Mr. Fergal Mulligan:

In regard to the commercial model, the Deputy made several points about take-up, clawback, penalties and the financial implications of higher take-up on the project. As Mr. Ó hÓbáin said, the project has a maximum capped subsidy of €2.1 billion in the first instance, as well as a contingency fund, of €480 million, which it is always necessary for projects to have in the event of a rainy day. That funding is there for 25 years and will ultimately be monitored, week by week, month by month, quarter by quarter and year by year, by our financial experts and engineers to ensure we are getting value for all moneys that are spent.

The clawback kicks in for a number of areas, as we have explained before. Where NBI spends a lot less money than anticipated on the capital costs of building a network - where, for example, it buys fibre cable or other materials at a much lower than expected cost - that will be clawed back 100% by the State. Something like 80% of the bill costs, if they come in under budget, are clawed back 100% by the State. That is the first saving of State money, regardless of take-up, in terms of subsidising the network. The second major area of clawback, which is very relevant to the commercial model of NBI - which is, after all, a commercial company - relates to the outturn, year on year, for the next 25 years. There is a clawback of 60% on any excess profits it may make.

That year-on-year model will really only come to pass in the next ten or 12 years, when we see the reality of the take-up and, more important, the reality of what it is costing to run this business. It is only then that net profit will become apparent, or, indeed, it could be a loss. Time will tell. If there is an excess profit, the State will claw back 60%, which will reduce, incrementally and over time, the overall cost of €2.1 billion to the State. We hope to have recouped a significant amount of profit from the overall project by 2025 such that the €2.1 billion allocation is reduced in aggregate terms. However, as I indicated, that is not something we will see in the next five years.

On the take-up scenario, there was a wonderful newspaper article a few years ago in which colleagues unearthed an article run by a newspaper in the 1950s or 1960s with a headline indicating that the take-up of ESB networking in rural Ireland was expected to be 10%. I put a copy of the article up on the wall at home because there were a lot of articles going around at the time about the national broadband plan and whether there would be any take-up of fibre broadband in rural areas. Articles claiming that there is a 5% or 10% take-up on the NBI network need to be seen in a context where, as we have seen in Cavan, Monaghan and all the places where broadband is now available for order and preorder for 27,000 premises, the take-up rate, in the majority of those areas, is in excess of what we expected in 2019 when the contract was signed.

Obviously, that is very positive news for the business case of NBI. We expect now, as the project gets into a steady state of roll-out, that there will be at least 1,000 connections per month, which will increase as we go from 27,000 premises to 60,000, 100,000 and 200,000. The rate of 1,000 connections per month will ramp up on the graph over time. The business model of this network, like the business model of Eir, SIRO or any other commercial operator, is based on a slow trajectory of take-up in the initial years. That is the way every commercial business model works in broadband, in Ireland and across every other EU member state. They work off a base of getting to 5% and thereafter to 10%, 20%, 30% and so on. We have always said, as we have stated before in this committee, that the expectation is that, over the next eight to ten years, 80% of the addressable market in the intervention area will buy into the private broadband service. We do not expect anything less because we do not see a reason people would not buy it. The price will be on a par with that in urban areas and the service will be second to none. It will be a 24-7, 365-days service, managed by the significant KPIs set out in our contract and at a price point that is similar to that offered in urban areas. Today, customers will get 500 Mbps; I have no doubt that in a few years' time, NBI will be offering probably a minimum speed of 1 Gbps.

In terms of future-proofing and take-up, we certainly have no concerns on that level.

One of the indicators so far is that take-up will be in excess of what we predicted in the first place, which is what the Deputy is alluding to. Covid-19 has proven that and has pushed that demand curve steeper than it might have otherwise been absent of Covid. That is really it on take-up and clawback.

At the very end of the project there is also a third clawback mechanism whereby we claw back the value of the business. If it is a very successful - and we would hope it is - company by the end of the year 2025, we claw back 40% of the terminal value of that company. In aggregate terms over 25 years, therefore, if we are all sitting here then, I will be telling the committee the exact story on what we will have clawed back and what the ultimate cost to the State will be of this project. We all have a fairly high expectation that it will come in below budget, we will have significant clawback and take-up will be very positive.

The penalties on delayed build are in the contract. There are a number of penalties in the contract, which we have explained before but I will go through them very briefly. There are three particular penalties on the company of National Broadband Ireland. The first one, which is not a direct penalty in the contract, is the commercial loss to the company if it is slower building this network than it should have been because it will not get customers onto its network. Like any business, therefore, if it does not get the doors open quickly, it will not get customers. That is the first penalty commercially on that company, which will reduce its revenue while its costs are still ramping up. That puts a fairly significant working capital pressure on the company if it is not getting the revenue in the door.

The second big problem for the company is that it will not be getting subsidy from us if it is not built. There are, therefore, many commercial pressures on the company to get this built as fast as possible in order that it gets the subsidy in the door from the State and revenue in from customers. On top of that, for every day it is late from February next year, there is also a daily penalty in the clause in the contract for every milestone it misses by whatever daily penalty there is in the contract. Other penalties have been there since day one and continue for 25 years, which are key performance indicators that Mr. Neary and his colleagues would monitor. If customers make orders, for example, the company is required to process 90% of those orders within ten working days. If it does not do that over the next 25 years for every order it receives, and it will be receiving thousands of orders every week, it will suffer key performance indicators, KPI, and deductions from subsidy. If it does not fix the network within a certain period where there is downtime given a storm or whatever might happen in any given time, and people are without a service, it will be suffering penalties for that as well. Again, that is a critical point because particularly from Monday to Friday but also for businesses at weekends, the network cannot be down. In this environment with Covid-19, if people cannot make a video call, work from Monday to Friday or do business at weekends, a network that is down for an hour or three or four hours costs everybody a lot of money. There are, therefore, significant KPIs in the contract to incentivise NBI to have a robust business recovery plan for every time there might be a network outage.

I will note that many Deputies were invited to NBI's head office and headquarters yesterday and it went through the network operating centre, which showed them clearly the controls and procedures NBI now has in place to monitor and proactively ensure that the network never goes down. It can, therefore, predict where something might happen. If, for example, there is an ESB outage because of a storm that will bring the broadband network down, it has the crews ready and waiting to go and fix the network. Those things are, therefore, all in place to ensure that it does not suffer penalties. The first thing NBI does is to ensure that it does not suffer a penalty. It is not in its interest commercially to do so and it also does not want to lose subsidy. We believe all the incentives are there for it to avoid penalties in the first place.