Oireachtas Joint and Select Committees
Wednesday, 22 May 2019
Joint Oireachtas Committee on Communications, Climate Action and Environment
National Broadband Plan: Discussion
To discuss the national broadband plan, from the Department of Communications, Climate Action and Environment I welcome Mr. Ciarán Ó hÓbáin, assistant secretary; Mr. Fergal Mulligan, programme director, national broadband plan; Mr. Patrick Neary, chief technical officer; and Ms Ciara Kennedy, assistant principal officer, and Mr. Tom McCormack, national broadband plan division.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. I also advise witnesses that any submission or opening statement they have made will be published on the committee's website after the meeting.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I remind delegates and members to turn off their mobile phones because they interfere with the sound and broadcasting systems, even when left in silent mode.
I invite Mr. Ó hÓbáin to make his opening statement.
Mr. Ciarán Ó hÓbáin:
Go raibh maith agat, a Chathaoirleach, agus go raibh maith agat as ucht an cuireadh a bheith i láthair anseo inniu.
We welcome the opportunity to attend this meeting to discuss the national broadband plan, NBP. The Minister attended a meeting of the committee last week to discuss the plan, during which he answered questions and provided extensive detail for the committee. Accordingly, I do not propose to cover the detail addressed by him; rather, I will focus on the three themes identified in the correspondence received from the committee as being of particular interest - roll-out time; value for money, including the cost benefit analysis; and ownership. These themes were also addressed in some detail by the Secretary General of the Department in his letter of 24 April which has been published on the Department's website.
In the first year of roll-out National Broadband Ireland, NBI, will deploy approximately 300 broadband connection points, BCPs, across all counties. It is anticipated that between seven and 23 BCPs will be deployed in each county. They will provide a community based high speed broadband service, enhancing online participation and allowing for the establishment of digital work hubs in these locations. A deployment plan will be made available by NBI once the contract is signed. NBI is aiming to pass 133,000 premises by the end of the second year of deployment, with between 70,000 and 100,000 premises being passed each year thereafter until roll-out is complete. This means that by the end of the third year of roll-out, almost 40% of premises in the intervention area will have been passed. The timeline for deployment is informed, in particular, by the deployment of Eir’s rural fibre network and learning from that project. After the contract is awarded, the Department will continue to work with NBI and Eir to identify means of potentially reducing the overall roll-out time.
Value for money has been a key consideration in preparation of the NBP contract in the past three years. The contract contains strong provisions in that regard. The contractual controls will play a key role in ensuring costs are minimised and deliverables are met. I highlight a number of the extensive controls included in the contract, including the subsidy only being released on the receipt of proof that a relevant deliverable has been achieved, which has to be established by an independent certification process; oversight of the purchase of materials and sub-contractor contracts year on year; substantial oversight arrangements to monitor progress, costs, and uptake; significant checkpoints at various stages of the project, in addition to ongoing monitoring; substantial claw-back provisions for cost savings achieved or a share of future excess profits; key performance indicators to ensure the service will be maintained appropriately; and significant penalties to address under-performance, should it occur.
From a governance perspective, there is a stand-alone board responsible for the ring-fenced operations and day-to-day management of NBI, with a requirement to report to Minister monthly, quarterly and annually. In addition, the Minister has an appointee on the board, while there will be an independent audit of the accounts. As noted in the KPMG report published on the Department’s website, value for money in the NBP can only be measured during the deployment and operation of the contract and will be dependent on the State putting in place an oversight and governance regime that is fit for purpose. A strong governance team will be established within the Department initially to oversee the contract. In line with the public spending code, a cost benefit analysis was commissioned by the Department and it has been updated throughout the procurement process. This has been an iterative process, involving extensive engagement by the Department with the Department of Public Expenditure and Reform throughout. The most recent final version of the quantifiable cost benefit analysis demonstrates a positive benefit to cost ratio of 1.15:1 in a pessimistic scenario but that is estimated to be as high as 2.14:1 in an optimistic scenario. I am sure we will return to the cost benefit analysis in questions, but the point I want to note at this stage is that the analysis was based on a conservative estimate of benefits and did not include unquantifiable benefits in areas such as e-health, e-education, social inclusion, rural development, tourism and climate.
The Minster addressed the question of ownership in some detail when he attended the committee last week. Therefore, I do not propose to go into extensive detail at this point, although I will be happy to answer questions about it. However, I re-emphasise three points. Re-using existing infrastructure minimises cost and the impact on the environment and is in line with the relevant state aid guidelines. In looking at the ownership model it is important to look at what is being owned versus what is rented. The ownership decision was taken in July 2016 and it would not be possible to change the ownership model without a new procurement process.
We are quite happy to respond to questions with as much detail as we can. If issues are raised by members of the committee which require a more detailed or technical response, we will also be happy to revert to the committee after the hearing.
I thank Mr. Ó hÓbáin for coming before us. I have three quick questions, some of which have been raised by members of the public. Mr. Ó hÓbáin may have answered some of them in his statement.
The maximum capped cost to the State is €3 billion. Will Mr. Ó hÓbáin illustrate how that figure could be reduced and what measures are in place to reduce the amount? Are there examples from other countries which how the use of claw-backs has been successful? Can ESB infrastructure be used instead of Eir infrastructure? What engagement has the Department had with the ESB?
Mr. Ciarán Ó hÓbáin:
I will ask Mr. Mulligan, the programme director, to take the first two questions, and Mr. Neary, the chief technical officer, to deal with the third which concerns a technical point.
In dealing with the cost the Minister was very clear in his presentations to both the committee and the Dáil that the cost we were seeing was the maximum that could be envisage. The committee will see this coming through in the answers to questions. It is a capped cost, from which one will have to work back to assess what the actual cost could and is likely to be. We have very clear views in that regard.
I ask Mr. Mulligan to pick up on the first two questions.
Mr. Fergal Mulligan:
I thank the Cathaoirleach and members. I will address the subsidy because, like everything else in this project, even the make-up of a simple number can be quite complicated. The overall capped subsidy is €2.9 billion which includes VAT of €355 million. In net terms, the maximum cost that could go to third party operators and the bidder is in the order of €2.6 billion. The €355 million in VAT would not leave the Department but would go straight to the Revenue Commissioners; therefore, the amount of the subsidy paid outside the Department is up to €2.6 billion. Within that amount, €480 million has been set aside to cover unforeseen and potentially unavoidable eventualities, the incurring of which expenditure will have to be proved on a case by case basis by the bidder.
We will be working with the bidder during the next ten years in terms of passing and connecting homes. The seven-year deployment plan includes connecting homes and runs for years and years. The €480 million will not go outside the Department until the actual cost incurred is verified as a cost that was not foreseen. It is for 14 discrete cost activities which we have identified with the bidder and which it could not, with any reasonable degree of certainty, put into its bid because they are subject to future events in years two, three and four. If we did not agree a contingency fund, the bidder would probably have brought it into its bid price as a risk premium price. We have provided this €480 million contingency in a very controlled manner.
That brings us back down to the overall gross or the cost that is committed within the 25 years of €2.1 billion. Within that figure, €1.8 billion is committed up to year ten and the balance is thereafter. The difference between €1.8 billion and €2.1 billion is for the cost of connecting premises and for the rental and infrastructure. Again, the capital related cost beyond year ten is only paid once it has been incurred.
In response to the question as to where we can reduce costs and where do we plan to reduce cost, these are numbers in a spreadsheet at the moment. We hope they will be much less than that when we return in five or ten years' time. That is the expectation. The figure will not and cannot be higher than provided for, but we expect it will be much lower. Why do I believe that will be the case? I will break down the capital cost of the project into three categories. The first is the cost to pass premises and there are 540,000 premises to pass. The second is the cost to connect the premises. The third, which is included in the first two costs, is the cost of renting infrastructure. We have a very good handle on the cost of passing, as did all bidders. It will cost, give or take, €1 billion to actually physically pass all premises in the State during the next seven or eight years. This includes BCPs and all the material that one has to buy, be it brackets and poles, including new poles, and fibre cable. There is also a requirement for 144,000 km of cable, which I will address shortly. It may not be 144,000 km of cable because that is based on bringing fibre to every single home, which we know is not likely to be the case. However, we factored that cost of fibre cable into the bid as the worst case scenario.
The other major cost in the cost of passing is the optical line equipment that one would have back in the Eircom and Enet exchanges. The bidder has said publicly that its preferred partner is Nokia. If it is Nokia or another company, one has to pay for the equipment. We have estimated all those costs in our internal models and in the models of the bidder and the other bidders. In terms of the cost of connecting and passing premises, our internal model up to the final tender stage showed a 5% difference because it is the most clear path of costs. How much does it cost to upgrade the MANS for the equipment, the Eircom exchanges and bring fibre cable from the poles? The cost of upgrading and remediating the poles and ducts sits with OpenAir. That is within the rental agreement with OpenAir. If we pay €20 per pole, the cost of replacing that pole and maintaining it for the next 35 years sits with Eircom. That is the rental cost. As we know, the rental cost is around €900 million over 25 years. As to how we will look at that rental cost of €900 million, we do not do this because ComReg will look at that. ComReg is 100% responsible for whether we pay €900 million, €800 million or slightly more. If ComReg were to determine that the pole and duct prices should be slightly more, we have factored that into our contingency of €480 million within one of the 14 buckets to which I referred. Again we have provided for a capped amount and the bidder is on the hook for ComReg making a determination over the next 35 years that the regulated price should be more than is currently provided for. That risk sits with the bidder, except for the small amount of money within the €480 million that we have set aside for the eventuality that ComReg raises the price. If ComReg were to reduce the price, we would take back 100% of what was factored into the bid. We will only pay the actual regulated price on the day or month or in a given year. We are not in a position to determine what that price might be because it is an independent process run by ComReg. As we speak, the regulator is going through a detailed review of the pole and duct prices and other relevant prices to the market generally and it will presumably publish documents in the coming six months on what the pole price should be for Mbp in other areas of the country.
The third area, which is the biggest unknown, is the cost of connecting to broadband, in other words, how much it costs to get from the curtilage of every single road into every single premises and farm. For all the companies that were at the table for the past three years, that was the major debating point in every single dialogue and every modelling session with the technical staff and engineers. It is very difficult to estimate costs in this area so what we have accepted in the bid model is a cost of between €400 million and €700 million to connect the 540,000 homes. We have to assume the number that will be connected in the next 20 years. That price paid will be paid based on the actual costs. If it costs €300 million, we will only pay €300 million. The maximum factored into the cost of connection is under €700 million.
We will work on every eventuality, be it technology choices or doing it in the most effective way, depending on the premises and where it is located. The demographics and geographics of the locations of premises off the curtilage of every road are unique to each single premises. We have to decide whether to go underground or overground, whether there is existing infrastructure from Eircom or the ESB or whether it requires a wireless solution. Those decisions will be made area by area and bit by bit over the next seven years with the bidder, with our full oversight. The bidder has our full oversight month by month and quarter by quarter in terms of what it actually spends. Month by month and quarter by quarter, we will seek to reduce the maximum subsidy provided for to the least amount required. We stated in previous documents that in a very optimistic scenario, which is quite doable, we could see that subsidy fall by up to €1 billion. We could get a cheaper passing cost, although that is not likely to be the biggest saving, and there are potentially significant savings to be made on the connection costs. Maybe ComReg will reduce prices and the company may not need any of the €480 million we have set aside for weather events, inflation and other eventualities in years two, three, four and five. If, in the best case scenario, none of those events happens and they are all avoided or avoidable - we will look at other ways of mitigating having to dip into those buckets - we will not touch the €480 million. Those are the elements we will look at in the next number of months. We are constantly working on this to find out ways in which the engineers and accountants can come together to reduce the cost. Ultimately, however, we must achieve the objective of passing and connecting all of these premises. That is the answer to the first question.
