Dr. Dónal Palcic:

As my colleague noted, the briefing note we submitted to the committee contains more detailed information on the points we wish to raise. I will summarise some of my main concerns.

One of the most important and controversial aspects of the debate surrounding the plan to date relates to the gap funding model that has been adopted. A number of the assumptions made in the KPMG 2015 ownership report that underpinned this decision were questionable at best and appear even more dubious now, given the events that have unfolded since. The original assumptions underpinning the recommendation of the gap funding model were essentially that placing the long-term ownership of the network with the private sector would allow bidders to leverage the use of their existing infrastructure and encourage them to continue to invest in the network to develop and exploit new markets; and that the aforementioned benefits would be reflected in the strategic value that bidders would place on winning the contract, thereby driving down the amount of subsidy required in a competitive tendering process. Strong competition among existing industry players is highlighted by KPMG as one of the key drivers behind its estimation that the gap funding model would achieve the lowest cost to the Exchequer. However, it is difficult to understand how KPMG could assume a strong level of competition when only Eir and SIRO could realistically be considered as having the ability to leverage their existing assets to deliver the NBP at a lower cost to the public purse. Moreover, at the time that KPMG was making its recommendation, Eir had already announced plans to invest in approximately 300,000 premises within the intervention area. The risk of Eir moving forward with its plans and the impact that this would have on the fundamental nature of the plan appear to have been ignored when the decision to proceed with the gap funding model was made in July 2016.

A number of the assumptions in respect of the other ownership options examined by KPMG are highly questionable. For example, it stated that the design, build, finance, operate, maintain, DBFOM, option would involve significant additional subsidy as a result of the Government being likely to seek step-in rights to operate the network in the event of contract termination. The fact that step-in rights will be built into the current contract with Granahan McCourt calls into question why KPMG assumed the cost of such rights would occur only in the DBFOM option.

In order to fully assess all the assumptions made by KPMG in its ownership report, it is imperative that the financial appraisal underpinning its analysis be published in full. Without such transparency, it is difficult to avoid the suspicion that the assumptions made were engineered to deliver a recommendation for the gap funding model only, especially given the belief at the time that it could achieve an off-balance sheet accounting and budgeting treatment.

A critical juncture in the NBP procurement process was the signing in April 2017 of a commitment deal with Eir to remove 300,000 premises from the intervention area. This development had grave consequences relating to competition for the contract and the cost of subsidy. In terms of subsidy, the original estimated budget for the plan was between €500 million and €1 billion. We know from KPMG’s single bidder solution assessment report published in December 2018 that the estimated subsidy for the plan in April 2017 after the removal of Eir’s 300,000 premises was €787 million. What remains unclear is the exact cause of the increase in the cost of subsidy since then. The Department of Communications, Climate Action and Environment and KPMG have recently stated that when Eir and Granahan McCourt submitted detailed solution submissions in September 2017, both bids included significantly higher levels of subsidy than the Department's budget model. We have not been given any detail as to why the bids submitted were far higher than expected. Since Eir withdrew from the competition it appears that the cost of subsidy to the Exchequer has increased further.

KPMG’s 2018 report highlights how the major contributing factors to the increase in subsidy requested by Granahan McCourt are the decision to move from renting Eir’s wholesale network in the 300,000 premises area to the NBP co-deploying its own fibre in that area, and an increase in the blended equity internal rate of return, IRR, reflecting an assumed higher level of risk. Although Analysys Mason touched on this issue when it appeared before the committee last week, there are still serious questions regarding exactly how much additional cost is being incurred as a result of the decision to roll out a parallel fibre network in the 300,000 premises area and why Granahan McCourt is being allowed to do so. The Department needs to clarify if this is being done purely so that Granahan McCourt can connect back to the metropolitan area networks for its backhaul needs and what the comparative cost of using Eir’s regulated wholesale network and backhaul services would have been. Unless the Department can provide convincing answers for why Eir’s fibre cannot be used, it is difficult to see this as anything other than a very costly duplication of infrastructure paid for by the Irish taxpayer.

I wish to conclude on some issues relating to governance of the NBP. The success or otherwise of the plan will critically depend on the appropriate implementation and governance of the final contract. We have been told that an in-house unit will be established within the Department to monitor the contract and will require a budget of up to €10 million per annum which will cover up to ten permanent civil servants and support by specialist external advisers. However, given the sheer complexity and scale of the contract, it is worth asking how realistic the proposed budget is in terms of ensuring the appropriate level of governance and oversight that will be required.

Outside of the cost implications of establishing a largescale governance and regulatory structure for the plan within the Department, the decision to so do also had a significant impact on the competitive tension for the contract. For example, one of the stated reasons for Eir’s withdrawal from the competition was the fact that it would have to provide access to its network at prices below the regulated level set by ComReg in the intervention area. As a regulated entity, Eir must ensure equivalence all over the country and would therefore be forced to offer access to its network across the country at the same lower intervention area price if it was awarded the contract. Another factor affecting the incentives for Eir to bid for the contract was the restriction that winning the contract would impose on its wholesale market activities. If it won the contract, its wholesale division, Open Eir, would not be allowed to sell wholesale products in the intervention area, whereas other operators would be allowed to offer wholesale products across the country, including the intervention area.

While the logic behind such clear lines of separation is understandable, the fact that Eir is already regulated by ComReg across the country but the Department has proposed setting up a separate regulatory structure for the intervention area with conflicting requirements for access prices, for example, made it very difficult for Eir to continue with its bid. This again calls into question how KPMG and the Department could have assumed that there would be strong competition for the contract from bidders such as Eir that would drive down the cost of subsidy to the Government. Our briefing note raises a number of other concerns that we have with the procurement process to date. Professor Reeves and I thank the committee for the opportunity to present our observations and we would be happy to take any questions that members may have.