Slingshot CEO Mark Callander Responds to Chorus Report

17 December, 2013

Media Statement: Mark Callander – Callplus/Slingshot Chief Executive

Chorus’ golden summer is over, the real question is why didn't they prepare better?

The Ernst & Young report into Chorus has some clear messages for the infrastructure lines company - along with a few omissions.

It suggests that if Chorus management takes some prudent steps, which it probably should have started well before the Commerce Commission announced its rulings, the shortfall it faces could be reduced to $200-250M over 5 years.  This is not a big number for a company of Chorus’ size.

But for Chorus to continue to focus on the estimated $1billion shortfall by 2020 leads to the ludicrous assumption that they continue to operate and manage their business as they have done since separation from Telecom in 2011. 

This should not be the case – yet the last couple of years do not instill much confidence in the company being able to make changes.

In fact, the status quo was never an option, which was one of the primary reasons the Government gave Chorus a three year period in the 2011 changes to the Act to get its house in order. 

Chorus has been enjoying a ‘golden summer’, which is clearly reflected in the high levels of profitability and returns to shareholders, that couldn't last. A cultural change from monopoly-type behaviour is well overdue and it seems that everyone, but Chorus, knew this had to end.

For Chorus to continue to focus on the shortfall from the Commerce Commission’s decision, compared with the current situation in which they have been artificially protected by the regulatory holiday, is deliberately disingenuous. 

Just a few of the changes that were made to help Chorus adjust at this time included:

1.        A regulatory holiday freezing the price that RSP’s paid Chorus for UBA at $21.46.  The UBA price had steadily declined over previous years from $27.44 which is a 21% drop – in fact, it got to as low as $17 at one point. 

2.        An increase in the price paid by RSPs to Chorus for unbundled lines.  RSPs will pay an average price for UCLL to Chorus of $23.52 from December 2014.  Most unbundled lines are in urban areas and currently are priced at $19.08 – this is a 23% increase.

3.        Telecom were prevented from unbundling for 3 years which would have resulted in Telecom paying Chorus up to $21.46 less per line – this considerably more than the $10.52 reduction Chorus face from the Commerce Commission decision.

So the real question still remains: why has Chorus continued to operate the way it does?

The cultural change that was needed within Chorus was meant to happen over a three year period, but it must now do it in twelve months or less.

Ernst & Young have made this transition easier by outlining possible solutions to the shortfall. 

“Accordingly, Chorus would need to consider other funding options which may include (but are not limited to):

•    Further revenue, operating cost and capital expenditure initiatives in addition to those identified;

•    Further reduction in dividends;

•    A capital raising; and / or

•    Renegotiating contractual arrangements with CFH”

In addition, the government is further accommodating Chorus by agreeing to review the arrangement with Crown Fibre Holdings (CFH).  In return, Chorus continues to threaten the speed and performance of broadband throughout New Zealand, which is not the solution.

The market uncertainty needs to be addressed for all players and the focus must move to RSPs developing new and innovative services that leverage all types of infrastructure and ultimately benefit end users and the economy.

ENDS

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