In terms of other countries that do clawback, the system we are applying is the same as the systems applied across every member state in Europe. It is required under state aid guidelines. These guidelines, which the European Commission views as legally binding on member states, specifically set out that all members states must include clawbacks, wherever possible, in contracts because it is so difficult to predict the future in terms of the cost of passing and connecting, the cost of regulatory prices or the demand on the network. We have had many discussions with Broadband Delivery UK, BDUK, the authority that oversees all broadband delivery projects in the UK on behalf of the local authorities. BDUK works with the European Commission in the same way as the Department of Communications, Climate Action and Environment in Ireland works with the Commission. It negotiates relevant clawback provisions with bidders. Again, the percentage clawback achieved varies from case to case and country to country. In Ireland, we have achieved a 60% clawback on excess profits. We also have a 100% clawback on any cost savings on the majority of the costs the bidder incurs. For example, if the bidder gets cheaper fibre prices in the market, we will only pay the market price it achieves and we will not pay the bidder a subsidy in excess of that. If the bidder has assumed a cost of fibre of €100 per metre and it turns out to be €70 per metre, we pay €70 and the bidder does not get the additional €30 per metre. That 100% clawback is provided for on what is in the bid.
Clawback is not unique to Ireland but standard across France, Germany and the UK. In the most recent example in the UK, BT submitted a bid which took a very pessimistic view of the number of people who would use the network but it turned out within one or two years that demand increased from 20% to 40% overnight. BDUK clawed back £700 million from the figure initially agreed to be paid out in subsidy.
That is going on continually in every single authority in the UK. The most similar project which will have similar clawback provisions, the R100 scheme in Scotland, has not been concluded. It is going through similar processes to those we have undergone. It has been decided to go with three lots, which is how we started. A gap-funding model will be used. In terms of the governance, the contract is quite similar to ours. It follows a very similar template and many of the advisers we have used have been on board.
What we are doing is not uncommon. There are concession models in different local authorities in France, but contract and clawback provisions within the first 20 or 25 years are also relied upon very heavily. That is the standard form for any gap-funded or concession model.
I will touch on the ESB before Mr. Neary gets into it. He is the technical expert on the differences between using ESB networks, Eir networks, and the tower and mast networks that would be used should a wireless option be chosen. The initial engagement with an ESB network solution occurred when SIRO was at the table. We had more than 880 hours of dialogue with all bidders. Between mid-2016 and when SIRO pulled out in September or August 2017, we went through what it would mean to use these networks with many representatives from the ESB Networks team, including engineers and accountants. We had the benefit of a couple of hundred hours of talking through the challenges, benefits and all of those things. Mr. Neary was at all of those workshops. We have a very deep understanding of what it would mean to use the ESB network. ESB Networks gave us all of that detailed information over many presentations. SIRO then pulled out and, as part the contingency planning we carried out, details of which can be seen in our reports and documents from the latter part of 2018, we engaged with the ESB in meetings and went through things with it in the context of the challenges involved and what would be possible both within any contingency plan and the current plan. Again, it is absolutely open to the current bidder to make use of ESB networks where it is most cost-effective and practical to do so.
Another actor that is very important in this regard is the Commission for Regulation of Utilities, CRU, because it sets the prices for access to that network. We have engaged with the commission, as has ESB Networks. That engagement is ongoing and will continue. I will hand over to Mr. Neary to discuss the technology aspect.
Mr. Patrick Neary:
I will cover ESB infrastructure. It is important to state that while NBI's bid is based primarily on use of Eir and Enet infrastructure, using ESB infrastructure in the course of the roll-out is absolutely still an option. It will be an option in instances where that infrastructure is most appropriate and cost-effective to use. During the roll-out and prior to starting to build in any location, NBI will carry out a detailed site survey. It will identify the existing infrastructure and come up with a detailed design that is cost-efficient and appropriate for the particular area involved. As we have discussed before, it has chopped the country into 110 deployment areas. It will identify the most appropriate infrastructure for a deployment area and will then propose a solution and seek authorisation from the Department to proceed with building. NBI is engaging with all infrastructure access owners to agree the processes by which that infrastructure would be used and an appropriate price for that use. These owners include the ESB.
Mr. Mulligan touched on the fact that each type of infrastructure presents its own challenges. Throughout the bid process and the SIRO engagement I got very familiar with the challenges associated with ESB infrastructure. A number of ESB experts were brought to the table to demonstrate the very stringent health and safety requirements which must be adhered to in using ESB infrastructure. Such use is governed by the primacy of the electricity network. The infrastructure is there to serve electricity customers in the first instance and that has to be respected by any other user of the infrastructure. There are a number of physical barriers to using the ESB's pole and duct infrastructure. For example, it has a lot of pole-mounted equipment. In certain instances, using a given pole can be a mini-project in itself. The ESB has developed a process by which it can be used so, to answer the question of whether it can be used, it absolutely can. NBI will have the option to pursue that, which it will, but, as with other infrastructure, there are challenges involved.
With regard to the overall engagements, we have examined the use of the infrastructure through the bid process with SIRO. We have had bilateral meetings with the ESB in order to understand the processes by which it makes its infrastructure available. We have also met the CRU with regard to how to determine pricing and how any issues arising from the primacy of the electricity network could be handled.
The agreement is that each member will have a block of time in which to engage in a dialogue with our guests. I will ask a question and then get a response and we will work our way through it. Who is the bidder at the moment? What is the entity to which the State has assigned this status of preferred bidder?
Mr. Fergal Mulligan:
With regard to the shareholders in NBI, above the latter is a holding company. The owners of that company are Tetrad Corporation and Granahan McCourt Dublin (Ireland) limited, which is not the same as another company people mention, McCourt Global LLC. Granahan McCourt Dublin (Ireland) limited is 100% owned by David McCourt, while Walter Scott and his family own Tetrad Corporation. NBI, which is the company with which the contract will be signed, and the holding company which sits above it are wholly owned by David McCourt and Walter Scott and his family.
There has been some confusion in recent days. Different answers were provided to two parliamentary questions asked by Deputy Cowen and me. McCourt Global LLC was mentioned as a shareholder on 15 May, together with Tetrad and Granahan McCourt. I take it that was incorrect. A subsequent response did not mention McCourt Global LLC, but only Granahan McCourt and Tetrad. Can I assume that McCourt Global exited the scene between 15 May and 21 May?
That is important. Did that formal change take place in the month or two after the former Minister met David McCourt, who is Granahan McCourt's principal, and McCourt Global LLC, of which the principal is Frank McCourt? Is it true to say that the character of the one bidder that was left changed substantially within a month or perhaps two of the event in New York?
Mr. Ciarán Ó hÓbáin:
They exited in a very public manner but that change had to be given effect through the pre-qualification questionnaire, PQQ, process. It conformed with that process. When that change happened, the role of those two companies, McCourt Global LLC and Tetrad, was that they were the two relied upon to demonstrate the capacity of the bidder to meet the financial and economic criteria of the PQQ. They were both assessed separately and either of them would have been sufficient to have qualified.
An event took place between the former Minister and a number of officials from the Department in the summer of 2018 or thereabouts. There was a discussion at that meeting, which was minuted, which talks about the make-up or potential change in the consortium. Frank McCourt of McCourt Global LLC was present. Subsequently, his company was relied on to act as a guarantor or to assist Granahan McCourt and David McCourt still being a qualifying bidder. The process auditor who investigated this, to the best of my recollection, never interviewed Frank McCourt and perhaps assumed that he just happened to be having lunch with his brother for the purpose of welcoming the Minister to New York. I do not know. Peter Smyth did not carry out any analysis of the presence of Frank McCourt at that meeting. I am at a loss to understand what was the purpose of Frank McCourt's attendance. One would not have to be Einstein to figure out that soon afterwards, he gave a letter of undertaking to his brother to get him to pass a certain milestone within the broadband process. That does not look great. I certainly think there is an issue.
David McCourt's company, Granahan McCourt, started a process a long time ago. It changed in character and nature almost monthly. It was like "Lanigan's Ball", with companies going in and out. There were different points at which he relied on the financial strength or ability of another company. That allowed him to progress a stage further and then his brother said he was on his own and that he got him this far. Does Mr. Ó hÓbáin not think that this raises very serious questions about the capacity of the company to which he has decided to grant preferred bidder status? We understand that the risk being taken by all concerned is €175 million of capital investment. The Taoiseach told us in the Dáil Chamber today that this is being put in by Tetrad. David McCourt, the actor for Granahan McCourt, is not putting any money in. We have had this company come all the way through, bringing different people along, potentially providing money, and now it turns out that he has found a company but it is not his company. The State is still carrying all the risk. Will Mr. Ó hÓbáin confirm that the €175 million in capital is coming from Tetrad? Was the Taoiseach clear on that today?
We talked about the holding company. Is Tetrad a shareholder of the holding company? Is it held equally with Granahan McCourt? We understand that all the capital is coming from Tetrad. What is its share of the ownership of the holding company?
Mr. Ciarán Ó hÓbáin:
I can confirm that it is a shareholder. As I indicated to the Chair, we will provide this in the form of a diagram. It may be helpful for the Deputy to have this in front of him to engage about it. The Deputy referred to a meeting. The note on the meeting last year is in the public domain and the process has been dealt with. I do not propose to comment further.
The capacity of the bidder has been clearly established through the evaluation process, right through to procurement. To get through the gates of this procurement process, there were detailed criteria. Five parties applied to come through the gates of the process and three were qualified. For those three parties to remain in that process, if there were any changes within their bid, they had to revisit and go through the pre-qualification test again. Where there have been changes in bids in this process, they have gone through that process, it has been evaluated in accordance with the rules of procurement, and they were approved. Most importantly, the final tender received went through an extensive, rigorous evaluation. The first conclusion from that, which allowed for the decision that the Government took earlier this month, was that the bid had been evaluated as meeting all of the requirements of that procurement. There was a bigger decision to be taken about moving ahead with the project, the cost etc. By coming through that evaluation, it is a categoric assertion that this entity which is sitting before us today, and that is the preferred bidder in the national broadband plan procurement process, has met all of the requirements of the procurement process at PQQ stage and at final tender stage.
The Deputy referred to two companies. It is important that, at the PQQ stage where the financial resources of the McCourt Global company referenced and Tetrad were assessed by the Department's team and our advisers. The conclusion was that either company would have passed the test if it was the sole party, to allow the bid to proceed through the PQQ. At the final tender, while they both provided letters of support, Tetrad provided the commitment to the €175 million of equity. It is Granahan McCourt, not McCourt Global, that will provide the working capital. That is information which the Minister has been very clear on in responding to parliamentary questions in the House this week. I understand that the Taoiseach also referred to it.
