Government’s broadband plan mired in financial controversy

Somewhere in the small print of most tender documents there’s a line that says “tenderers are liable for their own costs of tendering”. It’s a standard clause effectively meaning that the opportunity costs of being involved must be borne by the applicant party.

Similarly phrased caveats are included throughout the documentation for the Government's €2.9 billion National Broadband Plan (NBP), the most valuable contract ever awarded by the State.

The document requesting final tenders for the project in September 2018 states: “Each party will be liable for its own costs and expenses arising out of or in relation to its participation in this procurement.”

Yet within months of being awarded the contract in November 2019, the winning bidder Granahan McCourt, the US investment firm founded by tech billionaire David McCourt, received €33 million from the process to cover its tender costs.

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According to the 2020 accounts for Metallah Ltd – the parent company of National Broadband Ireland (NBI), the vehicle set up to deliver the project - it paid €32.73 million to NBI Bidco LLC, a US firm directly controlled by McCourt.

The payment “related to costs incurred by the group’s investors over a period of a number of years in connection with the tender bid, negotiation and successful conclusion of the 25-year project,” the accounts state. Industry insiders have expressed surprise that McCourt would seek and be facilitated - per the terms of the contract – in receiving such a payment and at such an early stage of the process.

The Department of Communications, which is overseeing the project, said: “No public subsidy was used to cover these costs, in line with the procurement documents.”

“The bid costs will ultimately be recouped by the investors from anticipated returns generated by the project over the next 25 years,” it added.

Shareholders in Metallah, which as well as Granahan McCourt include US hedge fund Oak Hill, have committed to stumping up €175 million in equity for the project.

Loans

Metallah received the first €100 million of this in 2020, comprising €98 million in loans and €2 million in cash.

It’s not unusual for investors to use debt as well as equity to fund infrastructural projects but the proportion of debt versus equity is extremely lopsided. So is the interest rate attached to the loans. Metallah last year paid €11.8 million in interest charges on the loans, which equates to a rate of 12 per cent.

One industry expert said the rate charged was similar to what you would attach to a junk bond, which are noted for their eyewatering charges.

The Department of Communications was last week forced to clarify who actually owned and controlled NBI given the complex structure of ownership that sits behind it

This might have something to do with the fact that the contract was won by a group of financiers, including a US hedge fund, and not a utility or a telco, the Government’s intended target.

The latter may also explain why operationally NBI has been so slow to deliver. As per October this year - 22 months into its rollout - it has managed to build out to just 17,000 homes and businesses of the 542,000 earmarked for coverage.

As a result, it also cut its end-of-January target for the number of premises “passed” by the network from 115,000 to 60,000. By any yardstick, and even taking account of the Covid disruption, this is not good.

The winner bidder of Northern Ireland’s rural broadband project, Fibrus, which started its rollout significantly later - in October 2020 - has passed 16,000 homes.

Subsidy

The North’s scheme provides a state subsidy of a £165 million (€184 million) to connect 76,000 homes, which works out – on a per unit basis – at €2,500 per home. The €2.9 billion subsidy (for 542,000 homes) in the Republic works out at more than double that, approximately €5,300 per unit.

Part of the reason for the disparity in cost is the Republic's complex tapestry of one-off housing, which is incomparable to anywhere else in Europe, even the North. This makes the cost of connecting these homes very costly.

The North has also opted to omit 0.5 per cent of the most out-of-way homes on cost grounds. In contrast, the Irish Government is insisting on connecting the entire housing stock not covered by commercial operators, from remote cottages to holiday homes.

Another reason for the differential relates to the cost of using the existing infrastructure. Former state monopoly Eir’s poles and ducts are costlier to rent than BT’s.

That said, it’s unlikely the NBI will use all the €2.9 billion subsidy, which includes VAT of €355 million and a contingency €545 million which is subject to strict drawdown conditions. In addition, cheaper wireless technology is likely to be deployed for the most remote units.

Another reason for the high cost south of the Border relates to the gap-funded model and procurement process advised by KPMG consultants (the firm was paid €11 million for the advice) which left just one bidder in the race and the Government effectively over a barrel on price.

Bidders

The €175 million in equity being put up by the winning bidders is low in the context of a €2.9 billion subsidy; the potential revenues that might flow from the project; and in the context of the bidders, not the State, owning the infrastructure after the contract lapses in 25 years.

From the outset, the Government was desperate to avoid a Moriarty two-type debacle with the award of another large telecoms asset mired in financial and political controversy. That hope is fading fast.