Eir’s baffling broadband plan offer raises suspicions of sabotage

Is Eir attempting to torpedo the National Broadband Plan (NBP)? Ireland’s largest telco threw the process into chaos last month, claiming it could do the job for less than €1 billion, roughly a third of what the Government intends to pay US businessman David McCourt, its preferred bidder for the project.

The company claims the lower price tag could be achieved if the Government’s contract, littered as it is with onerous legal provisions, financial clawbacks and monopoly-busting caveats, is watered down.

In other words, if the Government tears up all this governance stuff, gives Eir a free rein to do it on its own terms, thereby deepening its rural monopoly, we’d get it for a fraction of the current estimate.

It was a Michael O’Leary-style intervention to prevent another competitor from coming onto the pitch.

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It later emerged, via a letter from Eir chief executive Carolan Lennon to the Department of Communications, Climate Action and Environment, that it had estimated the cost at between €512 million and €1.5 billion. That's quite a spread, with the latter figure more than 50 per cent higher than that which was indicated to the Oireachtas committee.

The company’s intervention enraged the Government, which has been on the hook for months over cost overruns to do with the plan.

And it should be remembered that Eir had submitted a “detailed solution” or quasi bid of €2.75 billion for the project while still part of the process.

It later dropped out, suggesting the venture posed too big a risk for the company, although not before it had hived off 300,000 homes originally earmarked for the plan, the low-hanging fruit, and seen off rival Siro, the ESB's joint venture with Vodafone.

Eir has rejected suggestions that its intervention amounts to "tactical interference" in a public procurement process, a charge made by Alto, the umbrella group for rival telcos. It has suggested the former semi state could be legally challenged if the NBP were derailed by its actions.

The company insists chief executive Carolan Lennon proffered the €1 billion figure in good faith. “Eir was invited by an Oireachtas committee to make comment on the NBP and the topic of value for money and, having expertise in the matter, responded to that request,” the company said in response to allegations that it was simply trying to disrupt the process.

However, the disjuncture between its inside-the-process costing of €2.75 billion and its €1 billion claim is baffling and has done little to dampen suggestions it is engaged in an act of sabotage. It was like "they pulled the pin out of the grenade and rolled it into the room", Green Party leader and former communications minister Eamon Ryan said.

Eir's figures come at the expense of tighter regulation and oversight

Do Eir’s figures stack up? Could the €3 billion state subsidy insisted on by preferred bidder Granahan McCourt really be cut by such a margin?

The biggest cost saving relates to the rental of Eir’s poles and ducts, which are necessary to get at the 540,000 homes and premises covered by the plan. Bar the actual cost of rolling out the infrastructure, it’s one of the biggest components of Granahan McCourt’s bid, adding up to €1 billion over the lifetime of the plan.

Eir indicates it is willing to absorb this or at least to weave it into its business operations. The company is entitled to charge a third-party rent for use of its infrastructure, particularly if it will have to maintain the poles the fibre is hung from.

Fibre monopoly

What Eir appears to be saying is that it would forfeit the pole rental in return for a Government subsidy to upgrade its network. Such a move would give it a near total fibre monopoly in rural Ireland. And the ageing copper network will have to be replaced with a newer technology at some stage anyway.

The Government, however, has serious reservations about this, believing it is likely to present competition and regulatory issues, or more precisely it would leave the regulator with no oversight over whether this rental cost is being passed onto consumers in a different form.

Another potential saving is the cost of connection – the sign-up fee paid by households or absorbed by providers to get connected to the NBP. Eir suggests it should be €170 as per its existing rollout, while the Government and NBI have agreed a fee of €100.

It’s unclear how much Eir thinks it will clawback from this higher fee. Under Eir’s proposals, it would also cost an additional €170 every time a consumer switched provider, disincentivising customers to move retailer, potentially reducing competition and innovation on the network.

Another area and one which Eir highlighted as a reason for exiting the process in the first place is duplication. Under the terms of the NBP, the winning bidder has to set up a legal entity – NBI is the vehicle established by Granahan McCourt – separate from its existing telecoms business.

For Eir, this would require establishing a new wholesale division, which it claims would amount to a costly duplication.

The department maintains that a separate legal entity is mandatory to conform with EU state aid rules and to generate the necessary level of transparency and oversight. The cost saving of dispensing with this has not been specified.

Eir has highlighted other cost-saving measures, including less onerous service level agreements (SLAs) with third parties for maintaining the network once it is built, but the main bulk of the reduced cost is generated from the rent, connection and duplication issues.

Eir’s figures come at the expense of tighter regulation and oversight. But as Eamon Ryan says, “is it worth €2 billion to get that level of oversight over the line?”

Key objectives

A Department of Communications spokesperson said the suggestion put forward by Eir does not meet “any of the key objectives the NBP was designed to meet”.

These were listed as follows: high-speed broadband to 100 per cent of premises in the country; strong protections to the State – with clawback mechanisms for excess profits, and full transparency of where the state subsidy is being directed. A guarantee of up-front equity and risk lying with the bidder if certain milestones aren’t reached. Equal access for all commercial providers to the network, so that consumers can get the lowest costs and highest level of services.

There is also the ghost of Moriarty hanging over the broadband plan

A level playing field for all applicants in line with state aid rules, and no particular technology was specified, but any solution was required to be “future-proofed”.

Crucially, the department also noted Eir’s pricing didn’t encompass VAT. Under the NBP, the maximum possible cost to the State overall will be €3 billion over 25 years (including Vat of €355 million which is returned to the State and a contingency €545 million which is subject to strict drawdown conditions.

“Eir has explicitly stated that it’s letter is not a formal offer seeking to replace the current NBP process. It had previously withdrawn from that procurement process. Any new process would delay the project by between three and five years,” a department spokesperson said.

Benign view

Fianna Fáil communications spokesman Timmy Dooley takes a more benign view of Eir's claim.

The company is already providing high-speed broadband to a vast tract of rural Ireland on a commercial basis, he says, citing the 300,000 homes done in conjunction with the Government.

“They’re rolling it out to 300,000 homeowners that previously didn’t have it, and what they’re saying is, we can do the same for your 542,000,” he says.

“And they’re not saying, with no regulation. Don’t forget they are still a regulated entity.”

Under the existing open access regime, the company has to provide access to other service providers so that there is competition for the end user, he says. “It seems to me what Eir is saying is, if you go down the NBP route, to protect the value of €1 billion, you’re going to have to spend an additional €2 billion,” he says.

Dooley believes the NBP is “over-engineered” and that’s why it’s been dropped as a viable venture by the industry here. He doesn’t believe that Eir is acting in bad faith, intervening at this late stage.

“I can only take in good faith what they say, that they can deliver broadband to those 540,000 homes for less than a billion euro,” he says. “They’re not talking of a concept, they’re showing a worked example,” he says, referring to the company’s 300,000 project.

From day one, companies involved in the NBP project complained about been snowed under in paperwork and drowned in legals, raising concern that the Government, fearful of repeating mistakes of the past, has got too tangled up in process.

There is also the ghost of Moriarty hanging over the plan. The last time a major piece of telecoms infrastructure was sold off, it scarred the body politic.

The NBP's programme director, Fergal Mulligan, is a former Comreg director and has witnessed first hand Eir's various brushes with the regulator. Has his quest to protect the taxpayer and the end user from the vagaries of monopoly been in vain? Time will tell.