With regard to the gap funding model, in 2015, five elements were looked at. If one goes through the work of KPMG and PwC at the time, it seemed like a good option when looking at the pros and cons. It was the cheapest overall, with the lowest level of subsidy required upfront and it minimised State exposure to risk. It was all good.
It went with the gap funding model and it was hard to disagree with it at the time. When SIRO and Eir pulled out, I am at loss to understand how the project team and the Department did not revisit the ownership model, recognising that all of the pros had effectively evaporated, and consider how it still made sense to go with the gap funding model. Following the passage of 20 months, the State now has to carry all of the burden of risk with the figure of €3 billion. Was it a bad decision not to re-evaluate the situation at the time?
Mr. Ciarán Ó hÓbáin:
If we were dealing solely with that issue, we could spend significant time discussing it because it is a complex issue. It is not black and white. Clearly, there are pros and cons for either model. As circumstances change, I would not agree with the analysis that the pros have evaporated.
Mr. Ciarán Ó hÓbáin:
We will absolutely. The complexity of it is such that the pros change. Some actually remain at the core and we could usefully address that aspect. There was a reappraisal at a point in time when we had a single bidder. I fully accept that it challenges the Department. The question is did it not look at and fundamentally assess it and then, if it was on track, should it have continued with it. The answer is we did. We tend not to come outside the front door to set out what it is we are doing. When we are inside the door, we are absolutely asking ourselves these questions. We will talk through the process. We are confident that it is the right outcome and that the analysis is still right.
Mr. Fergal Mulligan:
As to what are the pros now that we have a single bidder, it goes back to the shared risk and whatever model one would have chosen. It has been a long road since 2015 since when there have been many changes. As Mr. Ó hÓbáin said, we engaged KPMG and Analysys Mason. The minute Eircom left the process, the team went into the room to look at the options available across the board. They included stopping or starting.
Mr. Fergal Mulligan:
We would not be sitting here if we did not think the gap funding model worked. There are many reports, but I will take the Deputy through six points I would like to articulate.
The gap funding model still achieves the policy objective which is to provide people in rural and other parts of Ireland with high speed broadband. In our view, the gap funding model and the solution we have on the table will achieve that objective. The contract we will have in place by the time it is signed will ensure that objective is met with the necessary rigour and oversight to ensure these guys deliver.
In terms of where one’s starting point is, what is one trying to achieve? One is trying to achieve a policy objective of ubiquitous high speed broadband. Regardless of which model one chooses, the gap funding model will achieve that objective. I assume a concession model would achieve the same objective. Before and after Eircom left, the gap funding model would have achieved the same objective.
I think the question the Deputy is asking and what some commentators have said is the gap funding model is based on two premises, namely, competition in the process and it is much cheaper. The premise for the decision was not those two issues. What can be seen in the 2015 consultation reports and the reappraisal report is a wide array of matters which were taken in the round in considering what was the most appropriate model. The policy objective is the starting point. The gap funding model, similar to a concession model, supports all state aid and market requirements. It is a wholesale open access network, fully regulated, with products and prices and allows for effective competition at the retail level. Both models do this. The gap funding model is positive in terms of meeting not only state aid requirements but also market requirements. It is akin to what ComReg tries to achieve with the private operators that it regulates such as Eircom.
It will all be on the basis of appropriate governance. It is all absolutely wedded to the appropriate governance model being in place from day one for 25 years. Everything carries that big health warning. Whatever model one chooses, one must have appropriate governance by the Department, or whatever it decides to do in the future with an agency. That is absolutely fundamental.
Mr. Fergal Mulligan:
I could come up with 40, but there are just six important ones.
We also believe it is important to give an incentive to the private sector to run this business as efficiently as possible, to be the one dealing face to face with Eircom, Enet and the 40 subcontractors they will have to employ. No matter what model one chooses, one will have to have one’s infrastructure provider, builders of the network and an operating company. We chose a design, build, manage and operate model. We still believe the most efficient way to run it is through an integrated model where the operating company is working with the building company. It is better that they are working together, as opposed to having two contracts, with two separate companies that could be pulling and tugging at each other for the next 25 years. Again, that was a critical point. One is creating an incentive for these guys to be efficient because they will want to maximise profits. We hope they will because then the project will be successful, the policy objective will have been achieved and we will have a 60% clawback. They are our objectives and we hope the private sector has the same ones.
We believe it does protect the public interest because we have protections in place on the three factors of passing, connecting and renting infrastructure whereby the public purse will be protected. With the governance process in place, effective regulation by ComReg and the other measures we have in place in the contract in terms of accounting and oversight, we believe it is achievable in the short term. It does not require us to start a new process and kick the can down the road for another two or three years before it starts. That is not a key determinant, but it is an important factor in that everyone wants this to happen quickly. We believe this model does that but in an appropriate fashion. We are not doing it just because it works and we have two or three years to wait. It works because of what I have outlined. We believe it brings in an appropriate allocation of risk. It is said there is no risk on the private sector side. It has a mammoth task to build a network in the next seven years. It will have to set up the project management office and manage the make-ready programme with Eircom. It has been with the latter for the past year and a half, with a good process set up, with Eircom engineers with 30 years' experience working together. All of the people and systems are in place. The private company will take the risk that Eircom will go slower or that demand on the network will not arise as quickly as it thought it would. It is also taking the risk of operating the company from year ten to year 25 and up to year 35. There is an allocation of risk in a context where it really needs to make this work.
Mr. Fergal Mulligan:
We have looked at every eventuality, including if this does not work. Every contract must provide for this eventuality. School contracts had to provide for that eventuality because Carillion did not work out. It has to be included in every public contract and we have it in spades in our contract. If, for some reason, these guys fail during the design, build or operate phase, what will happen? We can step in to take back the asset or the business, depending on how appropriate it is to do either at any given time without placing more risk on the State.
With respect, Mr. Mulligan said the Department had looked at everything in the context of the policy to provide broadband for the people. Surely he is not suggesting the Department at a later stage, in an effort to mitigate the risk to the State would abandon the project.
If that were followed through, all of the risk would fall back on the State. While Mr. Mulligan was speaking, I read through a reply, dated 15 May, to a parliamentary question. It states: "The holding company will be wholly owned by Granahan McCourt Dublin (Ireland) Limited, subject to the Minister's special share". This does not seem to suggest Tetrad Corporation has any ownership of the holding company. I am not being niggly, as this has to do with who is carrying the risk. If the only risk being carried is the initial €175 million of equity, it does not give me much confidence in going to years ten, 12, 15 and onwards. In the memo circulated by the Secretary General of the Department of Public Expenditure and Reform, Mr. Watt, which formed part of the documents that were released he made it clear that all of that money would be paid back to Granahan McCourt, Tetrad or whoever was the beneficial owner within eight years. That would be before many of the people in question had even signed up. I am trying to figure out whether there will be any purpose for Mr. McCourt or his myriad of companies to remain around after year ten, as they will already have got their money. My concern which tends to undermine the reason for following the gap funding model is the State is carrying all of the risk.
Mr. Fergal Mulligan:
I will address the notion that Mr. McCourt might be fully paid back by a certain date. We hope the design, build and operation of the plan will be successful. If everything is a roaring success, like any equity put into any company, the equity providers will be entitled to take their money back with a rate of return. That is what Mr. Watt would have said. If Mr. McCourt is successful in rolling out to 540,000 premises, connecting them on time and meeting all of the KPIs, requisite milestones and every other part of the contract - it will be a significant burden on any private operator over ten years, but I hope to be sitting here in ten years' time saying he has done it - he will be entitled to take back the money he has invested. If he does not meet the requirements, he will have two choices. His main choice will be to invest more equity. If there are fewer customers in year four or five and a cashflow shortfall, he will have to make up the equity. He will not get more of the subsidy. The equity in the company being established is to be €175 million, but who knows what additional amount might have to be invested by year six or seven to avoid us stepping in.
The Deputy should not forget that we have a choice. If Mr. McCourt has 150 or 200 people working in a company, we will not be starting from scratch. As long as it is appropriate to do so, we have the choice, not the obligation, to take that company and keep everything going. Much of the subsidy will not have been paid at various checkpoints. There are 110 deployment areas. If 40 are delivered by year four, the network will have been built for those 40 areas. We would take on those 40 areas and have a choice about whether we shouold keep the process going with the operating company or doing it differently. I assume the operating company would be working in the way it should, with experts and people in place. It might just be the case that Mr. McCourt had ran out of road and money.
For the purposes of clarity, is Mr. Mulligan saying the only returns to the bidder will be based on certain performance milestones being achieved or will it just be a straight line return over a certain number of years, that is, a return will be made on an annual basis, regardless of the requirements?
Let us take the worst case scenario, in which no one or a low percentage of less than 20% - that would be the standard in starting off - sign up. Would Mr. McCourt still be able to achieve the bulk of his milestones based on designing the network, rolling it out, passing premises as set out and so on?
Mr. Ciarán Ó hÓbáin:
We have considered the risk at both ends, for example, the potential cost to the State if the process goes badly. That is why we have taken this approach to a contingent subsidy and a maximum capped subsidy. On the other side, we have considered what would happen if the process was to be very successful and the uptake was fast. In the Department we are positive about the project and considering what is happening in urban areas. We have the figures for Eir's 300,000 households, but we cannot share them. There is frustration about that, as figures are sometimes thrown around that are below them, although I will not say which. Everything we are seeing in the market suggests we will not have the worst case scenario; rather, we will be somewhere in a mid-to-positive case scenario.
On how the contract is structured, it has to protect against the very positives and the very negatives. Governance will lead towards the place one will expect to be in - the middle case scenario.
We have been trying to follow the process and read what has been happening behind the scenes for the past three years. The past few weeks have seen startling revelations. What we have been told publicly by Ministers and so on has not matched what has been happening behind the scenes, some of which we suspected.
I wish to ask about governance. I would like the delegates to keep their answers short, as I have a number of questions to ask and they will appreciate this is the first opportunity we have had to ask some of them.
There will be nine representatives on NBI's board. At a recent morning briefing by officials in the Department, we were presented with a diagram. One of the board members will represent the Minister and the taxpayer. The taxpayer is putting in up to €2.95 billion. According to the Taoiseach today, Tetrad is putting in €175 million. It has only come into play in recent days or, rather, we have only been told about it in recent days. The entity has changed numerous times in the three years I have been following this process. As far as I can ascertain, Granahan McCourt is putting in a maximum of €45 million in working capital. The taxpayer is investing up to €2.95 billion but will only have one representative on the board. I do not know whether any of the delegates has ever been a member of, for example, a residents' association, sports club or some other committee. I do not mean this to sound smart, but if there are nine people at a committee meeting and a decision has to be made, it can come down to a vote. If there are eight people representing the interests of the private investor of €45 million, €175 million or whatever else and only one person representing the 4.7 million of us who inhabit the State, do the delegates believe the governance model is sufficient to provide for the interests of the Government, the Oireachtas and the taxpayer?
Mr. Ciarán Ó hÓbáin:
I understand the point about there being one member. I have been involved in committees and have scars on my back after chairing a GAA club on the north side of Dublin for nine years. The Minister's appointee to the board is just one of a suite of governance measures. The board has only one purpose in life - to deliver on the contract it has signed with the Minister. It is a 1,500-page contract, with a suite of governance measures. That is where the key controls are for the Minister.
