Everything you wanted to know about the Chorus deal …
Written By: - Date published: 9:19 am, November 6th, 2013 - 103 comments
Categories: capitalism, Economy, infrastructure, john key, national, same old national, telecommunications - Tags: Axe the Copper Tax
The Chorus fibre roll out deal with the Government is one of those issues that promises to embarrass the Government deeply, more deeply than us lefties may think. Because amongst the ranks of this Government’s supporters are those who hold close to principles. They may not be our principles such as help for the poor, gender equality, support for the treaty, racial tolerance and environmental protection. They are quite different but nevertheless from the view of the right are just as if not more principled than our views. One of the most important is the sanctity of the market. This is why National’s treatment of Chorus for some of its supporters is the equivalent of Labour deciding that gender equality is a bad thing.
To explain the situation I thought that I should pose a series of questions and answers. Feel free to agree or disagree. Blogs should be about open debate. Anyway here goes:
- What is Chorus?
It is basically an offshoot from Telecom that looks after New Zealand’s telecommunications network infrastructure.
- What is its role in the fibre optic roll out?
Well it won the tender to roll out about 70% of the fibre optic network. Many thought that its tender price was too low and that Chorus was trying to maintain a monopoly. If this is the case then bailing it out makes no sense at all.
- How much is construction of Chorus’s share of the fibre optic network going to cost?
Chorus originally thought between $1.4 billion and $1.6 billion but has since revised this figure to between $1.7 billion and $1.9 billion. It claims to need $3 billion for the rollout but I am not sure why.
- What do others think?
Deutsche Bank thought that Chorus underestimated the cost by $500 million, not $300 million.
- So what does this mean?
That Chorus’s tender was going to worsen the company’s position by between $300 million and $500 million.
- What would happen to the company if it has to pay this extra cost?
Well last year it made a net profit of $171 million and so while earnings would take a hit it will still be solvent. The shareholders would see the value of their shares reduce and dividends would reduce but that is life in the big city.
- What else is affecting Chorus’s financial outlook?
The Government determined that as part of Chorus’s formation it should charge out access to its network on a “cost plus” basis benchmarked against comparable networks overseas. The Commerce Commission was tasked with setting the price and it was widely expected that the price would reduce.
- What did the Commerce Commission initially think?
That when it applied the statutory test set by the Government in 2011 the cost of copper broadband should reduce by 28%.
- What did the Commerce Commission finally decide?
That the cost of copper broadband should reduce by 23%.
- Should Chorus or the Government have been surprised?
No. The test was in the legislation that National designed and Parliament passed in 2011.
- What does the Government think of the Commerce Commission’s interpretation of the law?
John Key said that the Commission had misinterpreted the law but Amy Adams said that the Commission had got it right. If Key is correct then he can only blame himself for passing law that was not fit for purpose.
- What options does Chorus have?
Well it has the right to appeal and the Minister has to conduct a review of the regulatory framework. Or it could do a quiet deal with the Government.
- When Chorus says that the Government has to make a decision really quickly is this true?
Well no, because the change in pricing does not come into force until December 2014.
- What is the Government planning?
John Key has not ruled out the nationalisation of Chorus. Amy Adams has proposed that the Government Chorus should sit down with Chorus to look at the numbers and come back with some options. This is crazy talk as Key has admitted that the Government is not good at analysing business.
- What do others think?
National Party cheerleader David Farrar has said that the Government should make a decision based on the best independent data there is, not on the basis of a press release from a monopoly provider. I could not agree more.
- Who should the Government blame?
Whoever designed the statutory test and whoever agreed to accept the tender. Stephen Joyce and Amy Adams apparently were involved.
- Could Chorus go broke?
It has made some very concerning statements and its share price dipped 8%. But it still looks very solid.
- Why do I agree with Matthew Hooton?
Because he said “that is just a risk they took as a commercial enterprise so I don’t know why the govt has any further interest. Business is about taking risks. And if you manage your risks well you make great profits. And if you don’t you don’t.”
- Why do David Farrar, Matthew Hooton, Chris Barton and a cast of thousands from the left to the right of the blogosphere care about this issue?
Because the Internet is the new commons. Access should be free, or at least as cheap as possible.
- What should happen?
If one of the largest companies in the country, stacked with the best talent that money can buy makes commercial decisions that with the benefit of hindsight may not have the been the best, it and its directors and shareholders should wear these decisions.
- Why this is so embarrassing for the Government?
Because at the same time it is selling valuable highly strategic assets that belong to all of is it is thinking about nationalising a private company which has mucked up it sums AND because the Government designed the legislation which it is now saying is faulty AND because the Government accepted a tender where the price was obviously undercooked.