Opinion: there's no economic justification for proceeding with the existing plan as it will not provide value for money for the taxpayer

By Donal Palcic and Eoin ReevesUniversity of Limerick

The government has just announced that it has received the final tender from the remaining bidder for the National Broadband Plan (NBP). The plan will see the government subsidise the rollout of broadband infrastructure in rural areas using a gap funding model where the winning bidder will retain ownership of the new network.

But when one examines the main justifications for adopting this approach, as set out in the various consultancy reports underpinning the plan, it beggars belief that the plan is set to proceed. The KPMG Ownership Report for the NBP published in December 2015 asserts that placing the long-term ownership of the network with the private sector "allows private sector bidders to leverage the use of their existing infrastructure and encourages them to continue to invest in the network". Private sector bidders would therefore place a high "strategic value" on winning the contract, which would lead to a high degree of competition and would drive down the amount of subsidy required from the government.

What has emerged in the shambolic tendering process for the NBP since then has violated all of the key drivers of the assumed lower cost of proceeding with a gap funding model. The withdrawal of both Siro (the ESB/Vodafone joint venture) and Eir as bidders for the contract has obviously removed all competition from the procurement process.

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Moreover, there have been multiple changes to the makeup of the remaining consortium bidding for the contract since the tender was first announced. The departure of SSE from the initial Enet led consortium left it without the backing of a major utility company with expertise in rolling out network infrastructure. Since then it now appears that the consortium is being led by private investment firm Granahan McCourt and Enet is just a partner.

However, one thing remains constant. None of the partners in the consortium have extensive infrastructure that they can "leverage" and the cost of the subsidy that the government will have to provide will be significantly influenced by the price of access to Eir’s infrastructure. Media reports over the summer suggested a cost well in excess of €1 billion, with the State likely to foot a large part of this bill. 

The reason for this vastly higher than expected subsidy is due to the ridiculous decision to allow Eir to carve out the 300,000 most commercially viable premises in the original intervention area proposed for the NBP. This decision was the main reason why Siro, the only other realistic bidder for the NBP contract, withdrew and all critical competitive tension was removed from the process.

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Given all of the above, the fundamental justification for using the gap funding model and private provision no longer applies and there is absolutely no economic justification for proceeding as planned. So why is the government ploughing ahead with a plan that will not provide value for money to the taxpayer? The political fallout from an embarrassing cancellation of the process and a return to the drawing board is the most likely answer.

But a return to the drawing board is exactly what is required. Why pay hundreds of millions of euros to the private sector to build infrastructure that they will then own and control? Why not instruct our existing public enterprises to carry out the required investment? Investment by our commercial public enterprises would be off balance sheet and would free up the money earmarked for the NBP subsidy for other much needed services.

The ESB is the most obvious company to use in this regard. It already has a substantial telecoms network business through its Siro joint venture with Vodafone. It is also connected to every home and business in the country and can use some of its existing infrastructure to roll out broadband. The ESB has paid almost €1.47 billion in dividends to the Exchequer between 2008 and 2017. A large portion of these payments were in the form of "special dividends" during the economic crisis with some of this financed by ESB borrowings. Instead of using the ESB as a cash cow and employing financial engineering to achieve this, the government could simply agree to forgo dividends from the ESB for a period of time, with that money instead directed towards investment in broadband infrastructure.

Now is time for the government to pull the plug on the failed NBP procurement process.

The cost to the ESB of rolling out broadband infrastructure could be significantly reduced through coordination with other state owned utilities. For example, Irish Water is currently digging up roads all over the country in order to upgrade its network. Why can’t it be instructed to install ducting for fibre optic cable as part of any civil works programme they are involved in?

The same applies to Bord Gáis Networks and other public enterprises engaged in civil work programmes across the country. The co-ordination of plans by a network holding company that oversees the investment activity of ESB, BGN, Irish Water, etc. would ensure that there is no duplication of costly civil works and lead to a lower cost of investment.

Ironically, a similar vision was set out in Fine Gael’s NewERA plan published in 2010. The NewEra plan proclaimed that "there is an alternative" for Ireland’s economy. Their alternative vision placed public enterprise, including a new telecoms utility called Broadband 21, at the heart of plans for investment in Ireland’s infrastructure. Now is time for the government to remind themselves of their plan and pull the plug on the failed NBP procurement process.

Dr Donal Palcic is a Lecturer in Economics at the Kemmy Business School at University of Limerick. Professor Eoin Reeves is the Head of the Department of Economics at the Kemmy Business School of University of Limerick

The views expressed here are those of the author and do not represent or reflect the views of RTÉ