Chapter 8.2 of the report of the Comptroller and Auditor General reads:
In my 2000 Report, I referred to the acquisition in 1999 by the State of large bandwidth capacity by way of a 25-year contract with Global Crossing Ireland Ltd (the company) for a significant block of fibre-optic communications links to a number of European cities and New York. The cost of the contract, which was subsequently re-negotiated at no extra cost, to include connections to other cities in Europe, the USA and Asia, was €77,140,24072. The project was designed to ensure availability of state-of-the-art competitively priced international connectivity to facilitate the development of Ireland as a significant centre for e-business. Connectivity was achieved by way of two submarine telecommunications cables landed in Wexford and terminating at an international high-speed bandwidth exchange (telehouse) in CityWest Digital Park in Dublin. The Government Decision approving the project, provided for the State to transfer to third parties its rights and obligations under the Agreement with the company on an investment recoupment basis. On foot of this, the State offered the capacity acquired, 160 STM -1s73, to the Irish market, as a result of which, contracts to a value of €80,784,124 were agreed with 6 telecommunications operators for the sale of 154 STM-1s. Payment was to be made in stages up to December 2002. Government approval of the project also provided for a proportion of the capacity to be made available for public interest and strategic initiatives in areas such as education and research.
The Department of Communications, Marine and Natural Resources (the Department) has responsibility for the project, which is managed through an inter-Departmental /Agency Task Force. Funding for the project is channelled through the Vote for Enterprise, Trade and Employment and IDA Ireland, which is also responsible for making payments under the supply contract to the company and for the collection of revenues due in respect of the onward sale of capacity. At the date of the 2000 Report, a balance of €23,287,620 was due to the company in respect of the supply contract.
At that time, as a result of financial difficulties experienced by certain telecommunications operators, only capacity-sale contracts with four companies were active. These were in respect of 73 STM-1s and had a total value of €38,440,500. However, by 2001, the companies were falling behind with their payments for the allocated capacity.
The 2000 Report concluded that, while the primary objective of providing large capacity bandwidth with low cost connectivity had been achieved, the contractual arrangements for on-selling the capacity were not satisfactory. Specifically, it stated that bonds and guarantees should have been obtained and it recommended that outstanding instalments from purchasers should be vigorously pursued. It also suggested that any reduction in the demand by telecommunications operators or further difficulties in the execution of contracts would have serious implications for the State recouping its €77m investment.
The Department contended that the project's economic and commercial value to the country should be measured over its 25-year life span and that difficulties encountered in recouping investment should be viewed against the backdrop of the very considerable global downturn in the technology and telecommunications markets, something which could not have been foreseen at the time. It pointed out that the project had been managed very tightly and had been instrumental in attracting and retaining a number of prestigious international investment opportunities in Ireland. It also stated that it would shortly undertake a value for money review of the project.
Supply Agreement
In January 2002, the parent company, Global Crossing Inc, and a number of its subsidiaries became subject to Chapter 11 proceedings in the USA in order to restructure their debt profile. Initially, the Irish subsidiary was not party to this process. It continued to provide the contracted supply and invested in the Irish network by constructing a second point of connectivity at Ballycoolin, Dublin, at a cost of €4m. Contract enhancements and price reductions were also negotiated during this period. In September 2002, the Irish subsidiary became subject to the Chapter 11 proceedings. In light of legal advice received and proposed improvements to the contract with the company, the final instalment of €7,762,540 in respect of the supply contract, was paid by the State on 16 December 2002.
The Accounting Officer informed me that the Irish subsidiary was still subject to the Chapter 11 process in the USA but the company continues to provide international connectivity per the Agreement. He stated that in order to protect the States investment, the Department had recruited US legal advisers and Irish counsel to monitor developments in the Chapter 11 process and to advise the Department and IDA Ireland on the appropriate courses of action. Among the significant improvements negotiated to the original contract was a wider more flexible product range and an option to request that the company transfer the Irish Ring 74 to a Special Purpose Vehicle (SPV). The Minister, IDA Ireland or a nominee may exercise an option to acquire this SPV in the event that the company is unable to meet its debts, fulfil its obligations under the agreements with IDA Ireland and the Minister or go into liquidation. These options would be exercisable subject to Government approval in the event of the companys liquidation.
The State did not exercise its options to purchase additional STM-1s or to purchase or lease dark fibres on the submarine cables.
The Department commissioned consultants to carry out a review of the Agreement with the company. Some shortcomings from the States point of view were identified and a number of recommendations were made in regard to future dealings with the company.
Sale of Capacity
It had been envisaged that the State, having acted as a facilitator in the provision of low cost bandwidth to the Irish market, would withdraw from the project having sold on capacity to telecommunications operators. Following the downturn in the global economy and the consequent fall in demand for connectivity, 80 unsold STM-1s remain in the ownership of the State.
The unsold STM-1s are reflected in the financial statements of IDA Ireland, where their net book value has been reduced from €24.1m at end 2001, to €3.1m at end 2002.
The Accounting Officer informed me that the Department and IDA Ireland had recruited a sales agent to sell unsold capacity on the Irish market but no further sales had ensued. He stated that it was intended to use some of the remaining capacity for national strategic purposes as appropriate.
