Oireachtas Joint and Select Committees
Thursday, 13 June 2019
Joint Oireachtas Committee on Communications, Climate Action and Environment
National Broadband Plan: Discussion (Resumed)
I welcome the following witnesses from PricewaterhouseCoppers, PwC, to the meeting to discuss the national broadband plan: Ms Amy Ball, partner, advisory consulting; Ms Fiona Smith, directory, advisory practice; and Dr. Luke Redmond, senior economist, advisory strategy team.
I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by the Chairman to cease giving evidence on a particular matter and continue to do so, 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. Any submission or opening statement provided to the committee 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 House or an official either by name or in such a way as to make him or her identifiable.
I remind members and witnesses to turn off their mobile phones or switch them to flight mode as they interfere with the sound system.
I invite Ms Ball to make her opening statement.
Ms Amy Ball:
We welcome the opportunity to attend this session today to discuss our role in the cost benefit analysis, CBA, and the benefits report on the national broadband plan, NBP. The committee's investigation has particular interest in the following three themes - the roll-out time; value for money, including the cost benefit analysis; and ownership; and for today, we will be providing input on the CBA element of the second theme only, given our limited scope.
I will start with a brief introduction. I am a partner in the PwC advisory practice, leading the technology, information, communication and entertainment practice. I have more than 25 years experience, having spent 15 years of that time working as a senior executive in both the telecommunications and technology sectors prior to joining PwC in 2012. I am the lead partner on the CBA advice provided by PwC on the NBP. I am joined by my colleagues, Ms Fiona Smith, a director in our corporate finance practice and by Dr. Luke Redmond, an economist in our consulting team. Together, we have extensive experience of delivering similar services across the public and private sector.
PwC was appointed in January 2015, following a competitive tendering process, as strategic advisers on the NBP, including assisting with the CBA as set out below. We were commissioned to complete a CBA on behalf of the Department of Communications, Climate Action and the Environment. The objective of the CBA is to assess the extent to which a State intervention to support the attainment of the primary NBP objective of universal next generation access will yield a positive return to Irish society. The CBA was prepared as part of a wider-NBP project, which included a technical, design and planning work-stream - Analysys Mason-led; a financial appraisal and procurement work-stream - KPMG-led - including value for money, ownership and cost model; and an NBP strategy work-stream - PwC-led - which includes the CBA. The team described above led the CBA, which falls within the scope of this committee session today. Separate aspects of our work were performed by international experts from other PwC offices, with the UK firm of PwC responsible for the strategic advice and PwC Netherlands responsible for state aid advice.
Under the CBA, all public projects over €20 million are required to complete a CBA in accordance with the public spending code. Our work on the CBA was completed over a four-year period with numerous iterations with the final CBA published in May 2019.
The technical option as advised to us by the technical project advisers, Analysys Mason, is for 100% fibre-to-the-premises. They concluded that this technology was the optimal solution for the delivery of the NBP objective of universal next-generation access broadband in the intervention area. Therefore, this technical option forms the basis of the CBA assessment. However, the Department advised us that it reserved the option to change the technical solution on a case by case basis during deployment where it makes technical and commercial sense to do so during the build period.
KPMG was responsible for developing the cost model taking into consideration the final bidder costs and assumed take-up over the duration of the contract. This cost forms the basis of the cost element of the CBA.
Each of the work streams operated independently and no one team had visibility of the detailed calculations of each of the constituent parts. At no point did any change to the costs influence the benefits case, as both were prepared on a standalone basis by different parties. The basis of the benefits compilation remained consistent throughout an iterative process over the four-year period, but was updated for new data points including, for example, changes to demographics, reduction of households in the intervention area and change in economic parameters.
We adopted a conservative approach to the evaluation of benefits throughout. Additional adjustments were agreed at formal review stage with the Department of Public Expenditure and Reform in response to debate on certain subjective matters. As the public spending code is not exact and requires an element of judgment in its application, the debate related to certain assumptions which were based on domestic data and international research. We evaluated the Department of Public Expenditure and Reform's queries and adjusted the CBA consistent with our conservative approach to benefit evaluation and in light of expected updates on the public spending code. Our CBA is, and always has been, positive relative to the costs and benefits at each iteration.
We ran three different scenarios in our CBA. All scenarios resulted in a positive benefit to cost ratio, BCR, over the 25-year period with the central scenario resulting in a BCR of 1.3 to 1. In accordance with the public spending code, the only benefits included in the CBA are those that have empirical evidence available to substantiate them. The benefits we have qualified as part of the CBA work are classified into two categories: residential, which are €2.2 billion in the central scenario; and enterprise, which are €1.5 billion in the central scenario. Residential benefits within the CBA analysis include bundled communications - realised savings available by purchasing communication bundles; service waiting - reduced time required for value-adding online activity to be completed; remote working - time and cost savings for white collar workers being able to work remotely; and transaction savings - time and cost savings from online shopping. The CBA analysis identifies enterprise benefits totalling €1.5 billion to farm and non-farm enterprises in the intervention area, non-intervention area enterprises, and from additional job creation or employment benefits for enterprises within the intervention area.
