Oireachtas Joint and Select Committees
Wednesday, 3 July 2019
Joint Oireachtas Committee on Communications, Climate Action and Environment
National Broadband Plan: Discussion (Resumed)
I welcome the officials from the Department of Communications, Climate Action and Environment to the meeting to discuss the national broadband plan. They are Mr. Mark Griffin, Secretary General; Mr. Ciarán Ó hÓbáin, assistant secretary; Mr. Fergal Mulligan, programme director of the national broadband plan; Mr. Patrick Neary, chief technical officer; Ms Orla Ryan, principal officer in the national broadband plan division; and Ms Ciara Kennedy, assistant principal officer in the 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 committee. However, if they are directed by the Chairman to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a 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 they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Any submission or opening statements that witnesses have made to the committee will be published on the committee website after this 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 members to turn off their mobile phones. I invited Mr. Mark Griffin to make his opening statement.
Mr. Mark Griffin:
I apologise that I was not able to be here on 22 May when the committee last met the Department about this issue. I am glad to be back before the committee today to deal with some of the issues that have arisen in the intervening period and some of the evidence that it has heard from a wide range of experts in the telecommunications, finance and regulatory sector. We have listened to input over the past weeks which is supportive of the approach taken but also, as one would expect, contrary views.
When one looks at the range of interventions, there appears to be support for certain policy objectives. High-speed broadband should be provided to 100% of premises in the country. There need to be strong protections for the State, with full transparency of where the State subsidy is being directed. There must be equal access for all commercial retail providers to the network so that consumers can get the lowest costs and highest levels of service. We need to provide a future-proofed network to ensure that in the future, a digital divide between urban and rural areas does not re-emerge, and this is reflected in the approach of a predominantly fibre solution proposed by Government, which was supported by ComReg in its evidence. Prices should be affordable for users, both for connections and products. These objectives were set out in the strategy approved by Government in December 2015 and signed up to by bidders through the pre-qualification process.
There has been commentary to date about the complexity of the process. It is the scale of the project that brings complexity and not the process itself. This is an ambitious one-off intervention to bring high-speed broadband to 1.1 million people in 540,000 premises across the country, dispersed among the most geographically and topographically challenging areas. The competitive dialogue process was chosen as it is designed for processes of this type where it is not possible to fully define tender requirements without extensive engagement with bidders. The Department’s negotiating team met with the bidders on more than 450 occasions culminating in more than 850 hours of dialogue overall. We left no stone unturned in working with the bidders throughout the process.
We have embedded very strict governance into the contract reflecting the requirements of state aid rules, the public spending code, the level of State subsidy involved and the fact that we are dealing with a 25-year contract. The importance of strong governance to protect the taxpayer’s interest was recognised from the outset of the procurement. Following consultation with stakeholders, including ComReg, the detailed principles of the governance model were set out in the procurement documents and agreed to by the short-listed bidders. These included access for all bidders to critical infrastructure on equal terms; significant penalties to address underperformance; substantial oversight arrangements to monitor progress, costs and take-up; and substantial clawback provisions on cost savings achieved or to share in future excess profits. The principles also require a stand-alone board responsible for the ring-fenced operations and routine management of the national broadband plan company, with the board required to report to the Minister regularly.
Comments have been made about the capacity of National Broadband Ireland, NBI, to deliver the national broadband plan. NBI has been subject to a rigorous evaluation of its financial and technical capabilities and its proposed solution. NBI has participated in the process for more than three years and at each point in that process, it has met the Department's detailed assessment criteria, which have been published and in some key areas well exceeded those requirements. It has the experience and expertise to carry out the work that it has been asked to do and to deliver a project of the size and complexity of the national broadband plan.
Insofar as the 300,000 premises with which Eir is involved are concerned, in April 2017 the Department published an updated high-speed broadband map. This took account of commercial operator plans which had not materialised and new developments since the publication of the original map, notably the commitment agreement signed by Eir with the Department to deploy high-speed broadband to approximately 300,000 premises in rural Ireland. The Department was obliged to take the Eir proposals into account in accordance with state aid rules and the map and the number of premises in the intervention area was adjusted downwards accordingly. Evidence from ESB at the committee last week indicates that this decision, unavoidable though it was from a state aid perspective, had a material impact on the commercial viability of the project.
The Department notes the detailed contribution of Eir last week where it asserted that high-speed broadband could be provided in the intervention area for €1 billion if it was allowed to deliver it outside what it refers to as the constraints of the national broadband plan procurement process. In subsequent correspondence with the Department, received last Friday and copied to the committee, it set out a range of €512 million to €1.55 billion of subsidy, with the higher figure referred to as the mid-range scenario, and exclusive of VAT and contingency costs. In its letter, Eir makes it clear that it is not "a formal offer designed to replace or supersede the current NBP procurement process". It could not be as Eir withdrew from the process in 2017. From a purely legal perspective, the Government could not accept such an offer even if it was made, given procurement and state aid law. The State cannot simply mandate and fund directly outside a procurement process any economic undertaking to carry out a project of this nature. We have covered this ground previously when the issue arose about assigning the national broadband plan to ESB.
If we had to start a new procurement process for whatever reasons, we estimate that it would take at least three years, considering the requirement to consult on a new strategy, the procurement rules which mandate particular timelines, state aid notification, a new cost-benefit analysis, and an evaluation process. Further time would be required to mobilise and commence roll-out. In three years' time, the preferred bidder under the current process would have connected up to 1,000 broadband connection points across all counties and passed more than 200,000 premises with high-quality, high-speed broadband at affordable prices. There would be no guarantee that a new procurement process would attract bidders and if it did, there could be no certainty as to what the ultimate price would be. It is certain that whatever form that process took, the resulting contract would still need robust governance and oversight measures of the nature specified in the current contract.
The Department welcomes the commitment in the Eir letter to supporting the national broadband plan and the provision of pole and duct products. When we met representatives of Eir on 28 May, they reaffirmed that to us in a bilateral meeting. We received the letter last Friday evening. We have had an opportunity to carry out an assessment of the Eir letter and we are happy to take questions on it from the committee. I am aware that the committee has received a separate note from Analysys Mason on Eir's overbuild for the 300,000 premises in the course of today. We submitted an aide-mémoireon the contract provisions. I apologise for the lateness of my own statement and those supporting documents being submitted to the committee. We can orally present to the committee this evening if that is helpful.
Mr. Mark Griffin:
We listened closely to what the chief executive officer, CEO, said in her evidence last Tuesday. We received a letter on Friday evening and have been studying that closely since. It has been in the possession of the committee for a number of days. I will recap on a couple of points that I made in my opening statement. The suggestion in Eir's letter is not a formal proposal. It suggests that it could deliver broadband in the intervention area for between €512 million and €1.55 billion if it was allowed to deliver it outside what it calls the constraints of the national broadband plan procurement process. In the letter, it refers to €1.55 billion as its mid-case scenario. That is somewhat similar to the mid-case scenario that we set out in the national broadband plan documentation which we published, which is approximately €2.1 billion. The key points that I would draw at a high level from the Eir letter is that it recognises that the national broadband plan is a public policy intervention with societal and political objectives, which is likely to influence the solution chosen. It is, and we will speak more about that this evening.
It is not making a formal offer to replace the national broadband plan procurement process. It remains firmly committed to supporting the plan and the provision of poles and duct products for National Broadband Ireland which are very important in the roll-out of the network in the intervention area. It sets out, in what it calls a hypothetical scenario, how it could deliver high speed broadband in the intervention area if it were asked do so and the estimated cost. The letter reiterates positions on governance advanced by Eir when participating in the national broadband plan process, how the contract imposes obligations over and above those required by regulations, concerns about the risk of contagion where regulatory equivalents could force Eir to offer what it considers to be more onerous services and prices throughout the country as a whole. These are issues on which we engaged with Eir in the period leading up to its withdrawal from the process in January 2018.
There are a few critical points that are probably worth drawing out and saying a little about. I will ask colleagues to come in on them.
On governance and what it calls the constraints of complex and onerous provisions, we characterise them as obligations and sound governance mandated by state aid rules and contract law. They are particularly important when speaking about how we protect €2 billion of taxpayers' money. The system that operates for Eir's 300,000 customers is designed for commercial intervention where a commercial company is spending its own money. We are speaking about spending €2 billion of taxpayers' money. Therefore, we need a different model with greater oversight. The aide-memoirewe sent earlier in the day will be useful in that regard. I will ask Mr. Mulligan to speak about it.
The other thing that came through in evidence last week - it was raised again by Deputies in the discussion with the ESB - was the Eir overbuild. There are questions about why that approach is being taken by the bidder in terms of whether the infrastructure for Eir's 300,000 customers should be used, what happens if it is done in a particular way, whether additional costs will be incurred and the technology impacts and constraints. Again, this was the subject of the document received from Analysys Mason this morning, about which I will ask Mr. Neary to speak momentarily. Another point that is very important and which, in looking at the transcripts, generated a lot of discussion - Deputy Dooley raised this issue in his discussion with ComReg - concerns the nature and cost of connections in the 300,000 customer intervention area, the approach been taken in that regard and what we are doing in the national broadband plan intervention area. It is important that we tease out the differences and why we are doing it. I will ask Mr. Mulligan to speak about governance because he has spent the past four of five years of his life in the bowels in dealing with the issue.
Mr. Fergal Mulligan:
In recent weeks there has been much discussion about the process, in particular, by bidders because they have been involved in it since 2015. In the end, three bidders spent a huge amount of money, as did we, and four large teams have been involved for long periods. Our team has involved 50, 60 or 70 people at various times. Bidders also had large teams, as the committee heard last week from the ESB. There were large teams in the ESB, Vodafone, SIRO and Eir and the current bidder still has a large team. The extent of the teams gives an indication of the amount of work required as part of the process since 2015 on the technical, commercial and legal aspects. Eir, in particular, as the dominant player in Ireland, would probably state it was facing more challenges than others.
I will explain the challenge an incumbent operator would have in any such process. It is not new to Ireland and is the same in every state throughout the world. When an incumbent is a dominant player in the provision of pole and duct access, in particular, and the passive infrastructure, owns this infrastructure and is regulated, there are strict conditions. One document that eventually came out of ComReg in the middle of 2018 was on the issue of contagion alluded to last week by Eir. There was an ongoing discussion, with much correspondence shared between bidders, Eir and the Department since 2017 on the risk of contagion. The net point about contagion played into the governance process.
I refer the committee to the state aid guidelines which really played into the governance process we had set out. It is the bible we have had to follow since the get-go in 2015 when we set out the strategy because it had to align with state aid guidelines. For example, those guidelines state there must be a wholesale open access company; therefore, the strategy had to land on a wholesale open access company. That wholesale open access company must offer services on equivalent terms. Again, this is included in the state aid guidelines. These are common practices in regulation and must be followed. For incumbents that own infrastructure, there is a particular paragraph in the guidelines, section 78(f). It states that if an incumbent that owns the infrastructure enters a procurement process, it must allow the other bidders equal access to its infrastructure; otherwise, it cannot tender. The amount of work and complexity this small paragraph brought into our process was enormous for all bidders that owned infrastructure. They included the ESB and Enet because they own infrastructure from which other bidders might want to pick and choose. Because reuse of infrastructure was so critical to reduce the cost to the State, the Department was obliged to put all of the infrastructure into one bucket. We had to tell anybody who wanted to bid the infrastructure that was available and that they could pick and choose the infrastructure they wanted to use, depending on the network design, in selecting the most cost-effective solution. All bidders were required to set up an independent ring-fenced team for their infrastructure with Chinese walls.
Section 78(f) states any operator that owns or controls infrastructure, irrespective of whether it is actually used in the target area - our intervention area - and that wishes to participate in the tender process should inform the aid granting authority - the Department and the NRA - about the infrastructure during the public consultation process and provide all relevant information - this is a critical point which plays into the Analysys Mason document sent today - for other bidders at a point in time that would allow them to include such infrastructure in their bids. It also states member states should set up a national database on the availability of existing infrastructures that could be reused in broadband roll-out. We did all of this. In our procurement documentation in 2015 we set out the rules that applied to these companies because we were required to do so under state aid rules. We had to tell the European Commission that we had followed all of them as, otherwise, we would not receive state aid approval. This added a layer of complexity for any bidder that owned infrastructure. Clearly, it added a layer of complexity for Eir that others might not have had. The ESB had it, but it was not regulated in telecoms.
While Eir was happy to do this because it was regulated, it spoke about a contagion problem. We had a level of sympathy for its argument that if we were to do something under this paragraph for bidders in the intervention area such as giving them a discount on a pole price or better terms and conditions, there was a risk that ComReg would make the company do it in Dublin. We were at pains to say - I have a little bit of experience of regulation - that we were not really sure at what Eir was getting with the contagion argument. It stated it had a non-discrimination obligation and had to treat everybody equally throughout the country. That issue was debated to and fro. I have a letter from January 2017, in which I stated I did not believe it was an issue, that it was imposing the obligation a little too far and that it should talk to ComReg, DG Competition and DG Connect to see whether it was actually true. Almost a year and a half later, ComReg published an information notice that stated Eir's obligations to act in a non-discriminatory manner meant it was to apply equal conditions in equal circumstances to other undertakings providing equivalent services and information for others under the same conditions and of the same quality as the operator provided its own services or those of its subsidiaries or partners.
That is the obligation that Eircom was interpreting, saying: "If I do something for the national broadband plan company or the bidders in national broadband plan land, I would probably have to apply it to everyone else in the country." ComReg published specific information saying that was not true, that obligation did not have to be applied in the national broadband plan world because national broadband plan world is different. That was after Eircom left the process. I said this to Eircom officials many times during the process that I thought it was a red herring, and that I did not believe Eircom had a contagion problem, or that ComReg believes it had. However, as Ms Lennon said in her letter, her legal advisers said that she had and that put them in a difficult position. I was not acting as her legal adviser and nor was anyone else but it played into the issues and the red lines they were talking about. The rules of our game, which is in line with state aid guidelines, presented them with a commercial issue for their business. For example, if the national broadband plan company orders 1.2 million poles from me at €20 a pole, we would think it reasonable to assume there would be a discount at that volume. Eircom said "No" and that under regulation that was not permissible. We replied that did not seem appropriate or fair to us in a national broadband plan state aid context. That took a year and a half to resolve that single point. Subsequently a discount was given on the 1.2 million poles, which was a substantial sum, in fairness to Eircom. That is still under review, but that is a regulated product and ComReg still has to conduct reviews of all those poles and ducts and come to a view on those matters.