Collection of Outstanding Debts
There have been difficulties in collecting moneys due on foot of the sales of the 73 STM-1s to four telecommunications operators. Although the main debtor made an agreed payment of €12.1m (VAT inclusive) in April 2003 in full and final settlement of amounts outstanding, the other debtors whohave outstanding bills totalling €12.9m (VAT inclusive) have been slow to settle their accounts. TheAccounting Officer informed me that IDA Ireland has commenced legal action to recover the moneys owed.
VFM Review
The Department commissioned a firm of consultants to conduct a study on the impact of the project vis-à-vis its original objectives and its direct and indirect impact on the Irish market.
It found that the project had achieved its objectives notwithstanding adverse market developments, but that gross costs to the State had exceeded original levels targeted due to a lower take up by the private sector. It arrived at this conclusion having noted the following:
Changes in the External Environment
Increases in the supply of interconnectivity since 1999 combined with weaker than expected demand had led to overcapacity. As a result, prices had fallen by more than the 20% per annum that was projected.
As well as the Global Crossing group being subject to Chapter 11 proceedings, there had been a dramatic fall in the value of telecom companies and a number had gone bankrupt.
The Cost of the Project
The likelihood was that the State would secure a lower than targeted take up by the private sector resulting in a significant direct cost to the State. This had also been the case for private sector investors in other telecom infrastructure internationally. In this case, however, there had been benefits to the State in terms of achievement of specific objectives of the project.
Effectiveness of the Project
The project had led to a significant increase in capacity and had contributed to achieving the objective of reducing the price of connectivity. The key industrial policy objective was to provide an important element of infrastructure in order to develop Ireland as an e-commerce hub in Europe and to encourage high-tech international companies to locate in Ireland. The achievement of this objective had been affected by adverse developments in the external environment. However, available data suggested that growth in the period to 2001 had been positive in those sectors that are large users of interconnectivity. Information from surveys carried out by the consultants had suggested that most respondents believed that the project was important in achieving a range of industrial policy objectives.
Cost efficiency
In determining the level of cost efficiency achieved, the consultants accepted the importance of global rather than regional or European connectivity. This was confirmed by its research with leading companies and industrial development agencies. It believed that the necessity for Government intervention to incentivise operators to provide such connectivity should have been examined more comprehensively and explicitly as part of the planning process. It suggested that it would have been preferable for the State to have entered a joint project where all risks were shared between the public and private sectors as originally envisaged, but it understood that this did not prove to be feasible. The fact that the project had the potential to result in costs for the State was clear because of the uncertainty regarding demand. In the circumstances, the issue for Government should have related to whether the benefits of lower prices and other industrial development benefits had been sufficient to justify the costs. Except for this reservation, the consultants were of the opinion that the project represented good value for money.
Future prospects
The consultants' assessment was that while the demand for international connectivity was slow, growth prospects were positive. The prospect of significantly better performance depended on a pick up in Information Communications Technology (ICT) growth, the development of Ireland as a relatively attractive location for e-commerce, and the development of new applications. Under the most likely scenario, there was sufficient interconnectivity capacity for the foreseeable future.
The Accounting Officer said that the project achieved its stated objective of providing sufficient levels of competitively priced international connectivity for the ICT sector in Ireland. He stated that perhaps a more rigorous ex-ante evaluation could have been conducted but, in light of the timescale involved, the Department and IDA Ireland needed to move quickly and that if the Department and IDA Ireland had not acted when they did, there would be a real risk that Ireland would be without sufficient levels of competitively priced international connectivity with all the ramifications that that would have for the Irish economy. He also stated that the project remains a very important factor for IDA and Enterprise Ireland in retaining existing high technology companies and attracting high profile international operators to Ireland as evidenced by the recent decision by a leading internet company to locate in Dublin.
The purpose of this part of the chapter is to bring the committee up to date on an issue raised in my 2000 annual report, that is, the acquisition of a large block of fibre optic communication links to a range of European cities and New York which have since been extended to other cities around the globe, and the subsequent sale of that capacity to the telecommunications operators. The State paid Global Crossing Ireland Limited €77 million for the capacity, the last instalment of which was paid in December 2002. As members are aware, the parent of the Irish subsidiary became subject to Chapter 11 proceedings in the US in January 2002. In the meantime the Irish company has been similarly enjoined. This process is ongoing and clearly creates a measure of uncertainty about the continuity of supply which will depend on the nature of the outcome of the Chapter 11 proceedings. In the event that the outcome is not benign, the degree of protection of the State's interests contained in the supply contract with Global Crossing will undoubtedly come under scrutiny.
On the other side of the coin - the sale of the capacity - the State managed to sell on only half of the available capacity. The slowdown in the global economy with the consequent fall in demand for connectivity and an oversupply of capacity changed the business environment from that pertaining when the capacity was acquired. This factor also had implications for the collection of outstanding instalments from the companies to whom the capacity was sold. At the date of my report, €12.9 million was overdue from three companies.
The committee will also note that after I last reported on the matter, the Department commissioned a value for money review of the project. The consultants concluded that the project had met its primary objective of providing sufficient levels of competitively priced international connectivity for the ICT sector in Ireland. It had one reservation, that it would have been preferable to have an arrangement whereby the risks could have been shared between the State and the participating telecommunications operators including a more thorough ex ante evaluation. The consultants were of the opinion that the project represented good value for money.