Given that it is not possible to quantify a significant number of the benefits of the national broadband plan owing to the lack of available empirical evidence, we were asked by the Department to perform a separate piece of work on the qualitative benefits. It was completed in August 2018 and published by the Department in May 2019. The objective of the report was to outline additional benefits deemed to be non-quantifiable that could complement the quantifiable benefits outlined in the cost-benefit analysis model. Such benefits include e-health, e-education, social inclusion, rural development, tourism and climate change. The approach and content of the report consist of desk-based research to support each of the qualitative benefits and interviews and case studies with individuals and businesses both inside and outside the intervention area.
I thank the committee for giving me the opportunity to appear before it to make this statement. We are happy to take questions that members may be related to the advice we provided on the cost-benefit analysis for the national broadband plan.
I have two brief questions for Ms Ball. For the benefit of those listening and tuning in to this hearing, will Ms Ball explain in layman's terms what monetary return the State will get from the roll-out, as opposed to the cost of it? Is she saying all of the scenarios at which PwC looked resulted in a positive benefit-cost ratio. Will she expand on that issue?
The second part of the work of PwC was on the non-quantifiable benefits of the roll-out. Ms Ball mentioned e-health and e-education. Will she expand on the work PwC did in those two areas?
Ms Amy Ball:
It is a complex project. Overall, the benefit-cost ratio is 1.3:1, which means that the benefits are 1.3 times the costs. The total benefits amounted to €3.8 billion, while costs were €3 billion. I will ask my colleague Ms Smith to go through the detail to bring it to life a little more for the committee. I will be happy to go into the non-quantifiable aspects afterwards.
Ms Fiona Smith:
I will talk about breaking it down into actual numbers. When we built the benefits, we assumed that certain data points were relevant. The first was the number of households about which we were talking about. It amounted to 387,000. We are talking about 100,000 businesses, of which 56,000 are farms and 44,000 are non-farms, being smaller SMEs. We are also talking about 147,000 white collar workers who live in the intervention area.
It is important to think about these numbers in the context of the benefits which I will outline. As Ms Ball said, we quantified two benefits: residential and enterprise. We looked first at residential benefits which we categorised in four key components, the first of which was remote working. We quantified that the annual savings per household would be €81; that would be the benefit of remote working. There is a study that states approximately 4% of people work from home. That is considered to be a conservative estimate in today's terms. Recent studies from the Industrial Development Agency, IDA, state that figure is up at 10% and there is an even more recent study which suggests it should be 14%. That is an example of what Ms Ball meant when she mentioned that we were being conservative. Remote working is about the savings to be gained. If I was travelling from Milltown, outside Ennis, to work in Limerick, it would be a round trip of approximately 80 kms. The savings we have calculated in that particular instance are from the points of view of fuel consumption and the time spent travelling in a car.
The next component we have quantified is what we call reduced service waiting time. We have calculated that the annual saving per household would be approximately €500. The services about which we are talking are e-government services, including applications for motor tax, driving licences, NCT tests, passport applications and even video conferences that could be undertaken instead of face to face meetings. It is based on the average time an adult spends on the Internet weekly, for which we have assumed a figure of 8.7 hours. We have assumed that 25% of that time is productive. That is how we came up with the calculation of €500 per household per annum.
The next benefit is what we call bundled communication, which is easy enough to understand. Many service providers offer a complete package that is quad play. In other words, a customer buys one package covering his or her mobile phone, TV and broadband services. There is obviously a discount in buying such a bundled package. In this case, we came up with an annual household saving of approximately €31. Again, we have tried to be conservative with that figure. We have only applied it to 19% of the people in the intervention area because we all know that everybody is slow to change and that there is inertia when it comes to these things. People in the intervention area might not be paying for a TV service.
The final benefit in residential areas is transaction savings through online shopping. We are assuming an annual saving of approximately €120 per household.
I will move on to the enterprise benefits. We looked first at farm enterprises. We are looking at the improvement in gross value added by virtue of this benefit. In the case of farm enterprises, we have assumed an amount of €492. As I said, we are talking about 56,000 farms in the intervention area. We have been conservative because we have only applied the figure to 20% of farms in the intervention area because we realise the savings about which we are talking will require some investment and will only really apply to medium and large farms. The savings about which we are talking relate to animal health in monitoring animals, calf mortality and online applications. The online applications are for e-government purposes and the savings are those that would be expected if a farm enterprise had access to high-speed broadband. Our benefits report refers to a raft of developments in farm technology and the ways in which a farm is run as a business. They are in areas such as energy efficiency, crop management, data for soil fertility and the monitoring of health and welfare of animals. We say it is at early development stage, but, more importantly, as far as farm enterprises are concerned, it is at early adoption stage. Therefore, we have not included their benefits, but one would expect significant growth in that area in the next 25 years.