People refer to the complexity of the process, especially in respect of Eircom. Last week, ESB representatives said they understood the complexity but thought it was fair and in line with the rules of the game. The current bidder is playing by the rules, has stuck by them and not diverged so far. Eircom obviously thought the rules were difficult and complex and that it was difficult to stay in the process based on those rules and the constraints, as Mr. Griffin alluded to. There were constraints but when any incumbent is dominant and that dominance has been placed on it by the regulator, it will face constraints.
Eircom might say it faced constraints under regulation and, therefore, does not need other constraints in the contract. If I am regulated, I am regulated and those are the rules of the game. We discussed this a lot with ComReg, which is why the aide-memoirewe are discussing comes into play. The complexity and challenge for the bidders is reflected in the contract. It is 1,500 pages and we have said that we would not give it to the committee yet.
Mr. Fergal Mulligan:
Our team and three other teams have suffered this contract for three or four years, and nobody asked for it. It sticks by procurement law, state aid law and contractual law. It is a commercial contract, which needs to be commercially enforceable within the Department, through the Commercial Court or whatever. We are covering every nook and cranny of the contract and making sure on behalf of the State that it is tight. If, unfortunately, we ever end up in the Commercial Court with any commercial company, it needs to be tight. It needs to be enforceable and it needs to be possible to penalise companies if they breach the rules of the contract.
We need to understand the regulation versus the contract. In an significant market power, SMP, environment, ComReg hands down obligations on a commercial company. No state aid is involved. There is no requirement under regulation for any company to spend any money and there is no requirement on the State to spend any money. When ComReg hands down regulations it is based on the status quo, that Eircom will invest in the 300,000 premises in the knowledge that they would be regulated, but they negotiate the type of regulation with ComReg.The regulation outlined the terms and conditions last October. If ComReg finds that regulation has been breached and that it is non-compliant, the next stage is the Commercial Court. It is a very difficult process in regulation and does not cover many of the things in the contract. Let us take any of the clauses and schedules of our contracts, for example, the deployment schedule. It is page 13 before one gets to the schedules, which is the body of the requirements. The clauses are normal contractual clauses that one would find in any typical contract. When people say that the contract is complicated, the first 13 pages are standard contractual terms that one will find in typical PPPs, such as in the Building Digital UK, BDUK, contract with BT. Most of what is in those clauses was in the national broadband scheme contract with Three back in the day. It is a mixture of those which has gone through iterations to be tailored for the NBP process.
I refer to schedule 2.3, No. 97, on page 13. It refers to deployment requirements, which require the bidder to stick to milestones, quarter by quarter, year by year, for 25 years of what they have to do and when they have to do it. If they do not do X, Y, and Z, they will not be paid. That is an example of a part of this contract over which ComReg would have no jurisdiction under regulation. Schedule 2.5 contains environmental obligations which, again, ComReg would not hand down; they will be dealt with by county councils. Schedule 2.6 sets out demands on the bidder to set out a communications plan, a demand stimulation plan and a brand plan, over which ComReg would have no jurisdiction. Schedule 5.2 which is on the next page sets out wholesale prices, benchmarking and product rules. We benchmark to what ComReg does. The key point is that ComReg has no role in affordability of pricing to end users - we can discuss connection charges later. ComReg is there to regulate whatever costs Eircom believe it costs and to ensure that those are efficiently incurred costs but it has no role in the current regulatory regime to say the prices are capped and companies cannot charge customers X, Y, or Z. They are subject to retail-minus rules and to a different rule for connection charges, which was decided last October, when Eircom put forward a proposal, ComReg did not intervene and, as a result, people can be charged multiples of €170 depending on whether they change retail providers. The current connection charge is more than €170, but it can be multiples of that depending on how many switches a customer makes.
Many different rules are in the regulation and they are covered for different reasons compared to a state aided project. Under state aid, ComReg has no role to review how much is spent by the bidder on behalf of the State. It has no role in clawing back or monitoring that money. It has no legal power to do any of that; its legal powers come from regulations handed down by Europe when people are designated with market power absent state aid. That is a critical point. That adds another layer of complexity for Eircom as a business. It deals with a complex regulatory framework. I recall a meeting with a previous Eircom CEO who had not long joined and he told me that the regulation was so complicated that it was like walking into the cockpit of a plane, having never flown a plane before, but the regulatory framework handed down to telecommunications operators is a complicated area. We have reflected much of that complication in the contract because it is necessary but, unfortunately, the state aid rules handed down by the Commission means another layer of complexity is added to that which one must contract. Nobody asked for the process to be complicated, long or expensive but the rules of the Commission and of procurement law to ensure a level playing field and equal access to a procurement process by everyone who wants to participate if they qualify lend themselves to a very complicated and difficult process. In 2015, allowing all bidders equal access to the infrastructure - ESB, Eircom, Enet, masts or towers or whatever, was a very complex area to get under. The consequence of not doing that job properly was that no one would have bid because they would have felt there was no infrastructure to use, and they would not have known the pricing or products so how could they design a network? We will come to the over build of 300,000. It plays into the issue of bidders not being able to bid on something if they do not have clarity on products and pricing. That makes it very difficult.
Then there is the matter of wholesale access on number G, and what Eir has referred to as an added complexity of additional standards of service which needs to be applied. We dispute the added level of service.
Under state aid rules, paragraph (g) of section 78 says subsidised companies, which are different from regulated companies, should provide a wider range of wholesale access products than those mandated by NRAs under sectoral regulation to operators with significant market power. In this case, it would be Eir. That is because the aid beneficiary is using not just its own resources but taxpayers' money to deploy its own infrastructure. The rules provide that such wholesale access should be granted as early as possible before starting the network operation. That will include dark fibre, full unbundling, virtual unbundling access, bitstream and the entire suite of products retailers and wholesalers will expect this network to provide. If someone wants to deviate from that, the European Commission will say "No". One cannot deviate from that because it is state aid. When one is in a regulatory environment, a regulator and an incumbent can generally negotiate because they need to reach an outcome. We are somewhat shackled, which is the right word, but appropriately so because state aid is involved and the rules of the European Commission apply.
If Ireland approached the Commission and asked if it really needed X and Y, the first thing it would say would be that if Ireland was exempted, Germany, France and Italy would have to be exempted too. The rules are the rules and they were set out in 2013. As far as the Commission is concerned, they constitute a legal instrument and it does not deviate from them. It will not allow a member state to deviate. We have to get a European Commission state aid decision or we will not be able to spend any state aid. Until that decision is awarded to Ireland, which we expect it will shortly be, the state aid cannot be spent. It is a circular thing. One could say we do not have to abide by these rules, but if one does not, one will never get a state aid decision. Under the rules, one has to run a thorough, open access procurement process which one ensures can be competitive. The Commission provides for the event in which that process is not competitive. It does so because across Europe, there have been uncompetitive processes. We have used the UK as an example before, but it is across the board. I saw a presentation seven or eight years ago from DG Competition which said 80% of state aid projects went to incumbents. The rule of thumb was that the incumbent generally won because it held all the cards. That is normally what happens in a process because the incumbent will have economies of scale and an advantage over others. The Commission is trying, through these rules, to rebalance that and it places a significant burden on member states to achieve it. That is exactly what we did. We followed the Commission's rules and today we have an operator that does not own the poles and ducts entering a process to use them. It is a regulated operator and comfort is being taken from that fact. It will go forward to propose to build a network on those poles and ducts.
In terms of how the Commission says one deals with a single bidder process, that is referred to in paragraph (i) of the section. It provides that monitoring and clawback mechanisms are an absolute requirement. One must monitor and that goes back to the onerous obligations in our contract in terms of clawback. As such, the Commission has envisaged a single bidder process. I go back to the UK and everything else. In that event, the Commission refers to a scenario in which future costs and revenue developments are surrounded by a high degree of uncertainty, which some might say they are here, and there is a strong asymmetry of information. With a Department and network operators and providers in the market, they are the experts and we are the authority and sometimes an asymmetry of information can exist. In that case, the Commission says the public authority, namely, the Department, may wish also to adopt a financing model which is not entirely ex antebut which is rather a mix of ex anteand ex post. An example would be clawbacks to allow balanced sharing of unanticipated gains. As Mr. Griffin said, we have a €2 billion subsidy for the bidder and we have a contingency set aside of €480 million. As we have explained before, that is all based on a thorough clawback mechanism on build costs, unanticipated gains in terms of excess profits for the operators and on the value of the business at the end. That is part of the process. The Commission does not set out the percentages but rather says it is up to the member state to negotiate the best possible percentages which we believe we have in the circumstances while balancing the incentives for the operator to maximise the output of the network and its success on a commercial basis.
People are being unfair in alluding to an unnecessarily complex and protracted process that has been unfair to some bidders. We do not believe so. It required substantial bidders with deep pockets to bid and that has cost a great deal of money. That is just the nature of the process. We are still at it. After 2016, 2017 and 2018, there is nothing we have done that people in other member states would not have had to do.
Mr. Mark Griffin:
We do not believe the extent of the additional burden placed on Eir by virtue of the contract was of the order that its representatives seemed to suggest at the hearings before the committee last week. It appeared to suggest we required whole separate teams and that Eir could not use its existing wholesale team of 80 staff and so on. However, that was not the case. Obviously, we needed a clear line of sight for the €2.1 billion to be channelled into whatever entity won the contract and that was a critical piece. However, that did not mandate a duplication of systems, staff or other infrastructure in the Eir organisation. Mr. Mulligan might want to comment on that.
Mr. Fergal Mulligan:
I refer to the aide-mémoirein the contract under No. 101 in schedule 2.7 - NBP core requirements. This is the area where Eir says there was an unnecessarily duplicated process for it given that it was regulated. This is the area where we required a separate board, a Minister's appointee and a senior management team ring-fenced for the network we needed to build. It is fair to say that over the course of 2016 to 2017, there was significant engagement between the Department and Eir because of the unique nature of being regulated in the market and having an Open Eir access team already in place. We went through a lot of workshops with Eir to ensure it could maximise the Open Eir team while respecting these provisions in the contract. The provisions in this contract to have a special purpose vehicle for the NBP only were set out in 2015 in the Government decision on the strategy. It was set out in the requirements of the tender documents which all pre-qualified bidders signed declarations to follow, including Eir. It did not necessarily disagree that it would not set up a special purpose vehicle. Where we ended up having a very healthy debate was in relation to the spirit in which it would apply that special purpose vehicle with regard to what the board meant, what its terms of reference were, whether a Minister's appointee would sit on it and what that role would be, and the relationship between the NPB SPV board and the Eir board. Would the Eir board tell the board of the NBP company that is budget would be affected in a particular year because of a current shortage of cash? How would that all work? These are the discussions we had.
Eir raised issues around duplication of technical platforms, gateways and billing systems. My colleague, Mr. Patrick Neary, is the chief technical officer in the Department and he conducted many workshops with the Eir technical team to say we were not sure it was right about that and pointing out that we were requiring it to reuse the relevant infrastructure. At the end of the workshops, Eir agreed it could use all that and that it would work fine. It said it just needed to tweak some things to make it NBP company operable. We did not agree on much of the duplication to which it referred. We pointed out that we wanted Eir to maximise its economies of scale and that we did not want it to waste State money. However, we said with regard to the schedule that the independent board and senior management were important. We said it was important for the NBP company to have a CFO, CEO and CTO dedicated to the massive build. As the ESB pointed out, the build will involve fibre cabling that could loop around the globe twice. We thought a stand-alone team was justified in that regard. If after ten years that was no longer necessary, the contract made significant provision in the change of control procedure in No. 113. It is a massive part of the contract which sets out that where things are going well and according to plan, the winning bidder will have every opportunity to seek changes to make things more efficient. Today, however, we are going into the unknown somewhat and it is critical, given the extent of State subsidy involved, that this board is answerable to the Minister, contains a Minister's appointee and is responsible for overseeing the money in.
Eir was asking in the end if it would impact its ability to compete nationally. Eir wanted to sell a service at a national level so that if Sky, Vodafone or anyone else wanted a national product, Eir would not have to go through the nonsense of selling with both Open Eir and the NBP company. We said that was fine but we asked how it was going to sell using the Open Eir brand. We wanted a clear distinction between the revenues of the NBP company and Open Eir so we could manage the clawback and trace the money, as opposed to everything being sold from the NBP company into Open Eir. There was, without question, a difference of opinion about that. We believed that was resolvable, and on the cusp of being resolved, just before Eir withdrew from the process.
Eir sent the Department ten red line issues in a letter the week before it withdrew, or the same day. I looked at them over recent days to see where we still had an issue. We had an issue as to whether the NBP company could sell into Open Eir and Open Eir could sell to the country. We had an issue with that in terms of transparency and traceability and the independence of the NBP company board from the Eir board. That was on the cusp of being resolved and I do not think it was a big hurdle to get over.
We did not agree with the duplication of resources. We wanted 80 people in the NBP company. We wanted a board, senior management and an administration team. It was, without question, going to be an incremental cost but we thought it was a cost worth paying to ensure a team was sitting on this contract and managing it for 25 years or ten years. The agreement could have been amended once it was all proven and tested and everything was going according to plan.
The Department had a risk that all the contractors Eir used nationally could be cross-subsidised, that Eir could take money from the Department and pay another firm in Dublin or different things like that. Eir refused to say the Department could impose a clawback mechanism on a contractor that it used across the country. That also seemed as if it was going to be resolved. It is no longer there or necessary because of the mechanism we have in place with subcontractors.
We had a red line on the ring-fenced funding. We wanted Eir to commit funding to the project and have it guaranteed in writing. We were not landed on that issue and, according to Eir, it was going to be difficult to land on that. That red line had not moved.
I also mentioned the contagion issue which was a fundamental factor. The information notice from ComReg came out in June 2018 and Eir left the process in January. I do not know if that information notice would have kept Eir in the process. That is a matter between ComReg, Eir and the commission. As I frequently said to Eir in 2017, I did not believe the position it was taking on contagion was altogether right. I do not believe it was the risk that Eir perceived it to be, but perhaps, as a business, it took a different view.
Another of Eir's red lines was that it needed more time in the contract. We were trying to push all bidders to get to a final tender. We had issued a letter to Eir around that week saying we were open to talk and more dialogue. Timing was not an issue. At the time, although this has since been resolved with ComReg, there were issues around equivalence of inputs and whether everyone had to be given equivalence of inputs. It has since been accepted by Eir, through a ComReg decision in October, that they do, but before that ComReg decision, Eir was disputing that with my colleague. Its position was that there were certain things it did not believe it was necessary to have equivalence inputs on. That was one of its red line issues but that has disappeared because ComReg has imposed that on Eir anyway.
