NZ government backs Chorus on funding shortfall

New Zealand’s government has sided with telecoms infrastructure player Chorus in its assessment of the impact that regulated price cuts would have on planned investment in a nationwide broadband network.

According to a government report prepared by Ernst & Young, price cuts mandated by New Zealand’s telecoms regulator for access to copper-line networks would leave Chorus (Auckland) with a funding shortfall of about NZD1 billion ($825 million) assuming it did not implement any cost-saving measures.

The network is expected to cost as much as NZD3 billion in total, with Chorus and the government each stumping up half of the required sum.

Ernst & Young reckons Chorus could reduce the funding shortfall to about $250 million by slashing dividends, taking on more debt or making cutbacks.

“Copper price changes will have a significant impact on Chorus’ financial position, and the wide range of actions that Chorus can consider taking itself will not be sufficient to cover the funding shortfall to safeguard the UFB [ultra-fast broadband] and RBI [rural broadband initiative] build commitments”, said Amy Adams, New Zealand’s communications and information technology minister.

Chorus has been fiercely critical of regulatory plans on pricing and had been attacked by some of its rivals for overstating the impact of the cuts.

However, Ernst & Young emphasizes that its findings are consistent with those of the operator, a point on which Chorus seized in issuing its own response to the report.

“The report aligns with our market disclosure of November 5 and the information provided to shareholders in the letter from the Chairman earlier this week,” said Chorus chief executive Mark Ratcliffe.

According to Adams, Chorus has now entered into discussions with government agency Crown Fibre Holdings about possible ways of closing the funding gap.

Keen to reduce the financial pressure on Chorus, Ratcliffe notes that all the measures set out by Ernst & Young come with “substantial trade-offs”.

“These initiatives must be weighed very carefully, as while they may save money that can then be invested into UFB, they also have the potential to negatively impact service levels and broadband services for consumers across New Zealand on the current network,” he said. “The right balance must be struck to ensure New Zealand consumers continue to benefit from high quality infrastructure today and into the future.”

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