The next category is non-farm enterprises. These are small and medium-sized businesses in the intervention area which employ fewer than 50 people. We have calculated a benefit of approximately €1,200 per enterprise in terms of improvement in gross value added per annum. These are the savings one would expect to make. By virtue of operating on a 24/7 basis, a business has access to more customers and can increase its revenue. Its costs are reduced because of a decrease in the cost of marketing, for example. A company that might have engaged in mail drops can now do everything electronically. There can be savings made in the area of IT through cloud computing. We expect an improvement in gross value added of approximately €1,200.
As I said, 147,000 white collar workers work outside the intervention area. They are travelling, say, from Rathdowney to Naas. There is obviously a benefit for the business in Naas where that employee can work remotely. We have used the same 4% statistic for remote working for enterprises that we have used for residences and assumed, based on a significant number of studies, that productivity can be increased by approximately 35%. That results in an improvement of just under €1,100 in gross value added for those businesses.
The final category is employment. We have assumed an uplift in gross value added for businesses of approximately 212. As Ms Ball said, we only include a benefit if there is empirical evidence that we can justify and quantify. Equally as important is that they all comply with the public spending code on what should and should not be included in a cost-benefit analysis of this nature.
I should make two final points. We have applied a displacement factor in the enterprise benefits. Effectively, it is another haircut to reduce the benefits in order to reflect the economic factors that might apply at the time.
We, again, have been conservative in our approach.
Ms Amy Ball:
Yes. As Ms Smith and I mentioned in our opening statement, under the public spending code we cannot put a quantifiable benefit within the CBA in the absence of empirical evidence. As such, we commissioned research, examined case studies, conducted interviews, and consulted with enterprise bodies to assess the opportunities for benefits beyond the scope of the quantitative benefits. They cross a range of areas and sectors, so I will just go through them at a high level. Members are free to interrupt if they need clarification on anything.
In terms of education, there is a significant benefit attached to all schools having reliable access to technology. Some of the school staff we spoke to mentioned that most of their courses were coming through an online format and children were now expected to complete their homework online at home. One of the problems they are having in rural areas is that they do not have consistent resilient broadband available to them at all times.
Regarding health, doctors would have the ability to monitor patients in remote areas and people would not have to travel to GPs or hospitals on every occasion. This helps ensure older people can live at home for longer periods. On social inclusion, interacting online with community forums, or being able to communicate with family members who are not local or may even be abroad via Skype or FaceTime, has fantastic benefits for mental health. Keeping in contact with people solidifies that social inclusion. We are seeing huge movements there in some proof of concepts, which I have no doubt will become more and more prevalent over the next 25 years and will have a major impact on peoples' mental health and well-being.
This is relevant for tourism, given that many of our prime tourist spots, such as the Wild Atlantic Way, are in remote areas of the country. It is very important that businesses, start-up enterprises, hotels, and tourism bodies in those areas have access to broadband to maintain an online presence, promote the areas and activities that are available to tourists, and develop small businesses in each of those areas. I spend quite a lot of time in County Mayo, and the local surf company says its broadband is always falling out and it has missed out on mass bookings because of that. It would definitely value always-on broadband.
The environment is a very topical area, both for Ireland generally and globally. We have looked at the reduced emissions related to reduced commuting times. I spend a lot of time in Silicon Valley and I am amazed at the prevalence of driverless cars. They are definitely coming our way, if not in the next year or two but certainly over the next five to 25 years. We see always-on broadband as being a key enabler of online access for cars, smart motoring and smart trafficking. It will encourage the use of electric vehicles and, therefore, reduced emissions.
I refer to the smart home experience. I do not know if any member has Alexa - we do not - but the rise of the Internet of things is something we often talk about. In the future, all of our home appliances will be connected to the Internet. I have seen a fridge that will automate one's order if the milk is running out. Not only that, but if we think about the broader context of smart metering or smart home monitoring for businesses and homes alike, broadband is a key enabler for those and they are just not possible in its absence. Yet technology is moving at pace, and the pace of growth of data is incredible. In a recent study of ours, which has not yet been published, we see an increase in data at 25% year on year over the next five years for Europe alone. With that data comes a need for better transmission networks, faster speeds, and greater resiliency across networks.