There are certain products that the European Commission requires us to have in our product set in this contract, such as dark fibre access and stuff like that. I am not sure if that was offered under regulation but Eir had raised that as a red line, saying that offering dark fibre in rural areas was a load of nonsense. That was also under discussion and I do not believe it would have been a red line in the end.
The contagion issue was one of the big red lines that Eir put forward. I do not think the duplication of resources was a big one and I do not think the ability to sell nationally, with our national platform, was a big issue, and it was on the verge of being resolved before Eir left the process.
Mr. Fergal Mulligan:
It was referred to last week as a technical submission. In September 2017, there two bidders. SIRO left the process in August 2017 but it had all but got a draft submission ready, many aspects of which the Department had seen. Two bidders submitted a full draft tender in 2017. It was not a technical submission. It was a full, technical, financial and contractual submission in draft form as a dummy run for the final tender. That was the intent of that. In the commercial model that was put forward by Eir, it presented a bid of €2.7 billion which was in its letter as of Friday. That was exclusive of VAT and any contingencies as far as we were aware. That was its starting bid in the process.
Mr. Patrick Neary:
Analysys Mason submitted a paper to the committee today. I will explain the intent of that. When the area including 300,000 households was removed from the process, it created what the ESB referred to as a doughnut of premises around towns and villages that bidders would now need to traverse to get to the intervention homes. That is 5 or 6 km out the main roads of villages and part of the way down boreens but not all the way to premises at the end of the roads. Bidders were faced with trying to traverse that area and they considered two options. One was to use an active product that Eir was developing which reused the fibre that was deployed to service the 300,000 households. The bidder would plug in its own fibre at the end of that area of 300,000 households to address the intervention area or, alternatively, the bidder could rent poles and ducts from Eir to deploy, or use its own structure in the ESB's case, to get across the area of the 300,000 households. Both options involved network infrastructure sharing and reusing infrastructure. In the active wholesale product option, the fibre is being rented, but that includes the cost of the rental of the pole and duct that is holding up that fibre and the active equipment, the electronics that are in the telephone exchanges from which Eir manages fibre. The pole and duct rental option means that a company would be renting the physical pole and the duct in the ground and deploying its own fibre through it.
We spent a lot of time with the bidders looking at preferred options and which would work best. It became apparent that the best option was different for different bidders. Open Eir's preference was to use the active product and plug the fibre into the fibre that was already on the build that had been done for the 300,000 households. It was apparent that the other bidders preferred just to use the physical infrastructure of poles and ducts and deploy their own fibre. The main rationale for that was that those bidders demonstrated that, due to where their design was starting from - metropolitan area networks, MANs, in the case of Granahan McCourt and ESB substations in the case of the ESB - there was not the same cost benefit of using the Eir fibre based on the topology. At the same time, the cost of the poles and ducts was reduced somewhat based on the volume of poles and ducts that were being used by Granahan McCourt in particular. It got a lower price for using the pole and duct infrastructure. That option became a cheaper one and was then more cost efficient for Granahan McCourt to use. The ESB said in its evidence that it was more cost effective to use its own infrastructure.
Eir, on the other hand, continued because the design of its network obviously fits directly into where that fibre can be accessed at its exchanges and at the other end towards the intervention area.
It could achieve cost savings in using that product. That is why Eir chose-----
Mr. Patrick Neary:
Yes. There were a number of operational issues with the fibre product at the time that were listed by Analysys Mason. The product was in development at the time and that prevented the other bidders from being able to have the assurance of being able to use it in particular locations. It is possible for National Broadband Ireland, NBI, to re-engage and reuse an Eir active product in its deployment. Any available cost saving could be achieved in certain circumstances. The product would need to be redeveloped and introduced to cover future-proofing, capacity and operational requirements of NBI in order to be able to rely on it in these circumstances. It is an option for it to pursue in the future.
Mr. Mark Griffin:
As we stated to the committee, in consideration of a low level design in individual deployment areas, NBI will be mandated to come forward with the most cost-effective solution, whether it is use of an FEI product if it is brought back onto the market and appropriate, use of the ESB's infrastructure or use of Eir's pole and duct infrastructure, in addition to looking at what is the most cost-effective way in regard to connection charges and wireless infrastructure.
I thank the delegates for their comprehensive presentation. It was certainly more comprehensive than the initial response of the Department to the presentation made by Eir to the committee last week. The Taoiseach told the Dáil that Eir's offer of €1 billion was the result of not including VAT or connection charges, which was subsequently proved to be incorrect. Somebody in the Department's press office hastily got that response out and left the Taoiseach with egg on his face, but that is not a matter for the delegates.
Representatives of Eir told the committee last week that it could provide high speed broadband access for 542,000 homes, premises and farms dotted throughout the intervention area for €1 billion. Members of the committee represent taxpayers and the people who need broadband. It would be foolish of us not to pursue the matter as far as possible and anything I say should be taken in that context. It seems, based on the presentation made, the lengthy responses, the layers of complexity involved and the rules and regulations which must be met, that in order to protect the €1 billion, the State will have to spend another €2 billion. That seems ridiculous to the taxpayer and, I am sure, the people waiting for broadband. Eir which has been getting a bit of a bashing from the Department in recent days - it often gets a bashing from me on other issues - is being portrayed as the big baddie, whereas the truth is the Department entered into an arrangement with Eir to roll out broadband in the original intervention area covering 300,000 homes. Successive Ministers have gathered political capital for their foresight in bringing it about. We know what the ESB stated and the implications. Are we spending €2 billion to protect €1 billion?
Mr. Mark Griffin:
We think the comparison that needs to be made is between what Eir has characterised as its mid-case scenario costed at €1.55 billion and the NBI mid-case scenario costed at €2.1 billion. There is a difference of approximately €600 million, a sum that is not to be sniffed at. To briefly take a step back, we have not bashed Eir. In fact, we have worked very closely with it on the 300,000 premises area and have a very good relationship at official level with its CEO and staff, with whom we are in regular contact on a range of issues, including its proposals to roll out the fibre network to 1.4 million premises in urban areas. That is an important point which I will ask Mr. Mulligan to address further. We may try to tighten the long presentation we made at the start because we need to be able to point out to the committee the key differences between rolling out a network in a manner similar to that used in the 300,000 premises area and rolling out a network of the nature and with the controls required for the national broadband plan and why they are so important.
We have heard quite a lot of it already. The Department is responsible to the taxpayer. Taxpayers and the people awaiting broadband may be coming to the realisation that the procurement process is taking such a long time because of the complexities involved. Does Mr. Griffin agree that it is mission creep beyond belief-----
Before Mr. Griffin contests anything, he should take certain matters into account. Are there issues with the 300,000 homes that have been passed, some of which have been connected, under the arrangement the Department had with Eir? Is he satisfied with what Eir delivered?
Mr. Mark Griffin:
I know that the Deputy does not mean it, but there is an inference that we in the Department do not care about achieving value for money. We have been pushing the project for the past three years to ensure we maximise value for money for the taxpayer. We have done so in very difficult circumstances in a situation where we were left with one bidder. We are confident that we have controls in place in terms of clawback and so on that will provide us with a solution we can roll out reasonably quickly and which will secure value for money for the taxpayer. The crucial factor relates to why the national broadband plan cannot be rolled out in the intervention area in a similar manner to what Eir did in the 300,0000 premises area. There are certain key things we need to call out that draw us into a conversation on connection costs also.
Mr. Fergal Mulligan:
Mr. Neary will address the technical requirements we are obliged to include in a contract. In 2016 and 2017, with others, he and I negotiated the commitment agreement over the course of nine months. It is a 30 or 40-page document which does not compare to the 1,500-page document which I explained was unavoidable. We certainly cannot flip to a 40-page document. I do not know if that is what Eir is assuming we will do.
I understand that. I will try to short-circuit things. Eir introduced the notion of a universal service obligation when its representatives appeared before the committee. They cited examples of the extension of a universal service obligation. The State has an obligation agreement with Eir that connects to every home in the country that wants to be connected with copper wire. If the model is good enough to have copper wire running to every home, surely it should be good enough to run a piece of fibre cable to every home. Why would one want any more complexity, rules, regulations and transparency in making that connection? I do not wish to simplify the matter, but these are the questions members are being asked. The public is looking at the massive superstructure that has been created and wondering why something that started out with a potential cost of €500 million will now cost €3 billion. Eir has stated it can do it for €1 billion. It has already done it in part of the intervention area on a commercial basis.
I can sit here until tomorrow, I am sure, listening to Mr. Mulligan and he will give fact after fact that are all correct. Is there another model or arrangement that can be entered into? That may require stalling where we are at now. Is there another model? Knowing everything that the Department now knows, and clearly it did not at the beginning, is there another model through the extension of a universal service obligation or whatever that can get us high-speed broadband at the same speeds and quality of service, as in the 300,000 area, for €1 billion?
Mr. Ciarán Ó hÓbáin:
I will make a very quick reference. Looking at the figures and the gap, it is absolutely not €2 billion in the first instance. In fairness to Eir's CEO, looking to her testimony, which I have been through and to the letter, it is very clear to me that what she was doing was trying to be helpful to the committee in responding to a question by saying what it would cost to continue the roll-out in rural Ireland to the 300,000. She was not saying that this would be done as the NBP because once we start to do it as that, clearly, if there is a cheque coming from the taxpayer to fund that, with that comes - I will not go into it - a minimum level of controls so that the taxpayer can be sure that in the event that this thing does not go to plan or if the commitments are not met, we get our money back or we are protected. In fairness, when we asked Eir for further information, it was forthcoming and quickly responded with information. It is clear, looking at that, that there are optimistic scenarios, a mid-case scenario and we have our hard case scenario. Clearly, when we are looking for money for a project like this, we talk of maximum numbers. We are not going to go into it today regarding the optimistic number in terms of the capital clawback coming to our advantage or the revenue uptake being higher and what that might be. That kind of speculation would not be helpful.
In terms of other models and the USO in particular, there is a USO for copper and it is a USO for functional Internet access. I do not know how it would work if one tried to do it with one's phone here today but 28 kbps is the functional Internet access. That is what exists in Ireland today. The new European electronic communication code, which is due to come into force by December of next year, allows for, and Ireland argued for this in the context of the development of the directive, the provision of adequate broadband through a USO. The directive is very clear that there is a hierarchy as to how broadband should be provided in member states. It should be provided in the first instance by commercial operators, which is not surprising because we operate in a liberalised telecoms market. The next way the directive provides that broadband should be provided is through public policy instruments. That is the national broadband plan or it could be the approach to spectrum auctions, etc. One uses the tools available. Very much as a last and third resort we could have a USO.
I understand that this is an area that ComReg would propose to look at when the new code is transposed, in particular in the light of the NBP being delivered, to see if there are areas still remaining. The code is clear that it is looking to the final percentage as we move forward and even if we have done the whole country. It is looking to ensure for that percentage if it happened that the approach taken in a member state was such that there were new instances of people who could not get broadband.
If Ireland were to take such an approach, the code will have to be transposed in December of next year, ComReg would then have to do its analysis as to whether a USO was appropriate, and then there would have to be engagement with the market on this key term of adequate broadband. Looking to the directive for the kind of services it should be possible to carry out under the definition of adequate broadband, it would seem that it would be possible to do them at relatively modest broadband speeds. In the UK, for example, there is a USO of 10 Mbps. The expectation is that it would be at a low level. If we were to go the route of introducing a USO, establishing the adequate broadband level and getting it high enough to be meaningful and to work, market players would have to be allowed an opportunity. We could not just designate. We would have to allow market operators the opportunity to come forward to offer themselves to be that USO provider.
I remain unclear as to why a USO is not possible now. Mr. Ó hÓbáin has said that it can only be used at a later stage where the market has already been satisfied. We are proposing to satisfy the requirement by State intervention. Surely a USO comes into play when it is needed due to State intervention. If we were to leave the NBP aside for the moment and we looked again at using the USO model, could that be used to roll out high-speed broadband? Minimum and adequate levels have been mentioned. It should not be forgotten that the national broadband plan, in its initial call, only looked for 30 Mbps, and I am on record as calling that into question. Mr. Griffin mentioned a predominantly fibre solution proposed by Government. To the best of my recollection, it is not fibre proposed by the Government because it has to be technology neutral. It was the three bidders.
The witnesses are identifying constraints based on the rules. Those same constraints existed to a large extent in terms of what the Department in its initial documentation could request from the marketplace, but the market came flooding back and said that it would provide fibre to the home. Based on Eir's testimony to the committee last week, it is very clear that, if it were responding, it would be in its commercial interest to replace copper with fibre. I would say that is the case for many of the incumbents across Europe.
This is not a case of us against the Department or the Department against us. Rather, I am trying to be collaborative on behalf of the people, whom we represent to the best of our abilities, just as the Department does.
Mr. Fergal Mulligan:
I do not want to bore the committee with facts, but the USO regime has been discussed in detail under the European communications code. The European Commission has made it very clear that it does not view a USO for broadband as the silver bullet for fixing member states' broadband market failures. It is clear in the code, and ComReg has confirmed this to us, as it would be the overseer of the USO in the copper context for voice and the regulators would be tasked with overseeing this in future, that commercial investment with public sector investment, that is, the Government, should be the main vehicle to solve the market failure identified. The code is quite clear that a universal service obligation for broadband, which is not currently in any legislative process in Europe - there is no standard or anything else other than what may or may not be done for functional or adequate Internet access-----
Mr. Fergal Mulligan:
Could a member state do it? A member state can introduce primary legislation. The UK has done so in respect of 10 Mbps. We spoke to Broadband Delivery UK, BDUK, several years ago about USO as part of the strategy and determining our best options, and we spoke to it as part of the reappraisal in 2018 when Eir left about whether a USO was an option.
We have explored this with BDUK, which got a lot of legal advice from general counsel on what is possible within the framework, the regulations and local legislation. That led to a primary legislation instrument imposing a universal service obligation, USO, of 10 Mbps until such time as the commercial sector-public sector, with its funding through state aid, gets to the area. This would apply during the interregnum until a provider could offer 50 Mbps or 100 Mbps.
