The Government is battling to win support for its broadband plan – welcomed through much of rural Ireland, but attacked by its own senior officials and political opponents. But a key problem in making a full assessment is that many of the vital figures are not available, with most of them redacted in documents released. So what do we still need to know – and why aren’t we being told ?
1. Why are there questions?
A few key issues have led to the deal coming under particularly sustained questioning .
The increase in the price:
From an initial estimate of a State cost of €500 million, the price tag rose to almost €800 million by late 2017, then finally to a nominal figure of €2.176 billion including contingencies ( and before VAT).
It is widely observed internationally that big projects tends to go way over budget – we have previously written about the work of Oxford economist Bent Flybvjerg, who has observed that major projects tend to go " over budget, over time, over and over again."
The nature of the deal:
The broadband project is being undertaken as a public-private partnership (PPP) These deals are meant to harness the expertise and ability to deliver of the private sector and transfer some risk from the State. The disadvantages are typically that the financial cost can be higher – after all it costs private businesses more to raise cash than the State and they also require a return.
PPP deals can be hard to structure and the procurement process can be longer and more complicated than the more traditional routes of the State paying to get something built. All these points have fuelled controversy in the broadband plan – now in planning since 2012 – as well as the type of PPP used, which leaves the private company owning the asset.
Eoin Reeves and Donal Palcic, economists at the University of Limerick (UL) specialising in this area, have pointed out that previous PPPs here, including motorway contracts, have also typically involved low equity contributions by the bidders, but that the fact that the asset remains in private ownership in the long term is a key issue this time around.
The lack of competition:
Usually PPPs are subject to competition among bidders, as would have happened, for example, in motorway contracts here in the past, or school building projects.
This helps to deliver value for the taxpayer and was seen to be a crucial factor in the broadband plan. However the broadband plan has a curious history. Crucially Eir, one of the bidders, did a deal in 2017 to provide a service to over 300,000 homes which were to be have been covered by the plan.
This reduced the attractiveness of the contract and subsequently a joint venture including ESB and Vodafone dropped out of the bidding – and then Eir itself did the same.
This left a sole bidder and a lack of competitive tension as the final deal was done. We know that the level of subsidy from the State was pushed up significantly in the final discussions and will be paid earlier than originally planned.
The Government argues that the demands from the winning consortium were not markedly different to that from Eir – though we don’t know the details. Nonetheless, as Mr Palcic has pointed out, the original argument for the type of contract awarded was based on competition between bidders.
2. What do we know about the deal – and what do we not know?
The idea of the so-called “gap funding “model being used is that the State funds the gap between what the market would provide on foot of the commercial attractiveness of the project and the overall wider economic benefit to society. The questions in relation to the broadband plan are whether this balance has been struck correctly, whether the State is getting value for money and if the risks are fairly allocated between the State and the private company.
Following the initial reaction to the announcement, we were told that the cash investment from National Broadband Ireland will be €220 million – with €175 million in equity and €45 million in working capital. The company said it had a commitment to invest €2.4 billion over the next 25 years of the project. However the bulk of this will be recouped from State investment and, later on, from user fees.
A lot of the details of the contract remain under wraps. However we know from a letter from Robert Watt, secretary general of the Department of Public Expenditure, that by 2028 the company could have recouped all its money, while the State may have spent close to €2.5 billion. The State faces " unprecedented risks", he argues.
The “ value -for money” case for the deal is based on a cost-benefit analysis undertaken by PWC, which says that benefits would exceed costs by a ratio of 1.3 to 1 in a central scenario. As well as raising questions about the detail of the analysis , including significant late changes, particularly on the scale of costs, Mr Watt has said that it does not, to his mind, justify the risks and cost to the State.
The key point is that he argues the gains will largely accrue to individual consumers and businesses, rather than to society at larger. The scale of external, or wider, benefits does not justify the cost, he says. Consumers will only pay €100 in most cases to be connected, while the cost of the connection will often be multiples of this.
