Oireachtas Joint and Select Committees
Wednesday, 5 June 2019
Joint Oireachtas Committee on Communications, Climate Action and Environment
National Broadband Plan: Discussion
Ms Michele Connolly:
My name is Michele Connolly and I am the head of corporate finance in KPMG Ireland. I am the KPMG lead partner on the national broadband plan. Joining me today are my colleagues, Mr. Robert Costello and Mr. Chris Rainbird, who are directors on my team.
In this opening statement I will provide some background on KPMG. I will then take the committee through the scope of our engagement, followed by a summary of some of the key aspects of our advice.
I am a chartered accountant by profession and I have been a partner in KPMG since 2005. I lead our government and infrastructure practice in Ireland. For more than 20 years, I have provided financial and commercial advice to public and private sector bodies on major infrastructural projects in Ireland and overseas. From a telecoms perspective, the team has advised on a range of projects in Ireland and internationally, including similar broadband projects in northern England, Scotland, Northern Ireland and Australia.
We were appointed in December 2014, following a competitive tendering process, as financial and commercial advisers on the national broadband plan. Our scope of advice was split into three phases. During phase 1 KPMG advised on the ownership options, funding, governance and the financial appraisal of the project. Phase 2 involved the state aid processes, which were led by PwC with Mason Hayes & Curran, which we supported. Phase 3 was the procurement phase, during which KPMG provided advice on the design of the process, the commercial deal structure, the commercial contract terms and negotiations, the funding requirements and the overall process from pre-qualification to contract award together with a range of other ad hocmatters. Analysys Mason is the technical adviser on the procurement and Mason Hayes & Curran is the legal adviser.
I will now describe in more detail some of the key areas of our advice, turning first to the ownership question. Our 2015 ownership report examined five main options that were identified as potential vehicles for delivering the Government's national broadband plan intervention strategy. The report provided a financial and non-financial appraisal of various ownership options. Its preferred option was that the private sector design, build, operate and own the infrastructure. We refer to this as the gap funding model. This option was assessed as the least expensive in monetary terms and ranked highest on deliverability of the non-financial objectives.
There were a variety of reasons for this recommendation. Some of the over-riding ones were that where the private sector owns the infrastructure, it is incentivised from a commercial perspective to continue to invest in and upgrade the infrastructure and to continue to drive additional usage from the infrastructure indefinitely. This, in turn, drives additional economic benefit to Ireland. This could be achieved under other options but it would be through a contractual obligation, which we believe is not as strong as a commercial imperative. Under the recommended option, the State transfers significant downside risk to the private sector, such as technological obsolescence and long-term renewal of the asset, while retaining upside through a variety of financial sharing mechanisms over the life of the contract.
I shall turn next to some key aspects of our role during the procurement. As the committee is aware, shortly before detailed solutions were to be submitted SIRO withdrew from the procurement. The Department received detailed solutions from the two remaining bidders, namely, Granahan McCourt and Eir, in September 2017. In their detailed solution submissions, both of the bidders that remained in the procurement projected significantly higher levels of subsidy than the Department's budget model. The Department, therefore, made the decision to reappraise the project in accordance with the public spending code and asked KPMG to assist. The reappraisal identified a long list of eight options. The results of our assessment indicated that the current approach should continue. This assessment was made based on looking at the then current situation against the same criteria as the original ownership report.
Following Eir's withdrawal from the process, the Department requested that KPMG undertake a review of the available procurement options at that point. The review concluded that the current process should continue but came with a clear recommendation on including initiatives to address the lack of competitive tension. The report also considered the methodology regarding how we would assess whether a bid received in a single bidder situation was acceptable to meet the requirements under the public spending code.
The final tender was received in September 2018. The overall finding of the tender evaluation completed by KPMG and Analysys Mason was that the final tender was now capable of satisfying the Department's requirements as set out in the tender documentation. A tender evaluation considers how well the bid meets the requirements of the Government. This is different from the cost-benefit analysis as prepared by PwC, which compared costs to economic benefits delivered.
I turn to the concept of value for money. In light of the fact that two bidders had withdrawn from the procurement process before the final tender stage, it has not been possible to compare the final tender received with any competing bid, which is the traditional means of assessing value for money. Using the methodology that we had set out previously, additional detailed analysis was undertaken by KPMG, with support from Analysys Mason, to inform the Department's consideration of whether the final tender submitted by the remaining bidder was an acceptable outcome for the Government by reference to the public spending code. This analysis examined various means by which to verify or benchmark key components and assumptions in the tender, and it concluded that the bidder's final tender pricing was higher than expected in some key areas. The detailed technical assessment undertaken by Analysys Mason concluded that the bidder proposed a technical solution that was capable of delivering on the Government's requirements.
Each of the areas of difference between the bidder's key assumptions and the Department's was then considered to ensure that the Department was adequately protected should its assumptions prove to be more accurate than the bidder's. In a number of areas, we made additional recommendations to try to enhance the relevant contractual provisions in favour of the Department further. However, a contract is only effective if it is appropriately adhered to and implemented by both parties. We have made a series of recommendations throughout this report as to the level of effort and skills required to monitor and oversee the various contractual provisions.
This has been a protracted procurement process to this point, but that is reflective of the complexity of the infrastructural deficit that the project is trying to address. It is a large and complex project with significant inherent risks. It has also had to address varying challenges along the way. The level of detailed work that was undertaken at key stages to assess and reassess the optimal route forward as circumstances changed has been significant. The solution on the table now, which is more expensive than originally envisaged, has been assessed as capable of delivering on the Government's requirements. It is underpinned by a contract that, if implemented and monitored appropriately, should provide the Government with the mechanisms to exercise oversight over the deployment and long-term operation of the network, share in certain upsides, and limit the downsides of the project. I am happy to take questions on the advice that we have provided.