Mr. Fergal Mulligan:
Before the Deputy goes on, let me refer to the old days of the USO, with which we are quite familiar. Our contract is exactly akin to a USO that one would impose. A policy direction will be set, calling for 100% coverage at 30 Mbps, 50 Mbps or 100 Mbps. The consensus is that 30 Mbps is too low. At the moment, 150 Mbps is the market minimum where SIRO and Eircom are concerned. ComReg will be tasked with the same job we have done for three years. It will have to go to the market and seek out a provider that is willing to do it. Then it will have to decide how that will be funded. If it is funded to the tune of €1 billion, €2 billion or whatever, a decision will have to be made on who will pay for that. There is no provision for this under any USO legislation in Ireland. Should the State pay that to the universal service provider or should it be spread between all the operators? Eircom is looking for a small amount of money relative to our numbers and it has gone to the Commercial Court under the old USO regime. The old USO regime was an automatic designation because of its legacy incumbency on the copper network. The connection charge for anyone that wants a copper connection has been the same for about 15 years. It is €117. We are charging €100, so it is not too different. The consumer paid nothing unless the cost went over €7,000 in what was called a regulated access threshold. We have a similar threshold in our contract but it is set at €5,000. The USO model to date and any likely USO model in the future are very similar to the model we have today. Would going into the USO world lead to a different outcome? The State could not designate Eircom automatically. Vodafone, SIRO and wireless operators would all have to be given the opportunity to seek funding. A procurement process would take place. We would face the infrastructure problem I just mentioned. Everybody would have to have equal access to the infrastructure to be a designated operator and get funding from either the State or from ComReg to do the job. The State would face a circular problem of how to make this work given all the competing operators that would want a piece of the pie. It is difficult.
Mr. Mark Griffin:
I know we have buried the committee members under a lot of material. It is not so much the complexity as the needs and the obligations set out in the contract. There are a few key points which must be drawn out. They make clear why the approach taken to the 300,000 rural homes would not work in the national broadband plan, NBP, intervention area. There are about half a dozen things that are worth mentioning in that regard. They are important.
Mr. Fergal Mulligan:
Mr. Neary and I, along with many others, are intimately familiar with the agreement pertaining to the 300,000 homes. We bear the scars of about nine months of lawyer-to-lawyer engagement with Eircom in getting that agreement. It was a difficult agreement to get. While we got criticism at the time, we were quite proud of getting it because at the start Eircom, fundamentally objected to a commitment to connect people. In the end, the agreement included a fundamental commitment to connect 95% of the 300,000 homes at the standard connection charge, which at the time was €270. That was a one-off connection. That connection charge is now €170. However I understand that the new Eircom model, which ComReg has seen but not intervened on, allows Eircom to get a connection fee of up to €460 from the consumer. That is under a standard connection model. The average rate of switching, say from Vodafone to Sky, is 42 months. Over the next ten years people will generally switch operators. The Competition and Consumer Protection Commission and ComReg will welcome that. People want to switch and it is good for competition. However it means that most homes will end up paying €460, not €170.
Has the Department surveyed that area? As part of an altogether separate project, I hear from people about duplication of Eircode postcodes. Farm buildings have been assigned Eircode postcodes. What level of detailed survey has the Department carried out?
Mr. Fergal Mulligan:
No. We did not have to. We know from the analysis. Sometimes a farm is a business and a home, which makes two Eircode postcodes. We know that. In carrying out our current project we know there might be an overlap of Eircode postcodes. We are not treating the same Eircode postcode as two connections.
Mr. Fergal Mulligan:
A fundamental aspect of the commitment agreement was de-risking Eircom against incurring significant capital costs of connecting people. If the pole is in the road and a household needs a wire into the eaves of the house or an extra pole, connecting it is likely to cost an average of €460.
Mr. Mulligan has just reminded me of a question. If I live in one of the 542,000 homes in the intervention area, why would the State facilitate me with a better level of service? In other words, because there is a lesser cost it will make it easier for me to switch than if I lived in the area of 300,000 homes. I thought the purpose of this intervention was to level the playing field so that somebody in Haddington Road gets the same service if he or she has fibre to the home as somebody living in west Clare, Westport or wherever. The people I represent want to get broadband. They are not overly concerned about the rates of switching out afterwards. That will be a commercial decision they will make. However, the objective from the taxpayer's point of view is to provide access to high-speed broadband. What a consumer does afterwards is his or her choice. If consumers want to switch services, they can pay for it. I have no issue with that and I suspect most people do not.
Mr. Fergal Mulligan:
I will not go into that decision, which is before the Commercial Court, as members are aware. Sky has challenged the decision to allow that charge. Retailers are not so happy with that regime. That regime only came into play after we set the rules of the procurement process. We always set the fee at €100 because that was the rule that existed at the time. It is akin to the rule under the USO. We have to look at it from an affordability point of view. If we increase the connection charge from €100 to €200, for example, we might bring in an extra €15 million in revenue in the first ten years. However, we do not want to reduce demand on this network by instituting a connection charge regime that puts people off connecting. That would increase the required subsidy. Increasing the connection charge might generate short-term revenue through the initial connections, but in the long term it will reduce revenue because fewer people will connect or they will take longer to do so. Therefore the subsidy required in the business model will actually increase over 25 years. The connection model is a red herring from a subsidy perspective. It does not lower the subsidy. We are better off offering the consumer a €100 connection charge. In the model used for the group of 300,000 homes the average connection cost is about €460. Ms Carolan Lennon said this. In the intervention area, where an average-cost model applies, it is a lot higher than that. If we used the Eircom model, consumers would pay €1,000 or more to connect if they were not within 50 m of the road.
Ms Lennon referred to the fact that we are offering ducting into every home. We are offering an overhead network along the lines of the Eir model. The only difference is that we are saying to consumers that if we cannot get them overhead network connections and if they have to have ducting because there is no other alternative, we will subsidise and pay for the ducting. We are not going to ask a person to get a mini-digger out put the ducting through his or her garden. However, if we are given permission to put the ducting through a garden, we will do it and it will be subsidised. Why will we do that? We will do it because we believe that many consumers do not have mini-diggers or the opportunity to get one in order to build a connection for €1,000 or €2,000. We are subsidising the connection up to €5,000 because there are a lot of homes with broken ducts that cannot get an overhead connection or that need an extra four or five poles to get the connection down there. As Ms Lennon stated, a pole costs €600. There are many homes in rural Ireland that are not within 50 m of the border of the road. There are poles every 40 m.
Mr. Fergal Mulligan:
I live in rural Ireland and I do not have copper wire because I built I built the house in the past 15 years. The majority of young families in rural Ireland that built homes in the past 15 years are using mobiles. I looked for a landline but there was an ESB line coming across something and I was told to build my own duct. I knew I would be obliged to pay for that. I asked myself what was the point and decided to use a mobile. This is how the USO for that worked. There were supposed to connect me but it did not happen because there was an issue. It is not as simple as it is being made out to be because the process involved is complex.
In the context of the 300,000 properties, there is an issue where Eir's connection costs are not the same as those for the intervention area. We know that the average cost of connections is much higher than within 50 m of the road because we are dealing with every extremity. In the case of the worst extremities, we estimated 2%. We stated that we might have to do wireless but that we are going to connect the rest. That 100% obligation is the key difference from the Eir proposal. The fundamental difference is that there is no state aid involved. However, let us forget about that for a moment. Eir is regulated for, at most, five years at a time. ComReg would confirm that it cannot give any assurances beyond five years that regulation can be relied upon to regulate Eir in respect of poles and ducting within a state aid environment. Everything in the obligations package regarding service quality, future proofing and capacity, service level agreements, clawbacks and the other provisions in the contract cannot, therefore, be done through regulation or the commitment agreement. One's whole contract is gone if one reaches a commitment-style agreement. Future-proofing was always a tenet of this. In April 2014, we stated that this is a long-term infrastructural investment on the part of the State and is therefore a long-term contract. Regulation does not do long-term contracts. That is a key point.
Last week, a particular backbencher suggested that Eir was somehow about to leave the planet and go and do something else. Why would Eir, or whatever entity might be its successor, would not want to continue to operate a fibre network that would be put in place as a result of some kind of arrangement?
Mr. Fergal Mulligan:
It is not necessarily that. I return to the state aid guidelines. Contractually, there is a requirement to put rules in place . Such rules do not apply to a commitment agreement. The latter is a commercial agreement with no state aid involved. That is a fundamental difference. I am not saying that there is anything different. Nor am I stating that it is going to run away or that it would not provide a decent level of service. Unfortunately, however-----
We are back to the point Mr Ó hÓbáin made earlier. During its consultative dialogue, the Department did not call for fibre in the initial request for proposals because it could not do so. However, all of those in the market, namely, the two incumbents and the new company, offered fibre because it was the best investment option from their perspective.
Mr. Ciarán Ó hÓbáin:
We did not call for fibre. What we did call for was a long-term approach. We called for something that will have to be upgraded over time and that has to be future-proofed. It will not be a case of coming back to have a second bite at it or finding that people are falling off the service in three, five or seven years' time. It was as a result of our taking that long-term approach that the market reacted in a positive manner. If one took a minimalist or adequate USO approach, it is clear, from the regulations, that one would be looking at 2020 and the expectation that there would be Government intervention. Even if one were to take such an approach, it would be minimalist in nature and one would have to come back to it again. That has been at the very core of the NBP and it has been accepted as being a positive aspect of the approach. It might have made matters more complex but the view was - this goes for all of the bidders in the process - that by taking that long-term approach, we would get a better outcome.
I wish to comment on something Mr. Ó hÓbáin stated. We have had some interesting hearings and many very good presentations, including one from the Secretary General of the Department of Public Expenditure and Reform that was delivered in private session. From the analysis from Analysys Mason, it was not a long-term vision that forced us to look to fibre to every house, it is the fact that we have the lousiest planning system on the planet. We just allow houses to be built everywhere, and particularly along roads. Everyone develops a site along the road. The only way to get to proceed - because fixed wireless will not work - is by going house to house with fibre. This is because of the sprawl that exists and it is why we ended up with fibre; it has nothing to do with a long-term approach. It is as clear as day from the Analysys Mason presentation - I do not know if any of the officials will disagree - that this is why we ended up with fibre, not because of a long-term approach.
Like Deputy Dooley, my concern is that the Taoiseach has been misinformed. When I asked him about this in the Dáil, he stated that one has to be careful not to disadvantage one part of the country versus another. The truth is that we are giving an advantage to one-off housing. This is one of the concerns of the Secretary General of the Department of Public Expenditure and Reform. We have another 60,000 houses which we put on the books in this project and it could cost up to €5,000 per house in order to put in ducting. Those houses may not even be along the road. The ESB has a very interesting map which shows that when Eir has dealt with most of the road-based stuff, we will be left with the houses beyond the road. If anything, what we are doing is giving a very good deal to rural Ireland. Let us be very honest and clear about the fact that this is a gold-plated standard for the most rural of houses, particularly when one considers that my constituents do not get any €5,000 grants and do not have fibre to their homes in most-----.
Mr. Mark Griffin:
They will get it in commercial sector. We are long past trying to re-engineer rural Ireland. We have a situation whereby there are several hundred thousand homes in rural Ireland that are entitled to be provided with an infrastructure that is required for things they need to do. As to the additional 60,000 houses to which the Deputy referred, the figures that are contained in the projections for the NBP are consistent with Project Ireland 2040 and the growth levels that are predicted therein. Project Ireland 2040 looks at a level of growth within Dublin and the five major cities, the county towns and so on. There was a proportion of growth that was allocated to rural Ireland. We are not proposing to build at levels that are beyond what is envisaged in Project Ireland 2040.
What one will see, for example, in the urban areas mentioned by the Deputy, is a commitment from Eir that it will provide a fibre overbuild over the next five years to Dublin, all of the major cities and a number of towns. Approximately 1.4 million premises will receive a fibre overbuild from the commercial sector.
I do not have an objection to the fundamental principle that we bring high-quality broadband to every house. I agree with that. We have heard that the reason we are doing fibre is not that it is for the long-term but that it is a sprawled model. The sprawled model is also the reason for some of the costs. An extra 60,000 properties is a lot of additional sprawl because they are outside the 340,000 area and amount to more of the same. I have a fundamental problem with Project Ireland 2040. I believe it is a continuation of a sprawled development model, so that is the difference between us. It is also fundamentally opposed to our climate ambitions.
To move on to the technicalities, the issue of a connection charge of €100 versus €170 is interesting. I agree with Deputy Dooley that it would be complicated by adding further future switching, so it is better to compare the €100 and €170 straight up. That is an example where it is an advantage to be further out and more rural in comparison with the 340,000 area.
The other issue I wanted to ask about are the service level standards. I cannot remember the exact figures but Eir said the rate of next-day repairs within the 340,000 area was 85%, whereas it is 95% in the national broadband plan, NBP, area.
If Eir has given an incorrect figure, it should correct that. The chief executive of Eir informed this committee last week that Eir could complete the project for €1 billion or even less. I am reading the letter from the Department with the invitation to submit detailed solutions, ISDS, subsidy requirement and alternatives, and it is complicated because there is an absolute subsidy and a present value subsidy. The Department has said that Eir's maximum range subsidy of €1.549 billion is actually its mid-range subsidy. I do not understand that.
Mr. Mark Griffin:
Eir called it its mid-range subsidy. We did not call it that. The table on page six shows the mid-range subsidy of €1.54 billion. The table shows the ISDS submission, least subsidy and mid-range subsidy. I do not know whether that suggests that there is an upper level again or if that is the €2.75 billion. We have compared that with our mid-range subsidy, which was €2.1 billion, so there is a difference there.
Mr. Fergal Mulligan:
We deal in maximum terms, as Mr. Ó hÓbáin said earlier. We do not want to speculate, but I have said previously that, of the €2.6 billion gross maximum the bidder might get, we would be reasonably optimistic that we would get up to €1 billion off that number over the next ten or 12 years. That would be due to factors such as the bidder achieving savings, uptake being better than expected, the roll-out going as planned or materials and subcontracting coming in on price.
Eir is putting its least subsidy at €512 million, which could be compared with the Department's figure €1.7 billion. That does not include the €250 million cost to the Department of monitoring this, which would bring it close to €2 billion. There is still a difference of €1.5 billion between those two figures.
Mr. Mark Griffin:
The letter from Eir stated that the €10 million cost for annual oversight was a big deterrent for it. However, we did not mention a €10 million annual oversight cost until we published the suite of documents when we moved to a preferred bidder. That is not an additional cost. The purpose of the oversight arrangements we put in, whether they cost €5 million or €10 million, with a mixture of Departmental staff and some external advisers, is to drive down the cost. It is not €3 billion, which would be the figure at the outer extreme, plus €250 million. That funding would be met within the overall provision for the national broadband plan and the only purpose of that oversight and governance unit within the Department is to drive down cost. It will ensure that we are all over the procurement process in terms of subcontractors, fibre, who is managing the claw-back, the most efficient design and so on. That is its purpose and if that is in place, savings are achieved, but if it is not in place, they are not achieved.
