A suggestion for the Government

November 5th, 2013 at 3:00 pm by David Farrar

Stuff reports:

says it could default on its loans and may not be able to complete construction of its share of the ultrafast network, following a ruling by the this morning.

The NZX-listed company issued the dire warnings after the commission released a “final determination”, which ruled that the company should be allowed to charge $10.92 a month for its copper broadband connections.

Its shares have plunged 8 per cent this morning, and were trading down 21 cents at $2.42 within minutes of the NZX opening at 10am.  

Chorus has a contract with the Crown to complete its work on the UFB network by 2020 but the company said that if the Government didn’t intervene, it would be left with a $1 billion “funding shortfall”.

Chief executive Mark Ratcliffe said Chorus would “simply not be able to borrow the money we need” to complete its UFB contract.

The company had notified its bank lenders that unless the Government intervened, the ruling would have a “material adverse effect” on the firm.

“If this did occur lenders would be entitled to trigger an event of default,” the company said in a statement.

Chorus would also “discuss with the Crown whether Chorus is still a credible UFB partner” and how it might still deliver on its contract, the company said.

No one wants to see Chorus bankrupt or defaulting on its loans. But wise politicians would do well to remember the words of Mandy Rice-Davies who basically said “Well he would say that, wouldn’t he?”

The price set by the Commerce Commission is almost half way between the draft determination and the price the Government indicated in its discussion document it might set.

Now I can totally understand that the Government doesn’t want the UFB project derailed, or worse Chorus to go bankrupt or default on its loans.

But please please please I hope they don’t just take Chorus’ words for it, and make a decision based on a press release. This is not to suggest that Chorus is wrong. Just to say, that a very high level of certainty should be required before you intervene. It should be the last option, not the first option.

If the Government really thinks there is a risk of that magnitude to Chorus, then it should hire the best accountancy or financial analysis firm in New Zealand to go into Chorus, and do an independent review of its income, spending, profitability, debt and the like and have them report back on whether they concur with what Chorus has said. Release that report publicly and allow people to peer review it.

As Chorus is asking the Government for a special law change, that would benefit it by hundreds of millions of dollars, surely they could not object to an independent review?

I understand the Government is stuck between a rock and a hard place. They have to make a decision. My plea is for them to make a decision based on the best independent data there is, not on the basis of a press release from a monopoly provider.

Also the Government could do worse than play a bit of hardball themselves. If Chorus is going to threaten the Government by saying it may default on the UFB project, then maybe the Government should open talks with Vector and other UFB bidders and see if they would be willing to step up if necessary. Use the same tactics that Steven Joyce used with Novopay – keep the pressure on the company, by looking at backup options.

Personally I think it is almost beyond belief that Chorus would seek to default on its UFB contracts, considering that would leave the company with almost no long-term future – being a copper provide only in what is a future world.

Maybe the price recommended would cause them issues with their debt. If so, let’s have the details.

As I said I understand the difficult position the Government is in. But this is a decision they should take great care about. Both because it may set a precedent, and also because it will affect almost every Kiwi household.

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27 Responses to “A suggestion for the Government”

  1. anonymouse (708 comments) says:

    Is you position on this mellowing a bit David?

    previously you said,

    “The only response by Ministers should be that these pricing decisions are a matter for the Commission, and they support its independence.” http://www.kiwiblog.co.nz/2012/12/the_price_of_copper.html

    and your comrades over in the Coalition said this morning that
    “Chorus is crying wolf, and the government should simply tell it to accept this morning’s decision, ”
    http://www.scoop.co.nz/stories/BU1311/S00111/copper-decision-chorus-crying-wolf.htm

    Now it is
    “this is a decision they should take great care about. ”
    whereas the coalition are simply saying no care required, just damn the torpedos…

    [DPF: The coalition speaks for the coalition. I speak for myself. ]

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  2. backster (2,122 comments) says:

    David Cunliffe quoted this in Question Time probably before you posted it here, only of course he didn’t say he would be sorry to see the company fall.

    [DPF: I'd be impressed if he quoted it before it appeared on Kiwiblog, as it means he is one of my sub-editors in his spare time!]

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  3. burt (8,015 comments) says:

    No one wants to see Chorus bankrupt or defaulting on its loans.

    Except of course the Greens and Labour – they would love to see us all loose money for their popularity …

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  4. burt (8,015 comments) says:

    I can hear our Socialist National party now – we had to bail them out they were too big to fail !!!!