I thank the witnesses for their presentations and answers. A cost benefit analysis is quite difficult to perform in respect of some issues because of the subjective nature of the benefits. The costs are always clear but the benefits are somewhat subjective, notwithstanding the public spending quota. This is an example in that we are looking at the potential for the future. Sometimes it is difficult to apply a mathematical equation that covers the future potential and, therefore, this is probably not a great example of the best use of a CBA, regardless of the fact that it is required by the State. Both the need and the potential are obvious, and trying to apply a mathematical equation to support that is not always easy when one is at the early stages of such future potential. Notwithstanding that, a lot has been made of it. Some of the documents that were released, particularly the one from the Department of Public Expenditure and Reform, noted that some benefits were identified at a later stage, and that corresponded with additional costs. The witnesses will have read some of the comments so I will give them an opportunity to provide us with some more information on that. Could they elaborate on that?
I want to move on from that to the issue of ownership and the gap funding model, which does not fall under the witnesses' areas of expertise, but PwC did a report at some point on the ownership model. If the witnesses could answer the first question, we will then move on to the ownership issue.
Ms Amy Ball:
I will address the first question. When we are looking at a CBA of this nature, in the context of a 25-year programme of spend and benefits, it certainly relies on detailed empirical evidence and strong assessments of any of the underlying economic assumptions that would drive benefit delivery. With that in mind, and looking at the composition of the team, we have had very strong expertise across it, including on economics, corporate finance, accounting, and international expertise in thought leadership. We have liaised extensively with the network and we have examined extensive literature and research. Our methodology and process have been very robust. There has also been robust governance of each component of the CBA.
The CBA is split into three parts: the costs model, which was tendered separately by a separate group of advisers who prepared the cost under strict protocols; the technical solution, which was also tendered under a separate tender and again prepared under strict protocols; and the benefits, which were done and delivered by us. It is at the CBA point that each of those three constructs come together into one formula. We are happy with our methodology as part of that. However, when we examined the public spending code, PSC, some of the directions were not always clear or specific in the context of, for example, certain economic drivers. In that case, we took our knowledge of international precedents and applied our assessment to domestic data.
As we were running through the CBA, which started back in 2015, we ran a collaborative process with the Irish Government Economic and Evaluation Service, IGEES, which is the economic unit of Department of Public Expenditure and Reform. At that time, we underwent an extensive review of the CBA, which has not changed essentially in terms of its format or content. There may have been some changes to data and certain costs along the way, but the construct was essentially the same from 2015 on. We had a very positive interaction with IGEES in 2015. Any queries were addressed quickly and no outstanding issues or concerns needed to be remedied. Following that, there were other iterations of the CBA because it was a working document or a working model. We then met with IGEES officials again in June of 2018 and went through another review of the CBA. At that point, we shared the CBA report and the detailed model along with all of the assumptions underpinning the model. We then had a back-and-forth engagement with IGEES, probably for another seven months. During that period, additional queries and points of clarification were raised, which we again addressed. This culminated in a final meeting with IGEES and the Secretary General of the Department of Public Expenditure and Reform in December 2018.
During that meeting, a new member of IGEES who had just joined raised fresh concerns or challenges in respect of the formulation of the CBA. Given the lengthy duration of this as a 25-year forecast for the future and predicated on taking an economic interpretation of some of the guidelines in the PSC, we had a good debate. Particular areas of concern were raised by IGEES officials during the meeting. One was about the inclusion of e-health, for which we had included both costs and benefits, as we believed there was a robust case to do so. Its view was that under the PSC it was probably more conservative to remove it on the basis that a separate investment case would be required for that. We accepted that and reverted.
The other main issues related to the gross value added, GVA, and displacement factors we applied to the CBA. We took those away. As I said, we relied upon international evidence and our assessment of domestic data to align on certain elements that would support our GVA and displacement factors applications within the CBA. I will ask Dr. Redmond to reflect on this a little more, given that he is the economist in the room. However, we met with IGEES at a later point in January where we debated those issues. We accepted some of the challenge but we aligned on specific numbers that we would include in the CBA, which ultimately reduced the net benefits. Following this, we did not receive any formal communication from the Department of Public Expenditure and Reform. Typically, that communication would have gone to the Department, but we did not hear anything to reflect any issues or concerns that might have arisen.
To return to the Deputy's point relating to the costs and the benefits, there were very separated work streams working in silos. Both were working to different timelines so the benefits would have been adjusted in February 2019 and the costs would have been changed in March 2019 once the final bidder costs were through. I hope that answers his question.
I would expect that. I have a question on the ownership. Ms Ball might be unable to discuss this because it is not her area, but if there are questions she is unable to answer, perhaps she could ask the relevant group to provide the answers for us at a later stage. They relate to the ownership model that has been followed, which is the gap funding model. PwC did work on the broadband strategy for Ireland at one point and examined the various ownership models. Like others, it identified the gap funding model as potentially the best route to take for a number of reasons, which it set out. They are well documented and are included in the documentation provided to us. Does Ms Ball accept that as the tendering and procurement processes moved on and SIRO, the ESB and Vodafone as a consortium pulled out, many of the benefits that were attached to the thinking at the time that supported the gap funding model were no longer reasons to continue with it? Does she also accept that the case for the model was weakened significantly by the exit of SIRO and Eir?