If the Department had, hypothetically, gone with the universal service obligation, USO, model, there is a possibility that ComReg would be doing that job. ComReg would, to a certain extent, already have the capability or teams in place to manage that, so there might be a cost saving in that regard.
Mr. Fergal Mulligan:
I am familiar with ComReg and its resourcing and it is bursting at the seams with work at the moment. It is continually looking for more resources from my colleagues. Representatives of ComReg informed this committee recently that it had been allocated 40 or 50 extra staff who they are currently recruiting. It is a difficult environment trying to recruit people in the current market. ComReg is not resourced to deal with this project of half a million homes and a USO designation laid down by legislation. Any primary legislation that would require ComReg to do that would bring with it significant additional costs for ComReg.
The intervention by Eir last week has changed the tenor of our investigation to a certain extent. The previous presentation by academics from the University of Limerick was also very compelling. Going back to my core concern, the question was always whether a gap model or concession model was the appropriate approach. The State is the investor here and the one taking the risk and putting in all the money. I am sure the witnesses have been following the hearings we have had on this, but it is still hard to understand how, given that the State is putting all the money in, we do not own the asset at the end. One thing we learned from what Eir said last week is that fibre stands up well against lightning and wet Irish conditions. The experience of the 340,000 houses is that fibre holds up well and will hold up even better if we are building a new network. What Analysys Mason said today is slightly different from what it said to this committee. Is hard to reconcile what it says in its note to the Department with what it said here about the benefits of having a dual network. Given that we are creating that dual network and, according to Eir, that the fibre is standing up well to the environment in rural Ireland, why are we giving away the assets that we are paying for? Is there anything the two University of Limerick academics said in that regard that does not make sense? I found their arguments compelling.
Mr. Mark Griffin:
We have been dealing with this intensively since 2015. We went out and consulted on it and, interestingly, Eir, which was before the committee last week, supported a gap funded model. We then did a project reappraisal in 2018 when we were down to one bidder. A comprehensive review was done from the ground up as to whether the gap funded model was the right way to go, from both a financial and non-financial perspective. The answer was "Yes". We covered this in our previous submission. The key piece in ensuring the effectiveness of the gap funded model is putting the protections Mr. Mulligan referred to in place in the contract . Those include the claw-back provisions and provisions for future-proofing and so on, and having strong governance mechanisms in place in the Department to oversee it. One thing that struck me about the intervention by the two academics from the University of Limerick was the way in which they drew comparisons with public private partnership, PPP, projects. The PPP sector in Ireland delivers projects or services traditionally provided by the public sector, with assets reverting to the State.
We are in a space where we are looking at how to provide services in areas that are not served by the commercial sector but for a technology that is traditionally provided by that sector and where the public sector has to step in and provide a subsidy. One is comparing apples and oranges to a certain extent. I understand, of course, that this is one of the issues that people have found quite perplexing and we have dealt with it comprehensively in the original documents that we put forward all the way through the analysis when Eir dropped out and we were left with a single bidder. We asked KPMG to talk to us about whether the arrangement still stands up in a single bidder solution and if it does, what are the additional protections we need to layer on top of that to ensure the State gets value for money and that it is fully protected in the investment that it makes.
I welcome our witnesses and thank them for their painstaking efforts to explain it. It is very complex.
I wish to comment on Deputy Eamon Ryan's intervention without opening an extraneous debate, I wish to remind him that his constituents benefit from the Luas, a public bus service, and an entire infrastructure subsidised by the great taxpayers of Ireland and it is my contention that the people whom I represent, albeit in disparate locations and wishing to be so, are entitled to similar services.
We will not go there but the people whom I represent would be anxious that the point would be made, because they feel they have rights as citizens too.
I say that respectfully because I have great time for Deputy Eamon Ryan.
I have an intern, a very bright fellow from America in my office. It occurred to me that if he had been in this room last week listening to Eir, he could only draw one conclusion, if he believed everything it said, and I say this with great respect and not in a flippant way, which is that we had a totally incompetent public service and we had incompetent politicians leading our policy makers. I do not believe either is the case but it would be a reasonable observation. Either Eir is correct or the departmental officials are not up to their job. A lay person could only look at the situation in that way. One cannot say both are up to it, if Eir is telling the truth. For those who are watching the proceedings of this committee, it will occur to them that somebody is off the wall in this regard and somebody is not up to what they are at. Either the representatives from Eir who appeared before the committee last week were putting in red herrings and erroneous stuff or the officials present are defending the indefensible. I have a view on that and the officials would be happy with my view. I am stating what a reasonable person looking at the proceedings would say.
This is a significant question and one to which the public would want to know the answer. It was mentioned that an Eir connection costs €170 but that there is another connection charge for each change of service and that can lead to a substantial sum and then there is the issue if one is more than 50 m from the pole owned by Eir. I think the people watching the proceedings have a right to know the answer to this question. The Eir proposition will cost consumers a great deal more and I would like the witnesses to put figures on that because the public needs to know. As Mr. Griffin said it was like comparing apples and oranges. The public needs to know that this is the implication of the hypothetical Eir bid of last week.
Mr. Fergal Mulligan:
I thank the Senator. Based on what ComReg has communicated to us and these are the ComReg documents so I think Eircom would not disagree, the current connection model allows for multiple €170 fees up to the figure €460. Consequently, one cannot charge somebody €170 four or five times, if the figure has gone over the €460. The figure is capped at €460 -----
Mr. Fergal Mulligan:
That is only on the basis that it is the average cost. If the average cost rises to €560 or €760, I understand they could add more charges. I think Eircom is pretty comfortable with the figure of €460 on the 300,000 customers because while people use the phrase, "low-hanging fruit", they are the least cost within the previous -----
Mr. Fergal Mulligan:
If one drives along a rural road outside any village in Ireland, the topography generally is homogeneous. What I mean by that there will be a percentage of homes, bungalows, one-off housing in ribbon developments where the gate is 10 yd. or 15 yd. in from the road, there is line sight and the house and the driveway are just there. There also are many homes that are up laneways and on farms. Moreover, there could be four or five homes on a farm in a cluster where, rightly or wrongly, the sons and daughters have built on the family farm.
Mr. Fergal Mulligan:
They absolutely have a right to do so and those young families will want high-speed broadband in the next 25 years. Eircom, under its current model, does not offer the connection to those homes for €170 in the area of the 300,000 houses. It will, of course, connect that farm if the people there are happy to spend whatever money it costs in addition to that. Of course, it will.
Mr. Fergal Mulligan:
Let me correct myself, within the area of the 300,000, it is not currently offering to connect those premises because, as the former Minister, Deputy Naughten, has stated on the record, there were a number of premises outside the 300,000 houses that the Department and the previous Minister, Deputy Naughten, asked Eircom to connect because it made sense to connect them because they were close to the homes it had already committed to connect.
Mr. Fergal Mulligan:
Eircom said no, and said it would not do those because that was not in the commitment agreement. Eircom has stuck pretty rigidly to the commitment agreement for its own reasons, mainly project management and costs.
The second element of cost to the consumer is the monthly rentals that Eircom wholesale will charge retailers. Currently that is regulated on a retail minus basis and ComReg does not have a price cap on the wholesale charge and it is basically regulated based on the level of competition in the market but over time - I think it is alluded to in Eircom's letter- it assumes a wholesale price increase of 2% per annum. In the current bid, our bidder is saying that it is not assuming that 2% because it does not expect urban prices to go up by 2% every year and telecom prices generally do not follow inflation. I think the telecom federation has presented numerous times saying that telecom prices have generally gone down the curve compared to inflation, which has gone up. It is difficult to assume that over the next 25 years, wholesale prices in rural areas, if they are benchmarked under our model, will go up whereas if Eircom is in a commitment agreement that is not contracted by us, then it may be free to have different prices. I am not saying that it will or it will intend to do, but there will be no universal service obligation on it to have an affordable retail price.
Mr. Fergal Mulligan:
That is the connection charge. I am talking about the monthly rental. The monthly rental is €30 per month on a wholesale basis. Our bidder is considering that €30 a month and there is not much likelihood that figure will increase if it is benchmarked urban, which is the policy. The policy set out in the contract stating rural prices should be similar and comparable to urban prices for the duration of this contract for 25 years and the bidder is sticking to that in a contract. There is no requirement on Eir in a commitment agreement or commercially over 25 years to keep that level of comparison.
Mr. Fergal Mulligan:
But hypothetically, it could increase on a commercial basis in the fibre area of the 300,000, that fibre could increase and ComReg would be obliged to let them increase it if that is the cost it has incurred in terms of operating, repairing and maintaining the network. That could result in different prices in urban and rural areas over time on a commercial basis, if Eircom elected to have differential pricing. I am not saying it will but it could.
Mr. Mark Griffin:
It probably goes back to the point we made earlier that our intervention was acknowledged as well in the Eir letter. There is a societal and policy issue that we need to deal with. If one sets a connection cost at €100, one is far more likely to attract people to connect to the system.
A family living in the intervention area in rural Ireland with four or five children can be got onto high-speed broadband much earlier. They benefit from the education-----
Mr. Mark Griffin:
Totally. One gets the educational benefits and the remote working benefits. If one talks to any of the companies in Dublin or Cork like Google, Apple, Accenture and so on, they are mad to get people to work from home because of the pressure on office accommodation in Dublin and the cost of housing. It makes a big difference from a climate action perspective and a social inclusion perspective with all the developments in e-health and remote monitoring of elderly people with health issues. It includes the whole area of smart farming. There is a massive range of technology, value-add and social inclusion that we can deal with really quickly by providing this infrastructure at a reasonable connection cost and a reasonable cost to buy the products. That is where the societal piece comes in and where the Government policy is at.
I thank Mr. Griffin for that. It is or should be very clear to people. I will race through the following point, but it is an important one. I refer to the opening statement which said there appeared to be support for a set of stated policy objectives, including getting to 100% of premises. We are all very keen on that. Another aim is strong protection for the State and taxpayers and we are keen on that too. Another aim was equal access for all commercial retail providers to the network in order for consumers to get the highest level of service at the lowest cost and to achieve competition. The objectives further include a future-proofed network and that prices should be affordable for users, which was our last discussion. Did all bidders agree with these five policy objectives during the negotiations?
That speaks volumes. In Eir's letter to the Department, it indicates that the NBP process would have forced Eir to offer better wholesale prices and access, better service levels and lower prices to the 20% of customers in the intervention area, which would have led ultimately to better prices, access and service levels for all customers. Eir indicates that would have had a catastrophic effect on its business. It is not fair that Eir is not here to answer, but we all have anecdotal evidence from our constituencies about the level of complaints regarding services. Surely, it would hardly be a bad thing if Eir was forced to deliver a better service. Surely, it is admitting implicitly that all is not as it should be now. Does the Department have a comment on that?
Mr. Ciarán Ó hÓbáin:
Mr. Mulligan has dealt with the contagion issue in some detail already. We had sympathy for Eir on the contagion issue and the prospect of it taking an action within the NBP process which had an unintended consequence outside which put it at a disadvantage to other commercial operators. We had a different view, however, about the risk of that happening which we outlined earlier with regard to how that played out.
I refer the witnesses to Eir's evidence to the committee last week. It said it could complete the process for less than €1 billion. The letter received three days later indicated that the subsidy Eir would require would be between €500 million and €1.5 billion. None of the figures included VAT. Given the cost inflation over just three days, can we have any confidence in the Eir proposition?
Mr. Ciarán Ó hÓbáin:
We wrote to Eir to seek information so that we could understand clearly what it was it was saying to the committee. From listening to the committee, reading back over the transcript and reading the letter, it is clear to me that what Eir was saying was "To be helpful to the committee, if you take our model and the 300,000 and ask what it would cost to do the same in the NBP area, this is what it would be". When one looks at the letter-----
Mr. Ciarán Ó hÓbáin:
It is a complex matter and it points to that. However, we have spoken to the key point for us which is that the approach the Department has taken with the NBP process has been to deal with regard to numbers with the worst-case scenario. It is appropriate to call out areas where there could be wins and a number could be lower and where there could be a clawback. However, to be fair, when one is looking forward this far, one has to call out what it might cost. The point made here today is that in the model Eir has talked about, which is a commercial model of delivery without the imposition of public money and all that comes with it, it says €1.5 billion whereas the equivalent in our model is €2.1 billion. However, that is not comparing like with like. They are two different projects.
I thank Mr. Ó hÓbáin for making that clear. Would the Department be happy to come back to the committee in writing if there is any other testimony it wishes to provide a comment on or if there are issues which occur either to members or the officials that were not covered today due to the constraints of the debate? This is a very serious matter. It raises enormous questions and we just have to get it right for people, including with regard to any answers. Were the other stuff to be correct, it would be very serious.
Mr. Mark Griffin:
There are a couple of things to say on that. It is important to restate what I said at the outset and to quote what Eir said in its letter, namely, that it is not a formal offer designed to replace or supersede the current NBP process. That is an important point to record. We were in a difficult situation and I apologise to the committee for the late provision of my opening statement. The committee also got the Anaylsys Mason paper and the aide memoireduring the course of the day. Right up until we came to the committee this evening, we have continued to work through some of these issues. We have carried out a great deal of analysis since Friday evening. However, we would be happy to spell out in writing some of the more important issues, including the over-build, the connection costs and so on.
We would welcome anything submitted to the committee in writing, either on foot of today's deliberations or if the Department wishes to contribute in respect of future meetings we hold. I call Deputy Stanley.
I appreciate also that there are two other members waiting to come in and that the witnesses have been here for two and a half hours. There have been revelations on the broadband plan in the last number of weeks and some of the information that has come out has included stuff we suspected and raised with Ministers previously.
Another revelation today was that Eir had held up the project for a year and a half with hard bargaining over the subsidy and how much it would charge to allow cables to be hung on its poles. The delegates mentioned this.
Mr. Fergal Mulligan:
The timeframe to which I referred was the time between the discussions with Eir and an information notice that was published by ComReg. I am not tying the two together in terms of what happened in 2017. Bidders engaged with Eir over a couple of months in 2017 after the 300,000 premises were removed from the package. Analysys Mason set out in its memo that the bidders had made decisions based on the information in front of them and that they had all moved on.
Mr. Fergal Mulligan:
The Analysys Mason document set out what the bidders had told us about difficulties in getting information on the product being made available. As my colleague stated, that product was in development in 2017. It was a new product. Products take a long time to develop in the wholesale telecoms world. The information was not available to SIRO and Granahan McCourt at the time. The pricing had nothing to do with the 2017 process. I said that in 2018, following the information notice from ComReg, Ireland had benefited because Eir had put a lower price on the use of poles. It was available to everyone in 2017. It was €20 for everyone in 2017 and slightly lower in 2018 for anyone who was still involved in the process. It just happened that there was only one bidder left in the process, but it got a discount through the open eir product set.
