Chief executive, Philip Nolan, believes relaxation of the regulatory regime is a prerequisite for Eircom to earn a return sufficient to attract investment. John McManus reports

"I think you'll find he is a bit different to Alfie," comments the Eircom public relations executive. We are sitting in the boardroom on the top floor of the company's St Stephen's Green headquarters waiting for Philip Nolan.

Such is the shadow cast by Alfie Kane over the former State telecoms monopoly that six months into the job, Mr Nolan is still seen as the "new" chief executive.

Superficially he is not dissimilar to his predecessor. He has the same slight build and a head that seems just a little too big for his body, helping convey an impression of calm intelligence. His Northern Irish accent has been softened somewhat by years working abroad but, rather alarmingly, he also displays the sort of technology wonkishness for which Mr Kane was so famous.

It is inevitable that Mr Nolan will be compared to Mr Kane, who ran Eircom for seven years, the latter part of which saw him very much in the public eye during Eircom's brief foray as a public company.

But the Eircom that Mr Nolan has inherited is a slimmed down beast and also one that arguably lost its way a little during a traumatic period when attention was very much on corporate deals more than on the core business.

"My focus was to stabilise what I got and to get it focused on what I thought was important," explains Mr Nolan who joined Eircom in December from a similar position with Lattice, the pipeline and telecoms offshoot of British Gas. He says he is happy now that he has got the business focused on fixed-line operations and that peripheral operations such as Yellow Pages and the Eircom retail stores have been disposed of.

Where the company goes from here, he claims, is going to be determined by the overhaul of the regulatory regime currently under way.

The outcome of the process will dictate the level of investment Eircom will make in its network and also the way in which it will be used by competitors, he says.

It is a high-stakes game and Mr Nolan believes the last six months has "helped my thinking and everybody else's thinking as we approach the price review we are going into and as we look at the state of the telecom sector".

The industry in Ireland, no less than elsewhere, is in crisis and can no longer attract the investment it requires, he says. "The common agenda here for investors, consumers, management, regulators and the Government is that this infrastructure is no less strategic now than when the sector was booming ... it needs critically to be able to attract the investment it needs."

The Government must allow Eircom earn the sort of return that will enable it attract investment, says Mr Nolan. When the company was privatised in 1999, it made a very fundamental and far-reaching decision. It implicitly accepted that future investment in telecommunications infrastructure would come from the private sector and that, by definition, it would have to earn a commercial return.

It seemed like a one-way bet when the sector was booming and companies were queuing up to get into the the Irish market. The easy availability of capital meant that the various entrants would all be able to fund networks over which to compete with Eircom and one another.

A regulatory structure was put in place to suit this environment, the main tool in its armoury being to put limits on the size of the return a company could earn on its investment in infrastructure. This served as an indirect price cap, which worked in tandem with direct price caps on the price of retail services.

This approach - which was supposed to facilitate new entrants to the market - has been found badly wanting in the current environment. The rates of return allowed by the regulator are simply too low to justify further investment in the current market, Mr Nolan claims. Retail prices have been capped at a level where neither Eircom nor potential competitors can make money.

The caps are currently being reviewed and the new regime is expected to be announced by the Office of the Director of Telecommunications Regulation at the end of this month.

"The rate of return has to be a sensible one that is set by negotiation with the regulator. We are not suggesting we should be given carte blanche... but there is no doubt that, in the final analysis, the flight of capital is telling you that the market requires a higher return on equity," according to Mr Nolan.

The flight of capital to which Mr Nolan refers has manifested itself in, amongst other things, the takeover of Eircom. The collapse of the company's share price as the telecoms market imploded in 2000 left it vulnerable to takeover by private investors and the inevitable happened at the end of last year.

After a battle lasting almost a year, a consortium chaired by Sir Anthony O'Reilly won control of Eircom. Valentia paid some €3 billion, much of it in the form of short-term debt.