Mr. Fergal Mulligan:
In other countries these contracts tend to be awarded to large groups. In the United Kingdom they are awarded to BT, Orange, Deutsche Telekom and similar.
We set out on this journey in 2015, when we clearly said in strategy and procurement documents that a tenderer must set up a ring-fenced stand-alone special purpose vehicle that would be dedicated to this project. Therefore, the Minister's appointee is a very important person to have on the board. The sole responsibility of the overall board, whether it is made up of five, seven or nine people, is the delivery of the contract for the Minister and the board will report to the contract regularly. It is not like other group companies across Europe or even in Ireland.
With respect, they are in place and are appointed by the company. I asked this at the private meeting in the Department the other day. They are appointed by the consortium. If they are appointed by the consortium, they are there to represent the interests of the consortium. If I was part of the consortium and I put eight representatives on the board, I would be clear about who they were representing and to whom they were reporting back. The entity, National Broadband Ireland, is flawed because of that. I get no pleasure in pointing this out to the Department officials. The structure is flawed from the point of view of the taxpayer, the State and protecting the interests of the taxpayer. With representatives allocated eight and one, the balance of power on the board is overwhelmingly weighted in favour of the investor.
I want to move on to discuss the risk to the taxpayer. The Secretary General of the Department of Public Expenditure and Reform described the risk as a leap of faith. Mr. Brendan Ellison, principal officer, strongly recommended against it. We have seen that in the documents released. The Department called into question the financial and technical ability to deliver the project.
Deputy Dooley referred back to where it started but it actually started long before that, because Enet was the company in the bidding. Then, Granahan McCourt entered. We have seen all the changes since. SSE pulled out. John Laing pulled out. All of the others who were part of that consortium have pulled out. Now we hear that there is another investor. This morning, the Taoiseach said a total of €175 million is being put up by Tetrad. Is that written into the contract? Has that money being lodged into an account? Is it simply an A4 sheet of paper? Is it simply a letter of comfort from an entity called Tetrad to say that it will commit a given amount to the project? Can the Department officials clarify that? The Taoiseach mentioned that letter.
I am asking the Department officials what they have at this stage from Granahan McCourt and the consortium in terms of guarantees that the money is in place. Is it simply a letter of commitment that the Department has?
Mr. Fergal Mulligan:
This applies in any tender process. We are not doing anything different from normal tender processes. Under the tender process, the company had to get through the gateposts. It had to meet significant requirements in terms of the financial support and whatever else it had to provide in terms of guarantees that the money would be in place before a contract was signed by the Minister. Then, when a contract is signed, the money will be in a bank and will be absolutely contracted before the Minister has to sign the contract.
We have a complex process judging from the diagram the Department officials produced the other day. It is overseen by the board of National Broadband Ireland, which has one member representing the taxpayer. We have a letter. The only thing we have from a private investor is a letter of commitment at this stage in the process. We are three years into it.
Mr. Ciarán Ó hÓbáin:
The whole point is that until a bidder has got to a position where the Government is able to indicate to that bidder in the process that it wants to get the contract closed and award a contract to that bidder, then we will not get those kinds of contractual positions. Such a bidder will not be in the contract. A bidder can only be there at the point when we have the contract signed. We went through a procurement process. In the procurement process we needed to know that the financial standing was in place. We needed to know that there was equity to be invested and we needed to know the amount of that equity. We needed to know who was committing it. We received all of that. Then, we give effect to that in the contract. It is an entirely appropriate way to proceed.
I remember the Department officials and the Minister telling us that they had John Laing and SSE on board as well as all the financial firepower behind the project. Now, it has all evaporated like a ball of smoke. What we are left with now is a letter from a new company, one we are only hearing about this week. Those are the facts. Can we move on?
Mr. Ciarán Ó hÓbáin:
It is not a new company that we are only hearing about this week. The Department has worked with the Committee of Public Accounts. We referenced before who was putting money into this project. There is context here. Deputy Stanley mentioned other companies that had an interest in the national broadband plan procurement. Those companies participated in that and came through the gates. However, at the end of the day we can only deal with the companies that came forward, submitted a final tender and are now seeking to sign a contract. That is what we have before us.
Two companies pulled out in 2017. After that the Department drew up two contingency plans. I want to move on to that. In his opening statement, Mr. Ó hÓbáin pointed out that the Department investigated the need for a plan B. The Department published two contingency reports, one in 2018 and another in 2019. Both reports concluded there were viable State-led alternatives that could deliver high-speed broadband in rural Ireland. Will Mr. Ó hÓbáin outline to the committee the strengths of each of those State-led alternatives that the Department concluded were viable?
The Department officials referenced the contingency report. Page 111 of the 2019 document states that a significantly more robust and thorough analysis would be required before the preferred plan B approach could be confirmed. Will the Department officials tell the committee whether this thorough analysis was ever carried out or whether a cost-benefit analysis was commissioned by the Department on the plan B options? If that did not happen, why did it not happen?
Mr. Ciarán Ó hÓbáin:
Let us step back. First, I will not dare to attempt to go into the detail of all of the contingency options because they are in detailed reports that have been published. Having said that, we are happy to drill down on any specific questions on individual options. Under the 2018 and 2019 processes there was extensive engagement internally in our Department and with the Department of Public Expenditure and Reform. We were looking at this in the context of the procurement process ending without a successful conclusion for any reason. We looked at where we would go. Then, at a later stage, we had a final tender in. We understood that it could be delivered but we also understood what the cost was at that point. We had to look again to see where that would bring us. There was extensive analysis. Across the analysis there were some common themes. There were options that we could proceed with in the event that plan A did not go ahead. Under any of the options the first thing we would have to do is effectively go back to the drawing board and consult on the strategy. Then we would need a decision and we would need to publish a new strategy on the way forward. It would not matter which option we took, whether we took one that was going to depend entirely on the market or one of several options around the establishment of a State agency. One factor with a State agency option is that we do not have a State telecommunications body so we would have to establish that and build it up. The obvious starting point would be to look at the resources in place. There is a small team within the Department and we would have to try to build from that. That of itself would take a certain amount of time. We would expect a legislative element involved in that scenario. Then we would need to go back to the market no matter what model we took. Time was certainly an issue.
The Minister answered questions in the House yesterday around a cost-benefit analysis for those alternatives. It would not be possible today - I would challenge anyone who could claim to do meaningful cost-benefit analysis on any of those options - because we are too early in the process. Let us suppose that at this point we considered those options, allowing for the fact that we would have to consult on strategy and the amount of associated time we would lose once we have ended the current process. The first question is what the scope of the intervention area would be.
Would it be 540,000 premises? What would have changed by the time one had moved on that strategy? If we consult on a new strategy, we must be open to different approaches that could affect it. We would have to consult the market in terms of the infrastructure that would be used, because infrastructure was central to the procurement process that we have just come through, whether we plump for fixed line infrastructure of the two main networks, Eir and ESB, or whether somebody might come forward with or press for a more of a mobile solution. Until there is clarity on the scope of the area, the nature of the technology and the scope affect the revenues plus the timing. Again, some of those options that we looked at were to do a project very similar to the current project but over a longer period and gauging the impact of that on revenues. Until we could lock down those factors, investing money in cost benefit analysis or CBA would have been meaningless.
We now know that the chosen model requires a subsidy to the tune of €1 billion for the rental of the poles. The Minister said it would cost €1 billion but Mr. Ó hÓbáin said today that it would cost €0.9 billion over 25 years in rent. If the ESB model had been used, the infrastructure would have been in place. The taxpayers will subsidise the project to the tune of almost €3 billion, of which €1 billion or almost €1 billion will be spent on the model that the Department will use which, in turn, will go to the company called Eir, which was purchased by a French investor about two years ago. Is that correct?
Mr. Ciarán Ó hÓbáin:
The figure that was called out is close to €1 billion. Of that, Eir is allowed a return on its investment, which is 8.2%. Let us do the maths. It means over 90% of that money is to meet the cost of keeping the infrastructure in place. What one is paying for is the fact that poles need to be replaced and for all of the costs of operating a network over 100,000 km of road in rural Ireland. This is not money for jam. This is money where one gets a rate of return that was set by ComReg, and ComReg can change the rate of return - the pole price. On the basis of the model that we have before us, 8% of that money is the return to Eir on its investment in that network but the rest of it is for meeting costs. The ESB would have costs of maintaining the network, equally.
The ESB network is in very good condition in terms of its pole structures and ducting. One can see when one drives around the country that a lot of Eir's poles are falling over into ditches and there has been very little investment in the basic infrastructure since it was privatised in 1999. First, Eir has got the 300,000 easiest to reach and most profitable households that banjaxed this process, which I will discuss in a minute. Second, Eir needed an investment and a subsidy to modernise and repair its poles and ducting network in every county throughout the State. Eir now has it in the form of the €0.9 billion or €1 billion that it will get over the next 25 years, so well done to Eir.
Thanks must go to the taxpayers for the contingency fund, and I am sure they will be happy with it. In terms of the contingency, the Department's position was pointed out in the opening statement. In 2018 and 2019, the Department produced two contingency reports and outlined alternative models. At what point or date was a decision taken to produce the contingency reports? Why did the Department feel the need at that point, in 2018 and 2019, to produce the reports? I ask because the decision by the Government to go with the gap funding model was made in 2016, yet there was no contingency report or, seemingly, no sense until two and three years later that there was a need to draft contingency reports. Was it only in 2017 that the Government realised that the project was in a more precarious state following Eir taking away the 300,000 easiest to reach and most commercially lucrative households? Is that the reason for the timing? Is that the reason contingency reports were drawn up in 2018 and 2019? As someone looking in from the outside, it seems that was all we could do at that point and we had to figure out what was going on behind the scenes. It looked to me, which I said to the Minister publicly in the Chamber and privately outside the Chamber, that the whole process at that point was fatally undermined and banjaxed.
Mr. Ciarán Ó hÓbáin:
In terms of the engagement around the 2018 contingency report work, that commenced in mid-2018. The key factor influencing that piece of work was the fact that we were in a single bidder situation. Earlier in the year we had carried out a project reappraisal, which led us in the direction of continuing with the procurement process, but notwithstanding that, it was determined that it would be useful to carry out contingency planning.
The second element, in 2019, as I alluded to earlier, was triggered by the fact that the evaluation of the final tender had reached the point where we understood what we had by way of a bid and we understood the cost. We had to be realistic and say that here was a very big decision the Government was going to make in this space and, in advance of that, we had to look and ask, in the event that we were not to proceed, what else we might do.
Given that the former Minister had had numerous meetings with the representatives of the consortium at that stage and the main investor, or who we thought was the main investor - it was David McCourt at that point - was it not the case that the whole process was in a very precarious state? Obviously Mr. McCourt had to be kept in the game because it was the only show in town. Was it not the case, at that point, that it looked like the whole house of cards could collapse?
Mr. Ciarán Ó hÓbáin:
I can absolutely and unequivocally say that the driver for the reports was the fact that the Government - the Civil Service - was doing its job in terms of looking at a significant major project, looking at the place we were at in that context, and understanding that we had to do a deep analysis of the alternatives were we to find ourselves needing those alternatives, and not do that analysis when a decision was taken or something landed on us.
