‘Unprecedented risk’ - What the Government was advised about its broadband plan

The Cabinet advice from senior government officials on the broadband project, published by the Government on Wednesday afternoon, demonstrates an unprecedented strength of opposition to the plan which was approved by ministers at their weekly meeting on Tuesday.

What was the Watt advice?

In a lengthy observation, sent as a memo (read it here), Secretary General of the Department of Public Expenditure and Reform Robert Watt and his officials say they "strongly recommend against approval of the appointment of the preferred bidder"

This was on grounds of:

• Cost and affordability;
• Impact on the NDP [National Development Plan] and on projects foregone as a result;
• Value for money and, specifically, uncertain benefits;
• Unprecedented risk for the Exchequer; and
• Compatibility with the spatial objectives of Project Ireland 2040.

The Department memo says an alternative exists to promote a more limited, prudent, affordable and less risky approach that would allow the project to be extended if demand became apparent.

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The Department also advises against hiking capital budgets to pay for the plan - a move that the Minister for Public Expenditure Paschal Donohoe has since announced - despite the warnings about stimulating inflation in the construction sector.

The department also lists a series of specific projects that could be cancelled or delayed to pay for the plan - including water projects in Tralee and Killarney; roads in Sligo, Killaloe, Cork and Moycullen; developments in Dundalk, Tallaght and Limerick institutes of technology; new ambulance bases, and primary care centres.

“Recent experience in trying to secure additional capital for the overrun on the National Children’s Hospital within the existing capital budget highlights how difficult a task this is,” the memo says.

The memo also sets out specific doubts about the cost benefit analysis supplied by the Department of Communications, questioning many of its assumptions. It says that assuming a take up of 30 per cent, this implies a public subsidy of €20,000 per household.

“Providing the scale of investment [contained in the plan] to all areas is unaffordable,” it says.

While the figures which show the investment by the private company set to be awarded the contract are blacked out of the released files, the document suggests that they are considerably less than the state investment.

“Under this proposal the State will not own the asset, despite investing up to €3 billion in it as compared to a private sector equity investment of only [BLACKED OUT],” the department warns. “In effect the private operator will have all of their monies paid back by [date blacked out] while the exchequer could have paid out [sum blacked out] by that stage. In these circumstances, it is a challenge to conclude that this contract represents value for money for the state or is in the best interests of the taxpayer,” it says.

The document repeatedly warns about the low level of investment from the bidder.

The cost benefit analysis, it says, is “not credible”.

What does the Department of Communications think?

The top civil servant in the Department of Communications Mark Griffin wrote to his counterpart in the Department of Public Expenditure, Mr Watt, in late April in a bid to assuage Mr Watt's concerns about value for money (read the letter here).

Mr Griffin issued a fierce defence of the project and questioned the methodology of the cost benefit analysis required by the Department of Public Expenditure, saying that it did not take into account the broad range of benefits that the broadband project would bring.

“The benefits of social inclusion . . . are significant as an objective of public policy and have been invoked time and again for public support,” Mr Griffin writes.

His letter includes extensive reassurance on cost control, value for money and the protection of the public finances. It also rejects the criticism of the amount of investment made by the bidder, saying that it is “a substantial private investment”, though the amount is blanked out in the documents published.

It also says that the bidder is incentivised to make a success of the project, though if their profits are too large, they will be clawed back by the state.

Mr Griffin also rejects the criticism that the state will not own the network, saying there was “consensus across all officials” when the matter was discussed that owning the network at the end of the 25 years was unnecessary.

Mr Griffin repeatedly makes the point that many of the points raised by the Department of Public Expenditure have been previously decided upon.

“The Department has carried out rigorous analysis over the past three years to show that the project is compliant with the public spending code . . . However . . . value for money can only be measured during the deployment and operations of the contract and will be dependant on the state putting in place a fit for purpose oversight and governance regime,” he says.

Mr Griffin’s comprehensive answer to Mr Watt’s concerns did not satisfy the Department of Public Expenditure, which repeated many of its criticisms in the memo for government - the final stage in the deliberative process

And the minister?

Minister for Finance and Public Expenditure Paschal Donohoe has denied he ignored the advice of officials on the National Broadband Plan but admitted that he wrestled “deeply” with the decision.

He said that he decided against his officials’ advice not to sign up to the current national broadband plan because on balance there are safeguards and contingencies in place to manage risk.

The Minister said he had considered the advice offered by senior civil servants and made a decision based on that advice.

“As minister I have to receive advice, but I ultimately have to make a decision in relation to what to do.”

He said he believes there are safeguards within the contract for the project that “are capable of securing our needs as this project rolls out”.

Mr Donohoe said he would not be pulling funding from other areas in order to fund the project, which may cost up to €2.7 billion. It was also not his plan to change existing commitments to other priorities.

“This is why it is all the more important to be clear that it is my intention to deliver new capital funding to ensure we can deliver this plan in addition to our existing commitments,” he said.

Mr Donohoe acknowledged there is a risk in relation to the project due to the potential emergence of new technological developments. However, he said he believes this means the State is better off by not owning the infrastructure.

“We have to be aware that if the State was going to build this asset it would cost more to do that. If we owned this asset we would have responsibility for a high level of risk in relation to providing a project like this”.

The decision was made by the Government “after huge debate and an awful lot of robust inquiry.

“On balance I believe the proposal we have in front of us is the best way of delivering the additional connectivity that parts of our country have been demanding for so long”.

Mr Donohoe said he had to weigh up the consequences of going ahead with the project or cancelling it and believed that on a comparative basis proceeding is the right decision to take.

He also rejected claims that the announcement had been timed to provide Fine Gael with a boost going into the local and European elections at the end of the month.

What about the Taoiseach?

Speaking in the Netherlands on Wednesday night, Taoiseach Leo Varadkar said the plan was “a leap of faith in believing in the future of rural Ireland”. He also said he had confidence in Mr Watt.

Background

The Cabinet decided to award preferred bidder status for the National Broadband Plan to the sole remaining bidder in the competition, the national Broadband Ireland consortium led by the US businessman David McCourt.

The plan was first announced in 2012 by then communications minister Pat Rabbitte. Since then it has been mired by delays and setbacks. At the outset there were five bidders. Three were selected as preferred bidders but two pulled out, leaving one consortium in the running.

Last October, former communications minister Denis Naughten stepped down amid controversy over the rural broadband plan after it came to light that he held previously undisclosed meetings with the head of the last remaining bidder.

An independent review was commissioned by the Taoiseach following concerns about the procurement process, but it found it had not been influenced by Mr Naughten or businessman David McCourt, who is part of Granahan McCourt.

The cost of the project was originally estimated at between €355 million and €512 million, but last month the Taoiseach Leo Varadkar confirmed the cost would end up being closer to €3 billion. He maintained that the original cost estimate of €500 million was for a very different project.