Babcock plan to split up Eircom criticised in report

Proposals by Australian company Babcock & Brown Capital Management, the owners of Eircom, to split the telecommunications company into network and retail divisions, have been strongly criticised in a draft consultant's report commissioned by the Communications Workers' Union (CWU). Martin Wall, Industry Correspondent, reports.

The draft report by telecommunications policy consultant Kevin Morgan says that the proposed structural separation of the former State company would lead to higher costs for consumers, generate inefficiencies and possibly act as a disincentive for further investment in the network.

Mr Morgan told The Irish Timesyesterday that the separation proposals put forward by Eircom were untried in any market.

Mr Morgan said that some attempts had been made to achieve a similar break up in the United States in the mid-1980s and that it had taken the next 20 years to "put the pieces back together". He said that under the Babcock & Brown proposals, consumers would face higher costs as the profits sought by the two new arms of the company would be higher.

The report, which will be considered by the executive of the CWU, says that the company's case for its proposals "rest inordinately on obtaining highly favourable regulatory settings that will not be in the interests of many stakeholders in Eircom, including users and employees.

"Structural separation will end the synergies found in a vertically-integrated telecommunications company and limit the economies of scale and scope that Eircom presently enjoys.

"That will induce inefficiencies and imply substantial transitional costs as the company is split," it claims.

"Costs will also rise in the longer term as the benefits of vertical integration and economies of scale and scope are lost. These costs will be relatively higher in a small company such as Eircom than the costs associated with separation in a larger operator," the report adds.

It also maintains that investment would also come under pressure as the network company lost income streams and the understanding of the requirements of users.

The report also claims that if the proposed network company gained standing as a wholesale utility, it could act as a disincentive to further investment and "fossilise" the whole Eircom network.

"More significantly, separation will result in higher costs to consumers through double marginalisation as both the network and retail companies seek a mark-up that will generate profits.

"Higher prices would also flow from the return on capital [ which] Babcock & Brown Capital Management is seeking," the report concludes.