Ms Amy Ball:
As the Deputy mentioned, it is beyond the scope of the CBA review. I am not in a position to comment on developments since we completed that work in spring 2016. I accept that the world moved on and that the competitive landscape changed, but we were not involved in subsequent evaluations.
Ms Ball said a team from the UK advised in this area. Perhaps it could give a view, which might make its way to the committee in due course. The major question for us, which Ms Ball cannot answer, is why the State is still proceeding with a gap funding model when, effectively, it is taking on so much of the risk. There is the notion of the competitive tensions that would exist with the larger operators and their existing infrastructure, which is no longer part of the final process. We discovered yesterday from Analysys Mason that, in effect, the current bidder is going to build on the existing network Eir has for the 300,000 homes and businesses that have been passed. That will be overlaid, which raises many concerns for us about cost and the timeframe. Those are issues we must address and I accept Ms Ball's division is not in a position to answer on it, but perhaps another division within PwC might provide us with some information or a view on it.
Ms Amy Ball:
The work that was done on the strategy was completed in spring 2016. That covered five different options in the controllership model. This was in liaison with another group of advisers. We concurred with its recommendation on the gap funding model. Since then, the other group of advisers took on the responsibility of final recommendation on the ownership model, which was included in the published report in 2018. On that basis, PwC is not in a position to comment.
I welcome our guests from PwC. With regard to the cost, Ms Ball referred in her opening statement to the fact that the benefit should be 1.3 of the cost. We now learn the overall cost of the project is approximately €5 billion, according to what the Department and Ministers have been telling us in the past few weeks. It is €2.95 billion in subsidy and €2 billion on top of that. On Ms Ball's analysis that would appear to fall a long way short of the 1.3. It would show that it is not even reaching break even. When she was going through the different benefits, she used the word "assumed" in respect of each. She said that PwC assumed in each of the areas it examined. I have a concern about that. How firm is all of that?
With regard to the CBA, a number of senior departmental officials expressed concerns that the PwC report had a series of flaws and inaccurate financial information. For example, the Secretary General of the Department of Public Expenditure and Reform sent a letter to the Minister in which he said that it is flawed and that the project does not represent value for money on any rigorous or objective basis. We then found out, through a further letter from the Department of Public Expenditure and Reform to the Minister, that the value for money assessment consistently overestimated the cost to the private operator by €1 billion. That error was only discovered last April. Will Ms Ball comment on those two issues? The official went on to question whether the CBA was in any way consistent with the public spending code.
Ms Amy Ball:
I will start with the Deputy's original statement on the cost relative to the benefits. Under our model the differences relate to discount factors and internal rates of return.
We are looking at the same baselines as the Department so we are consistent with that. Our client is very comfortable that we are using the right numbers in our published business case - our cost-benefit analysis, CBA.
On the second point about the assumed benefits, as we talk through benefits and look at them over a 25-year term, economic assumptions need to be made. Forecasts, by their nature, can be subjective. That is why this very good governance process is in place with the Department of Public Expenditure and Reform and the public spending code where there is strong and robust evaluation of any cost-benefit analysis cases. As such, I would be comfortable in saying that our assumptions are very well grounded in empirical research. They have been evaluated by very qualified people. We have referred to similar case studies across other countries and we also have adopted a very conservative approach. We have some specific instances where we can show that we pared back benefits. As the Deputy said, this is an assumption-based process so we wanted to make sure that we did not overstate benefits in any way.
The Deputy mentioned the perceived flaw in the information. I refer the Deputy to the response I gave to Deputy Dooley when I went through the process of the creation of the CBA. Where the costs were coming from another source, there was strong programme governance in place to the Department. We are in constant communication with the Department. This is a complex programme. The costs were moving as the new bidder costs were coming through. There was a difference in costs in terms of the exclusion or inclusion of certain operator costs. Other costs which were moving were the contingencies. When the error was identified, the proper checks and balances kicked in and the error was communicated to us. We promptly remedied it within our CBA.
The most senior official in that Department, who has years of experience, was very definite about that. He did not say it may not represent value for money; he said it does not represent value for money.
I refer to the fact that the cost to the private operator, in other words, what it will cost it, was overestimated by €1 billion. It was not overestimated by €10 million or €20 million. It is €1,000 million. That is on a project the entire cost of which we were told only a couple of years ago would be between €1 billion and €2 billion and that the taxpayer's contribution would be €500 million or somewhere shy of €1 billion. The overestimation is €1,000 million and that was only discovered in April of this year, literally as this project has been rolling on. As a layperson, that would have red lights flashing all over the place for me.
