Once again the government has sold us down the river. One look at the outline of the UFB agreement between Telecom's soon-to-be-separate network arm Chorus and Crown Fibre Holdings, which takes the bulk ($929 million) of the government money, shows why.
First, it's not an investment at all. It's an interest free loan averaged over 14.5 years. Which makes it a gift to Telecom worth $1.8 billion, if you factor in the commercial compound interest of say, 7.75 per cent that Telecom doesn't have to pay. If that's not lining the pocket of an incumbent industry player, tell me what is.
Secondly it's not a partnership. Or if it is, it's the most lopsided partnership I've ever seen. The government takes most of the risk and Chorus takes the profit. Here's how it works. The government gives Chorus $929 million to dig up the roads and run fibre by 830,000 homes. That works out at $1119 per household. When a homeowner wants to connect, Chorus picks up the tab - on average about $1381 per household.
But at that point Chorus also gets a revenue stream which, depending on the services the householder takes, is likely to be around $500 per household a year. Even with running costs of around $100 a year per household, you can see that Chorus is going to get back its investment in three or four years. What does the government get? Eventually, probably not until 2036, it gets some of its money back.
The deal says the $929 million "investment" will be made through an equal contribution of equity and debt. The debt, as already explained, is unsecured and non-interest bearing. Debt securities will be redeemed in tranches from 2025 to 2036. The equity is the kind of equity you get when you're not getting equity - with no voting rights, no dividend payments before 2025, and full dividends will be paid only after 2036. In other words it's a loan by another name.
But here's the unbelievable bit. Telecom has the use of the $929 million, interest-free, for an average of 14½ years, has from 2025 to 2036 to repay, and can pay it back at face value at any time it chooses. Face value, not market value. That means the government gets none of the capital gain in Chorus shares which, as a new monopoly for fibre services, will inevitably rocket.
Look what's happened to Telecom's share price. It's risen from $1.95 to $2.63, an increase in market capitalisation from $3.75 billion to the current $5.05 billion since the deal was announced. The word among investment bankers and analysts is that if all goes to plan, the share price could hit $3.00 by year's end. That's heading towards another billion in market cap and more golden lining of Telecom's pockets.
Some might think this is just more Telecom bashing. But on this occasion it's coming from the champion of the unbridled free market - none other than Sir Roger Douglas. Read for yourself what he had to say about Telecom in parliament last month. A few quotes:
* "I want this afternoon to talk about Telecom's new monopoly status...
* "Steven Joyce has said that it is a good deal for the country. In fact, it is the worst possible deal for the country.
* "Telecom will take all the profit, and the Government will take all the costs.
* "It is not an investment; it is a subsidy, a massive subsidy.
* "The deal perpetuates Telecom's infrastructure monopoly for ever. It kills Telecom's competitors, without compensation.
* "We have what I would call the Crown Fibre Holdings sham investment.
* "The investment is a simple gift-a gift to Telecom.
* "The $464 million equity proportion has no rights to equity; it is actually a loan.
* "Telecom has no real costs until the customer connects. It gets an assured cash flow immediately.... of $492 a year, a gross return of about 35 percent. (Note that Hansard says $492 million, but what Sir Roger actually said was $492 which is an average estimate of revenue per household per year.)
* "The commercial compound interest saving of that for Telecom is $1.8 billion-$1,800 million-or, to put it differently, the Government's $930 million is on generous terms.
* "The net present-day value of Telecom's repayment on this funding is $140 million.
* "An independent assessment says that the present-day value of the subsidy is $800 million... if the Government were going to spend $1.5 billion, it should spend the extra $400 million and own the lot.
It's hard to argue against Sir Roger on the last point. Surely it makes far more sense for the government to own the fibre it's invested in? I asked Crown Fibre Holdings to tell me if there was anything incorrect in Sir Roger's analysis. You can read the full response here.
For the most part Crown Fibre refused to respond to the specifics of its deal with Chorus. But it did say the net fiscal cost to the Crown of the entire $1.3 billion UFB "investment" is $600 million - the cost to the crown in present value terms in today's dollars.
Crown Fibre admits Telecom will get some benefit from not having to pay interest, but says it's not the $1.8 billion outlined Sir Roger's speech. Not surprisingly, it doesn't offer to tell us how much. But accepting Crown Fibre's figure and working out the compound interest over 14.5 years makes it worth $1.7 billion shared by the Crown's UFB partners. Telecom's share of that would be at least 70 percent or $1.2 billion. That's still a lot of lining of an incumbent's pockets.
