Saturday 23 March 2019

Colm McCarthy: Telecom giant's exit leaves taxpayers to count cost of rural broadband pledge

It could be time to think again about the privatised State telecoms network, writes Colm McCarthy

Communications Minister Denis Naughten. Photo: Tom Burke
Communications Minister Denis Naughten. Photo: Tom Burke
Colm McCarthy

Colm McCarthy

Communications minister Denis Naughten shrugged off last Thursday's news that Eir, the former State-owned telecoms monopoly, had withdrawn from the procurement process for the Government's rural broadband scheme. With just one bidder left, he claims the procurement process will be simplified and the process will go ahead smoothly. But the minister represents the taxpayers as well as those expecting early connections, and the taxpayers are on the hook for the costs of the scheme. Would you be pleased to arrive at the fair, with a horse that must be sold, to discover that just one buyer had bothered to attend?

The minister's reluctance to acknowledge this predicament illustrates some familiar pitfalls for policymakers in utility-type industries. The main one is that the regulation of monopoly utilities is not simple. When Telecom Eireann was privatised back in 1999, the company owned the core national telecoms network. Almost 20 years later, and despite technological change and the arrival of new providers of wholesale network capacity, the successor company Eir remains the dominant provider of fixed-line communications infrastructure.

The delivery of broadband service by fixed-wire technology in rural Ireland cannot realistically be undertaken without using Eir's network. The company's departing chief executive, Richard Moat, told RTE that Eir was unhappy with the tariffs the regulator says it may charge for the use of its network assets. This was the trigger for the decision to withdraw. But the successful bidder (just one company,, Enet, remains) will have to gain access to the same network and Eir can resume the argument should the scheme go ahead.

The Government has chosen through successive ministers to target 100pc penetration of high-speed broadband across rural Ireland, with a commitment to the use of fibre-to-the-premises technology. There are alternative technologies. Existing wireless operators have maintained, in a report which I helped them prepare in 2015, that many rural premises can be served by wireless at lower cost.

The political pledge that all premises be reached by the installation of fibre has been accompanied by an understanding that there will be no connection charges for customers. This has never been the case for other utility services in rural areas - the ESB imposes connection charges and the higher the cost, the more the customer must pay.

People who want connections to the local authority's water and sewerage pipes also face charges, or the cost of sinking their own wells and septic tanks. There are hidden subsidies built into charges for high-cost connections, but the charges are not set at zero and can be substantial for premises located at a distance from the existing network. If you build a house half-a-mile from the nearest neighbour, try the ESB or county council website for a quick run-down on connection costs.

So far as I am aware, Ireland is the only EU country which has embarked on a 100pc fibre-only broadband connection policy with the promise of zero connection charges. This has never been done in Ireland for electricity, fixed-line telephony or piped water supply.

It is entirely reasonable to seek improvements to broadband access in remote areas but there is a serious cost issue with the official broadband policy. The problem is that rural Ireland is characterised by large numbers of sparsely populated areas - there has been no policy to inhibit rural sprawl and high coverage for a wires-based system will be very expensive. If the connection charge to the customer is to be zero (no politician has mentioned the notion of connection charges), then every potential customer will sign up, and the costs will escalate exponentially as the 100pc coverage target is approached.

For the 540,000 premises remaining to be reached, the average cost has been guesstimated at around €2,000 but for the more remote premises the cost will be higher, perhaps much higher. The State has intimated that a cost to the Exchequer of around €500m was in prospect but no hard estimates have ever been released by the Department of Communications. The withdrawal of Eir from the competition leaves just one option for the minister and the sole tenderer is in an enhanced position. The Government has promised early and free connections to every premises in the country and the sole potential buyer at the fair can secure the taxpayers' horse on the cheap.

Eir has recently attracted a new major shareholder from France (at the last count, the fifth since 1999) in a transaction which valued the equity in the company at about €1bn - it has about €2.5bn in debt. It had been the original intention to include 300,000 connections, in the more attractive markets in and around the main provincial cities and towns, in the Government's National Broadband Plan, but Eir decided to go ahead and connect up these customers without State subsidy.

It has reportedly spent around €200m in doing so at a far lower unit connection cost than awaits the taxpayers, a commercial decision which Eir was entitled to make. The market has thus been cherry-picked - the costliest customers have been bequeathed to the minister, who will pass the tab for ''free'' broadband connections along to the Exchequer.

Under the Government's Public Spending Code as published, no commitments of public funds above €20m are to be undertaken without a full cost/benefit study approved by the evaluation unit at the Department of Finance. Minister Paschal Donohoe extolled, yet again, the virtues of this cautious and sensible arrangement in answer to a parliamentary question a couple of weeks back. But in the case of the National Broadband Plan there is no cost estimate, none at all, never mind a plausible calculation of economic benefits. The plan is a straightforward breach of the public spending code. This is not to say that no case can be made for the subsidisation of better rural broadband service, merely to note that successive governments have declined to make, and cost, such a case.

The news media, with a few exceptions, have contented themselves with some plaintive interviews from rural businesses currently deprived of adequate broadband connections. How much would these firms be willing to pay for a better service? Most reasonable urban dwellers would, I imagine, tolerate a level of subsidy for the more costly rural connections. But why a 100pc subsidy?

There has been a commitment bordering on passion in Europe, over the last 20 or 30 years, for the privatisation of publicly-owned businesses. Where these companies are operating in potentially competitive markets, like airlines or long-distance bus companies, there are reasons for expecting that a competitive private capitalist model will deliver the best result for consumers and taxpayers.

Monopolies are different. It is possible to privatise monopoly companies, or ones with a dominant market position, and then to subject them to close State regulation. But this is a hard road. In 2011, the committee on State assets and liabilities established by the late Brian Lenihan and which I chaired, recommended against the privatisation of Eirgrid, the monopoly electricity transmission company. It is a natural monopoly. Deputy Alan Kelly of Labour was hinting last week that maybe it was a mistake to privatise the core network business when Telecom Eireann was allowed to fly the coop. Is it time to admit a mistake and buy back Eir at the French guy's price?

Sunday Independent

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