Govt to get independent assessment of Chorus' financial position and its ability to meet broadband contractual commitments

Govt to get independent assessment of Chorus' financial position and its ability to meet broadband contractual commitments

Communications and Information Technology Minister Amy Adams says she has instructed government officials to commission an independent assessment of Chorus' financial position and its capability to meet its contractual commitments under the Ultra-Fast Broadband and Rural Broadband Initiatives.

Her announcement comes after Prime Minister John Key said on Tuesday his government was considering all its options in response to Chorus' warning it may default on its debt and restrict its rollout of the Government's broadband network after the Commerce Commission ruled Chorus should cut its wholesale copper broadband price by 23%.

“In recent weeks, I have had the Ministry of Business Innovation and Employment (MBIE) work with external consultants to carry out an independent analysis of Chorus’ financial position across a range of pricing options, based on publicly-available information," Adams said.

“To complement this work, I have decided to seek an independent assessment at arm’s length from the Government. In order to properly assess the range of options before the Government, I have directed MBIE to work with Crown Fibre Holdings to commission independent advice to the Government of Chorus’ financial position and capability to deliver on its contractual obligations with the Government," Adams added.

She said the review will assess the impact of the Commerce Commission’s decisions on both the Unbundled Copper Local Loop and the Unbundled Bitstream Access prices on Chorus’ ability to deliver on its contractual commitments under the Ultra-Fast Broadband and Rural Broadband Initiatives.

"As part of the review, the consulting firm would be asked to assess the scope for Chorus to manage the impact within the constraints of the reduced revenue, and if required, a range of alternative options."

Once the review's completed a report will be provided directly to Adams, and a copy released publicly. The Government will then consider its next steps, said Adams. Asked which external consulting firm would be doing the review a spokesman for Adams said: "Work will take place over the next few days to appoint independent advisors to carry out the assessment."

The Bank of Tokyo Mitsubishi, which is taking legal action to try and block a rescue deal for Solid Energy that would effectively see it take a 20% haircut on its $80 million loan to the SOE, is also one of four banks with more than $1 billion worth of unsecured loans to Chorus.

Here's Adams' letter to Chorus CEO Mark Ratcliffe.

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28 Comments

 "independent assessment of Chorus' financial position and its capability to meet its contractual commitments"
 
Under normal circumstances, this would have been conducted BEFORE you award a multi billion contract to anybody....NOT AFTER....
 
We can assume therefore the the Goverment is negligent in assuming that Chorus is capable of delivering on it's commitment because it is BIG, CONNECTED, and has LOBBYING POWER...  

Yes indeed.
 
Crown Fibre Holdings Limited (CFH) is a New Zealand state-owned company building a fibre-to-the-home network by means of a public–private partnership as part of the National Party's 2008 election promise of an Ultra-Fast Broadband Initiative.[1][2] It is expected to spend NZ$1.5b, and connect 75% of New Zealand's population.
 
CFH will invest NZ$929 million directly in Chorus with 50% being non-voting shares and 50% interest free loans.[3] For the other three companies, they will each form a joint venture known as a local fibre company with CFH: Whangarei Local Fibre Company Limited, UltraFast Broadband Limited. Read more
 
Say it isn't so.

Kin - I think the big question here is the Commerce Commission. Chorus would have completed its analysis on the wholesale rate it thought it could use.
 
There are some serious issues going on here......
 
 
 

Obviously Chrus did not "thought" through their process enough....unless they "thought" that the Commerce Commission would go easy on them or better still that the Goverment would bail them out if they were to lose money.....perhaps the dreaded word "default" to be used as bait ??

Whats to study ?  Chorus entered a contract with the intention of making big bucks.  They miscalculated.   They need to complete the contract and if that means collapse and total loss to shareholders - so be it.
However a likely scenario is a middle sort of outcome.  Their equity will shrink markedly, as will their share price.  But they will continue on somehow.
But we still want our broadband as contracted.

many Chorus shareholders own shares by virtue of the Telecom split.  As I understand matters, Chorus has been charging too much to the likes of Telecom.  I bet ya there is some fine print that will allow Chorus to have this 'adjustment' compensated for by the gummit.  It will end up being a win win for Chorus and Telecom shareholders  - as Chorus will be compensated and Telecom will not pass on it's lower costs.  Expect to see some rise in TEL shares..

And that's how the 1% create the 99%.

Independent review to come to the conclusion that he govt's preferred option is the best one after all.
Independent my a***

People need to know what UFB capabilities actually are and why there is still a need for copper.
Do you think your UFB will still work in a power cut?......
 
Did the Commerce Commision give the above points any consideration when making its decision?