We started out with a benchmark of €800 million or €0.8 billion for this project and the Minister stood up in the Chamber week after week to tell us the sum would cover the delivery of fibre broadband to every home, farm and business in the State. It has now been clarified that the Government and the Department have moved away from that. Even though there is not going to be fibre broadband delivered to every home, and we do not know how many homes it will not go to, the subsidy has increased to €2.95 billion, which is amazing. I know that politicians will sometimes reject the advice of civil servants at either local or national level. We have all had bits of arguments with civil servants either at local government level or at national level, and I have had arguments and disagreed with civil servants on occasions.
There is a memorandum, dated 3 April 2019, by Mr. Brendan Ellison in the Department of Public Expenditure and Reform, which states:
However, we strongly recommend against approval of the appointment of the preferred bidder to the current NBP procurement process, on the grounds of: costs and affordability;
impact on the NDP and on projects foregone as a result; [We know the list includes schools and other infrastructural projects.]
value for money and, specifically uncertain benefits;
unprecedented risk to the Exchequer; [The phrase "unprecedented risk" is very strong language.]
and compatibility with the spatial objects of Project Ireland 2040.
That is just one quote. The documents are littered with such statements.
Mr. Watt in the Department stated in another document, "I want to again reiterate my gravest concerns about all of this", which he outlined.
Is the Department certain that it should go against this advice and the advice of the officials in the Department of Public Expenditure and Reform who are charged with looking after the State finances? The public is looking at this and those who have been looking at the issue over the past ten days or so see that the costs have not shot up, and that the nature of the investors and who they are has not changed dramatically. We were given to believe there would be a 50:50 split, even if it was not said explicitly, and that if the taxpayer put in €1 billion, the investor would put in €1 billion. The main investor now appears to be putting in €45 million.
Mr. Ciarán Ó hÓbáin:
It would be a very dull world if we were all in agreement, at official and political level, all the time. There has been significant engagement between the two key Departments - my Department and the Department of Public Expenditure and Reform - throughout the process and that is continuing. Where one finds oneself working as a civil servant is something of an accident.
The Deputy pointed to some material that is in the public domain and it is a positive aspect of the decision making around the national broadband plan that so much information has been put in the public domain. It does not always help with the discourse because there is a lot of material, but key documents are critical. In the letter from the Secretary General of my own Department in response to the Secretary General of the Department of Public Expenditure and Reform, the former goes through all the issues that were raised at great length. The conclusion was that the analysis of civil servants in the Department of Communications, Climate Action and Environment was that the project is the right project and that it can be recommended to Government, even though there was disagreement across points between the Departments. This Department is not an evangelist promoting the digital agenda or connectivity. We have a responsibility to provide policy advice on the implementation of projects. Having done the critical analysis and taken the expert advice available to us, from experts on our own team and externally, we have come to a clear conclusion and the Secretary General articulated that at a meeting of this committee. His letter of 24 April should be accessed by people who want to understand the position of the Department on the matter.
My questions relate to the two letters, one from Robert Watt of 16 April, the other the response from the Secretary General of the Department of Communications, Climate Action and Environment, Mark Griffin, of 24 April. Mr. Ó hÓbáin said it was a matter of accident what side of the line a civil servant might be on, but I would always be on the side of the Department of Communications, Climate Action and Environment, possibly because of my own past experience as a Minister of that Department. I generally take a dim view of most advice of the Department of Public Expenditure and Reform because, as sure as eggs are eggs, it always says we should not be investing in digital or renewables etc. It has an instinctive desire to protect the public purse and is sceptical of most initiatives coming from line Departments, so I expected the Department of Public Expenditure and Reform to be concerned about the proposals. Despite its opposition to the fundamental strategic decision to invest in fibre to the home, I think it is the right decision as it is ambitious for the long term. I am more concerned about the fact that it is more concerned about the rate of return to the private developer, which is not its normal modus operandi. When it expresses concern about the transfer of ownership to the private sector, which goes completely against its traditional outlook on the world, I really sit bolt upright. Why is the Department of Public Expenditure and Reform, which is not accustomed to using exaggerated language and normally couches its ideas in subtle ways, giving such stark warnings?
In the response from Mark Griffin of 24 April there is small detail at the end stating the Department would incur a cost of €10 million per year to maintain a team to oversee the project. I presume that €10 million is not included in the other project costs that have been itemised. Is that correct?
Mr. Ciarán Ó hÓbáin:
The cost of governance has not been factored into the budget. As the Secretary General pointed out, the expectation is that the Department would engage in the Estimates of the Department of Public Expenditure and Reform and raise a flag to indicate, at the early stages, what it might cost. There is an intent to move to a separate governance agency to manage State telecoms contracts.
It is not insignificant if we need to use our contingencies. If the State is investing €3 billion, the actual cost of the project is €3.25 billion, because that is the total when the €10 million is added for 25 years, even if it is not index linked. This additional cost has not been discussed in the public arena.
Mr. Ciarán Ó hÓbáin:
I can see where the Deputy gets his figures from because €10 million over 25 years is €250 million. However, the cost of governance will be much more significant in the early years when deployment is being undertaken. It is a signal in the context of the letter. It was raised by the Secretary General during his communication with the Secretary General of the Department of Public Expenditure and Reform in the context of the wider costs of operating his Department. I would not extrapolate to say it is to be multiplied by 25. The figure is conservative on the upward end and the costs will be higher in the early years.
My father used to say one can never take the salt out of the soup. My experience suggests that, once there is an allocation of €10 million to a Department from central Exchequer funding, it is never withdrawn. Budgets are never cut unless there are dramatic events.
My support for the Department is based on previous experience with the national broadband scheme which we introduced. It had similar characteristics in that we ended up with a single bidder. The speeds were not the same - we had 3 Mbps - and the design and contract arrangements were done in two years, after which we delivered very quickly. One of the differences, however, is that we were dealing with Hutchison Whampoa, one of the biggest private utility infrastructure companies in the world which owned massive assets everywhere. I have nothing against Mr. McCourt and I met him when I was Minister. He was involved in a speculative, high-tech satellite project. SSE, Laing, Enet, Eir, Vodafone and the ESB pulled out to leave Granahan McCourt, but there is no comparison between Hutchison Whampoa and Granahan McCourt in terms of scale or expertise. Mr. Ó hÓbáin said there had been various qualification processes for bidders, but was one done at the final stage, when all the other bidders had left? As Deputy Dooley said, all Granahan McCourt is providing is the working capital and that is not even upfront but is a contingency cost in case its costs go over what is projected. It is actually providing nothing but a letter from a bank to say the working capital will be provided if projections are met. We are dealing with a developer who does not have any of the experience of SSE, Vodafone, Laing or even Enet. Did the Department have a final check at any stage in this process to determine whether it was dealing with a substantial company that could bring the necessary international, industrial utility scale to the project?
When was the final qualification in respect of the bidder process? When was the scale of the bidder in the context of adding value most recently assessed?
Mr. Ciarán Ó hÓbáin:
I will ask Mr. Neary to reply to that. To clarify, however, Enet is a sub-contracting part of the bidder. That is where it has been from the outset. Enet is still there. Mr. Neary will outline the final evaluation process, who is managing the company that will build this network and the subcontractors who will build it on the ground and their experiences.
Mr. Patrick Neary:
There are two parts to that, namely, the technical and financial capacity of the bidder to deliver the project. The formal process has been the pre-qualification process. The last change was concluded in September 2018 just before the final tender was submitted. As part of the final tender there was an evaluation of the technical capacity and the plans the bidder would have to deliver the project over the 25 years.
An independent evaluation team was set up on the technical side to consider the deployment capabilities and the plan to deliver that in a credible and robust fashion, the technical solution, the partners underpinning that solution, the operational organisation that it will put in place, and how it will put that in place, the processes, procedures and tools that would govern the operation of the contract once it has been put in place. That evaluation concluded earlier this year. It has come through that independent evaluation.
When I was Minister, we delivered the MANs. The model used was that the Department managed the overall contract development or the delivery. The Department was the central co-ordinator of all these contracting companies and delivered the networks. In a sense, the Department played the role that Granahan McCourt is playing, namely, it managed the contractors. Given that we are paying €10 million a year for that Department, that it has real expertise, experience and capability in this area and that it has managed the bidding process over seven years, there are no better people in the world to deliver this type of project than those sitting in front of me. Did they not at any stage think that they could do it themselves in the same way they delivered the MANs previously?
Mr. Ciarán Ó hÓbáin:
The answer is that we are not the best people. There are certainly some very good people on our team and Mr. Neary has significant experience of building telecoms networks. Our team is able to manage this project but, while the Department was the lead entity, the role played by the local authorities in respect of the MANs was significant. It would be useful for Mr. Neary to talk about the depth of expertise within this NBI company already before it builds it out further and a bit more about who the sub-contractors are and their experience in Ireland and elsewhere of building fibre networks, something the Department does not possess.
Mr. Patrick Neary:
One thing I would like to go through in brief is the challenge NBI faces in the context of delivering the project. It is a large-scale roll-out over initially 100,000 km of roadway and up to 140,000 km of fibre. It has a substantial amount of activity to kick off, getting its IT systems ready for onboarding service providers and getting the products to market, as well as commencing the design activities and starting to roll out to the different deployment areas. To design a solution that we feel is credible and robust, it has put together a team of people who are highly experienced in rolling out networks in Ireland and internationally. It has brought in people with deep experience of using the Eir infrastructure, one of the lead technical people has over 40 years' experience in rolling out networks.
Mr. Patrick Neary:
The command and control that the bidder has put in place with these experienced individuals has outlined the organisation, which is up to 150 people in NBI and it will use that to sub-contract to a large number of subcontractors from highly experienced civil and build companies, such as one the Deputy mentioned.
My recollection is that the biggest risk in the national broadband plan, and one of the biggest difficulties, was in the billing schemes because it is dealing with 500,000 people. My understanding of this project is that because it involves wholesale access, NBI will not be a direct retail company. It will not have Mrs. Murphy from Ballyhaunis ringing. She will ring Sky or Eir.
I would like to finish this point. That is the most difficult aspect, a system network set up to bill a direct customer. It will not have any customers ringing it. They will not be able to contact NBI.
Mr. Patrick Neary:
It will have a substantial billing system. The billing is to other businesses. It is a business-to-business billing system and that is where we would have placed an emphasis in our procurement, to ensure that all service providers get equal treatment from the wholesale company. It gets equivalence of inputs, that is the regulatory term. Any service provider would be treated equally by the wholesale provider. That is through the interface into its IT systems which is a particularly important interface. There is also an operational side to the IT systems which maintains and monitors the networks. Between the operational systems and the billing systems there is quite a substantial IT challenge for it to kick that off and get it in place.
In his recent letter, Mr. Robert Watt, Secretary General of the Department of Public Expenditure and Reform, which has expertise, stated that the operation is projected to have a rate of return of we do not know what, which seems very high given the risk profile of its investment. Mr. Griffin stated in response that if it goes wrong and we are not happy instead of achieving that very high return the developer will get only a 5% return where the business underperforms. This is in effect a regulated asset where the State is putting in €2.25 billion upfront. With the weighted average cost of capital an investor would expect 5%. If 5% is the downside for the business, what is the rate of return on the operations? Is it 20%, is it higher or is it lower?
Mr. Fergal Mulligan:
We have been asked this a couple of times but we do not want to be putting out more information. The bidder has been very clear, with good reason.