    Disgrace… They have so much work … if they are struggling to stay viable – they should be shut down – plenty of other operators would like to have the “guaranteed income” snorting in the public trough.

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  5. rouppe (940 comments) says:

    Lets not forget the lobbying of Theresa Gattung for Telecom in 2004 when all manner of dire warnings were issued against the prospect of unbundling.

    It worked for awhile, but unbundling has occurred, and the sky hasn’t fallen…

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  6. infused (646 comments) says:

    They should be left to fail.

    They undercut the tender process, lost a lot of their contractors, now they are paying for it.

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  7. OneTrack (2,798 comments) says:

    Bugger, burt @ 3:41 beat me to it.

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  8. dave_c_ (217 comments) says:

    They’ll cry wolf once too often, and the wrath of the public will descend on them – then they’re really f__k_d

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  9. burt (8,015 comments) says:

    dvae_c_

    The wrath wealth of the public will descend on be given to them.

    There – fixed that for you.

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  10. adamsmith1922 (890 comments) says:

    Chorus should be left to it’s own devices.

    Questions should be asked of Minister Joyce as to why the contract was awarded to a company without the financial strength to complete the contract. I do hope the contract stipulated the posting of a completion bond.

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  11. adamsmith1922 (890 comments) says:

    If govt take a shareholding perhaps we should call it KiwiBroadband!

    This outcome is a disgrace and Chorus and responsible government ministers and officials must be held to account over the incompetence displayed.

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  12. burt (8,015 comments) says:

    Held to account … Ministers … Move on.

    They are probably just pissing around hoping for a Labour government next year so they can be purchased for twice their book value in the great leap back to Muldoon style nationalise, regulate, state owned monopolies for everything.

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  13. Viking2 (11,255 comments) says:

    Well if I owned the exchanges and countrywide means of distribution i reckon I would switch it all off for an hour and see who still wanted to argue.

    i.e. no phones, no internet, no interchange between exchanges, no eftpos etc etc.

    would you think anyone would notice.

    Let chorus make a profit.
    It will then pay wages taxes and dividends and the govt will recoup some of our money.

    Frankly I can’t be bothered with Vodagroan moaning especially as in the past they have ripped of the NZ taxpayer in 500 million lumps. Their service is shite, their broadband speed is light years behind Callplus ( Vodamoan spent zilch on unbundling) and they are oversea’s owned so will ensure they pay the IRD fuck all all the while robbing the crap off their customers because they can buy cheap broadband.

    All this noise should be seen for what it is. Pandering to the poor vote all over again.
    Seems Hooton knows how to do that.

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  14. rouppe (940 comments) says:

    adamsmith,

    The argument is that they do have the financial strength, but the commission is proposing to remove a large chunk of the income that underpinned that.

    Imagine if you went to the bank saying you had $100000pa income to underpin a loan and the bank agreed to lend $750,000 based on that. Then you go back and say “oh, actually is only $70,000″. Wouldn’t you expect the bank to no longer offer you. $750,000 in lending?

    That is what chorus is saying. Might not be true, but that doesn’t mean they didn’t have the financial strength.

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  15. Johnboy (15,537 comments) says:

    It’s no problem. In 2014 after silent T is declared Glorious Leader the glorious Kiwistring factory will ramp up production in conjunction with glorious Kiwican and all that vacant broadband ducting will soon have peer to peer communication between near neighbours! :)

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  16. Daigotsu (451 comments) says:

    As a member of the Taxpayer’s Union, if a cent goes to Chorus I will be lobbying hard against this unjustified use of taxpayer money.

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  17. orewa1 (428 comments) says:

    Questions to ponder:

    Didn’t Chorus undercut a bunch of electricity lines companies for the UFB rollout? Would those lines companies re-enter the fray if the contract was re-opened?

    Didn’t WEL Networks in Hamilton and Northpower in Whangarei get regional UFB contracts? Aren’t they getting on with the job, uncomplaining and ahead of the timetable, while Chorus moans and plays political games? Why can they do the job profitably while Chorus claims it cant?

    Isn’t the copper yesterday’s technology and haven’t we all known that for decades – investors included?

    How many Cabinet Ministers have investments in Chorus?

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  18. Sir Cullen's Sidekick (833 comments) says:

    Loser Cunliffe – The minister and the PM should resign…
    Biggest Loser Norman – Shows privatisation fails………..

