One interpretation of the Ernst & Young report into Chorus' financial state is that the network company was correct when it claimed the drop in copper access price would mean a $1 billion funding shortfall.
The report surfaced Saturday lunchtime. Later that afternoon Chorus CEO Mark Ratcliffe issued a statement: “The report aligns with our market disclosure of 5 November and the information provided to shareholders in the letter from the chairman earlier this week”.
Ernst & Young’s report outlines areas where Chorus could make savings to address the funding shortfall.
It’s hard to believe Chorus hasn’t been through a similar exercise internally.
Chorus needs external support
Chorus’ media statement says the company “would be unlikely to be able to meet all of its forward commitments without external support”.
If the company were to work through Ernst & Young’s plan it could reduce the funding shortfall to as little as $200 million.
Some perspective is needed on these numbers. The UFB fibre build project has another seven years to go. The funding shortfall doesn’t all have to be found in one year.
Even a $1 billion shortfall only means less than $150 million a year. A $200 million shortfall means finding less than $30 million a year. When Chorus was part of Telecom NZ, the firm’s financial team had little trouble squeezing savings of those size from the business’ costs.
There’s a sting in the tail, the company says Ernst & Young’s proposed initiatives: “Have the potential to negatively impact service levels and broadband services for consumers across New Zealand on the current network”.
Telecom NZ unimpressed
Telecom NZ isn’t impressed by this warning. It responded on Sunday saying Chorus needs to come up with a proposal that doesn’t undermine its monopoly copper network.
It’s possible Chorus sees its warning as negotiating leverage. It should resist the temptation.
The obvious way out of what could become an impasse is for the government to step in and take full or partial control of Chorus.
That’s ideologically out of step with a National Party government keen on selling state assets. Yet the government also has a strong pragmatic streak which could override ideology.
There’s an election next year. Stepping in to deal with an unpopular monopoly makes political sense. If that doesn’t happen, an alternative incoming government might deal more harshly with Chorus.