His counterpart in the Department of Communications, Mark Griffin, replies that via the connection and ongoing changes, consumers will end up paying around half of the estimated €12,000 benefits to a household of connection.
A key issue with estimating benefits in major projects like this is that they inevitably involve back-of-the-envelope calculations.You can put a value on better communications, reduced waiting times and the ability to work remotely, but it involves a heck of a lot of assumptions.
Then estimating what amount of the benefit accrues to individuals and what are wider economic or society benefits involves significant subjectivity. Being able to work remotely, or sign up for an online education course is clearly a benefit to the individual, but also yields a wider gain to society. But does being able to watch Netflix and Skype your uncle in Australia have any wider benefit ?
The counter-argument is that the dynamic of universal connection will, in itself, lead to significant benefits for rural Ireland.
3. What do we not know?
We do not know a lot of other important details. We have no detail of the breakdown of the state subsidy, how the State would share in any savings made by the company on the investment ( though we are told it would),the level of penalties for the company if it misses its roll-out targets, its revenue targets when the project is rolled out. the level of return built in for the investor or how profits would be split if the return is higher.
We are told the bidder could be obliged to invest more if the project overruns or hand the asset back to the State – but we don’t know the detail, nor what compensation would be due to National Broadband Ireland if this happened.
The case for commercial sensitivity of information would seem to be a lot less in the case where there is only one bidder in the field and no prospect of another emerging, barring a new procurement process. The IMF has called for much greater disclosure of information related to PPPs here .
4. Why won’t the State own the broadband network when it is completed?
Despite making a massive financial commitment to funding the network, significant controversy surrounds the agreement that it will remain in the long-term ownership of National Broadband Ireland – the company which has done the deal, in which the main player is US investment fund Granahan McCourt.
This issue was studied in a KPMG report in June 2016, but the key point – how much extra it felt a deal in which the State ended up owning the network would cost – was redacted in the published document. The sums around the deal have been revised upwards in the meantime .But it is very hard to see how this information is commercially sensitive and therefore should not be revealed .
A range of other options were also considered – over the past couple of months – by the Government. A published document from the communications department outlines how the Cabinet was asked to look at a couple of less ambitious schemes delivering broadband to fewer locations – concentrating on local facilities such as community and business centres for example, or spending a fixed sum and getting the most connections possible in return. Another option was to build the main network out in the hope that this would encourage private operators to finish the job and provide local services. However all the costings were blacked out and not revealed. Again, given that none of these routes were chosen, we must ask why.
The tone of the documents which went to Cabinet recently were in favour of the plan eventually approved, pointing out the delay in a new procurement process, the fact that many other options would provide less than 100 per cent coverage and the State aid hoops which would need to have been jumped through to get the job done by a specially created new agency, or by an existing state company like the ESB. But again any financial data and many of the key arguments are blanked out in what has been published.
The rationale for keeping the asset in state ownership also itself raises wider questions. KPMG’s 2016 report warns that 25-years on the State “ may be faced with the risk of technical obsolescence” and “ may require significant upgrade.” This is worrying, given the cash to be spent.
The Government argues that the private sector retaining ownership gives it an incentive to “ mind” the asset. However Mr Reeves and Mr Palcic of UL have pointed out that it is possible – indeed common – to ensure via PPP contracts that the infrastructure that is built is returned to state ownership in good condition and with relevant upgrades.
Letting the private sector retain ownership could lead it to be it being sold on. KPMG argues that legislation can underpin the obligations of any owner, but we have seen via the Eircom network - now owned by Eir – how difficult it is to ensure proper investment to meet wider economic and social goals with such an asset in private hands. Privatising our telecom network led to chronic under-investment over many years and a series of cash-ins by private investors.
Conceived during the crisis, the broadband plan was designed to minimise the up-front cost. Whether that is now the best option to deliver long-term value for money is the question.
