Chorus audit causes more FTTP unrest

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Chorus audit causes more FTTP unrest
Chorus chief executive Mark Ratcliffe.

A billion dollars short or not?

New Zealand telco Chorus is weighing its options after financial auditors Ernst & Young confirmed an unfavourable regulatory decision would cost the company up to NZ$1 billion.

The issue, which first surfaced last month, is said to jeopardise New Zealand's ultra-fast broadband (UFB) network, for which Chorus holds about 75 percent of build contracts.

The ultra-fast broadband network aims to bring fibre optic cables to New Zealand homes.

Ernst & Young said Chorus is facing a funding gap of NZ$1.07 billion by 2020 as a result of a regulatory decision to cut access prices for Chorus' existing copper network.

Auditors claimed the gap could be reduced to between NZ$200 to $250 million through a variety of measures, such as cash flow savings, dividend policy changes, debt headroom adjustments, and redundancies.

However, they warned some cost-cutting options could have adverse impacts on customer services, including higher fault rates and lower service levels.

Chorus chairperson Sue Sheldon said in a letter to the company's shareholders that repricing of existing, unregulated services is also on the cards.

Ernst & Young were asked by the NZ Government to audit Chorus' books.

Concerned that Chorus may not be able to meet its UFB obligations — and without parliamentary support to overrule the regulator, the country's communications minister Amy Adams has been looking for ways to quantify the potential damage caused by the adverse regulatory decision last month.

On releasing the report publicly, Adams said it confirmed the significant financial impact of copper price changes and that actions telco can take won't cover the shortfall.

She has previously ordered the government agency in charge of the UFB project — Crown Fibre Holdings — to negotiate contract adjustments with Chorus to close the funding gap.

Chorus chief executive Mark Ratcliffe said E&Y's assessment of the company's financial position confirmed internal fears. He used the audit to call for external support.

“E&Y has also identified a range of potential revenue, cost and investment-related initiatives that Chorus could undertake in order to partially address the funding gap, and they correctly identify that those initiatives come with substantial trade-offs," he said. 


The Coalition for Internet Fair Pricing lobby group said the E&Y report vindicates its position that neither higher copper prices nor a taxpayer bailout of Chorus is needed to continue the UFB project.

According to the CIFP, capital raising by Chorus of around NZ$500 million would solve all its funding problems for the UFB without having to resort to poorer service to increase revenue.

Opposition Labour leader David Cunliffe said the E&Y report shows there is no need for a taxpayer bailout of Chorus.

"Taxpayers should not be asked to subsidise Chorus’ shareholders,” Cunliffe said.

“Labour rejects a taxpayer subsidy; we reject the Government purchasing Chorus shares; we reject throttling back copper broadband speeds; and we reject renegotiating Chorus’ broadband contract."

Telecom NZ's general manager of corporate relations Andrew Pirie warned that eroding the quality of the current telco network and service levels "is not an appropriate way for Chorus to resolve its current financial difficulties."

Meanwhile, venture capitalist and backer of the failed Pacific Fibre submarine cable project Lance Wiggs called the $1 billion shortfall disingenous.

Wiggs showed that Chorus is enjoying high rates of return on equity and low debt gearing compared to its peers in Australia and New Zealand.

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