    I think NZ deserves these two, go to dogs and then come to its senses….that is the only way these pests will be eradicated once for all and never come back…..

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  19. lastmanstanding (1,240 comments) says:

    Anyone who thinks the telcos are going to pass on even one cent of the cost savings as a result of the idiot Dr Gales ruling are living in cloud cuckoo land. the telcos will trouser the savings and pay them out to their shareholders and Telco retail prices will keep rising. And remember all Vodafones profits go offshore to foreign shareholders as do much of Telecoms profits.

    Also forget Gen X and Gen Y investing directly into the NZX. Why would they when a regulator can destroy their hard earned savings as the idiot Dr Gale has done.

    Forget overseas investors coming to NZ. Why would they invest when the idiot dr Gale will destroy their investment.

    Forget getting UFB. that’s dead in the water. Thanks to the idiot Dr Gale.

    Disclosure. I am a Chorus shareholder alas who wrongly thought that a deal was a deal until I found out the idiot Dr Gale welshed on the deal.

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  20. adamsmith1922 (890 comments) says:

    Rouppe at 7.48, sorry I do not buy into that argument, as the change proposed by Commerce Commission was foreseeable risk and furthermore implies Chorus and indeed govt were planning to materially delay the achievement of UFB benefits, thus reducing return on the investment in UFB

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  21. Jack5 (4,828 comments) says:

    The whole fibre roll-out is a stuff-up.

    The Government should never have been involved. When it was economic, entrepreneurs would have provided the service with investor funds.

    Telecom had the right approach for the next decade or two with its fibre to cabinets. The tablet/smart phone revolution is blowing away demand forecasts of the bureaucrats, politicians’ advisers, and the industry lobbyists like Tuanz.

    The Government should pull the plug on the rollout, except where it is needed to improve appalling rural broadband services. That’s where the economic payback is.

    Adamsmith (1922) at 10.20: the vast swing to tablets and smart phones has caught out many of the best in the international industry. You couldn’t reasonably expect the Government or Chorus to have forecast it.

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  22. adamsmith1922 (890 comments) says:

    Jacks the issue re copper which I was referring to could have been foreseen. In addition some scenario planning would/ should have taken into account the likelihood of the impact of a disruptive technology impacting market in a technology space such as this. Failure to do this is a management failure.

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  23. Nigel Kearney (915 comments) says:

    adamsmith1922, if you think it’s ok for the government (or an agency it set up and appointed) to unilaterally set the price that a private company can charge for its product, then you are a utter disgrace and parody of your username. Maybe you should see if karlmarx1922 is still available.

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  24. toad (3,672 comments) says:

    @Nigel Kearney 8:29 am

    So you think a private monopoly should be able to rort consumers for whatever price its shareholders demand?

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  25. adamsmith1922 (890 comments) says:

    Nigel Kearney like it or not the days of unfettered monopolistic behaviour are behind us in most economies. Utilities are commonly regulated as to pricing due to their monopoly eg Chorus and UFB as essentially the sole seller, there is no market as such to set the price. You appear to consider that setting an extortionate copper price, a continuation of past behaviour to cross subsidise fibre is somehow acceptable. Bizarre!

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  26. Nigel Kearney (915 comments) says:

    Telecommunications infrastructure is just not a natural monopoly in the way that roads are, for example. There is an artificial monopoly created and sustained by the government. Chorus have all the wires because no company has chosen to compete by laying their own wires. That choice is because it’s not profitable for them to do so. And the reason it’s not profitable is government regulation.

    If the Commerce Commission was to fix the prices of goods in supermarkets, nobody would build any new supermarkets. Would that mean it’s necessary that prices are set by regulation because there is no competition? Of course not. Eastern Europe didn’t take long to move forward once the socialist boot was removed from their throats. Our telecommunications industry is more than capable of doing the same.

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  27. Jack5 (4,828 comments) says:

    Whale Oil has an interesting take on the issue (link below):

    He seems to think the furore is a jack-up involving Hooton and TUANZ.

    If TUANZ believes so strongly in the Commerce Commission, it should practise some responsibility itself and change its name from the Telecom Users’ Association of NZ, which implies it is a consumer group, to Telecom Providers’ Association of NZ, which is what it is – a trade group.

    Whale spouts:

    http://www.whaleoil.co.nz/2013/11/game-ultra-fast-broadband/#axzz2jorHLhsm

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