Oireachtas Joint and Select Committees
Tuesday, 14 May 2019
Joint Oireachtas Committee on Communications, Climate Action and Environment
National Broadband Plan: Discussion
I have provided the committee with a written copy of my statement. I thank the committee for the opportunity to present this statement. We have sought to be extremely open on this contract because it is of such importance to the State and we have provided a huge volume of information which I know the committee is anxious to discuss. This project is core to Project Ireland 2040 and I absolutely believe that the power of digital transformation is such that the Oireachtas should not contemplate 1.1 million people not having access to broadband.
That would represent a quarter of our population, 1.1 million people, including 68% of farmers, and 540,000 premises. Having previously been Minister for Jobs, Enterprise and Innovation and, more recently, Minister for Education and Skills, I am aware of the extent to which the digital transformation is altering how business is done, how lives are led, how education is consumed and, in time, how health will be delivered and the capacity for remote working. Nobody would dispute that what we are doing here is crucial.
Twenty years ago, the State sold Telecom Éireann, the merits of which decision I will not enter into today. It meant we have been reliant on the private sector to decide the level of telecommunications service that is delivered. In the intervening period, the State has stepped back dramatically in terms of provision. In the decade to 1996, nearly €2 billion was spent by the State on telecommunications infrastructure, a very substantial sum for the time. In the 20-plus years since, by contrast, just €400 million was spent. Over the comparable period, we spent €11 billion on the water system and nearly €40 billion on the roads network. In telecommunications, however, we have relied on the private sector. The latter is doing a good job for urban dwellers, who will, in time, receive fibre broadband to their premises, but for many households and businesses in rural areas, that is not happening.
Our decision was to use state aid, as is permitted under EU law, to deliver 146,000 km of fibre and thereby extend the current access to high-speed broadband to cover the 1.1 million people who are excluded. The evaluation showed very clearly that the most effective way to do this is to use the existing network of poles and ducts, which are privately owned and for which a rental must be paid. Doing so is much cheaper than building them from scratch. The total cost of the project is €5 billion to design, build and operate for 25 years. The State has committed to an upper limit of €3 billion, €350 million of which is VAT. Of the remainder, €545 million including VAT, or €418 million excluding VAT, is a contingency which will only be drawn upon in very specific conditions, which will be subject to audit where they are due to be paid. The contingency is capped.
The private investor is responsible for the remaining €2.4 billion. It will have to cover that cost partly by its initial equity, partly by its working capital and partly by the user fees it generates or new equity invested over the course of the project. The initial equity to be invested was confidential under the terms of the negotiations that were conducted. However, in view of the close interest of Oireachtas Members in this matter, I asked my officials to raise it with the investor, and the latter is happy to disclose the information. It is investing €175 million in initial equity and €45 million in working capital. It is important to bear in mind that the company takes the entire risk of building this out. It is only as it completes the network that it will be paid by the State. The operator, therefore, carries the risk. Several commentators have argued that take-up may be much lower than that predicted by the investor. If that proves to be the case, the risk will be carried entirely by the company. On the other hand, if the initiative is more successful than projected, the State will realise 60% of the additional profits. It is a very balanced contract that has been put together.
The other thing to be said about the network is that this will be a fully regulated company. It will be required to deliver open access on a wholesale network. Every retailer will compete over that network.
The price it can charge to operators is fixed. In the case of a residential home it is set at €30 per month per subscriber. This is an entirely regulated business. The Deputies can do the sums as to the pace at which the build-up of revenue can happen. In the early years, the revenue is likely to be very small, perhaps no more than €10 million by year 2. It will build and the expectation is that by the end of the period it will be approximately €150 million. To put that in context, that is a company operating in a controlled environment. Eircom today - not 25 years hence - has a turnover of €1.3 billion. Therefore this is a very small company by comparison. Essentially the company is taking on the rolling out of an infrastructure to reach those subscribers who would not be otherwise served. After a very careful evaluation, the State chose this approach of not seeking to own it at the end. Rather than trying to install the poles, ducts and so on, it is more cost-effective to have that fibre erected on private infrastructure, which is the dominant format now delivering service.
Not having it revert to the State by year 25 creates an incentive for the investor to continue to invest in upgrading that infrastructure in order that it can earn more revenue and get more people on the network. We can see that already in that it is committing to deliver not 30 Mbps, but from the outset to have 150 Mbps and by year 10 to have risen to 500 Mbps. By contrast, if this came back to the State in year 25, with the lifespan of fibre being 25 to 30 years, the incentive would be there to run it down to the point where the State would be left having to carry the cost for the significant upgrade. It is important to bear that in mind.
We have evaluated all the alternatives that Opposition Deputies and other commentators have put out there. This investment was not undertaken without considerable due diligence and evaluation of alternatives in every case from the earliest point in 2015 when the five options on the table were reduced to two options. Again in 2018 ten different options were evaluated when the cost of this became clear. More recently in 2019, a series of options were further evaluated. These evaluations included many of the options people have canvassed such as setting up a new company from scratch, a bit like Irish Water, or using the ESB. The difficulty with all of these is that they fail on the basis of being more costly or more risky to the State or fail to meet the ambition we set in the first place. That is the difficulty. We have carefully looked to see if there are alternatives. The only alternative that delivers while reducing the cost to the State is by reducing the scale of those who will benefit from this, which the Government has set its face against.
There has been much interest in whether the ESB should be one. The ESB originally entered the fray in partnership with Vodafone through SIRO, but then withdrew. This tendering process obviously has to proceed to its completion. If this were rejected we could not then give state aid to the ESB to undertake this and we would have to have a fresh procurement process before any economic entity such as the ESB could be granted that.
I pay credit to the team present today for the work they put in. Very detailed thought has been put into how the State can be protected in the context of a very significant investment of €2.6 billion in a worst-case scenario, albeit over a 25-year period. There is a suite of key performance indicators. If it fails in those, it will face penalties in the short term or even loss of the project. There are clawbacks in the case of it being more profitable than expected, being sold or the terminal value being higher than was projected. There are checkpoint reviews on its progress in rolling out the model with viability checks and if it fails those, the State can take back the asset. There will be a stand-alone board. Very detailed reporting will be required of not just the financials but also the technical roll-out and the costs of various items. We will police rigorously with a governance model every item where the State can save. A contingency of €480 million is included. In the coming months we will put together a team to strengthen the resources we already have to ride shotgun on the roll-out of that to protect the State.
While I know this is controversial and there will be many questions, I assure members that when I took up this post, like members, I came in with a sceptical approach and a questioning mind to look afresh at all of these. I can say hand on heart that I believe this is the best option available to us. It will deliver this at the least cost and the least risk to the State. It will ensure that 1.1 million of our citizens have the opportunity to participate equally and fairly in what I believe will be tremendous opportunities created by the digital transformation.