In terms of the public, there are major concerns about the overall cost, the discrepancies, the changes in cost and the changes in what the private operator is contributing. PwC is a long established, reputable company but it is far wide of the mark in many different areas. I refer to the whole basis of this contract and the way it kept changing. Those of us who have been following this for some time know it has literally changed, twisted and turned many times and the figures for costs have changed but the figure of €1,000 million, which was only discovered in April, is astonishing. Would Ms Ball not have concerns about that?
Strictly in respect of the cost-benefit analysis, PwC concluded that the cost of the private operator would be €974 million. We now know not only that the nature of that consortium has changed, and the funding, but we are now relying on a letter that apparently has been handed to the Department which states that an investor has been found who is good for €180 million and that the main bidder in the consortium, the financier, Granahan McCourt, now must come with in the region of €40 million to bring us to €220 million. Has Ms Ball concerns about that issue or can she explain the reason the cost-benefit analysis concluded that the operator would put in €974 million? We now know that the total cost, and I refer to the letter that came in from an investor who will throw in their lot with Granahan McCourt, is now in the region of €200 million or €220 million. Can Ms Ball explain that discrepancy?
I will move on. Regarding PwC's final cost-benefit analysis submission to the Department, it stated: "costs to the state have also increased as the subsidy is now more front loaded". That is surely the case. The first sight we had of any of this was about two or three weeks ago. It is certainly the case that the taxpayer's contribution is front-loaded. The taxpayer is coughing up a lot of money, and fairly quickly. Has PwC factored into its cost-benefit analysis the potential for losses the State could incur if the project did not work out as planned and that the taxpayer, as opposed to the investor, might carry that risk in the early years?
Ms Amy Ball:
I will respond on two fronts. The Deputy's first point was on the subsidy and it being front-loaded. I want to restate that the subsidy forms part of the costs work stream. The timing of the take-up would influence the subsidy and as the timing of the take-up came from another work stream, I am not in a position to comment on the subsidy.
On the risk, we ran some risk scenarios within our CBA, which is in compliance with the public spending code. We went through that risk assessment with the Irish Government Economic and Evaluation Service, IGEES, and we were comfortable that we had covered each of the risks outlined that we had agreed with IGEES.
On the cost-benefit analysis and the fact that an entire new network is being built, I expressed concerns on the day of the announcement about the fact that Eir was going to hive off 300,000 households and premises. That figure turned out to be 340,000 to 350,000, out of the 840,000 in the intervention area. I expressed concerns at that time that this would banjax the entire project because it was taking out the rich pickings and we were being left with the ones that were hardest to reach, which would be more costly and so on. We got confirmation, in respect of the concerns I had been expressing from the day of the press conference in March 2017, that this has happened.
An entire infrastructure must now be rolled out side by side in the areas that Eir has taken up, which are the richest pickings. It is where the houses are in clusters. The harder-to-reach houses are beyond them. As I said at the time, it has effectively doughnutted the residential areas and an infrastructure must now be built to get past that. The poles to get the rest of the way must be leased.
Do the witnesses have concerns about the fact the State and taxpayers are getting ready to hand over just short of €1 billion to another company? If this goes ahead in its current form, the board and corporate structure will be in National Broadband Ireland. That corporate structure will get a €0.9 billion subsidy from the taxpayer and will hand it to another private company for permission to hang cables on its poles. It cannot supply people within that area because Eir has a veto on it. That is what we were told yesterday by KPMG. The company will have to run the cables past all of the 340,000 houses and premises to get to the 490,000 that remain. We are told this is one of the main reasons for the cost escalation. Is PwC concerned about the fact we are doing all of this when the State and the public, that is us and the 4.7 million people outside this room who inhabit this part of the island, already own the infrastructure on which electricity is rolled out? That is already being used to carry broadband and telecommunication networks to parts of the country.
Ms Amy Ball:
On the cost-benefit analysis, we were not commissioned to evaluate the bidder or the bidding process, so I cannot reflect on the Deputy's comments on the construct. With regard to the technology solution, it forms part of the technology work stream. Technology is bound to move. We did get involved when Eir announced its plans to roll out to a further 300,000 homes within the intervention area. Our state aid team worked through it with regard to the cost-benefit analysis. We reflected the reduction of the number of households that would be covered. We reduced the costs and benefits accordingly. We looked at the geomapping and that in turn affected our regional view of certain benefits.
Overall, if the project works out as it is currently designed, we are looking at a subsidy of €2.95 billion and, as we were told recently, an overall cost of approximately €5 billion. The witnesses have said PwC used various methods to examine the various areas that would benefit, such as education and health. There are many assumptions because people are looking forward and things could change and technology could change. Some of it could become obsolete in a few years. Is PwC able to tell the taxpayers that they will get value for money for the figure that was €500 million only a short number of years ago, became €800 million in 2016 and has now reached almost €3 billion?