Hi,
Not sure what you are driving at with "power cut"?  Do you mean a std phone line or lack of in an emergency?
So if you "start" at your local exchange if that has no battery backup or generator your ADSL  and analouge phone is bye bye anyway.   Also apparantly new sub-divisions dnt have copper at all btw.
Would your UFB unit still work in a power cut?  If the base unit has a built in battery then yes it could.
BTW do people these days keep an old analouge phone connected/available at home?  I do and its connected but mostly we use the wireless one.  Again though a $300 UPS would power any of the above for hours. Or buy a $40mobile phone and pre-pay, if you dont have one.
UFB in terms of capability is really a bit of a misnomer for performance.  So Sure it can do 1000Mbsec up and down V a cable or Adsl at 30Mb/sec. In the real world its moot for most people.  What matters is the cost of volume and thats only driven by competition.  Ive looked at UFB and its going to save me 40% of my present broadband cost when its finally here (18months off) and give me more volume. In the meantime my existing provider will continue to rip me off and tell me how lucky I am.
regards
 
 
 

Not unexpected parallel in the UK it seems
 
http://www.theguardian.com/commentisfree/2013/aug/12/bt-broadband-scam
The same BT was last month hauled over the coals for its part in what is fast turning out to be a fiasco: providing rural Britain with decentbroadband. This is another billion-pound job: around £1.2bn of public money will be sunk into the project and most will be handed to BT to ensure it makes an "acceptable return" on the job. Except that the telecoms giant's definition of an acceptable return is murky to officials in local government, central government and the state auditors – and has been found to include millions in overcharging of the public.
With one hand, a £25bn company is taking more than a billion off taxpayers, to provide a public good. With the other hand, it's splashing out a billion – and further inflating football's Premier-League bubble. And in that ugly symmetry is a lot that's rotten with big corporates in Britain, and how lightly Westminster lets them off the hook.

Here's Chorus' letter back to Amy Adams.
Dear Minister
Thank you for your letter dated 6 November 2013 and published on 7 November 2013 advising that you are seeking an in dependent assessment of Chorus’ financial position following the release of the final benchmarked UBA determination.
Chorus welcomes the opportunity to assist and co-operate with the independent adviser. We understand that a consulting firm will be asked to provide an independent report assessing the scope for Chorus to manage the impact within the constraints of the reduced revenue, and if required, a
range of alternative options to inform the Government’s considerations.
We will be as transparent as we can in our engagements with your independent adviser. As a listed company we will need to ensure that appropriate arrangements (including confidentiality undertakings) are put in place to ensure compliance with listing rules and securities laws. As standard commercial practice we will also need to understand the conflicts position of your independent adviser.
We are happy to work with your officials on setting up appropriate arrangements.
Your letter has referred to Chorus’ future review of capital management settings, dividend policy and equity and requested that we advise Government on steps that might be taken.
The Government’s regulatory review and the Commerce Commission’s final pricing review processes (and any interplays between them) are inextricably relevant to any steps that Chorus might ultimately need to take in relation to capital structure, dividend policy or potential equity raising and this will need to be within appropriate parameters including a fair return to Chorus investors for the risks assumed.
To assist your independent adviser we are able to discuss preliminary views with them on the potential range of options that may be available to us, subject to the constraints of the limited timeframe, our
disclosure obligations and the fundamental challenge of solving for optimal capital management settings when broader regulatory and other key matters are unresolved.
We are proud of our role as a wholesale only nationwide fixed line communications provider of essential infrastructure. We are making a once in a many generation infrastructure upgrade in New Zealand through the ultra fast broadband (UFB) and rural broadband (RBI) programmes.
We have invested approximately $1 billion in fibre in the two years since we began to build the UFB network ahead of demand and of course continue to also maintain our existing network in order to support service levels.
Chorus is committed to providing resilient critical infrastructure nationwide. New Zealand got a very good deal for the UFB upgrade by entering into an innovative public-private partnership to leverage Chorus’ balance sheet to fund it. It is our revenues and the funding we receive from lenders and shareholders that underpins this kind of investment.
The majority of those revenues are from our existing network. Fibre is being taken further, for less taxpayer funding than other countries. We are already 20% of the way through one of the largest nationwide civil engineering projects ever undertaken in New Zealand and ahead of schedule. We are delivering on the RBI initiative and providing leadership through initiatives such as “Gigatown” and a proposed improved fibre product set. New Zealand is leading the way in broadband growth.
Having invested around $1 billion so far, as a consequence of the Commerce Commission decisions using a pricing principle that is out of date, we have noted that we now face a potential funding shortfall of around $1 billion during the build period. As we have said to the market, we are intensely disappointed that the much needed certainty at this time of generational investment and transition incentives for the whole industry has not shown up as was intended.
The pricing principles in the Act are out of date. There have also been significant implementation and timing difficulties. All four UFB partners and the Government intended and have publicly noted that s18(2A) was a signpost to recognise the significant investment being made in fibre and to ensure copper price decisions didn’t undermine the UFB investment. However, the Commission – rightly or wrongly - does not have the same view.
We find it incomprehensible that an outdated and flawed regulatory regime could lead to a listed company that is reinvesting 65% of its revenues, possibly being unable to perform obligations that it is currently performing appropriately, and giving rise to consequential real financial losses for investors.
For certainty to occur, and for the industry to focus on the opportunities that fibre brings, the sector must be underpinned with a high quality and effective regulatory framework and aligned implementation.
We are very willing to work with Government to resolve the unsatisfactory situation that has arisen and ensure that New Zealand benefits from investment that brings progress like the UFB and RBI initiatives at attractive entry level pricing as well as maintaining the existing infrastructure.
We welcome a prompt timetable as your letter indicates. We
look forward to hearing from you on the next steps and advice on who the key point of contact is from the Government perspective.
We will release a copy of this letter through the NZX and ASX.
Yours sincerely
Mark Ratcliffe