As there may be other projects or tenders in Ireland or other parts of the world in which they are interested, publishing everything to do with this tender could put them at a competitive disadvantage. Notwithstanding that, we have received a lot of advice from our corporate finance advisers on the rate of return within the tender. They have advised that it is commensurate with the risk in the project and is not very different to other public private partnership projects across Ireland and elsewhere.
The Deputy asked whether they will achieve 2%, 4% or even 10% but that is entirely dependent on how successful they are at designing, building and operating the network.
Mr. Fergal Mulligan:
Let us forget about termination events. What they get as a rate of return is entirely dependent on the business. That letter was written in the context of providing a ballpark figure. We were not providing an upper or lower limit but explaining that the return can vary. That is what the letter means. Ultimately, what we are saying is that if a company does not make any money, there is no return.
I take the point that it is not a guarantee but a hypothesis. Let us say the figure is 15% or 20%. That is the return on their initial capital investment of €175 million and that is ongoing over the lifetime of the project. I presume it goes up if they put more capital in and so forth. Why do they end up owning the asset? If they get a rate of return of 15% or 20%, that would be deemed profitable in a regulated market, with a long lifetime of 25 years so why do they own the asset at the end of the period? Is a 15% or 20% rate of return on capital not enough? Why do they get to own the asset?
Mr. Watt is concerned that at one of the possible break points or at the end of the period, the existing operator might have to be paid for the asset or be otherwise compensated. The asset is the fibre and the whole network. It is not a small asset. That is a very valuable asset in a world where fibre is going to be hugely important.
Mr. Ciarán Ó hÓbáin:
To go back to my first comment, we could discuss the ownership issue for the entire afternoon. It comes back to the ownership issue because the ownership issue sends one to that place. If it is gap-funded, it stays with the bidder. When one looks to the engagement between the two Departments, what one sees is questions being asked about the risks to the project and about the potential for a significant downside. The engagement is also saying that there are risks in the project if there is a significant upside. The discourse is appropriate in the sense that people are looking at the entire spectrum of issues.
The Deputy has asked about the asset and the value of the business. The asset is the physical infrastructure that is in place. The Deputy also asked a question last week about the science and research around the durability of fibre, to which he has not received an answer yet. We will explore that further but there is no question but that after 25 years or even 35 years, given the potential for a ten-year extension of the contract, we are in the space of renewing infrastructure. There is a cost there for somebody, either the private entity that holds it, as per the gap-funded model or the State. The Minister's response to parliamentary questions yesterday was helpful. Deputy Dooley spoke about doing the maths in terms of 400,000 people paying €30 per month. In that context, by the time we get to year 25, we could be talking about a turnover of €150 million. Who knows what pole prices will be by then but even using today's figures, one could be talking about €40 million or €50 million for pole rental. Let us say the company has 150 employees, it has poles that will need to be replaced following storms, equipment that will need to be upgraded and so on. There is not a likelihood of very high profitability in this business at year 25. This all relates to the ownership issue in the context of the gap-funded model, so I will not go on at length. In terms of the pros and cons, it really depends on what happens at year 25. If this business is very profitable, one would like to have it. If it could pay its way in terms of any reinvestment, one would like to have it. However, if it is the case that at year 20, the profitability was such that it required a significant judgment as to whether it was worth reinvesting and this was to come back to the State, the risk for the State would be that the private investor would not reinvest further and would not be incentivised to do so because it would not own it. It is caught up in that but we must keep sight of the fact that the value of the business at year 25 is likely to be relatively low because the potential profitability is very low at that point, post deployment. There is a risk up to the point of deployment but post deployment and post people coming on board, what we have is a regulated utility that is limited to selling wholesale services.
I have one last question. It is full of risks and the job of the political system sometimes is to take risks. I am perfectly willing to take risks in funding the provision of fibre broadband to rural Irish homes. However, given the fact that we are potentially investing €3.25 billion while the developer is investing €175 million, I see no reason not to go for a concession model under which we own the asset at the end. That way, the upside risk belongs to us in the end.
Mention was made of the ESB and negotiations with that entity. I have also been talking to the ESB and others in the last year about the possibility of using their pole network. There is a certain strategic sense in doing so because we do not really need two sets of poles across the country. My understanding is that the technology, regulatory and other risks are minimal because the ESB is already out there, rolling out to half a million homes. We know that it can do it and has learned a lot in the last few years. The biggest risk is getting anything done across a field rather than down a road. The Eir poles are on the road network, by and large, at the edge of fields whereas the ESB network crosses fields. It is my understanding, having spoken to many of those involved in recent years, that the biggest problem will be getting the agreement of landowners. It is not that landowners will be discommoded in any way and I am sure that farmers like Senator Lombard would readily agree to a line going straight across his land-----
The downside risk that the ESB and others saw was that it might not be the case with all landowners. Any time one tries to do anything in Ireland, getting access to land can be problematic. Even though it would not take more than an hour or two to run a cable across a field, access could be an issue. What if we had tackled that issue and had got agreement from rural Ireland on it because this project will be so beneficial to rural Ireland? If we had tried to get people to co-operate in order to ensure that the ESB has no difficulty in getting across fields, would that have made a material difference? Am I right in my assessment that land access was probably the biggest challenge for the ESB? I am thinking of the scenario in John B. Keane's play, "The Field", and the notion that no-one can cross a person's land. Was that the biggest problem in terms of amalgamating the network so that there is a single set of poles? As Deputy Stanley pointed out, the ESB poles are probably in far better condition than the Eir poles. What stopped us using the ESB network as the preferred route?
Mr. Fergal Mulligan:
Access is just one of a list of issues that we went through with the ESB. We discussed access to the ESB network, how broadband and electricity could cohabit without discommoding electricity consumers and the impact on wholesale and retail prices for electricity if poles and ducts are being shared. Connecting rural homes is different to connecting urban homes. The latter is predominantly done underground. Customers can be switched off in one area because there is broadband but connected in another. There is an array of issues which we would probably get through. We planned to get through them with the ESB so that its network was available but in the context of the programme that we have in place, it is not clear that it could be done faster or that it would be cheaper. While we do not know for sure, we do not believe it would be.
In terms of the road network in the context of Eircom, it has just connected 300,000 customers and has learned a lot from that. It worked very well so we have a proven network as opposed to an unproven one in the form of the electricity network across private land and across every part of rural Ireland. The bidder has chosen the Eircom network because it wants to have lesser risk on that roll-out. KN Networks and other companies, as the contractors, are now very familiar with what it takes to put fibre on Eircom poles and under Eircom ducts.
Other contractors do not have the same experience of using the ESB network and getting authorisation to climb its poles.
We might consider a different format.
I welcome the officials from the Department. It is great to have everyone here. We are debating a very important issue. Could our guests provide clarification on the cost–benefit ratio and how it operates? In the presentation, a ratio of 1.15:1 was referenced as the most conservative estimate. The higher estimate is 2.14:1. These are competing figures. The delegates might elaborate on why there is a difference. How was the analysis carried out?
Our guests might also elaborate on the key indicators that were not taken into consideration. One of these was e-health. An unusual indicator mentioned was climate change. I have never come across the latter being used in that way until now. We have obviously gone through a very extensive process in the Oireachtas producing a climate change report. All Departments told us what they need to do to ensure that we will meet our targets for 2030 and 2050. Mr. Ó hÓbáin might elaborate on why this was not considered a priority when it came to the issue itself. The lack of broadband in rural Ireland and the climate change issue are tied together. Why is the climate change element not central to the figures? Why was it excluded?
Mr. Ciarán Ó hÓbáin:
I will talk at a very high level about what was not in the cost–benefit analysis. Perhaps Mr. Mulligan will talk about the pessimistic and optimistic ratios. Regarding the cost-benefit analysis, there is a methodology in the public spending code. It is a very good discipline. One cannot make it up as one goes. One has to have the same set of rules for all cost-benefit analyses in order that the Government can have the ability to compare projects A, B and C over time.
The Senator is correct that the Minister called out benefits that cannot be captured under the public spending code, such as e-health, e-education, social inclusion, rural development, tourism and climate. Yesterday, in responding to parliamentary questions, he focused on the statistics that exist with regard to the percentage of time spent on remote working. A figure of 4% is given but it is recognised that this is increasing.
I refer to the reality when dealing with a technology project. The Secretary General of the Department of Public Expenditure and Reform called this out in his response. The cost–benefit analysis is important as a tool the Government so it can understand, having gone through the rigorous process, the answer it gets. The answer is positive. One must recognise, however, that the methodology has limitations as an analytical tool in that the benefits that will result cannot be measured at this point. If one were to have conducted a cost–benefit analysis on the introduction of a smartphone and follow the set of rules, the benefits one would have included would have been limited to the use of the phone for calls and texts, yet we now recognise all the other applications, such as online banking, email, social media, and entertainment. It is a question of the rigour of the process. One cannot invent a process to match a project but one has to recognise, as a decision maker, that there are limitations in a cost–benefit analysis of a technology project.
Mr. Tom McCormack might explain the pessimistic and optimistic elements.
Mr. Tom McCormack:
The central scenario considers the cost without the contingent subsidy or additional associated costs. The scope of the project does not change so the benefits remain the same except that, in the central case, we are saying there will be a figure of €2.1 billion, excluding VAT, as Mr. Mulligan alluded to. The other scenario includes the additional cost, the €480 million. When this is factored in, one gets a central scenario of 1.3:1 and the pessimistic scenario is 1.15:1. The additional costs are included as contingency. There is a differentiation between the two points.
The Chairman and other members of this committee spent six or eight months going through a very elaborate process of putting together a report on how we could move our nation forward in the context of climate change. Is it true that, in the cost-benefit analysis process, climate change is not considered as a priority?
Mr. Ciarán Ó hÓbáin:
The constraint is that only benefits for which one has empirical evidence to substantiate may be included. The body of data is needed. It is anticipated that, at a point in the future, we will be able to do what the Senator has proposed. First, one has to have the data available and the empirical evidence to underpin it.
Other members and I sat around for months going through this scenario. It is bizarre at the very least that, in the current circumstances, the Department did not consider climate change in the cost–benefit analysis. Is that a fault?
Mr. Ciarán Ó hÓbáin:
The point is that the cost-benefit analysis was one input to the decision for the Department and Minister to recommend that the Government move to preferred bidder stage but the wider benefits that will flow from the project, including the impact on climate action and the ability of people to work remotely, comprise considerations that were fully articulated in that decision.
Regarding the maintenance of the network for the next 25 years, what contingency plans or maintenance arrangements, including crews, will be in place if there is a storm of the kind we had over the past 18 months? The ESB can call on personnel from Northern Ireland, as occurred after the last storm. What is the built-in formula for considering those kinds of issues?
Mr. Patrick Neary:
It would have been very central to our evaluation of the proposal to ensure that there would be sufficient field staff available to maintain the network. The process is to cater for events such as storms. The contract has key performance indicators on the repair and maintenance of the network. The contractor is held to these. The contractor has a reporting obligation to ensure that, on a monthly basis, the governance agency is supplied with information that gives visibility on what is happening in the field. We considered resourcing in this regard and whether the contractor has subcontractors arranged to put the necessary staff in place in the relevant locations as the network is built and retain the ability to satisfy the criteria on the performance level being signed up to. There are a key repair times included. As demonstrated through the resourcing and subcontracts that underpin it, the ability to deliver on the targets has been demonstrated.
