For sure, I will not be the only one happy to see the end of the Fanny Adams Chorus.

The problem is that a reduction in copper pricing will lead to a reduction in the cash flows that support capital raising for the UFB roll out. So the solution is to inject additional capital to accelerate the uptake of fibre services.
The Grave of Fanny Adams.  Image from Wikipedia

The Grave of Fanny Adams. Image from Wikipedia

Perhaps I should rush in to add the definition of ‘Fanny Adams’ as meaning “nothing at all”, as in the ‘Nothing At All Chorus’.

For that is what the government’s song and dance in support of Chorus’ position on copper broadband pricing has turned out to be – nothing at all.

Mr Key sang the opening refrain in December last year when he described the Commerce Commission pricing determination “very problematic” and that the government “will not rule out legislating to get the outcome it wants,” This was added to in September when he said “Basically if the Commerce Commission ruling stands there’s a chance Chorus will go broke…”.

Yes, I know that the government-commissioned independent assessment of Chorus’ financial position doesn’t say that it is nothing at all.  It agrees with Chorus’ claim of a $1 billion shortfall in revenues over the last six years of the UFB roll out.  And that is quite significant.

But the hubris of the government’s call was, in the end, about nothing at all.  Chorus has the capability to solve its own problem.  It does not necessarily need taxpayer support.

Released last Saturday by Minister Amy Adams, the independent report outlines how Chorus itself could substantially mitigate the impact of the funding gap, leaving only a net $200 – $250 million shortfall.

The report does state that “the risk of Chorus not meeting its banking financial covenants remains.” Which represents to me a huge incentive for Chorus to bridge the remaining $28 – $36 million per year funding gap.  On annual earnings before interest, tax, depreciation and amortisation (EBITDA) of $663 million, closing that 5% gap does not seem undoable.

The report explores three areas where Chorus could help itself before being helped by the taxpayer.

First, Chorus could eliminate $290 million of the funding gap by revising Chorus’ dividend policy.  That policy presently returns a 10.3% dividend yield to shareholders.  This is more than twice the 4.3% yield of the average of peer companies.

Second, it could cut another $130 million by increasing the ratio of net interest bearing debt to earnings (before interest, tax, depreciation and amortisation) from its self-imposed target of 3.5 times to its covenanted value of 3.75 times.

Third, the report estimates that between $400 and $450 million of the funding gap could be covered off by implementing a range of measures to increase revenues, reduce operating costs and reduce capital requirements.

The debate is now shifting to the risks and downsides of these self-help measures, with each party to the issue rushing to protect their own self interest.

Instead, we need to set those differences aside and seek a pragmatic solution.

The problem is that a reduction in copper pricing will lead to a reduction in the cash flows that support capital raising for the UFB roll out.

So the solution is to inject additional capital to accelerate the uptake of fibre services.

Upgrading households to fibre as UFB cables are laid in the street, will increase Chorus’ revenues and reduce operating costs by avoiding the need for multiple truck rolls to an area to make new connections.  Were residents given an incentive to upgrade by changing the ‘free connection’ offer to ‘free connection whilst we are in the street’, then uptake will be dramatic and the problem solved.