our list as well.

    • Paul Brislen
      Paul Brislen says:

      I don’t think we read the same report, Tom. The report I read said nothing at all about Vodafone or Labour, their views or anything like it.

      How exactly does Chorus have the moral high ground? How does the report vindicate Chorus’s view that the problem lies with the copper regulation?

      You’ll need to explain your rationale a bit more I think.

  3. kkk
    kkk says:

    Yeah, no more cooperate rape. Consider Telecoms have a forward 26.3% return on equity is not far from Chorus’s, and this number is likely to go further up from this round of rape.

  4. John Smart
    John Smart says:

    tj, less cooperate rape and fair return could not be more spot on. Every company should get together as we don’t know which company will be raped next by com com or other regulations in NZ. Also EY, thanks for the truth behind all this, and showing how much Labour and Vodafone is lying behind this campaign of cooperate rape.

  5. tj
    tj says:

    EY report shows there is a need for copper tax, or less cooperate rape should be done, as it states everything chorus could do and then left a funding hole of $200million. Also compare the effective return for different monopoly company in New Zealand and Australia, and says Chorus’s current profit margin is below in terms of assets and above in terms of equity compared to others, and very close to the mean when take into account the debt adjusted asset to give a 8% return which is inline of the return for airport and many other monopoly sectors. If this is the best report to base the FPP review on, then the FPP review would move the copper price back to $45 per month or a bit higher adjust for inflation and extra risk with the sector.

    • Paul Brislen
      Paul Brislen says:

      The EY report shows quite the opposite. There is no need for a copper tax – Chorus’s problem is of its own making and can be resolved by addressing the dividend policy and its approach to debt raising.

      Have a look at Lance Wiggs’ post (http://lancewiggs.com/2013/12/14/chorus-turn-around-and-go/) on things Chorus can and should do to find the $150m a year. It’s pretty straightforward and doesn’t involve either a government bail out or interfering in the regulatory process. Appendix Seven of the report also points out the ways in which Chorus differs from other similar companies in regards to both debt and dividend policies.

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