I welcome our guests. I will make a statement at the outset and then ask some questions, some of which have already been touched on. We are all individually answerable to those who elect us so we have to ask the questions again. I am happy we are here discussing the working out of a scheme to give the same opportunities to the people of rural Ireland as their urban cousins. Had a cost-benefit analysis being done of rural electrification before it began, it could in no way have encapsulated the subsequent value that was realised. The same applies here.
Let me move on to specifics. Am I correct in saying the contingency figure of approximately €500 million that was built in to avoid overruns will address all the issues associated with the other celebrated project, the national children's hospital?
Are our guests confident that, within that figure, they have dealt with all eventualities, we are safe, we are good to go and we can assure those watching us today that there will be no further costs?
Given a rate of 20%, the figure for the VAT return is discernible. I gather it could be €345 million. The witnesses might give us the specific figure. With my previous question in mind, how would a clawback to the State work? Although they are slightly intangible, I would assume that the trends and other factors in society mean that the uptake will increase constantly until there is blanket coverage. Not to harp on about it, but it will be equivalent to rural electrification. There will be no home or premises in the Ireland to come without this broadband. In that good scenario, how will the clawback to the State work, how well has it been proofed and what will the percentage be? Are the witnesses confident in that regard?
There is a recurring theme in all of the questioning on and media coverage of this issue. Apart from the initial equity, which is not necessarily a huge issue, are our guests satisfied that NBI has the financial capacity to meet its obligations continuously over the period? Has it been stress tested properly? From my limited understanding of business, that is more important than having a nice flowery figure at the outset but no durability to last the long haul. While some of the points I have raised are obvious to those immersed in the situation, there are those watching who expect us to establish them in lay man's terms. We have within this room an immersed group of people, but not everyone outside understands. Beyond the down payment, what did the Department do to establish that NBI has the capacity to meet its commitments for the duration?
I am nearly there. Regarding the idea that we should get the asset after 35 years, I will ask two questions. What will the asset be after 35 years? I understand that our guests cannot account for technological advances in the interim, but what is the projection based on our current knowledge? What will happen in the lacuna between 25 and 35 years? If I understand it correctly, the contract lasts for 25 years. The Department seems to be looking towards a 35-year period and tightening it to 25 years.
Will our guests comment on a certain popular belief? It kept being raised in responses on my social media pages when, as we people do, I put up a standard message welcoming the plan. I was asked why we were not opting for 5G. People watching this broadcast and who follow this issue will have at the back of their minds the belief that 5G would do the business. Our guests know otherwise, but I would like them to elaborate for the sake of those who have doubts.
Why the ESB is not used is another classic question that arises. Will our guests explain the reasons for that? The idea of using the ESB has a certain traction in the public's consciousness. People relate to it as an entity and have confidence therein. They are asking why it is not the delivery vehicle. It would have to go through a similar process, of course.
Will our guests also explain the graduated nature of the payment? Taxpayers have the perception that someone will hand a cheque for €3 billion to Mr. McCourt next September and that we will depend on his goodwill and competence thereafter. What will the relationship between the work done and payment be and what are the projected payments over the period? Paying X amount over so many years is a different proposition than making a down payment of so much. Will there be a return over the period? My colleague referred to the non-established benefits that will accrue as we go along, for example, taking commuters off the road and letting them work from home in dispersed areas instead of having them seek accommodation in Dublin. My question is about the graduated payments.
There is a procurement process, but is the Department satisfied with NBI's technical competencies as well as its financial ones?
Why is it a seven-year period? It seems long. If I understand what they said correctly, our guests are suggesting that 134,000 premises will be completed in the first year.
There will then be five years to complete the remainder. That seems inordinately long. Are attempts being made to shorten the period? Surely there would be a commercial imperative for the company to shorten it. That might help.
A popular question is being asked, so let us address it once more. Why was Eir allowed to cherry-pick its 300,000 premises? We have been provided the official answer, but the people who elect us would wonder if the question was not addressed.
I have nothing more to say. This matter has been well rehashed, but not doing so would have been wrong.
Mr. Ciarán Ó hÓbáin:
I thank the Senator. He put a significant number of questions to us but, in fairness, he did so articulately and briefly. We will try to match that in responding. I will pass over to Mr. Mulligan in a moment to deal with the Senator's first five questions and one other. Mr. Neary might address the questions on 5G, the technical competence of NBI and the seven-year roll-out. I will conclude by dealing with the questions on the ESB and Eir's 300,000 premises. We will see if we can match the Senator's brevity.
Mr. Fergal Mulligan:
I thank the Senator for his questions. Every day, Mr. Ó hÓbáin and I ask Mr. Neary why the period is seven years. Since we will continue to do so, we will let him answer that question.
As to whether the contingency is adequate, it has been assessed over the 2016-18 period with all the bidders, including the most recent one. We considered everything they told us that would be a risk to the project, including risks that they could not quantify. Through that dialogue and 800 odd hours, we came up with everything in respect of which we as the State viewed it as being reasonable for us to share the risk with the bidders. For example, if there is a construction risk and it is not one of the 14 activities, it is for the bidder to share. With the best will in the world, we have assessed and quantified them, be they tree trimming, fibre cables or subcontractor labour rates, and a risk assessment has been carried out on where they might go in the worst case scenario. That is what we have addressed in the €480 million. It is what we believe is the maximum cost that could be incurred in the worst case scenario without there being a need to revert to the State for another penny. From the experts and our assessments, that is our current informed opinion. We went to the Government with this.
Clawback is in three areas. There is clawback on the costs. If it does not spend money we claw it back, if it has excess profits we claw it back and if there is a significant value on the business at year 25, we claw a percentage of that back as well. I will not speculate on what clawback amounts might be as it is difficult to say. As we said previously, how well this business does over the next 25 years is a big question. Some people say it is doomed to fail, some say there will be no take-up and others says it will be a huge success. Hopefully, it will be somewhere in the middle and clawback will be based on that. It is based on very thorough spreadsheets, which are calculated based on the bid model submitted versus actual outturns. The ring-fenced nature of the numbers will be done by accountants and locked in so it will be whatever percentage it is.
We touched on the capacity of NBI. It is not a matter of opinion. It has passed a strict bar of evaluation tests. It had to prove to us that it will have the capacity and the teams to do it. It passed that test, not just barely but quite well. On the basis of the evaluation, we are satisfied on that front.
On the ownership of what will be there at the end, we hope that at year 35, there is a successful wholesale open access business that is creating plenty of retail competition and consumers are getting a good set of services at prices akin to those in urban areas. That company will be in a competitive market with companies such as Open Eir, BT and others which will buy services from it and possibly even sell services against it. That is what we hope will be there if it is a successful outfit.
As regards year 25 and year 35, as part of the outcome of the dialogue process the Department wanted to avoid a cliff edge at year 25 so we insisted on a ten-year commitment beyond year 25 where the current owners of NBI will continue running the business at no cost to the State beyond year 25. There will invariably be customers who remain uneconomic or at a cost that may not be profitable, but NBI is committing to honour the contracts on all services in the area for a further ten years at no cost to the State. That commitment is in the contract with us this year.
Mr. Neary can discuss 5G, the ESB and the seven years.
Mr. Fergal Mulligan:
I am sorry, I forgot to mention the stage payments. The Senator is correct that the payments are incremental over the next ten years. Payments continue from year 11 to year 25 as well because we only pay it as customers are connected. There are payments for designing the network, passing the networks and for connections. That is in 110 deployment areas. Some money will be required next year and more the following year. When there is a mass roll-out of 100,000 premises a year, there will be significant subsidies in years three, four and five.
I am sorry to interrupt as I appreciate the detailed answers. Mr. Mulligan is thorough. Would it not be helpful if the great taxpayers of Ireland were aware of that? They should be made aware of the incremental nature of it and what it will be year by year.
Mr. Patrick Neary:
With regard to 5G, the procurement did not specify a technology at the outset. It invited bidders to come forward with what they felt was the most suitable technology. We did not specify a fibre to the home technology in the procurement. The most efficient and economical way to do this project was examined and all the bidders that participated in the process concluded that fibre to the home was the best way to do it. Alternative solutions such as wireless or 5G were certainly considered. We modelled that in terms of mixing different technologies, perhaps using wireless in certain instances and fibre in others. There are challenges in many technologies. On the 5G side, it would require thousands of new masts to be built around the country to reach all premises. That is a challenge for the deployment. Those sites would also have to be maintained and there would be rental costs for them over the full 25 or 35 years. Obviously, 5G will turn into 6G, 7G or 8G over the long term so technology upgrades would be required as well on the wireless side. All technologies were considered and it was concluded that fibre to the home was the best one for this project.
The technical capacity and competencies of the bidder were evaluated as part of a substantial evaluation test, particularly in the final tender. We published the technical capabilities that we tested. They related to the technical solution itself, the products that were going to be produced and offered, the deployment solutions and the operational solution. An independent team was put together to evaluate those and the bidder passed the final tender evaluation.
Why is it seven years? The scope of the project involves a substantial ramp up period. In the first year the IT systems are put in place and service providers who will sell the service are brought on board so they can sell the services. Parallel with that the bidder will be doing detailed designs. That involves people going down every road and boreen in the countryside to identify what existing infrastructure can or cannot be reused and then producing a low level design that is the optimum design for the location. That is the first effort involved. That leads to an order to be placed to Eir to remediate its infrastructure if that is the infrastructure that will be used. That is substantial work in itself. Parallel with that the bidder would do other preparatory activities such as tree trimming, brackets on poles and so on before it starts laying the fibre. In addition, it is looking at the local authority applications for licences if it needs to carry out any road closures or digs for broken ducts and the like.
All these tasks and issues came to the fore through the dialogue with the bidders. The rate of throughput that can be achieved by Eir in preparing its networks, the local authority applications and the subcontractors came together in the final tender submission from the bidder last year. In that process it had to demonstrate that its plan was credible and could be achieved. The outcome was that it could do this within a seven-year period. There are opportunities and there are certainly attempts to bring that timeline forward, in particular working with Eir to see if it can make its network ready earlier so the NBI contractor can roll out its fibre earlier. Through the work of the mobile telephone and broadband task force, we are working with the local authorities on ensuring they are ready for the applications that will go to them through the broadband officers who are now in place. There are attempts to bring that seven-year period forward and there is a commercial imperative as well to do it as quickly as possible.
Mr. Ciarán Ó hÓbáin:
With regard to the ESB, at corporate level the company was involved in the SIRO bid and withdrew from the process. In terms of an infrastructure provider, as Mr. Neary outlined, the country is broken into 110 deployment areas. When it comes to the point of designing the low level design for how to reach the 5,000 premises within the deployment area the bidder will be looking at all existing infrastructure and options. It will predominantly be based on the Eir network but it will also look at using the ESB infrastructure.
We have discussed the 300,000 premises previously. The procurement had a process that recognised one is operating in a live market and the environment is subject to change and that telecommunications companies could come forward with proposals that could impact on the procurement for the intervention on the map. Eir engaged with that process. It was assessed and it was concluded that it had followed the process, it was consistent with state aid rules and the 300,000 premises were removed from the map.