Thats a big sense of entitlement you have there Mr Ratcliffe.

Without doubt and one that he expects NZers to fund endlessly:
 
Chorus is committed to providing resilient critical infrastructure nationwide. New Zealand got a very good deal for the UFB upgrade by entering into an innovative public-private partnership to leverage Chorus’ balance sheet to fund it. It is our revenues and the funding we receive from lenders and shareholders that underpins this kind of investment.
 
Not much mention of the taxpayers contribution to date, together with exorbitant wholesale charges for services currently rendered:
 
Crown Fibre Holdings Limited (CFH) is a New Zealand state-owned company building a fibre-to-the-home network by means of a public–private partnership as part of the National Party's 2008 election promise of an Ultra-Fast Broadband Initiative.
 
CFH will invest NZ$929 million directly in Chorus with 50% being non-voting shares and 50% interest free loans.  Read more

Private enterprise is best, eh.
Yet another PPP deal in a bad way? oh dear....
Only 20% through, yet already 1 Billion in debt?
Need to rob Peter to pay Paul to get the sums to work?
"not shown up as intended" so they expected a monopolistic position but have as yet not got it, yet.
I feel a tax payer grab your ankles, vasiline and grin situation coming on.
regards
 
 
 

What does the UFB contract say? Does it say "Chorus will build a UFB network to x specifications by a fixed time, and will then have the right to charge for that to give it no more than an x% return; or no more than $x per customer per month"?
Is it specific on copper pricing in the interim? Separately was the regulatory approach to be used by the Commerce Commission clear; whether Chorus agreed with it or not?
If the contracts do say something like the above, and don't have get out clauses, then it doesn't look good for Chorus' existing shareholders (which by the by, I am one at a very trivial level, having acquired a few by default courtesy of historically having some Telecom shares).
Get on and build it per the contract. If there are not funds, then presumably either the government would need to step in, or the roll out would have to stop, or at least slow dramatically until Chorus cash caught up (and possibly put them in breach of time penalties?). Either one would wipe out the current shareholders. Not enough homework done by the management going in, it would seem, on how many customers would pay a premium pay for fibre.
Maybe the contracts do have get out clauses, in which case they should be declared and transparent. Then and probably only then should there be a tough negotiation on how to move forwards..

An exercise that not one single private company would undertake given the lack of national resources and expertise available at the right price - the government should have recognised this glaring gap in capability and not undertaken such a project with a PPP partner - fast adsl modems offer more than adeqaute speed on existing infrastructure and meet the majority of citizens' demands if the data caps were realistically adjusted upwards. We are a poor country and need to recognize extra debt does not translate into extra foreign income to reward the foreign borrowing, but just more debt.

Stephen Hulme: There is much, much more to it than that.

I cannot  wait any longer for you you explain - my patience threshold is thin - I need to refine the timing of a speculative purchase of Chorus shares prior to the government back down which involves spending more public money - I have to discharge the cost of such pecuniary inconvenience with an arbitrage.

I wouldnt touch it just yet.
I could probably write a thesis on it. I havent followed the history of Chorus fully, but I guess they are the product of the seperation of Telecom. What I dont understand is where all the debt comes from. Did the government saddle them with all that at the time of seperation? Pretty tough to retire aged assets with all that debt hanging over it.

Any organisation that plans to underatke a massive asset expansion program would plan a capital raising. It seems to me that Chorus were planning to undertake that expansion program out of revenue - hence the need to maintain what they assume to be monopoly pricing power.

While they have been doing the strategic dance of the tarantulas, others have quietly gone about exploiting the vacuum.