Ms Amy Ball:
In response to that question, I remind the Deputy of the benefits we have gone through. As the Deputy said, we have taken assumptions but they are well-founded in economic theory, robust methodology, strong research and strong validation by subject matter experts. We are very comfortable that the construct and results in the cost-benefit analysis are strong and we stand over our work. Yes, the world is changing. If I think back to 25 years ago, none of us had mobile phones. Today, business models are being disrupted due to digital and digital relies on broadband and fast generation network access. As we look into the future over a 25 year period, it is very hard for us to predict what the future landscape will look like. I would say we took a conservative approach to our benefits evaluation. From a benefits perspective, overall it is positive and has been with every version we have run.
I welcome the witnesses. Ms Ball mentioned that at the last meeting in December 2018 or January 2019, the Secretary General of the Department of Public Expenditure and Reform and the team from IGEES raised fresh concerns. If I recall correctly, she stated there were two concerns about gross value add and displacement factors. Will she give more details on these? She said that perhaps Dr. Redmond would like to do so.
Dr. Luke Redmond:
I will begin with the conversation on the gross value add, GVA. The GVA discussion focused on the figure used to underpin the productivity and output benefits associated with white-collar workers living in the intervention area but working outside it. In the updated model, it was originally proposed to use a 2016 GVA figure taken directly from the CSO but following conversations with colleagues at the Department of Public Expenditure and Reform, and in view of widespread conversations on the impact of multinationals in the economy, an issue was raised on whether the 2016 GVA figure might be slightly high and not totally reflective of the productivity levels in the domestic economy. In our discussions with the Department of Public Expenditure and Reform we agreed a different methodological approach. We stated we would go back to a 2011 GVA figure, which would then be scaled up by the rate of growth in modified gross national income, GNI*, over the 2011 to 2016 period.
The reason we went for this approach, and the Department of Public Expenditure and Reform highlighted this, was that in view of ongoing changes in national accounting practices modified GNI* was produced to give a more accurate view of the level of productivity in the economy. While multinationals are a very important contributor to the economy, the level of activity they produce can skew our true understanding of the domestic landscape. When we look at the calculation of GNI we have a GDP component and net factor income.
The reason I speak about this is because net factor income takes account of the income earned by Irish citizens and companies abroad from economic activity and property they hold. It also factors out income earned by foreign-owned companies for economic activity in an Irish context. GNI is a good figure but modified GNI was introduced by the CSO to take account of the activity of multinationals and specifically it takes account of the retained earnings of redomiciled foreign-owned companies in Ireland and the depreciation of foreign owned capital on national balance sheets. This meant that when we scaled the GVA figure from 2011 to 2016, we saw the growth rate of GNI* was 39% whereas across the same period the growth rate in GDP was 61%. We agreed with colleagues and used GNI* to give a more accurate figure than the productivity figure we were using across this period. It is interesting, and it speaks to my colleagues' points on the conservative approach we were taking.
When we talk about the productivity benefit that arrives to white-collar workers living in the intervention area, PwC considered it might be appropriate to use a GVA figure associated with white-collar workers, the assumption being these white-collar workers while living in the intervention area actually travel outside the intervention area to work in large urban areas. They undertake work in sectors that we would imagine have a higher value add relative to the national average. They work in professional services, IT and financial services. We felt this average value for white-collar workers would be a good GVA and could potentially be an option. However, on foot of ongoing debate with our colleagues in the Department of Public Expenditure and Reform as a result of the iterative process, it was concluded the GVA figure to be used was an average national GVA figure.
It included both white and blue-collar workers. The use of a GVA for white-collar workers would have led to a higher productivity uplift for the white-collar workers in the intervention area but who were not working there. The use of the national figure resulted in a reduction in the GVA. That was part of the robust approach we used.
The second area on which there was discussion was on the concept of displacement. When a policy intervention is introduced, such as the national broadband plan, and it leads to a positive uplift in economic activity or output in one sector of the economy, there is a risk that this might lead to a reduction in output in other sectors of the economy. The public spending code indicates that a cost-benefit analysis needs to provide some sort of estimate or indication of how this displacement effect has been taken into account. Officials in the Department of Public Expenditure and Reform have pointed out, and we agree, that there is a limit to domestic demand for output. There is an argument that any increased output in the economy from productivity improvements that the national broadband plan could be expected to deliver might lead to a fall-off in economic activity in other sectors of the economy. In the cost-benefit analysis we identify productivity and output improvements occurring at three levels, namely, for white-collar workers living in the intervention area but working outside it; for farm enterprises; and, for non-farm enterprises. The model took account of this through the application of a displacement factor onto the GVA or output uplift that the national broadband plan would deliver across these sectors.
