Adams says Chorus faces shortfall

Citing initial EY report, Amy Adams says Chorus will have to make up "significant portion" of UFB shortfall

5th Dec 13, 9:54am by Bernard Hickey

Communications and Information Technology Minister Amy Adams has released the initial details of a verbal briefing from Ernst and Young (EY) on Chorus' financial position, saying Chorus faces a shortfall on its Ultra Fast Broadband (UFB) rollout plans.

Adams said she had referred Chorus to Crown Fibre Holdings (CFH) to "discuss provisions" in their contract for the UFB rollout. Adams said she expected Chorus would have to make up a "significant portion" of the shortfall.

“The preliminary conclusion from Ernst & Young is that copper price changes will have a significant impact on Chorus’ financial position and that absent further action, Chorus is at risk of not meeting its UFB and RBI (Rural Broadband Initiative) contractual commitments, after taking into account a wide range of actions Chorus can take itself,” Adams said, adding that a full report due from Ernst and Young next Thursday was unlikely to alter that finding.

Adams said the Government’s UFB rollout had a budget of NZ$1.35 billion and CFH was required to act within that "fiscal envelope."

At a later news conference she said the Government was hopeful that changing some of the terms of the rollout would mean the Government did not have to top up the NZ$1.35 billion cost. She said the government was committed to the current agreed levels of service and timing of the rollout, but that other conditions could be tweaked, including perhaps the make up and timing of debt and equity payments within that NZ$1.35 billion cost.

“The Government expects Chorus to meet a significant part of the shortfall," Adams said, adding the Government expected to know the outcome of the discussions between Chorus and CFH "in a few months time."

The Coalition for Fair Internet Pricing, which includes consumer groups and retail telecommunications groups and has run an 'Axe the Copper Tax' campaign, said it wanted to discuss the rollout with the minister.

(Updated with more comments from Adams news conferece, Axe the copper Tax statement)

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11 Comments

by Chris-M | 5th Dec 13, 10:18am 1386191932

There were other companies who compedatively bid for the UFB contracts who missed out to Chorus. They bid without the comfort of the existing copper buisness and as such would not have any problem with the commerce commision ruling. If the government is now going to change the rules or in some way transfer public money to Chorus then the net result will boil down to uneven treatment of the other compedative bidders. ie corruption

by Kate | 5th Dec 13, 10:22am 1386192173

Exactly. Let's hope the CFH board live up to their stated corporate values;

http://www.crownfibre.govt.nz/about/corporate-values/

by Boatman | 5th Dec 13, 11:05am 1386194716

We dont have enough details to really know WTF is going on , and the opt out of "Commercial sensitivity/ secrecy" will ensure we never know , but surely Chorus would have done the numbers carefully before bidding on the job?

Also , when you are undertaing such a large contract its never a fixed price , there are all sorts of provisions for unexpected delays , time overruns , weather , fuel price increases , wage rate increases , unfavorable drilling conditions (such as rock ), repair and make good to pavements , roads and berms after installation and a host of other unquantifyable things that occur over time.

So , who has been managing the rollout ?

by Kate | 5th Dec 13, 12:00pm 1386198043

Crown Fibre Holdings Ltd. is managing the rollout (the PPP set up to deliver on this government initiative) - see link to their website above.

by steven | 5th Dec 13, 7:07pm 1386223644

There is no reason it cant be a fixed price at all, its not uncommon.

Chorus knew the conditions, it knew the time scale. With a large contract things like weather, the odd spot of hard rock average out. If they didnt know and to allow for fixing berms and roads then frankly they are incompetant, such data is straightforward especially over large scale. Wage increases and fuel can all be factored knowing the time scale, know its a 5 year program allow 5% per year wage increases, ditto fuel its not rocket science.

On top of this it unlike the other competitors, it expected to cross subsize its UFB by over-charging ADSL customers.

regards

by Stephen Hulme | 5th Dec 13, 12:08pm 1386198503

Adams said the Government’s UFB rollout had a budget of NZ$1.35 billion and CFH was required to act within that "fiscal envelope."

Hmmmmm.....

The Government originally agreed to pay Chorus what was in effect $929m in "soft loans" in return for building its 69 per cent share of the UFB network.

But because payments to Chorus and other UFB network-builders were to be spread out over many years, Economic Development Minister Steven Joyce said in 2011 that the "real cost" of the overall project to taxpayers amounted to only $600m. Read more

by kin | 5th Dec 13, 12:29pm 1386199742

Chorus miscalculated the cost of work...either intentionally to under bid their competitors or unintentionally through their own ignorrance or incompetence....either way, taxpayers should not be burdened by it.

Finally Minie Mouse Dunne and Mickey Mouse Banks has grown something and decided they are no longer to be patsies for the National goverment....maybe it's just conscience or is the next election coming soon ??

by Rob | 5th Dec 13, 3:55pm 1386212154

This sort of reminds me of getting a quote for buidling work. You usually never go for the cheapest quote if it is substantially lower than the other ones. You have to work out why it is so much cheaper price.

From what I understood Chorus was was subsidising the price they quoted, from the money they got from their exisitng copper connections, which is how they could offer a lower price. So once that was regualted to a level lower than their projections, they have now run into a problem. It is tough for them, becuase they appear to be in one of the most heavily regulated areas of the nz economy. ! billion though is very cheap for the fibre roll out, so NZ are getting a greeat deal, even if they have to pay some more. I would say even 2 billion is a good deal, considering NZ has been borrowing about 1 billion a month.

I hink bailing them out is going to be a far cheaper option than getting a new provider to do the roll out. Also I can't really see how a companiy could 'quote' on this sort of work and the uncertainties. Surely it was an estimate rather than a fixed quote. Many comapnies now only do estimates on unknown work.

by steven | 5th Dec 13, 7:30pm 1386225043

1st para, yep, or at least get them in to detail thier costs. You might find the cheapest wants the work and the other 2 had heaps so over-priced it, not uncommon.

Cant agree on bailing out because a) that shouldnt happen and b) moral hazard, from that moment on every PPP would expect handouts.

Dont agree on your estimates comment, Ive worked with lots of fixed price contracts its quite normal. In fact it is or was the norm. In terms of unkowns the contractor is usually asked to fill in a costs of extras / changes and thats then with the quanity surveyor. So if the owner says move the sink thats an extra and a known cost to both. Any unkowns such as ground worls can be an unkown but its sheduled ir $100 to move 1 cum of earth, $150 for 1 cum granite etc. On a project like this there will be swings and roundabouts....so the contractor wins some and loses some.

regards

by KH | 5th Dec 13, 9:31pm 1386232318

If there are experts on regulatory risk in new Zealand it is Telecom / Chorus. Unfortunately they are also the experts in manipulation of that system to their own advantage.

Unfortunately their little media ploy of some weeks ago has blown up in their face. And it seems the usually gullible government is reading the political wind on this one and really no longer wants to be falling for it - as they have done regularly in the past.

If indeed there is a hit to be taken it should be be taken in this order.

A. The Chorus shareholders. to the point where their shares become worthless.

b. Their bankers. They lent to them.

If somebody comes in and takes over Chorus inground assets in a receivership sale what can be wrong with that. We still want our broadband and we don't need to offer coporate welfare for the Chorus Company to get it.

by Kate | 6th Dec 13, 1:40pm 1386290404

Oh dear - funny thing.. is it is not so much the Executive was not willing to bail out the private sector - rather it was unable.

http://www.stuff.co.nz/business/industries/9485537/NZ-branded-as-risky-…

To date, that is!!!!