Regarding the 340,000 premises that are Eir's part of the intervention area, Analysys Mason described them to us as a double whammy and outlined what that meant. First, it incurred a significant capital cost for the State, as the remaining bidder had no guarantee that it would be able to use Eir's infrastructure or that there would be no difficulties in accessing it. Second, the remaining bidder would be prohibited from generating income within Eir's area, which continues to expand. According to the letter from Eir which we received approximately an hour before this meeting, there are specific examples of reusing the lessons and infrastructure for the 300,000 premises. In the access network open eir's rural 300,000 premises design also included spare fibre to facilitate the roll-out beyond the boundaries of the 300,000 premises footprint. According to the letter, Eir offered the use of this spare fibre to National Broadband Ireland but, for reasons unclear to it, it declined to use it and instead overbuilt on it. This has been a major question and a number of issues arise. Mr. Mulligan was present at the press conference when the Minister announced this in April 2017. The minute the A3 sized map was laid out in front of us, what was happening was clear. Clusters of houses, villages and towns were being connected by Eir. I will put a straight question to Mr. Mulligan. He stated Eir had to be allowed to proceed. Ministers have said the same. However, has the Department ever laid the map down in front of the European Commission and stated that, by allowing this to happen, it would banjax the process and make it more difficult? This is not just being stated by Analysys Mason. The ESB has been stating for a long time that it was blown out of the process and has made this clear more publicly in recent weeks. Were there detailed meetings and conversations with the European Commission about how, if this were allowed to happen in the case of the 840,000 premises being serviced, it would doughnut the housing clusters and villages and make the situation next to impossible? Apart from the increased complexity, consider the amount of discussion and hours spent on this issue. We can only imagine what the 80 people working on it have been doing to try to work through this complex web, or what some would call a mess.
Mr. Fergal Mulligan:
The Commission stated that, under state aid rules, we were required to remove those premises if a commercial operator was covering the majority in the given areas, which comprised the 300,000 premises. As a member state and regardless of the impact on the subsidy, the Commission told us that we had no choice but to remove them from the map.
It would be the same as if the Government and Transport Infrastructure Ireland wanted to build a motorway from Limerick to Cork and a private entity told them that it would build 20 km of it and that they could not go through that part if they wanted to build onto either end of it. In other words, the entity would hold the ring. That is what Eir has done. I find this difficult to accept if the complexities were explained to the European Commission. I have read some of its rulings on state aid and broadband. There have been judgments and pronouncements in that regard. From the ESB's point of view and in terms of what Analysys Mason which was hired by the Department stated, this decision blew the process to pieces. I am not an expert in this field and neither are many lay people; therefore, we must go by what the Department tells us, but it was clear on the day of the announcement in April 2017 that the process would be in major difficulty once this happened because it would make everything more expensive. The bidder would have to lease poles and toy with the decision as to whether to use the fibre that had already been laid by Eir or overlay new fibre and install a parallel system. I would like to see written confirmation from the European Commission that, having considered the proposal to doughnut every town, village and cluster of housing in the State, it was 100% sure that doing so would be okay and not damage the process.
We are in this situation and the summary is that no matter which way it is turned or twisted, this is the major issue that derailed the process and left us with just one bidder and the fallacy that we were involved in a competitive process. There is no competitive process and there never can be if there is just one team playing on the pitch.
Mr. Fergal Mulligan:
On European Commission rules, what is before me is a legal document. It is the state aid guidelines which are thrown at us in reference to this or that paragraph. The Directorate-General for Competition, DG COMP, case team was unambiguous in its view on a commercial investment. We have criteria for accepting commercial investments and taking commitment agreements on same. Eir came forward with all of them.
We had a difficult but a very good engagement on the commitment agreement, which landed in April 2017. When the commitment agreement was signed, we had no option. We also consulted ComReg which, under state aid guidelines, is to be consulted on the map. To be honest, this is not unique to Ireland. It has happened across Europe that one intervention was expected and the goalposts shifted. It happened in many local areas in the United Kingdom and it is happening in France and Italy. That is the nature of what we are involved in here. Commercial operators can make decisions in any given week and we have to deal with them. We are still dealing with them as we speak in that commercial operators may make announcements or put out press releases. Ultimately, however, we went through a rigorous process with Eir. We got what we believe was a robust commitment agreement under the circumstances where we could not avoid removing these properties from the intervention area. When I attended the press conference in April 2017, we were fully aware that the likely impact on the process would be to make it more difficult.
Mr. Fergal Mulligan:
At the time, we did not believe it would have a detrimental impact on subsidy and I am not saying it did. There were many other aspects of the bidding process for bidders that resulted in the subsidy going up, not just the 300,000 premises. What the ESB said was that bidders, including Eir, had to redesign their network. That took months to complete because Eir had already spent a year designing the network for the 757,000 premises. There is no doubt that the removal of the 300,000 premises complicated what was an already complicated process.
I understand the state aid rules in respect of a private entity that intends to invest in an area within two years. The point I am making is that a private entity was allowed to occupy a space, so to speak, which then made it next to impossible to design a contract, obtain value for money or put in place a viable project to roll out this project and operate and maintain it for 25 years. If there is document in the Department indicating that the Government contested this with the European Commission, I and many other people would like to see it.
Mr. Patrick Neary:
It is important to bring the discussion back to the tender we have received and the decision Granahan McCourt has made to use only the polls and ducts rather the active product Eir is using to connect to its fibre. The bidder's network design starts in the metropolitan area networks, MANs. It has to traverse the 300,000 area before it gets to the intervention area. Starting in the MANS means it is not getting the same cost savings from reusing the fibre that Eir would get if it were to reuse that fibre. We went into an in-depth analysis with Granahan McCourt on the benefit or otherwise of reusing that fibre on the 300,000 area. It demonstrated to us that it did not achieve the same cost savings from its design by reusing that fibre and that it was actually cheaper for it to deploy its own fibre and just rent the polls and ducts. Its design decision-----
No one will be connected into one of the systems in the 340,000 area and the second one, the Eir system, will be active within that area. That is the net effect of the way we have gone with this project.
On the cost of connections-----
Mr. Patrick Neary:
As I mentioned, that does not mean that Granahan McCourt or National Broadband Ireland, NBI, cannot use that fibre going forward. NBI still has that option to pursue when it gets into low level design. It could pursue that fibre as an option in certain circumstances where it makes sense for it and where that product can still satisfy the requirements on future proofing and capacity. It is not off the table, as such. It is something the NBI company could pursue now once it gets to the low level design stage. Following the low level design stage, it is obligated to come to the Department and demonstrate that it is pursuing the most efficient solution.
Eir informed the committee last week that its proposal was not an offer. It has since stated it could complete the project for a subsidy of between €500 million and €1.5 billion. In its letter it states: "We note that under the NBP plan, where the cost of connecting a Customer is more than €5,000 the customer will be asked to make a contribution." We know that from the documentation supplied by the witnesses to the committee in recent weeks. The letter further states:
Where eir does not have existing connection infrastructure, eir [will] operate a similar policy within the 300k, which applies to 1-2% of connections and we believe is likely to cost less to the end customer than under the NBP.
Mr. Mulligan is correct that many newer houses would not have copper going into them because they are using a mobile network. I see that in my local area. Eir is stating clearly that it can provide a connection to houses on greenfield sites where there are no poles, ducting or anything else as cost effectively as what is envisaged under the national broadband plan. Is that not the case?
Mr. Fergal Mulligan:
The cost to the customer under Eir's proposal is completely dependent on the cost of connecting. It is connecting people within 50 m for €170 in the 300,000 area. There may be some premises beyond 50 m but we do not believe there are many because that is what the commitment agreement requires. Eir was very specific in the negotiations with us that it would not go beyond 50 m. Where I come from there are two or three houses on the road, with farmhouses a few hundred metres behind them. Eir will do the two or three houses on the road but will not do the farms, even if all the properties made an order. The houses at the back cannot make an order on the Eir in terms of the 300,000 premises. NBI has to come back and hoover that up later on if those houses make a connection.
Mr. Mark Griffin:
There seems to be a suggestion in the Eir intervention that NBI connections will be gold-plated. That will not be the case. We will reuse existing infrastructure and the most cost-effective means of connecting a household. There is no such thing as running new duct or anything like that, as has been indicated in the Eir evidence.
On the overall project, the National Development Finance Agency, NDFA, oversees projects costing more than €20 million. In this case, we are looking at a project costing between €2.75 billion and €3 billion. Why was the National Development Finance Agency not involved in overseeing this contract? Its representatives were asked to come before the committee. The NDFA did not appear but supplied a statement in which it stated it had a "very limited role" in the national broadband plan and that it "had no involvement of any description since 2018". What is the reason for that?
I just want to clarify that from its point of view. It sent a written submission, as requested by the committee. It was not that the case that the NDFA did not appear. We could not meet its representatives on the afternoon in question.
Given that there was toing and froing with the Department of Finance, and we know that senior officials in the Department of Finance take a different position from the witnesses on the plan, as they have explained to the committee, would it not have been prudent for the National Development Finance Agency to be more directly involved in overseeing this project?
Mr. Fergal Mulligan:
We got to know the National Development Finance Agency very well over three years because of its involvement. It was involved in 2016, 2017 and 2018.
They have not been involved since 2018 because the procurement process and the evaluation which they were involved in finished when the evaluation was finished in October or November 2018. They came on the pitch in discussions with myself and Mr. Ó hÓbáin's predecessor in 2015, when we discussed their role in the NBP process. That was four years ago. Clearly, they have a role, as the Deputy states, under the legislation of any projects costing over €20 million.
It was agreed at that time what their terms of reference would be for the NBP. We set out our stall about what the NBP process was. We had hired at that time KPMG to be our commercial finance advisers, as well as other advisers. We had PBC on cost-benefit analysis, CBA, Analysys Mason on technical and Mason Hayes on legal. It was the view of the NDFA - the agency was busy with roads and schools, etc. at the time - that there would be a duplication of resources for it to take on the entire corporate finance role within the process when KPMG had just been hired to do the same work, and a full team of KPMG people that the NDFA would use for roads and schools as well.
However, the NDFA was involved along the journey of the procurement process. A senior member of-----
Mr. Fergal Mulligan:
November 2018. We received a bid in September 2018, as the committee will be aware, and the NDFA was in the review process of the evaluation of the team. It was not on evaluation teams but it was on what we call an evaluation review panel and on the procurement board. It was represented on those two stages of our governance of the tender process and over the course of September, October and November, it was involved in many meetings to review the tender in terms of whether it qualified through the questions that we set out in the tender documents. It was involved only in the questions that related to finance and the commercial finance aspect of the bid - not technical, not legal or anything else. It was involved only within the confines of its remit as a financial adviser to the State. We had senior people involved from the NDFA. I would not underestimate that involvement. They were very much involved.
They did. They stated it was a very limited role. Mr. Mulligan confirmed that they have had no involvement of any description since 2018.
In relation to the overall project, there are a couple of points that are fairly clear to the public and those, such as ourselves, looking at it. One is that the 340,000 premises that have been cherry-picked by Eir, and that Eir is serving commercially, created significant problems. We had a discussion around that. That created many difficulties in terms of the complexities and the cost and logistical problems which Mr. Neary would have dealt with, as well as technical matters around the rest of the project involving the other 500,000 premises. The ESB and Eir walked away after that and both of them confirmed that that is why. After that, they basically left the process.
Then there is the cost. The issue that the public is really exercised about is that we will take almost €1 billion of Mr. and Mrs. Taxpayer's money and we will give it to this entity that is backed by American investors. I have nothing against Americans - it just happens to be so. That American investor will then hand this to another private entity called Eir in order that it can hang the cables to get the broadband to the people's houses that people will then pay for. Is not that the crux of this issue? Are not those two factors, the 340,000 premises being taken out of the 840,000 and that there has to be a subsidy paid to the private investment entity to hand to another entity - another private company which, by the way, we owned until it was privatised - the root of this whole problem? It is unfortunate that we do not still have the infrastructure in State ownership because it would have saved a great deal of hassle for everyone. Is not that the crux of what has driven the price of this project out through the roof?
Mr. Ciarán Ó hÓbáin:
It is a short answer. I will not go back over the 340,000 because we have dealt with that extensively. There has been a good deal of focus around - because it is a figure of almost €1 billion - €900 million plus that we have in the model that would be paid to Eir for rental of poles over 25 years. That is based on the regulated pricing that is in place by ComReg. That is an estimate of what the cost of operating and maintaining that network over 25 years would be. It costs to build a network and then it costs to maintain that network, and one must pay those costs. If the State built its own network, the State would have to invest similar-type sums to maintain that network over 25 years. We have included in the tender the cost today that ComReg says is required to pay to maintain those poles and ComReg will regulate that going forward for so long as ComReg sees that it is necessary. That is a real cost. That is not giving somebody a return on earlier investment. It is related to real costs of maintaining a network over that period.
Mr. Mark Griffin:
Another point I would make goes back to the state aid rules. I refer to the criticality of reusing existing infrastructure to the greatest extent possible. We have already received some criticism about the fact that we have had to traverse the Eir 300,000, but if we ended up building a new network in the intervention area, the cost to the taxpayer would be multiples of what is on the table at present.
The other important point is that Eir has worked closely with NBI over the past while to try to come to an arrangement which works commercially for it and for NBI in terms of access to its infrastructure. Eir is involved in an access infrastructure agreement. The company will be working on a make-ready programme which is critical to the roll-out of this contract when it gets under way. Eir is a really important player in all of that. That is quite understandable because we need access to its infrastructure, both poles and ducts. We circulated some figures. Ninety per cent of the Eir pole network is used and probably a higher percentage of the Eir duct network. It is a critical part of the project overall. In terms of the duct network, 338,000 km of new duct and 14,000 km of duct rented from Eir, and 90,000 new poles and 1.2 millions poles rented from Eir. Eir is a major part of the equation. That is inevitable when one goes back to the state aid rules, which make a big play about reuse of infrastructure. Ultimately, it ends up a cheaper way to do the contract.
I thank the Department for its presentation. It has been informative this afternoon.
My colleague, Senator Joe O'Reilly, made a comment about rural Ireland. The Senator was rebuking the view of another colleague of my mine regarding a view on the sparse population. It brought into question why we are doing all of this. The Secretary General made a statement on what this means to rural Ireland in areas such as smart farming and smart education. E-health was mentioned, as was the opportunity to work from home and our digital companies, whether in Cork or elsewhere. Were all those matters taken into consideration by the Department of Public Expenditure and Reform in its analysis of the project? I refer to all those key issues for society in the future such as smart farming, carbon footprints and climate change.