That had some implications for the procurement process in terms of costs, benefits and duration. The learning from that and from operating in a live environment has influenced the approach to the contract, which is to recognise that as we go forward over the next 25 years, this bidder with a contract will be operating in a market that is subject to change, so in the contract we have sought to tie down and close out the areas of risk in that market because we cannot anticipate exactly the direction of travel of such change.
Senator O'Reilly will be aware that for public representatives in rural Ireland and that in parliamentary questions to the Minister, the most topical issue relates to the people who live closest to the Eir 300k because they are getting a wonderful service over the Eir 300k and their neighbours are envious. We are seeking to fill that void through the NBP.
I will try to keep it to questions. This assertion has been made that the State's liability is capped at up to €3 billion and Granahan McCourt is taking on an uncapped liability. What instrument is used to guarantee that position?
Mr. Ciarán Ó hÓbáin:
The contract is the tool to manage that. Through the contract, Granahan McCourt takes on a range of responsibilities. The contract addresses the money it has committed to in equity but the cap will be contractualised. What it has to deliver is set out in the contract and that is the instrument.
What instrument is used to give effect to the future protection of the State, since in the event of any failure or evaporation of one of the owners the State is the guarantor? What connection goes back to the shareholder? Is there a shareholder guarantee? Do the shareholders in the new company guarantee the contract? Is there any recourse between the NBP company, the holding company and the shareholders?
Perhaps I am putting this incorrectly so we will take it carefully. We have the ultimate company that will do the work, then there is this holding company and then there are the shareholders. In the event that the broadband company does not perform and, as a result, develops a significant liability or requirement for investment, what guarantee does the State have that the shareholder will invest further share capital or make good any liabilities that are there? I am somewhat concerned that there is National Broadband Ireland, a holding company, Granahan McCourt (Dublin) Ireland, which in effect is another subsidiary of Granahan McCourt, and then we have Tetrad Corporation over here. Tetrad Corporation seems to be the company with the money and I want to understand what encumbrance is on Tetrad Corporation or whoever the money person ultimately is because it has changed along the way and it was McCourt Global LLC for a while. What instrument is used to retain Tetrad Corporation, if it is Tetrad Corporation, at the table over the protracted period of this contract? In essence, if there is further capital required, what encumbrance is placed on Tetrad Corporation and what legal instrument? Quite frankly, the contract is different. As I understand it, the contract is between the State, NBI and perhaps Granahan McCourt. I want to know what grip the Department has on the people with the money to put it in if it is needed.
Mr. Fergal Mulligan:
-----but I have spent a couple of hours in a room with both sets of lawyers this morning on that very point of the shareholder agreements that have to be put in place, which underpin the contract. In any of these public private partnerships, PPPs, or large infrastructure projects, there is a spider's web of contracts that are signed by lots of different individuals, including the Minister. For example, we have direct agreements with the subcontractors and we will even have a direct agreement with KN Network Services and Actavo, for example. It will always go above National Broadband Ireland in the context of the committed agreements and legal ability to enforce the contract. NBI is the broadband company but the obligations do not just sit with it; they flow all the way to the people who have put in their bid. They have to honour the contract. What is the cause and effect? They could lose all their money. If they put in more money and it collapses they could lose that money. They can lose all that and we have a charge over all the assets that are built until the full contract is honoured for 25 years. It is like any bank that has a mortgage with a homeowner. The homeowner is not off the hook until he or she fully honours the mortgage. We have the same arrangement with this bidder and the assets. If there is an asset there of fibre cable, we have a charge over all assets that are built and funded through National Broadband Ireland.
That is just one aspect. It also has to put a bond up and there are a lot of warranties and indemnities that it has to honour in the contract, and if it does not fulfil them, it could be sued by the State. It has to sign up to all of those measures. That is why we will spend the next two or three months contractualising all that to the nth degree, all the way from NBI, Holdco and up to Tetrad Corporation and Granahan McCourt, as the Deputy mentioned. That is all in place with the contracts and that is why there is a data room as it is called. I found out this morning that a contract closed for two weeks because there are myriad documents, which are signed by all of those people and the Minister to ensure that over 25 years somebody cannot just walk away and that is the end of it. There are big consequences to walking away from this contract.
For sure and that is where my concern is regarding the ownership. It all speaks to the ownership model associated with gap funding versus the concession model because when myriad companies are involved, obligations denigrate somewhat over time, and they certainly denigrate as one goes from one holding company to the next. I would like to see that direct link back to the people who have the money-----
-----and whether they are required to remain committed because they have been in and out like "Lanigan's Ball" for a while. Whoever is the final money entity needs to be connected. Will the Department commit to providing us with whatever documentation it can to demonstrate the linkage between all these companies, which shows who owns what, the shareholdings and what instrument is used to ensure they remain on the hook for any additional moneys that have to be invested? Clearly the witnesses do not have that information available to them and they are not fully aware of who owns what in the shareholdings but perhaps they can provide that information to us.
That is great. The cost and value for money are important and we have to address those but rapid deployment of high-speed broadband is the major issue because that speaks to the policy behind all of this and seven years is not rapid deployment. I want to try to understand the contingency plan that the Department looked at in 2019, in particular, when it stated the following: "The information presented in this document has been developed with the intent of illustrating what could potentially be achieved in a plan B scenario using high level assumptions and assuming favourable timelines to complete a number of complex tasks." Does that imply that the costings of the alternative were not detailed in nature and it was more high-level analysis or was it detailed?
Mr. Ciarán Ó hÓbáin:
The analysis is relatively high level but it is informed by the people who participated in developing it having a deep understanding of what is involved in building this infrastructure and how the roll-out could be delivered. It is a high-level analysis but it is informed by a deep and detailed understanding coming out of the procurement process.
Yes. The Department states, "The subsidy estimates presented in this paper, as well as the costings, revenue projections, timelines and other supporting assumptions have been extrapolated from information provided by the bidder...". Is that Granahan McCourt?
Mr. Fergal Mulligan:
It is the experience of this and other projects that in the absence of a detailed engagement with the people who might do a plan B, it is highly dangerous to publish numbers for plan B1, B2 or B3 because, in two years' time, somebody could tell us that we got that completely wrong if one went to a plan B. The other part of that is, if for some reason there was a plan B, we do not want to give away our hand on what the internal workings are and what it would cost, for example, to bring fibre to a certain point in the village or outside the village. Of course, we got detailed costings of all of that. If we ever had to go to the market, inevitably, the market would provide very different costings. That is the challenge one has on a plan B.
I accept that, but the Department will recognise the difficulty we have. As politicians, we are charged by the Taoiseach to consider alternatives, examine what the Department is doing and not rule out the plan the Department has in place, but without information it is difficult to make a value judgment. I am not calling into question Mr. Ó hÓbáin's judgment if we are all in this together in an attempt to address the critical element, which is the roll-out.
I examined some of the alternatives. In 2019, the Department considered three options. In 2018, it looked at six. The language here is absolute - to do something to 100% of the homes. Did anybody look at where the sweet spot is between timing and costs based on fibre and wireless in terms of trying to get it deployed as quickly as possible using as much fibre as possible, but not using all fibre? From my experience representing urban, suburban and rural parts of my constituency, there are people on the periphery who, if they were told they would get a fixed wireless option - I will not get into the technologies of wireless, whether 4G, 5G, 6G or 7G, or whether it is packet radio network or whatever - in three and a half years, would take the hand off whoever would offer that versus being told that they will now get fibre with all the facilities of our friends here so that they will be able to monitor their temperature, their health and their heartbeat in seven or eight years. A good number of them will be dead by then. Children who are starting secondary school in September next will be through university before that is deployed. There seems to have been this absolute position that there has to be fibre to the home in 100% of the cases with the exception of 1% or 2%. Did anybody look at bringing back the scale and ask, "What if we did it to 70% or 80%?"
Mr. Ciarán Ó hÓbáin:
I will ask Mr. Neary to come in on that in a second. The technology was not being driven by the Government. The technology came from the industry. We all absolutely understand that frustration - I know it from the team here - about the time it will take to get to the last home.
It would be useful for Mr. Neary to address two points. One is the practicality or otherwise of a hybrid model where one was going for 30% or 40% of wireless in terms of the work that we did when we modelled what it looks like and what that would mean in terms of what one has to cover by fibre, which I understand to mean that one would still cover most of the same area if one goes for a hybrid approach. The second is work that ComReg has done. I refer to the Plum report in terms of if one is going 100% wireless, the scale of additional masts that one would require and the roll-out and build-out time there because it could be quite significant.
Mr. Patrick Neary:
We definitely looked at mixing the technologies and having different percentages of fixed wireless and fibre. Other technologies were considered as well. We looked at having a predominant solution, say, fibre and then the delta being used by a fixed wireless, say, 20%, 5%, etc. We have looked at lots of different variants of this.
Going back to what Mr. Ó hÓbáin was hinting at there, when one deploys a fixed-wireless network, one may pick up a number of homes through that deployment but, ultimately, one needs to bring fibre out to the backhaul in those particular sites and one is building a lot of fibre to those particular sites anyway. What one finds, if one mixes that then with a fibre deployment, is one ends up building a lot of the same infrastructure anyway because a fixed-wireless service will not take every contiguous home along a road. It might take 60% or 70% and then one must still build the fibre down the same road to get to the last three. One is not substantially reducing the fibre cost by introducing an overlay of a fixed-wireless network. It is not a case where one can say, "Okay, I will do this section here with fixed wireless and all of those premises are then removed, and then I will do the remainder with fibre." One is overlaying two networks, one on top of the other.
We have done a lot of analysis on what works best. Ultimately, we have had serious teams of bidders with real in-depth technical expertise examining the same question. Two of the bidders have mobile arms - Eir and Vodafone, which was backing the SIRO bid. They had serious mobile expertise and wireless expertise to draw upon to look at that as well, and they all concluded that a predominantly fibre-to-the-home network is the best way to do this.
Obviously, we looked at a full fixed-wireless access topology deployment as well. Independent of the Department, ComReg's Plum report shows that more than 4,500 new masts would require to be deployed. The deployment time of that is quite substantial. They estimated it was well over ten years.
We would look to how the bidder has come to the conclusion. We have examined that thoroughly to see have they robustly examined the variance. That certainly was part of our analysis.
I have a final man-or-woman-in-the-street question. I can anticipate the answer but I still want to ask it, if the Chairman does not mind. If the entire NBI or part thereof was to be sold or be taken over or flipped and sold on, all things remain the same. Are there mechanisms for that? How would it work that there would be no interest lost, if in a year's time they found someone to take them over? It is a question that will occur to those watching it.
Mr. Fergal Mulligan:
For at least the first eight years, the Minister must approve any such changes in shareholdings. Shareholding changes are allowed under the 25-year contract but they must go through the Department and Minister for approval. Within the first nine years, the Minister has a specific veto over any change of ownership or majority change of ownership should he or she have any issue with who a new owner might be in the context of honouring the contract. The most fundamental point is anybody looking to take a shareholding in NBI would have to meet the same responsibilities of the contract.
I thank the officials for giving their time this afternoon. They were good in interacting with members. We ensured a lot of clarity on many of the questions that people are raising with us. I think Mr. Ó hÓbáin will forward a diagram to the committee. Any other information he feels would be relevant for our work would be much appreciated.