18 Apr 2013

Chorus signs new broadband contracts

8:35 am on 18 April 2013

Chorus has signed new contracts worth $1 billion with its existing ultra-fast broadband (UFB) partners which it says should help mitigate the costs and risks of connecting households to the network.

Earlier this year the listed telecommunications network firm raised its capital spending plans due to the higher cost of rolling out the fibre network.

Chorus expects it will cost between $1.7 billion and $1.9 billion to build the network, $300 million above earlier estimates, due to much higher costs of digging up busy urban areas like Ponsonby, in Auckland, and central Wellington to lay the ducts carrying the fibre network.

The new contracts with Visionstream and Downer, which dig the ditches and put in the pipes for the network, build on existing 10 year agreements and are estimated to be worth about $500 million each over six years.

Chorus says the contracts are significant because they help keep a lid on costs and share the risks.

One of the key changes is a shift to targeted cost incentives and shared risks, which Chorus says will bring a sharper focus on financial management and better co-ordination of the roll out.

The contracts kick in immediately, and will apply to the work scheduled to start in July.

The company is still in negotiations with Transfield Services, which is responsible for about a tenth of Chorus' fibre network plans.

Chorus 'faces uncertainty'

An investment analyst says Chorus still faces uncertainty over the UFB build, despite having signed the new contracts.

Craigs Investment Partners senior investment analyst Arie Dekker says the move to share the risks and costs is logical.

He says there are three key areas of risk for investors; the communal element of the UFB rollout which these moves are seeking to address, regulatory risks and the installation process.

Mr Dekker says the communal rollout of UFB will be carried out until 2020 and these contracts cover 90% of that area through to their completion.

He says although the contracts are positive they do not absolve Chorus from all the risk associated with any further cost overruns.