The challenge here, and this is part of our robust methodology, is that there are no Ireland-specific estimates available for output displacement factors. To apply displacement factors to take account of displacement, we relied on a combination of international empirical research and an analysis of domestic data. The UK Government Department for Business, Innovation and Skills, now Business, Energy and Industrial Strategy, produced a research paper on research to assess the improvement of understanding additionality. It provides a range of displacement factors that can be applied to policy interventions across a range of themes and sub-themes and at regional and sub-regional levels. In the context of the farm and non-farm enterprise benefits, the cost-benefit analysis identifies these benefits emerging at a sub-regional level. We felt it was appropriate to utilise displacement factors from the UK Government paper at the sub-regional level. Specifically, the national broadband plan can be viewed as providing business development competitiveness support to the enterprises within these regions and the specific approach is almost an enterprise support. We applied an associated displacement factor of 16%. This was shared with our colleagues in the team in the Department of Public Expenditure and Reform.
Within the other principal sector, which is the big driver of productivity benefits relating to the productivity improvement for white-collar workers, the Department of Public Expenditure and Reform suggested we derive a displacement factor on the basis of looking at the volume of national output and identifying the split between the volume of that national output that goes to the domestic market versus the volume that goes to international destinations. An analysis of Central Statistics Office, CSO, data revealed it was difficult to show that split, so we looked at the total GVA produced in the economy and looked at the split between that produced by foreign-owned companies versus domestically owned, the assumption being that the volume of domestically produced GVA is for the domestic market and GVA produced by foreign companies would be for export, and that any change for domestic demand for output would not negatively impact that. That split showed that 60.3% of GVA is produced by foreign-owned companies, so we applied a displacement factor of 40% on the GVA uplift associated with white-collar workers. They were part of the iterative discussions with the team in Department of Public Expenditure and Reform. We had looked at using a displacement factor for white-collar workers of 20% based on an analysis of the UK Government research, but on discussion with Department of Public Expenditure and Reform, we felt the 40% figure was more appropriate. That was another contributor to the reduction in the benefit calculations.
At the previous meeting with the Department of Public Expenditure and Reform, it said it had outlined its concerns to PwC on gross added value mechanisms, displacement factors and so on. PwC went away and did further analysis in January and February and wrote back to say that it had adjusted accordingly. Is that a fair reflection?
Ms Amy Ball:
We met with Irish Government Economic and Evaluation Service, IGEES, and the Secretary General of Department of Public Expenditure and Reform in December. We reflected on their queries and met with them again in January. There was back and forth through February and that was closed down in February.
Ms Amy Ball:
Typically the Department of Public Expenditure and Reform would sign off on the cost-benefit analysis with the Department. In the absence of any notification to the contrary we have worked on the assumption that it has been fine. The Department has not flagged any issues or concerns to us.
Was PwC surprised when it went public some weeks ago that the Secretary General has taken a very strong position on internal communications? A memo for Government is not a small thing to raise such major concerns; it is almost unprecedented in my experience as a Minister. Was PwC surprised by that level of criticism?
I have questions on some of the details as this is our first time getting them. I believe Ms Smith said the assessment was that there is €500 per household gain from being able to do motor tax quickly or through e-Government. Is that €500 over 25 years?
Ms Fiona Smith:
Purchasing activity nowadays is completely different from how it was previously. Rather than having a very limited number of places to purchase merchandise, there is a gallery of places one can look for items. Various studies outline the kind of savings one would expect from online shopping. Our original calculation indicated a saving of €600 per household in the intervention area, but we applied an 80% haircut to that to reflect that a significant amount of online shopping can be accessed by households using their existing service. That means that we reflected a benefit of €120 in the model over the 25-year period.
I have four teenage children. I do not know whether Ms Smith has ever seen four teenagers online shopping. It does not result in any savings in my household - I kid you not. I am told that my children are not unusual in that respect. Is there potential for an increase in expenditure arising from having all those-----
How does one factor in the displacement factor that our internal retail economy is collapsing, as is evident from speaking to any high street retailer? In the displacement areas in particular, market towns are dying because we are all shopping online. Local retailers have gone out of business. Was the fact that shopping is being sent from places such as Manchester in a parcel and no one buys locally taken into account?
Ms Fiona Smith:
Effectively, it is the benefits less the cost. The cost is the €2 billion. The total benefits are €3.7 billion. When one subtracts the costs to the State and the operator, one gets the net figure. That is what gives the positive cost-benefit analysis - it is a positive benefit versus the total cost.
That is the net position. I understand. As Deputy Stanley pointed out, there are other costs. The Department will have to be provided with funding in this regard for 25 years. That is not included in these calculations.