Will we regret national broadband decision in years to come?
We are still paying the price for foolish decision to fully privatise Eircom in 1999
The most immediate issues are whether Ireland’s broadband project will provide value for money and whether this vital infrastructure should be privately owned. Photograph: Michael Smith/Getty Images
The debate around the National Broadband Plan (NBP) reached fever pitch this week. On Tuesday, the Government announced the appointment of private equity group Granahan McCourt as the preferred bidder for the NBP. This has opened up intense debate about the merits of rolling out fibre-optic cable to individual premises across the country, as well as questions about the precise benefits that high-speed broadband will bring to rural areas and the expected level of take-up.
These are important questions but, with the final contract likely to be signed over the next few months, the most immediate issues are whether the project will provide value for money and whether this vital infrastructure should be privately owned.
The Government has chosen a gap-funding model to procure the NBP. Under this model the private company will roll out the infrastructure and own it at the end of a 25-year contract period. When this procurement option was chosen, the Government took advice from KPMG that it would provide better value for money compared to alternatives involving more public ownership. We believe this was poor advice.
The original justification for the chosen approach was that there would be strong competition for the contract and that the winner would take on project risks that would reduce the subsidy paid by government. Realistically, there was never going to be strong competition for the contract as the only real contenders were Eir and Siro/ESB. In addition, there was a high risk that Eir, the incumbent fixed-line operator, would take advantage of its dominant position in the market and attempt to undermine the whole process. This would involve them protecting their network monopoly in rural areas by cherry-picking the most profitable premises in the NBP. Such a development would change the entire nature of the overall plan and make it less attractive for other bidders.
This risk was well known at the time the gap-funding model was recommended. In fact, Eir first announced plans to invest in 300,000 premises in the summer of 2015 and further developed those plans during 2016 before singing a formal commitment agreement in April 2017. It is difficult to understand the Government’s final decision to adopt the gap funding model in July 2016 when this risk was already materialising.
When the inevitable occurred and Eir carved out the most lucrative 300,000 premises the whole procurement process was fatally undermined. Siro withdrew in September 2017 and Eir subsequently pulled out in January 2018.
With competition eliminated, the only source of value for money remaining was the transfer of significant risk to the sole remaining bidder, Granahan McCourt. In procurement models such as the gap-funding method, the private contractor is expected to take on significant project risk, which should incentivise them to minimise costs. Unfortunately, the documentation published this week shows there are now severe doubts about the extent of risk to be transferred in this project.
The recently released letter from Robert Watt, secretary general in the Department of Public Expenditure and Reform, expresses major concerns over the private contractor “being insulated from project risk while being afforded a massive upside potential in terms of any excess profitability”. In addition, Watt indicates that the private operator is risking far less of their own funds and will have all their initial investment recovered by 2028, while the State will have spent well over €2 billion by that stage.
What should be of major concern to all Irish citizens is that for a comparatively minimal contribution on their part, the private contractor will have full ownership and control over a valuable asset funded by the taxpayer. This constitutes a massive transfer of public value from citizens to a small number of private interests.
The most frustrating aspect of this sorry saga is that we are still paying the price for the foolish decision to fully privatise Eircom in 1999. Twenty years later, Eir continues to dominate the fixed-line telecoms market and use its market power to make it more costly and difficult for the Government to deliver socially valuable infrastructure such as rural broadband.
The Eircom privatisation has demonstrated the social cost of giving up public control over vital network infrastructure. The current NBP ownership model represents a continuation of this privately-led approach. Will we regret this week’s decision to proceed in another twenty years’ time?
Dr Dónal Palcic is a lecturer in economics and Prof Eoin Reeves is head of the Department of Economics at the Kemmy Business School, University of Limerick.