It could be argued that the regulatory relaxation being sought by Mr Nolan has more to do with enabling Eircom pay down this debt than securing the investment needed for Ireland's telecommunications infrastructure. This perception is supported by recent moves by Eircom to refinance its debt and by accounts filed with the regulator indicating pre-tax losses last year of over €50 million. This year the company will have to bear the additional burden of the interest on its €2 billion debt.

MR Nolan is adamant that, although the company is losing money, it is financially sound. "We are well financed. I would not have joined this company if I thought it was flaky." The key ratio as far as Eircom's bankers are concerned is free cash flow to interest, and it is performing satisfactorily by this measure. This year's figures should show an improvement, as much of the 2001 loss was down to exceptional items.

"We are quite happy with the operating performance we have at present. The real issue is how much will be available for investment as we go forward and that will depend on the outcome of the regulatory review," he says.

The company is looking at refinancing some of its bank debt with bonds, but no decision has been taken, he says. Ultimately, Eircom will return to the stock market and all the shareholders are supportive of this. "A private equity solution is not a long-term solution. Private equity firms have a short-term horizon that they look at, but within that horizon they are very concerned with having a vehicle that is attractive. And that means you have to take a short-term view on performance and a long-term view on investment. No one wants to buy something that does not have a future," he says.

The shareholder unity cited by Mr Nolan will surprise those who doubted that the unlikely marriage of the Eircom Employee Share Ownership Trust (ESOT) and venture capital companies that made up Valentia would go the distance, particularly given that the ESOT has 30 per cent of the equity.

"I think there is a way of focusing them all in the same direction. There will obviously be issues about the culture, language, etc, that are different, but so far I have to say I have been pleased with the progress we have made and the involvement we have had at board level from all sides," says Mr Nolan.

One area in which the language has softened is manning levels. Gone are the constant comparisons between staff levels at Eircom and international peers that were common under Mr Kane.

"If we are going to take as a starting point that there is somehow a natural law that the number of employees per line in Germany should be the same in Ireland ... that is a step too far for me to take as a given," says Mr Nolan.

He prefers to characterise the issue in terms of how the company will respond if improved efficiency creates a "surplus" of workers. "What is very, very helpful is that the employees do have a significant stake in the company. Then they have a stake in any performance that will result from any reductions," he says.

Another concern that was raised at the time of the Valentia takeover was Sir Anthony's potential conflict of interest. The non-executive chairman is also executive chairman and controlling shareholder in Independent News & Media, which in turn owns 50 per cent of Chorus, the second largest cable television company.

A number of safeguards were required by the Government when it cleared the takeover. These included Sir Anthony "standing aside" from decisions relating to Chorus and not receiving papers on issues where Eircom competes with Chorus.

Sir Anthony has chaired every board meeting since the acquisition and " if there is a conflict, then it is not apparent to me and certainly it has not appeared in our boardroom or any discussions on strategy that we have had", says Mr Nolan.

Opponents of the takeover also questioned whether the interests of the investors in Eircom and the objectives of the Government could be aligned. The establishment of Ireland as a leader in areas such as electronic commerce remains a central plank of the administration's economic strategy. Achieving it will require a significant investment over the next few years and Mr Nolan has made it clear that Eircom will only do it if the regulatory regime is tilted in its favour.

"I am a simple businessman who has to deal with the funding and the organisation to make these things real," he explains. The alternative - a Government-funded rival infrastructure - would not be the answer either, he believes.

"There is a dilemma here... the Government has made a decision in previous times that it wants the market provision of these services and it wants competition. If the Government is then building something that competes with what it privatised then it seems to me there is something wrong," he argues.

The answer, says Mr Nolan - not surprisingly - lies in working with Eircom. Rather than pump money into fibre networks the Government should perhaps consider alternatives, such as stimulating demand so that it is economic for Eircom to expand its network.

It sounds a bit like wanting the best of both worlds, but there is nothing wrong with that, his shareholders will agree.