Naughten’s departure plunges broadband process into crisis, but can it be salvaged

Minister for communications Denis Naughten's surprise resignation this week over his contacts with the lead bidder for the National Broadband Plan has plunged the project into crisis.

His departure leaves the Government with two equally unpleasant, and potentially risky, courses of action. It can either pull the plug on the tender, setting the clock back to zero on a process that has already taken six years and outlasted three ministers, causing a political storm that may ultimately topple the Leo Varadkar-led Government and trigger a general election.

Not an enticing option when one considers the 542,000 rural households and businesses left waiting interminably for adequate broadband services, who may be inclined to blame the Government directly for this latest controversy.

Alternatively, it can press on with the current procurement process and hand the contract – likely to be worth more than €500 million – to US investment firm Granahan McCourt. It is the only bidder left in the race, despite concerns over its capacity to undertake the project and the make-up of its consortium.

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This option also carries with it a more immediate risk, centred on whether Naughten’s ill-advised meetings and private dinners with David McCourt, Granahan McCourt’s founder and chairman, constitute a breach of the procurement rules and leave the process open to legal challenge.

The Taoiseach has ordered an internal audit of the tender, principally to assess the risk of a challenge from one of the underbidders or from someone outside the process.

There’s also the question of whether or not we can be sure we’ve heard the full story of Naughten’s dealings with McCourt.

Opposition leaders claim his actions may have permanently contaminated the process.

Either way, it’s ironic that a Government so conditioned to avoid another controversy connected with the sale of a large telecoms assets – the sale of the second mobile phone licence more than 20 years ago prompted a tribunal – should find itself in this position.

Telecoms industry

There is also another, potentially more worrying, aspect to the Government’s flagship broadband project.

Eir, ESB-Vodafone joint venture Siro, Airtricity-owner SSE, and most recently UK plc John Laing – which between them make up a sizeable chunk of the telecoms industry both here and in the UK – have all looked at the project and said "no thanks".

In the case of SSE and John Laing, they joined the McCourt bidding consortium late on but then left what was effectively a one-horse race with a big Government cheque at the end.

Industry sources proffer several reasons for this, but the one that’s repeated most often is the market risk. While the cost of building the network is forecastable at roughly €2,000 per home or business, equating to a little over €1 billion for the 540,000 properties covered, the future operating costs, which are heavily predicated on the uptake of contracts, are not.

Eir and Siro are building fibre networks in rural towns and villages across the country, but typically only get 20-30 per cent of the population within reach of their networks opting in. In remote areas, where the roll-out costs are even higher, the uptake may be even lower. This makes the investment extremely risky for a commercial entity.

The Government’s decision to farm out more than of a third of the original tender, roughly 300,000 homes and businesses, to Eir on a commerical basis, may also have been behind Siro’s decision to quit the process last year.

Those homes were considered the low-hanging fruit or quasi-commercial end of the project. There was a suspicion all along that Eir, as the market incumbent with the most to lose, would try to game the process. Its decision to build out into the original National Broadband Plan area, having originally deemed the areas uneconomic to service, forced the Government's hand. Once the ESB via Siro, the chief threat to Eir's rural business, left the tender, Eir pulled the plug on its own bid.

The company’s policy of effectively “donutting” towns and villages with its technology means the winning bidder will now have to traverse Eir’s infrastructure to get at the homes included in the National Broadband Plan, paying a rent to the former semi-State in the process. This could cost €20 million a year or €400 million over the lifetime of the contract.

Critics say the Government’s automatic recourse to the private sector when it comes to building infrastructure is the problem and that it should have set up a utility, along the lines of Irish Water, to build the broadband network directly rather than enticing potentially unwilling commercial players into the fray.

If the current tender collapses, and there’s a heavy cloud hanging over it, this looks like the only other option. Where that would leave the timeline for delievery, which has shifted several times already – not to mention the half a million homes and businesses still waiting on the project – is anybody’s guess.