Mr. Mark Griffin:
The way the public spending code is currently structured, one is quite limited in terms of the issues one factors in when doing a cost-benefit analysis. Even allowing for the more limited approach taken in the cost-benefit analysis which we had to do, the cost benefit - the committee heard this from PwC - remained consistently positive. We made the point all along in the process that we are talking now about providing an infrastructure. We know some of the areas to which it will provide advantages. The areas the Senator mentioned are some of them. However, we are providing an infrastructure to deal with issues that have not even been conceived now.
Looking at the evolution of technology over the past ten years, there were no smartphones ten years ago. Everything that is done now by virtue of a smartphone can be seen, and the sort of high-tech technologies that are being produced. Even today, ESB has talked about the roll-out of its first tranche of smart meters in Cork over the next couple of years. High-speed broadband and technology are needed to ensure consumers reap the benefits of that in terms of time of use tariffs, better use of electricity in the home and the climate change agenda. This is a qualitative suite of benefits that are not allowed to be factored in or crunched with regard to the numbers, but to me they are as important, if not more important, than the things on which a figure can be put. That was a point we consistently made to our colleagues in the Department of Public Expenditure and Reform. We were very clear on that in the submission of the memorandum for Government. Some of the things this technology will do have not even been invented. Regarding the figures we saw, 50 billion devices will be connected to the Internet of things by 2020. This is a colossal figure. We are talking about smarter homes and offices and, down the road, autonomous driving. There is enormous potential. We have not fully conceived what that potential is but the provision of this fibre technology where there are unlimited download speeds and so on will be very important.
Regarding the roll-out, we are looking at having more than 200,000 homes passed by the end of the year with a large number of them connected in the intervention area . We have also provided in the contract for broadband connection points. This is the sort of stuff we have seen publicised in the Aran Islands where people can come together, get a high-speed connection, have a proper office set-up and be able to work from there well in advance of getting the connection in their home. This creates a very effective working community within the locality where people can work. If we look at Apple in Cork, we can see that a large number of people work from home where they can. More of that will happen. From speaking to the large technology companies, we know that they are absolutely up for this. The future of work and jobs will change dramatically. We will see individuals working from home but on a team basis, cloud computer services, collaborative conferences and so on. It is all there to be had and it is a big prize if we can get this right.
I have a question about the universal service obligation, USO, proposal about which we have spoken in detail today. Eir has been mentioned several times in that space today. Is Eir happy with the current USO model that is worked on the copper line or are there any proposals to change that?
Mr. Ciarán Ó hÓbáin:
It really is an area that is more appropriate to ComReg. It is in the public domain that there would be a challenge in terms of the cost and there is a dispute between Eir and ComReg about whether it should be compensated for the cost, but that is very much a matter for the regulator.
The witnesses have gone over some of the red line issues. One of them I heard mentioned concerned the bond, security or fixed amount of money pertaining to the bill. There has been an awful lot of talk and speculation about the €220 million that was going to be put up front by the preferred bidder. Was Eir happy to engage in that process and put up that sum of money or another sum on the table as a guarantee going forward?
Mr. Fergal Mulligan:
To be fair to Eir, there was a lot of discussion around that. At the time of it leaving, it was still under discussion. It is also fair to say, however, that it had not been resolved. There was a requirement in our tender documentation regarding anyone who bid. Anybody entering the process was looking for that State guarantee whether it was €400 million or €4 billion. The Government was committing that through a Government decision. We said that we wanted a commensurate guarantee from the private sector so that there would be no doubt that if we entered into a contract and regardless of whether someone was committing €100, €100 million or €1 billion, it had the money to call upon when it was required and there was no way the current or future board of any commercial company in the world could change its mind, because things change over time commercially. That was a key request of ours in the tender documentation, that we got the necessary financial assurance from everybody. We treated everybody equally so we could not deviate for any particular bidder or any particular circumstances. That was an ongoing discussion at the time. Eir presented it as a red flag issue in January 2018. Again, we will never know whether that would have been resolved throughout the rest of dialogue process.
Mr. Fergal Mulligan:
I read out the state aid guidelines earlier. These guidelines require member states to have a clawback. The guidelines state that it is up to member states to negotiate the best possible clawback. The state aid guidelines do not prescribe the percentages. Again, there is a percentage of clawback for the build, a percentage for excess profits if everything goes wonderfully well and a percentage for excess profits relating to the value of a business at the end of it, particularly if it is a gap funding model. This can range from 0% to 100% with regard to any of these three categories and that is where the best possible outcome for the State is negotiated while keeping incentives on the bidder. In a perfect world where there were multiple bidders and perfect competition, which is virtually impossible to achieve in a telecommunications sector like this given the incumbencies and the different technologies and infrastructures available, it is less risky with regard to bidders coming in with a prudent view on costs or likely profits. In a less competitive or a risky environment regarding a contract like this for 25 years, no matter what the competition or process, all bidders are likely to have a very conservative view. That is what we found with the three bidders at the table. Nobody was running to make the cheapest possible offer because the consequence of doing that later on - going bankrupt - was fairly significant. We were dealing with three bidders that had a very realistic view of the world. That realistic view was that prices might go up. It is like the Baz Luhrmann song in that certain things can be guaranteed but it can nearly always be guaranteed that prices and materials will go up. Therefore, there is no point in predicting that prices will not go up and ending up getting burned. In addition, we did not want to deal with operators that told us that prices will go up by 10% every year and that if they did, the State needed to give them all this money. We told them that we might give them some money but if it did not happen and the increase was 2% every year, we would claw that back.
In the current situation with most of the cost for build, we claw back 100%. That is what we got to after Eir left. Mr. Griffin mentioned that the recommendation was to go forward with a much improved and robust contract and governance model because we were in a single bidder situation. Before Eir left, we did not have 100% clawback. We had 50% regarding the majority of the build costs. It was a significant shift from having two to three bidders in the process to having one bidder on the main risk cost areas where we now only pay what it costs. Although it was not fully negotiated, previously, the commercial guys would have been looking for 50% of the savings that may have been realised, which would have been a significant bonus to them if they realised savings.
From memory, the figure relating to excess profits was a lot less than what we have now, which is 60%. It had been 50%. Again, we negotiated that up rather than down, which in a competitive environment would have been probably negotiated down by competitors, the more risk they saw with the project and the greater the risk relating to construction and demand.
On terminal value, I believe we now have 40%. We had a lot less before. I cannot remember the percentage. It might not have been much but we got a much better outcome in a single bidder situation on the claw-backs to the State. I refer to protecting ourselves from the single bidder situation, which may take a more conservative view on costs and demand, but that is exactly what the state aid guideline sets out. Where there is asymmetric information involving the authority and the bidder, one includes protections related to a claw-back. It happens all over Europe. As I said before, BDUK has already clawed back from BT £700 million or £800 million in certain projects in the UK. It would probably have predicted certain scenarios where the risk did not reflect what was actually the case. As ESB said, in a project of the scale in question, considering the scale of the construction risk, a seven-year period in which many housing and construction projects would be taking place, and the fact that subcontractors are out the door, nobody can predict the prices. It is, therefore, hard to make predictions for a model. The company predicted what might happen to prices. We have contingency plans if the trend gets worse. We have 100% claw-back if it gets better. That is a significant part of the governance model that Mr. Griffin alluded to. We expect the €10 million per year that we may spend on governance to be more than covered by savings.
Mr. Fergal Mulligan:
The special purpose vehicle is National Broadband Ireland. That is what it is now called. It would have been called NBP Co., hypothetically, but since the final tender came in, National Broadband Ireland has been incorporated. It is a special purpose vehicle incorporated and tax resident in Ireland. It will have a board that is answerable to the Minister, with the Minister's appointee in senior management. Whatever turns out to be the cost of governance, be it up to €10 million or otherwise, will relate to the Department. I refer to a unit that governs for a period, and there may, or may not, be an agency that does something in the future.
Throughout this debate, we have heard a great deal about the 300,000 people who have been moved over the past few years. I hope I am not wronging anyone in saying there has been conflicting evidence given here by Eir and ESB regarding the 300,000 and how this affected the process itself. Was the 300,000 the game-changer regarding the actual process?
Mr. Fergal Mulligan:
I believe it might have been referring to its view on the subsidy. Everybody would agree that Eir had concluded a fairly arduous commitment agreement negotiation with us for six months, or nine months, starting with the first draft of the contract agreement. That was a difficult process. We imposed significant, onerous requirements on the company, which, in the main, we understand it met in terms of the passing and connecting milestone. It is nearly there. I do not believe Eir would say the aspect to which the Senator referred did not add complexity to the procurement process. I am sure its bid team - it had a bid team that was separate from the commercial team - would admit that having to remove the 300,000, redo its network design, reproduce the commercial model and renegotiate the legal contract added complexity to its process in dealing with us, and in our dealing with it. The same applied to the SIRO bidders and Granahan McCourt. From that perspective, all three bidders were in the same position.
Deputy Stanley asked about the impact on cost and the subsidy. A mixture of many aspects had an impact on where we are now. On the subsidy, there is less revenue in the model so clearly bidders such as the ESB would say there was a lot less revenue and it was, therefore, less commercial. One bidder said it believed there was a pretty significant impact on its ability to bid but, again, it was planning to use its own network. It might see the world differently from Eir, which was using its network. Enet was planning to use the Eir network or the MAN, or a combination of both. Therefore, there were three different bidders with three different views of the world in terms of the commercial impact of the 300,000. The ESB indicated clearly in the past week that it had a significantly detrimental impact on its commercial view of the world in this context. There may also be other aspects it is considering.
What will be the position on tendering if, God forbid, we are to proceed to re-tendering? There was testimony from Department's advisers very early on to the effect that it could take from three to five years to work through the entire process again. If, tomorrow morning, we were to start the process again, how long would it take us?
Mr. Fergal Mulligan:
I will ask Mr. Neary to deal with this. We did a lot of work on this when examining the contingency options in late 2018 and early 2019. We dealt with a whole suite of contingency options. I instructed those concerned that they needed to be as aggressive as they possibly could in terms of a new procurement process if, for whatever reason, the Government decided to embark on such a process. Mr. Neary did a considerable amount of work on this, considering various models and options. We identified a period of around 37 months using a very aggressive timeline. Mr. Neary might break down the components.
Mr. Patrick Neary:
Through the contingency options exercise we did, we spent a lot of time developing how long it would take if a new procurement process were pursued. It was agreed in that exercise that the first step would be to set up a broadband agency or special purpose vehicle within the State that would be mandated to deliver broadband. The agency would then be tasked with developing a strategy. The exercise is similar to the one started in 2014. We brought together an international panel of experts. We used ComReg and we took on PricewaterhouseCoopers, KPMG, Analysys Mason, and Mason Hayes & Curran as advisers. We conducted a series of public consultations to develop the strategy, taking into account the state aid guidelines and views of the industry. That took 20 months. Mr. Griffin said we did not have 20 months in which to launch a new procurement process. We need to proceed much faster. Through parallel work, etc., we concluded we could do that, including through developing a new cost-benefit analysis, which is required under the public spending code, and conducting a project appraisal and preparing procurement documentation. We expected it would take 16 months just to get to the start of a new procurement process. Regarding the procurement itself, if there were a pre-qualification period of six months, dialogue and bilateral engagement with bidders, a further six months would elapse. To date, it has taken us 26 months to do that. Evaluating the final tender would take three months. Selecting a preferred bidder would take another three months. In our process to date, the final part has taken eight months. Taking an extremely optimistic view of procurement, we believe it would take 18 months to conclude a procurement process. Taking the two elements together, and taking the state aid approval process and the issue of contract closure into account, it would take at least 37 months to conclude a new procurement process from the start. That is a very optimistic view, based on a fair wind.
Mr. Mark Griffin:
The first question I would ask the Senator about that would be the basis for doing that. Eir withdrew and it is very clear from what it said, both in evidence to the committee and the letter sent to the Department and committee, that what it was submitting was not to be considered as a proposal. It was to be regarded as an hypothetical assessment of what could be done if a range of conditions applied.
I see no reason whatsoever, frankly, to even discuss that.
The second point echoes what we said in our document. If we go back to scratch, we have to go back to the initiation of a public procurement process. We got legal advice on that when it was mooted that perhaps we could assign the project to ESB, a commercial semi-State company. The legal advice was unambiguous. My interpretation is that if we start talking about a dominant player in the market then the legal advice becomes even stronger because we have an economic undertaking in a dominant position in the telecommunications market. We cannot go back in and negotiate based on something that is on the table. We have concluded a process that we believe is robust. It has arrived at an outcome. A preferred bidder has been appointed. We have a suite of protections in place that we believe will be effective.
I did not get a chance to say this when Deputy Stanley said there was no competition, but we have highlighted previously that the fact we only have a single better bidder in this competition is not unusual - it was the same in the United Kingdom. The critical thing is how to stitch in the protections for the State and the taxpayer and we believe we have done that. We have a preferred bidder appointed and we are in a process. My answer to the question is to ask why we would move from what we are doing to something that the company itself has said is not an offer. It is an assessment of giving us something under a different process and using certain hypothetical assumptions about how the company might do it. We could end up in a sort of death spiral, if I can call it that, if we halt or pause procurement and then go back out to the market. Who do we get to bid then? People have come forward in good faith in recent years and involved themselves in a process. I am uncertain that we would get a field of bidders. There will be a risk to the process. A decision has been made that someone in the process has been in some way given a status that would leave the outcome of that process open to challenge. We have no guarantee that if we went out to a process, having looked at the evidence of Eir, that the company would necessarily come back in. It may come back in on those terms but we are bound by state aid rules and normal contract law, both of which hold that we cannot offer the company something on those terms.
Mr. Mark Griffin:
We are working hard on the contract clauses and financial aspects and so on. We are trying hard to be in a position to close out the contract in the coming months. I cannot give the committee a definitive date. We are really pushing the boat out because, no more than committee members who have constituents who are kicking down the door to get broadband in rural Ireland, we want to deliver this. We believe it is the right thing to do and that it can make a fundamental difference. Notwithstanding the criticism we have received about the robustness of the process and lack of competition and so on, we believe that we have a robust outcome from all the work we have done in recent years.
Mr. Griffin maintains that his job or duty is to ensure value for money and ensure taxpayers' money is protected. I would expect nothing less. We too are elected to ensure the same thing, among others, the difference being that we will be thrown out of our jobs if we do not abide by it.
