Monday 17 June 2019

Richard Curran: 'NBP bidder could make too little profit - not too much'

On his own: David McCourt of Granahan McCourt
On his own: David McCourt of Granahan McCourt
Richard Curran

Richard Curran

The National Broadband Plan has been bogged down for years. Now it is closer to going ahead, but serious questions remain about the process, the remaining bidders and - most significantly -whether the €3bn price tag represents value for money.

As an Oireachtas committee investigation kicks-off, the whole project remains in jeopardy. The sole remaining bidder, Granahan McCourt, may have been selected but the contract with the Government has yet to be signed.

It is understandable that certain questions about this process would be asked given how unusual the tender was. It was unusual because there was only one bidder. It was also unusual because unofficial contacts between the remaining bidder and the then Minister for Communications, Denis Naughten, led to his resignation.

Finally, it was unusual because, in the end, the bidder's consortium shrank. It had included Enet, SSE and a role for the Irish Strategic Investment Fund.

All of these issues are being taken by some people as a kind of smoking gun, that the Granahan McCourt consortium had too much leverage in the process; is about to get a sweetheart deal, and doesn't have enough experience of delivering these kinds of project.

After all it is a US investment fund and not a telecommunications company or a utility.

Finally, throw into the mix the revelation that the whole thing will cost around €3bn and Granahan McCourt is putting in just €225m, but it will own the network at a point in the future.

A licence to print money, some would suggest.

However, a closer look at the business case and the numbers suggests the opposite could be true.

Here are a few salient facts. Eir has had a take-up of just 20pc on the fibre it put into 300,000 homes in towns, villages and rural areas in the last few years.

A similar take-up for National Broadband Ireland, as the business will be called, would see them with 108,000 customers. They plan to charge a €100 up-front installation fee per home. That would yield a one-off €10.8m.

If it collected an average of €50 per month, per home, its 108,000 customers would bring in revenues of €64.8m per year.

Out of that Eir will have to be paid €1bn or €40m per year for use of its network. The company will have to hire or outsource customer support people, somebody to fix the network, etc.

Somewhere along the line it will also have to pay interest on borrowings or bonds. Suddenly, this licence to print money begins to look more like a financial risk being borne by the bidder.

It could get much higher take-up levels in the future making it more profitable, but that could be a long way away.

Its €225m investment will be made first and upfront. Bear in mind that other commercial companies backed out of this bidding process.

Eir decided not to continue bidding because it believed there was a commercial case for covering 300,000 extra homes but not 840,000 extra homes.

Its CEO Carolan Lennon said the service level agreements (SLAs) being sought by the Department of Communications as part of the tender process were higher than those sought in urban areas.

In other words, if you build and run this network you must guarantee that broken lines or service problems will be fixed more quickly than they have to be in urban areas.

That is an expensive business and presumably failure to deliver on that will incur penalties.

So, where does Granahan McCourt see the business case in all of this? Owning the network is one solution. But Minister Richard Bruton has said that based on a commercial valuation the network will not be worth the €3bn or more it will cost to build, but will be worth more like one tenth of that.

As mobile technology improves with 5G ,etc, certain rural areas, especially those with more houses closer together, will be offered an alternative mobile broadband solution. That is simply competition.

National Broadband Ireland will have to compete against other technologies and operators in the more "lucrative" rural areas in the future. That could further undermine an already limited business case.

One solution would be to hike up prices to rural customers in order to make up the numbers.

However, built into the contract are pricing restrictions whereby its prices will be linked and benchmarked with competitors around the country. This will be a regulated pricing structure.

Both the Government and the consortium have emphasised profit clawbacks whereby the State would get an additional cut if profits went over a certain level or if the network is actually delivered at a cheaper price.

I don't see either of those things happening and it is hard to see the clawbacks ever coming into play.

So, where will the return on investment for the bidders come from? National Broadband Ireland CEO Peter Hendrick said at the weekend that the company is in this for the long haul, when I asked him about selling up at some point in the future.

He cannot realistically talk about the company's intentions over the next twenty-five years. Who knows where any of us, including Granahan McCourt, will be then?

In theory, there could be some profit to be made by selling on the network, but the company won't own the entire network for many years to come. They can only sell on the right to ownership in the future. That means a discounted price.

Perhaps everyone is looking in the wrong place when it comes to this contract. Perhaps a very different kind of problem will emerge, one which doesn't involve a US investment fund making super profits and owning a valuable nationwide network.

The roll-out of the network will begin in towns in every county in Ireland. These will act as hubs. The further the network goes out from those hubs, the more scattered the houses (customers) will be. This will make them even less commercially viable than homes nearer to towns. What if the network begins to be built and it goes out of these hubs in 26 counties to a level beyond which there just isn't a viable business for the bidder?

The cost of build could end up being more than anticipated and the level of customer take-up could be less than expected.

In this scenario, the private sector operator could simply say, "we cannot go any further". Any funding gaps have to be borne by the private company. They could just say, it isn't working.

What then? Presumably, they would be on the hook to the State which could pursue them for completion of the network.

But would they, especially if they had delivered fibre to enough homes to have 85pc or 90pc coverage? Would such a legal pursuit be financially worth it, especially if the business model has gone off the charts in the wrong way, on these more isolated houses?

By then, there may even be alternative solutions through mobile for those people.

Contrary to obvious thinking, instead of Granahan McCourt making far too much money out of this, they could end up not making enough to justify completion.

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