Sparks fly as minister and Eir battle it out over broadband

Eir threw something of a curveball at Minister for Communications Alex White recently. His big plan to connect rural Ireland to high-speed broadband was almost hatched when the former State-owned telco changed the parameters.

White and his team had spent months engaging with industry and stakeholders to ascertain the scale of market failure in the sector. Based on the business plans of providers, including Eir – formerly Eircom – his department drew up a map of the areas deemed not to be commercially viable, as required under EU rules for state aid interventions.

It covered a substantial 30 per cent of the market, equating to 757,000 homes and premises, three times the Europe average. More than 80,000 farms – 94 per cent of the total and the backbone of the rural economy – were located in broadband blackspots.

Decades of bad planning, one-off housing and under-investment had come home to roost, and was exacerbating Ireland’s two-speed economy.

Armed with his map and a raft of consultants’ reports, White secured Cabinet approval for a major Government intervention and the biggest policy initiative of his ministerial tenure.

However, just weeks before the big launch, Eir announced it had revised its business plan and could now supply high-speed connectivity on a commercial basis to an additional 300,000 homes in the intervention area.

The Minister proceeded with the launch as planned, using the original intervention area, but signalling that it may need to be revised.

The Government should, in theory, have welcomed Eir’s move to take a bigger slice of the pie as it reduces the cost of intervention to the State. However, the Minister’s actions in the wake of the company’s manoeuvre suggest a certain degree of caution.

First, he sent a team of accountants and engineers into Eir to verify if it could undertake the pledges in its new business plan, having previously taken the company at its word.

He also intends to make the company sign a “commitment contract” before entering the tender process. This will be done under the cover of making all prospective bidders sign such contracts.

Perhaps this isn’t surprising given the telecommunications company’s recent history. It has been flipped three times and loaded with debt since its privatisation in the 1990s and exited examinership only two years ago.

Industry sources argue Eir’s move could queer the pitch for rivals and potentially drag out the process. With a shrunken intervention area, the Government’s contract has been reduced to only the hardest-to-reach places, making it significantly less desirable. This may push others out of the race and land Eir the contract by default.

According to a well-placed insider, Eir needs “an IPO story that it can sell to the markets”. This has to be based on growth or protected revenues from its legacy network, he said.

Securing the Government contract or, at least ensuring it is not lost, before going to market is thus seen as important.

Selling the company for its owners – a 150-strong group of banks and hedge funds, including Blackstone – at price close to €2 billion would, under standard corporate practice, see Eir's management team secure generous bonuses. A figure of €60 million has previously been reported elsewhere.

A spokesman for the company told The Irish Times that its updated business plan reflected a more optimistic view of future demand and an ongoing fall in technology costs.

“Eir reviewed its investment plans based on key inputs, including costs of rollout, customer response etc given that its Eir fibre programme was, at that stage, reaching 1 million premises,” he said.

“This analysis – a normal prudent approach to a new relatively high risk investment in national infrastructure – concluded that the then planned final footprint of 1.6 million premises could be extended further on a commercial basis to 1.9 million premises.

“In June 2015, Eir announced this revised investment plan which was warmly welcomed by the Minister and other key stakeholders in particular in rural Ireland.

“In July 2015, the Government launched a further consultation on key elements of the National Broadband Plan. It acknowledged that it had received further investment plans from various operators but decided to leave the proposed intervention map as originally published pending further assessment of these plans.”

The company said it fully recognised the requirements for access to high-speed broadband in Ireland and “no one has demonstrated more ambition, delivered more or plans to go further across the country than Eir”.

It also noted it had spent in excess of €300 million specifically on fibre rollout as part of over €1 billion in capital investment over the past three years and had repeatedly met or exceeded its own rollout timelines.

The spokesman said the company planned to invest another €1.5 billion in its network over the next five to seven years – and would hook up the additional 300,000 homes to its high-speed fibre product.

The Minister was again pressed in the Dáil this week as to what stage the plan was at. He said he expected to publish an updated version of the map, finalise the strategy and move to the formal procurement phase before the end of the year.

A department spokesman said “the proposed Eir investment” was potentially very significant and, like other operator plans, required careful analysis. He said the company’s updated plan had prompted a further consultation period, announced by the department in late October.

As part of that process, the department set out the heads of the contract that it proposes to ask all operators who have future investment plans to agree, noting “the proposed contract is not limited to Eir only”.

“As we move closer to formal procurement, it is critical that the department is assured that these investments will materialise,” he said. “The Government has committed to ensuring that every premise in Ireland has access to at least 30 megabits per second (mbps) broadband and has repeatedly stated that the National Broadband Plan aims to deal conclusively with Ireland’s connectivity challenges.

“That means ensuring that all promised commercial investment materialises – regardless of the operator – and that a State intervention provides for the remaining areas,” he added.

Eir's main rival in the process appears to be Siro, a joint venture between the ESB and Vodafone Ireland, which is investing €450 million in a fibre-to-the-building network, primarily aimed at 50 regional towns.

Other potential bidders could include new entrant Gigabit Fibre, fronted by former O2 Ireland boss Danuta Gray; UPC, which is now owned by Virgin, giving it extra financial muscle; and BT, which has exited the domestic market but maintains a foothold in the corporate market.

No one has put a figure on the overall cost of the scheme and, for obvious reasons, the Government is keeping shtum. At best guess, it is expected to cost between €500 million and €1 billion, with the Government stumping up half the cash in some form of public private partnership. An initial allocation of €275 million for rural broadband up until 2018 was announced in the Government’s latest capital spending plans.

The Minister has already signalled the tender will involve multiple lots, meaning more than one company could be involved.

The most controversial aspect of the tender is the relatively low bar set on broadband speed, with the minimum download set at a 30 mbps. When you consider that US telecoms watchdog FCC, the equivalent of Comreg here, believes speeds of less than 25 mbps no longer fits the definition broadband, this is hardly going to put rural Ireland on a digital fast-track, not with 4G and fibre broadband fast becoming the benchmarks.