The taxpayer, as has been alluded to by others, is aware that the Department and the Government are moving towards finalising the contract to employ what many see as an unknown entity with no experience or history of the provision of such a product in this area. The exposure to the taxpayer is €2.9 billion. This is along the lines of what Senator O'Reilly said. Meanwhile, Eir says now, definitively, that it can do the same thing, that is to say, provide broadband to every home, with an exposure to the taxpayer of €1 billion. That is inclusive of VAT and contingencies and it is an informed estimate because of the experience that Eir has since had with the 300,000 extra connections originally intended to be in the national broadband plan.
In response to this contention, Mr. Griffin and his colleagues state there are rules that must be adhered to, especially state aid rules. We now know that is contested by reputable opinion. It would appear that there is nothing definitively in writing from the Commission to back up the Department's contention. Mr. Griffin also says there are issues surrounding governance and oversight. I am not a member of this committee but I have responsibility to speak for my party on public expenditure matters. As Deputy Dooley said earlier, it would appear the Department is spending €2 billion to protect €1 billion.
The last questioner asked what would happen if the whole process was paused at this stage. Mr. Griffin asked about the basis for that and noted that Eir withdrew from the process. He says the contention from Eir, as well as the information the company has given to the Department and the committee, are not to be considered as a proposal. It would appear the Department is simply carrying on regardless. The Department has legal advice that contravenes what the company contends, states or insists could be the case. Is the Department simply doing us a favour by entertaining us in this process, despite the best intentions of those who called for this process?
I have some specific questions on foot of that. This did not simply become a story recently when Eir submitted details to the committee on how it was in a position to provide the same solution for €1 billion rather than €3 billion. Eir wrote to the Department in January 2018. Can Mr. Griffin confirm that? While Eir might not have stated that it could do the job in a certain way or that it would give customers or the public or the taxpayer what they wanted for €1 billion, the company did say it could do it at a fraction of the cost. What consultation or correspondence has taken place with Eir since the Department received that letter?
I have some other questions. I had to listen to the Minister, the Taoiseach and the Government tell us that they looked at every alternative and every other option, as is their duty. They said they went over and under them and considered them and reconsidered them but were left with no option but to proceed along the course as we know it now. Meanwhile, this letter was sitting on someone's desk since January 2018. I have no correspondence or information to tell me that the matter was investigated to the nth degree at the time or that it was checked, rechecked, considered and reconsidered based on what was contained in that letter.
The State has conferred preferred bidder status to Granahan McCourt Capital.
What cost does the State incur in the event of a contract not being finalised or signed? I asked the Minister that question at the Committee on Budgetary Oversight. He could not answer and said he would come back to me. That was about a month or six weeks ago and I have not got an answer yet. In the meantime I put it in writing. It is important and the public need to know. If there was a breakdown in the negotiations on a contract with the preferred bidder, what legal status is given to the bidder and what cost is associated with that? That is against the background of the €200 million it is putting in. People say the wholesale contract allows a recoup. However, if it goes to the wall, the taxpayer picks up the cost, end of story. It might not be the case with a reputable firm like Eir, but it is definitely the case in this instance.
All joking aside, the Department is hell-bent on implementing this process at a cost of €2 billion to save €1 billion. If Eir said it could deliver this to every home for €1 billion, would Mr. Griffin accept its good faith? Does he believe it could do it its way for €1 billion?
Mr. Mark Griffin:
I go back to the Deputy's earlier point. Our job is not just to entertain the committee; our job is to provide information to the committee as part of the hearings and that is what we have sought to do in good faith. We spent a number of hours on 22 May and have spent more hours this evening going through the basis for why the contract was constructed as it is. This not something we dreamed up; it is not a figment of our imagination. There is a contention that a process we have put in place to protect taxpayers' money has in some way driven the cost of delivering this service from €1 billion to €3 billion. As we said earlier in the process, to compare like for like we are talking about €1.55 billion as against €2.1 billion in the mid-case scenario.
I have a note here that something was contested by reputable opinion, but I am not sure what the Deputy is talking about.
Mr. Mark Griffin:
However, he was talking about the 340,000 and 300,000 properties and whether we were obliged to apply state aid rules and allow it to go into the intervention area, provide 300,000 houses with fibre infrastructure by way of a commercial operation and reduce the size of the intervention area accordingly.
Mr. Mark Griffin:
There is no contest around state aid rules; that is how they apply. The state aid rules and the contract law that apply to the national broadband plan intervention area are clearly set out and were read out by Mr. Mulligan earlier in the process. They are black and white and not contestable.
Mr. Mark Griffin:
We got correspondence from the CEO of Eir. There was a meeting on 23 January, attended by the former Minister, Deputy Denis Naughten, and Mr. Richard Moat, who was CEO of Eir at the time. I was in attendance, as were Mr. Ó hÓbáin and one or two other colleagues. We made it clear at that meeting with the CEO that we had done considerable work on addressing the red line issues Eir had set out. Mr. Moat indicated to us his intention to withdraw from the procurement process. I said to him that in every normal negotiation in which I have been involved often the most difficult issues to be addressed are those issues that are left to the end. There was a possibility that we would be capable of moving on some of the other red line issues Eir had identified but on others we simply could not, again going back to the obligations of the state aid rules and the contract.
As we said earlier, that meeting should not be seen in isolation. We had 65 meetings and 200 hours of dialogue with the company prior to that. Everything it had ventilated in terms of concerns and that it has put in the letter we received in the last week were all on the table when we were in the dialogue process. We asked Mr. Moat to go back and meet his board to reconsider because we felt it was important for it to be involved in the process. He went back to his board, reconsidered and wrote to the Minister on 30 or 31 January stating that the company was withdrawing from the process. We did not have contact with him, perhaps, other than through-----
Mr. Mark Griffin:
The Minister responded to the letter at that point. Eir had withdrawn from the process. It did not say to us at that point that it could do it for €1 billion based on what it knew about the 300,000 area or anything like that. Even if it did, it was effectively saying it would do something by way of a different process that is not mandated by state aid rules.
However, the Department is now investigating that. It is now engaging in a process of informing the public as to why it believes that contention cannot be delivered. Why did we have to wait until now for that to be the case? I would have thought there was ample opportunity between the Minister, departmental officials and whomever else was privy to the information that came in the letter on 30 January to investigate that contention and to emphatically refute that suggestion rather than leave it there. The Taoiseach and the Minister have told us that every other alternative consideration was checked and rechecked. They have told us that we can take their word for it that it is €3 billion, and that we will have to live with it and proceed accordingly. That is what I was led to believe, but now I hear about this letter which specifically mentioned doing it for a fraction of the cost.
In the meantime, Eir has invested €150 million in mobile 4G. It has made announcements about 750 jobs in the region. It has talked about, I believe, two new apprenticeship programmes. I am sure there were Ministers and Departments all over those items. Great credence was given and great assistance afforded to Eir for that to be delivered. Of course, we welcome that in the economy. However, in the meantime, back at the bloody ranch, I am told it will cost €3 billion when it should only cost €1 billion in my eyes and those of the taxpayers.
Did those who have responsibility in this area who are acting in the best interests of the public and the taxpayer not think to say, "Hold on a second, let's call these boys back in and put this to bed one way or another."? That should have been done in case Mr. Griffin or any of his colleagues was ever faced by us, who are elected to ensure the taxpayers get value for money, and asked about this letter contending that this could be done at a fraction of a cost if it is done it in a different way. The public want to know what they get at the end of the day. They are not particularly worried about how they get it, but if they can get it for €2 billion less than what the others are saying, they need to know what is going on here.
I will check, but I do not necessarily agree that that is the case in the way in which it has been delivered. The point I am making is that the letter was sitting on someone's desk. On whose desk was it? If it was sent to the then Minister, did he contact his officials? As a colleague of Mr. Griffin's in another Department said, this has a knock-on effect on other capital development projects in the State that many people were led to believe would take place in forthcoming years. We are not sure now if they can because of the threat posed by Brexit. Some €2 billion must be found and I have not yet been told exactly from where it will come.
Mr. Mark Griffin:
The letter we received from the CEO of Eir stated it was withdrawing from the process because the obligations being placed on it were too onerous and too complex. That was after 65 meetings and 200 hours of discussion in which we had moved on 83 of its 100 plus red lines. We listened to it very closely on every single issue it had raised.
Why not tell it that? Why not have it on the record in order that it could be presented to us that Eir had made that contention and the Department did not agree with it based on A, B, and C, that the Department had met Eir and gone through them? The record will show that there was no response. It does not tell me or nobody has told me whom the then Minister contacted after receiving the letter and what discussion was had. I submitted a freedom of information request but got very little back.
Mr. Mark Griffin:
The then Minister said we recognised Eir's commitment to the NBP procurement process. I believe we published the letters. If not, we can do so. We did publish them. However, he also acknowledged the decision not to engage any further in the procurement process was entirely a commercial matter for Eir. That fundamentally is it.
In that correspondence the then Minister did not reference the point made, namely, that if we were to step outside the way in which the Department wanted the State to do it, if it were to be done in a different way, it could be delivered at a fraction of the cost. There was nothing in writing to refute this.
It was incumbent on whoever had responsibility to categorically state it in response rather than leaving it hang. It was left to hang and has been added now by virtue of a figure being put on it, in addition to the fact that the 300,000 premises are now more or less dealt with. There is much more information and knowledge on how the project can be delivered. That also comes into play. Many are alarmed about this and want these hearings to get to the root of it. In that context, I have heard that a letter came from Eir in 2018 further to a meeting that had only taken place a couple of days earlier, to which Mr. Griffin alluded, rightly so, but the response from the then Minister was not adequate to refute the suggestion and contention made in the letter about it being done at a fraction of the cost. The Department needed to state at the time that the Government was not backing down for anybody, that it was proceeding, carrying on and sticking to the process it had put in place, irrespective of the fact that there might only be one bidder left or that it still believed the project could be delivered within seven or eight years. We are now at a juncture where if the Government sit downs to reconsider the matter, it will involve another period of years in procurement. That baffles people. What they cannot get their heads around and what I am trying to get my head around is that an entity, with vast experience and expertise and which has much of the infrastructure in place, has stated it will give us something for €1 billion, while somebody else, about whom I know nothing, is putting up €200 million and exposing the State to a figure of €2.9 billion and saying he can do the same thing at a cost of €3 billion to us. It is very hard to square that circle, especially when representatives of the Government tell us that every road was travelled down in order to be sure that every possible way in which it could be done was investigated before they arrived at a conclusion.
We will have to agree to differ. As I said, I register my disappointment there was no adequate content in the then Minister’s letter to assure me or anybody belonging to me or I represent that a thorough investigation had taken place in order to respond to it in the way it should have been responded to. In conferring preferred bidder status on Granahan McCourt Capital, GMC, in the event that the Department does not enter into a contract with it, is there a cost to the State?
Mr. Griffin can say definitively that if the State was to withdraw from the process in favour of arranging a new tendering process to take advantage of Eir’s proposal, it would not be liable in any way, shape or form, to Granahan McCourt.
Mr. Ciarán Ó hÓbáin:
At any stage in the process we are not liable for the costs of bidders. The Deputy has asked what preferred bidder status means. It clearly means that we have reached a stage in the procurement process where the Government is satisfied to take the decision where a bidder has come through and passed the evaluation and demonstrated it has met requirements. There is an intention on the part of the Government, having conferred on it preferred bidder status, to move forward to contract award, subject to the necessary steps being taken.
Mr. Ciarán Ó hÓbáin:
It is important that it be understood granting preferred bidder status is a critical milestone in a procurement process where one recognises a party has met the tests where one has asked the market to bid and that party is capable of delivering.
It is capable of delivering it. That is the first point. Second, it is my intention to move forward and bring it to a contract. That is the purpose of the declaration. We want that party to engage in the next step of the process and procurement to engage subcontractors.
It is and a very expensive one if the Department does not proceed. It has stated categorically, in conferring preferred bidder status on Granahan McCourt, that the company has met the criteria laid down to deliver the project for the State.
Would there be a cost to the State if that were to happen, considering that preferred bidder status has been given to Granahan McCourt? In doing so, the Department, on behalf of the State, has acknowledged that the company has met the criteria, has done all that it has asked it to do and has the capacity to and will deliver the project.
With the indulgence of the Chair, I have come to the conclusion that we are shooting in the dark. If Eir could substantiate its claim and turn it into an offer, the Department and the State would not be in a position to take it up. This is all great, but I do not know where it is bringing us.
On that issue, would it be possible to go back into a procurement process with a particular company? Could a procurement process be tailored for one particular company such as Eir? That is an important question in the context of what Deputy Cowen said. In an ideal world would it be legal, hypothetically? Could the Department do it?
Mr. Mark Griffin:
It has to be an open process. We have received legal advice on that matter. We received it in wondering whether we could assign the function to the ESB. The answer was that we could not. It has to be a procurement process where bidders can come back in. Of course, they might not want to come back in because of all of the discussion concerning Eir doing such a great thing in coming forward with a cost of €1 billion. We simply cannot design a procurement process based on what was done with the 340,000 premises and apply a set of rules which only apply by way of regulation. We have set out the differences between regulation and state aid in our presentation. By the way, we do not accept that the €2 billion that is being spoken about as a difference is by virtue of a heavy regulatory burden. We do not accept that for one second. There are different things at play.
It appears that there is no turning back. As I stated, if Eir could substantiate its claim and it became an offer on the table in front of the Department, it would not be able to sign it. I think the report of the committee could be written now.
Yes, but we are only going through the motions. Mr. Griffin is doing his best to answer questions. If it was the case that Eir could undoubtedly provide this facility for €1 billion, the Department still could not take up that offer.
It has to be admitted that this scenario has been a roller coaster. The public has lost confidence in the process. Is the Department absolutely confident that Granahan McCourt can deliver the project? Can it deliver it for the nation and the Government? What if something were to go wrong six or nine months into the contract? Would it then be necessary to reschedule the process and seek a new tender?
Mr. Mark Griffin:
The answer to the first question is "Yes". Granahan McCourt has passed all of the tests. I am referring to adherence to aspects such as the financial and technical requirements, future-proofing, the commitment to adhere to the obligations set out in the contract signed by all bidders in 2015, claw-back mechanisms, separate oversight mechanisms and the requirement to have ministerial appointees. All of these tests were passed and Granahan McCourt has signed up to adhere to all of these aspects of the contract. Notwithstanding recent comments, the company has the technical capacity to carry out the project.
I thank everyone. It has been a long session, but it shows the commitment of the departmental officials to come before us and answer all of our questions. I was conscious of the need to let members and non-members of the committee have the opportunity to seek clarity on what is an important issue.