The government has chosen the Commercial Stimulus model for funding rollout of the National Broadband Plan, rejecting the alternative of taking the network under state control.

The only figure that has been mentioned so far for the taxpayer subsidy for the NBP is €275m for an ‘initial stimulus package’, plus €75m drawn down from the EU’s European Regional Development Fund.

The various reports drawn up for the Department of Communications envisage state funding for the capital investment required, plus an ongoing subsidy over the 25-year lifetime of the NBP contract.

The Department of Communications commissioned a Financial Appraisal Report, Cost Modelling Report and Cost Benefit Analysis Report, none of which have been published. The rationale is that the government doesn’t want to put all its cards on the table ahead of commercial bids being made for the subsidised infrastructure.

It’s not inconceivable though that the cost to taxpayers of hooking up that artist in his tigeen overlooking the Atlantic could run to €1 billion or more in the decades ahead.

In Association with

Consultants PwC struggled to formalise the economic benefit rationale for this level of public investment. In their report, there was lots of waffle about e-health and e-education benefits, remote working and productivity efficiencies accruing from transacting online over a 30MB connection instead of 5MB.

Tax Transfer

Basically though, the National Broadband Plan is a gut-feeling, political decision. Rural areas in Ireland are under the economic cosh and proper broadband can only help foster enterprise activity. If that effectively means another large tax transfer from the city to the country then so be it.

Former communications minister Alex White and the Labour Party agonised over who should own the new rural internet access network envisaged by the NBP. Ownership options postulated by the consultants included the commercial stimulus model, where public funds are made available to make private investment commercially viable (gap funding), and a concession type arrangement where the state owns the network from the beginning or at the end of the contract.

Consultants PwC and KPMG favoured the gap funding arrangement, arguing that this option is the most practical, affordable and minimises risk for the state.. However White and his government colleagues couldn’t reach a consensus on this issue ahead of the formal NBP procurement announcement in December 2015.

Instead, this thorny issue was left in the in-tray of White’s successor, Denis Naughten. Until this issue was clarified, formal tender documents could not be issued.

In a statement today, Naughten (pictured) said: “While I recognise the potential long-term value in the State owning any network that is built, I am advised that under a Full Concession model the entire cost of the project would be placed on the government’s balance sheet, with serious implications for the available capital funding over the next five to six years.

“Given that both models will deliver the same services and be governed by an almost identical contracts, I cannot justify reducing the amount of money available to government for other critical priorities such as climate change, housing and health over the next six years.”

Incumbency Advantage

Department consultants KMPG noted that its preferred gap funding model (private operator owns the network with state subsidies), existing infrastructure owners such as eir or the ESB/Vodafone JV will have the capacity and capability to leverage their own network, and that of other parties in the Intervention Area, to deliver the wholesale open access network at a reduced cost to the public purse.

KPMG observed: “Such an outcome could reinforce the incumbency advantage of such companies in the Irish market, and make it more difficult and less attractive for other parties to seek to enter the market or to expand their presence. There will therefore be a heavy reliance on the mechanisms in the contract that facilitate open access to the wholesale network and which safeguard competition and non-discrimination, as set out in the governance report.”

In a trenchant analysis of the National Broadband Plan commissioned by wireless broadband operators, economist Colm McCarthy observed: “If a market is designed in a manner which places inordinate demands on contract specifications and on the vigilance of the regulator, it is prudent to question whether it may be an unsafe market design.”

In McCarthy’s view, KPMG’s preference for the ‘gap funding’ model was reached without adequate reference to the issues about market design and competition raised in the voluminous technical literature on these matters.  “It is possible that the operator already deemed to enjoy market power by the regulator would secure the NBP capital subsidy for the entire Intervention Area, which would enhance its already strong position. There is no adequate analysis in the KPMG report of the likely consequences for retail competition,” states McCarthy.

Larger Intervention

Minister Naughten also announced his intention to change the High Speed Broadband Map published last December to include up to 170,000 more premises in the “Amber’ area i.e. eligible for state subsidised intervention.

Naughten said this is to take account of commercial telecoms investment that has not materialised and for which the department does not have any concrete alternative investment plans from the sector.

Naughten pledged that the State intervention would deal conclusively with connectivity issues in rural Ireland and that all 757,000 premises currently in the Amber  area would ultimately have access to quality, affordable services, as a result of the current procurement process.

“I have a responsibility however to ensure that nobody is left behind,” he said. “For this reason, my department has been closely monitoring the rollout of services by the commercial telecoms sector in the so-called Blue areas on the High Speed Broadband Map”.

Naughten claimed that for up to 170,000 premises of the 1.6 million premises in the Blue area (i.e. not included for intervention last year) there is no certainty that services will be provided.

The department is working to identify the exact number and location of premises involved. This work will be reflected in an updated High Speed Broadband Map. In the meantime, the Department will inform qualified bidders in the procurement process that the Intervention area is likely to expand by up to 170,000 premises.

Intervention Area

According to the Department of Communications, the possible Intervention Area (IA) for the National Broadband Plan consists of 96% of national land mass, 100,000 kilometres of road network and 750,000 postal addresses. The department estimates that the NBP investment programme in the IA will benefit 40% of the population currently denied the benefits of fast broadband. This cohort includes 38% of labour force, 94% of farms, 62,000 micro SMEs (B&Bs, shops, doctors etc) and 600 business parks.

The tender process for the National Broadband Plan currently involves three lots – Northern Intervention Area (350,000 premises), Southern Intervention Area (400,000) and a Combined Lot.

The essence of the National Broadband Plan is the state-subsidised establishment of one or two wholesale service providers (WSPs) to provide fast broadband services to other wholesale and retail service providers (RSPs) on an open access, non-discriminatory basis. End users will then have access to Next Generation Access (NGA) broadband made available by RSPs using the WSPs’ portfolio of wholesale products.

These third-party retailers may include the current broadband market leaders such as eir, 3, Vodafone and UPC but also the broadband minnows who currently provide a basic broadband service to around 70,000 rural homes and 7,500 businesses.

The state-funded National Broadband Plan will consist of two core elements: the internet pipe (the backhaul) and the access network. The current access network is primarily twisted-pair copper wiring (phone lines) but can consist of fibre or may be provisioned via wireless connections. The final connection to the premises will only be installed on request, as it is impractical to install the premises connection upfront during the roll-out.

The government envisages a scenario where the cost of the NGA connection will be the same for the farm half way up the mountain as for the bungalows stretching along the road from the village. Residents and businesses will be encouraged to sign up immediately when the NBP service lands in the townland. If they don’t, and change their mind later, the government allows that the connection charge will be more costly.

State Aid Rules

A crucial aspect of the NBP is that the intervention can only occur for premises not being provided with NGA services by commercial operators. This will lead to anomalies in certain areas. For example in the Roundwood townland in Co Wicklow, half the premises are covered by a commercial operator. The other half are not, so they qualify for inclusion in the Intervention Area. In theory, these IA premises could benefit from more competition for their custom, depending on how many retail service providers become active in the locality.

In the past three years, eir has passed 1.3 million homes with its fibre to the cabinet solution. The company has also hooked up 40,000 direct fibre connections and in mid-2015 eir announced that it intends to bring NGA broadband to an additional 300,000 homes. This will present a challenge to the government when the Intervention Area map is finalised ahead of the tender award. Under EU state aid rules, the state cannot crowd out commercial investment. So if eir doesn’t win the tender, the Intervention Area may have to be scaled back - or else the issue will end up in court.