Despite the Government spending $80 million on a joint-venture dealwith Global Crossing, only a small portion of the purchased cable capacityis currently being utilised, writes Jamie Smyth.

Next month Eircom will make a final payment to the Government for the supply of international telecoms capacity from the State's $80 million deal with Global Crossing, that was signed in 1999.

This means that, by the end of March, Eircom will have paid a total of €15 million in several tranches to the Government under the State's joint-venture contract with Global Crossing. But far from offering Eircom a competitive advantage, the State deal is described as an "onerous contract" in its annual report and the firm has written off its full investment.

Eircom's annual return shows it cannot find a use for the massive amounts of telecoms and internet capacity that it agreed to purchase under the State-backed deal. The collapse of Formus Communications, Worldport, and the sale of Metromedia Fibre Networks, have also undermined the deal, vastly reducing the amount of international capacity used by Irish firms.

Under the terms of the Global Crossing contract, the Government bought a right to use 160 STM1 circuits (very high capacity cables capable of carrying 155 megabytes) for a 25-year period. This investment enabled Global Crossing to link its global fibre optic network to the Republic by landing a huge fibre cable off the Wexford coast from Britain.

The IDA is now trying to sell on this capacity to telecoms firms, internet service providers and large data centre operations. But at least 50 per cent of the capacity remains unsold and, as Eircom's results shows, little of its allocation is actually being used.

The Irish Times has learned that Eircom, the anchor tenant of the Global Crossing cable, is using just four of the 38 STM1 circuits it purchased from the Government. It is unlikely the other contracted users, Chorus and HeaNET, are using much more capacity.

Considering that Irish taxpayers coughed up $80 million (€74 million) to finance the Global Crossing joint-venture deal - the final tranche of which was paid last month by IDA Ireland - was it money well spent?

IDA Ireland and the Government have no doubt. There is no denying that there has been a big drop in the valuation of telecoms assets, says Mr Dennis Molumby, the IDA executive who is responsibility for the $80 million deal.

"Global Crossing's assets were worth billions and are now being bought for $250 million... Likewise, we paid €500,000 for each STM1 circuit and they could be bought for substantially less."

But despite the $80 million price tag for Global Crossing, Mr Molumby strongly believes that the capacity deal was essential from a strategic and economic point of view for Ireland Inc.

"Look at the types of operations that are now being undertaken by HP and IBM at their campuses in Dublin... These are cutting-edge activities," he says. "The fact we bought Global Crossing's network brought in a flood of data centres and massive investment."

It signalled to the world that the Republic was serious about becoming a player in e-commerce, says Mr Molumby, who is trying to attract the world's biggest internet search engine, Google, to Dublin.

The deal was signed after some of the biggest Irish-based technology firms, including Microsoft, warned the Government that the lack of international telecoms capacity would hurt investment, according to Mr Molumby.

Mr Joe Macri, general manager of Microsoft Ireland, supports the IDA's view of the deal and describes the decision to go ahead with the Global Crossing deal as "hugely important".

"Our operations centre in Sandyford is evolving into an e-enabled hub and the deal was a fundamental requirement for this. We needed thick broadband pipes into Ireland," he says. "I would consider the Global Crossing deal even more important than the current strategy to build broadband networks in 19 regional towns."

He does, however, acknowledge that the timing was "unfortunate".

"In the short-term there is undoubtedly some pain due to the industry downturn but this is not because the investment the country made was a failure."

Telecoms experts all agree the massive slump in the international telecoms market has caused fibre prices to fall to a fraction of their 1999 level, while the collapse of the dotcom market has also dramatically reduced many company's future capacity requirements.

Global technology consultancies such as Gartner Dataquest and IDC have all dramatically revised downwards their projections for internet use following the prolonged slump since early 2000.

This has caused huge problems for firms in the telecoms sector including Global Crossing, which remains in bankruptcy protection in the US more than a year after it first applied. Several firms with big Irish operations, including Canadian firm 360networks and US-based Metromedia Fibre Networks, are also in financial difficulties, and both recently sold their assets here at a fraction of the cost of building their operations.

The Government has appointed Irish and US law firms to track Global Crossing's bankruptcy process in the US to ensure its investment is secure. It has also managed to re-negotiate the terms of the original deal to make it more attractive to firms.

One of the most important changes to the original deal is that alliance members can now buy capacity for six months or a year, rather than purchasing for the 25-year period, says Mr Bernard Keogh, Global Crossing's Irish general manager.

"Back in 1999 everyone wanted 25-year rights of use but now the market has changed," he says. "This opens up a whole new range of customers who can become alliance members."

Leap Broadband, which was set up by former Formus executives Rory and Charlie Ardagh, signed the first deal under the new terms this week. They bought 45 megabytes of global capacity from the State and will use it to offer customers speedier internet access.

The Government managed to reduce maintenance costs that are levied on firms for the network. These have fallen from €80,000 to below €40,000 per year. But it was unable to renegotiate the $80 million purchase price.

Perhaps unsurprisingly, this has prompted criticism from competitors to Global Crossing. Columbia Ventures, which recently bought 360networks cable that links the US to the Republic for €17 million, says the State could have got a 90 per cent reduction in the cost.

But Government sources claim any refusal to pay the final tranche of cash under the deal last month would have enabled Global Crossing to pull out of the deal.

At least with the telecoms infrastructure already built, the Republic is in a strong competitive position - even if the deal cost more than equivalent contracts currently being negotiated, says the sources.