Now, thanks to an iwi-owned fibre optic cable network, businesses in Helensville, Wellsford, Te Hana and Kaiwaka can be as internationally competitive with connectivity as downtown Auckland. In May last year, Taitokerau Networks finished laying its 165 kilometre, $8.5 million Auckland to Whangarei fibre optic cable. Profits in the first stage of the network to Whangarei will bankroll further development into the north, with a two-year target to get to Kaitaia. Taitokerau Networks, owned by Northland iwi Te Rarawa, Ngati Whatua and Whaingaroa, has joint funding from China through Axin NZ and is managed by Wellington company Datalight. The Taitokerau Networks cable runs north through Helensville and follows State Highway 16 through Wellsford and further north through Te Hana and Kaiwaka to Whangarei. This sees residents and businesses in the towns and along the way able to connect directly with fibre to the cable. The four marae between Helensville and Wellsford are working toward getting connected, which will happen in the next couple of months
http://www.stuff.co.nz/auckland/local-news/rodney-times/8958611/Fibre-op...
 
And .. they achieved all that with $8.5 million .....

As previously discussed, I have had cable for 8 years, 20mb down, 6 mb up, 120 gig data allowance all for $59 per month. Have just priced a connection 30 kms from Dunedin CBD - $169 per month plus connection fees with 1 gig per month data allowance. Right.

Thank you iconoclast - I now remember you raising the iwi competition factor previously.
 
I wouldnt touch it just yet.
 
Hmmmm- Chorus printed a low of $1.85 today, presumably on a stop run - thus forcing a bout of short covering? Any way it's back above $2.00 for the moment..
 

The one thing that the Stuff article fails to mention is there is only one cabinet - and that's at wellsford - anyone else in-between auckland and whangarei cannot access the cable

Sure we are "poor", yet,
a) the adsl and indeed cable is aging infrastructure and technology. 
b) Does it offer real competition?
eg UFB prices quoted to me indicate a 50% saving potential.
c) Does it offer more? yes it would seem so, the ability to conduct business, education, life from more anywhere...eg practical telecommuting from remote locations at an affordable cost. 
Now is it worth the investment? harder Q.
The "technology gap" you mention  I cant see at the moment, its not actually much technically.  Its mostly stringly bits of glass bewteen poles, agrigated at fibre switches, at least 30 year old technology and very reliable.
"debt" well we seem content to waste a lot of money on over-priced housing and expensive toys.
regards
 
 

I think Chorus is referring to this piece.
 

18 Purpose

(1) The purpose of this Part and Schedules 1 to 3 is to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand by regulating, and providing for the regulation of, the supply of certain telecommunications services between service providers.

(2) In determining whether or not, or the extent to which, any act or omission will result, or will be likely to result, in competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand, the efficiencies that will result, or will be likely to result, from that act or omission must be considered.

(2A) To avoid doubt, in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services.

(3) Except as otherwise expressly provided, nothing in this Act limits the application of this section.

(4) Subsection (3) is for the avoidance of doubt.
 

Did the Commerce Commission give enough consideration to s18(2a)? Chorus is saying that it is one of the largest generational infrastructure upgrades so this section of the Act must be given a lot of consideration.  It appears from where I am sitting that the Commerce Commission have not considered this section.  Could be another case of regulators being out of control in NZ.

Maybe, or its incompetance on the part of Chorus, or an immoral grab for more $s, lots of Qs.
regards
 

notaneconomist;
Thanks for that. I imagine several lawyers are digesting the details right now.
The link was a hard read, and I didn't pretend to understand it (The Baumol Willig pricing rule for example is new to me). Nevertheless simplistically the legal positions seem likely to come down to whether Chorus can expect a return on its total investment including copper and all its related infrastructure plus the new fibre investment; or whether copper is considered in isolation from the new fibre investment; such that Chorus can expect a fair return from copper on its copper investment only, and has to take its chances with fibre. 
The circumstance they (and we ) all find themselves in should have been entirely foreseeable; such that you would expect the lawyers for both the crown and Chorus to have buttoned this principle down. Whichever set has not, unfortunately has potentially cost their side billions. If neither the crown nor Chorus has made it clear; then you can envisage lawyers at 20 paces firing shots for years to come.

 

 

Grant Diggle, shareholder and director of the shareholders ass.

'I think it was a totally misguided decision and I think he took far too much notice of self-interested groups.... I think he listened to them and he didn't take full cognisance of the realities of the marketplace," Diggle said.

Those pesky self-interested groups how dare they. And marketplace realities, I love it.

 

I thought that getting good returns commensurate to risk also meant taking a hit when the risk didn't pay. If its guaranteed there's no risk. No wonder I fail to understand business.

Here's my anecdotal observation of the UFB rollout. There must be some pretty tight margins in it because around here (Taranaki), it's the dodgiest traffic management I've ever witnessed for road side work.