It is clear that developments at EU level, as outlined by me last night require fundamental changes in the regulation and administration of telecommunications in Ireland. These changes must take place against the background of the Government's objectives for the sector. The Government's key objectives is to achieve a telecommunications sector which is in the top quartile of OECD indicators of price competitiveness, quality and availability as soon as possible. The Government believes that such a sector will play an important part in maintaining and developing Ireland's economic competitiveness. Before outlining the steps which are being taken to achieve this objective and the role of this Bill in this context, I would like to briefly review the current status of telecommunications in Ireland.
The function of providing telecommunications services in Ireland was transferred from the former Department of Posts and Telegraphs to Telecom Éireann on its establishment on 1 January 1984. Telecom Éireann's function is to provide a national telecommunications service within the State and between the State and the rest of the world. It has the duty to meet the needs of the State for comprehensive and efficient telecommunications services and to satisfy all reasonable demands for such services throughout the State, so far as is reasonably practicable. This is the company's universal service obligation. The company has the exclusive privilege of offering, providing and maintaining the public telecommunications network and voice telephony services. In addition, Telecome Éireann is the only undertaking licensed to provide international public infrastructure and international voice telephony services. The company's privilege, as originally granted, has been narrowed as areas of the sector have been opened up to competition.
Investment in telecommunications has been an important component of productive infrastructural investment in the Irish economy since the late 1970s. More recently, the scale of investment has remained at an impressive level. Total investment since 1985 has been of the order of £1.9 billion. This investment has generated tangible results in terms of the capability and quality of the infrastructure. At this stage 75 per cent of the national backbone transmission network is based on optical fibre and 80 per cent of Telecom Éireann's customers are connected to digital exchanges. This is on a par with the most advanced networks of other member states. However, investment continues to be required to meet the growing demand for new services, such as mobile communications, and enhance the ability of the network to provide widespread advanced services. In particular, this requires further investment in the customer access network.
As regards market development, Telecom Éireann has 1.3 million lines in service giving a national telephone density of 35 per cent. This has grown from 28 per cent in 1990 but lies well behind the EU average of 48 per cent. The Government is determined that this gap should close over the medium term.
As regards telephone tariffs, Ireland has historically had high average charges for telephony, although some elements have been provided below cost. However, in recent years, in preparation for competition, charges have been substantially adjusted and this had led to a better alignment between costs and revenues. Since 1990, all charges including rentals and local calls have fallen significantly in real terms. Overall reductions of the order of 40 per cent in real terms have been achieved, and long distance prices have fallen by over 60 per cent. Despite this achievement, Ireland still has a relatively high level of telephony prices compared to many of our EU partners and certain prices are still out of alignment with costs.
Telecom Éireann has made significant progress in improving its financial position in recent years. Its debt level has been reduced from two and a half times annual turnover in 1985 to 60 per cent in the year to March 1996. While this level is now comparable with some other public telecommunications operators, further progress is required to give Telecom Éireann the same financial flexibility enjoyed by others. An important aspect of the delivery of telecommunications services, like in all other areas of business, is the need to provide the optimum customer service. Telecom Éireann has made considerable progress in this area. I welcome the publication earlier this year of its customer charter.
Apart from Telecom Éireann, the Irish telecommunications sector includes a number of other service providers. These operators are entitled under licence to provide services outside of Telecom Éireann's exclusive privilege. Approximately 30 of such service providers are licensed to provide liberalised services. In addition a second operator has been licensed to provide GSM mobile telephony in competition with Eircell, which has been established as an independent subsidiary of Telecom Éireann. Another segment of the sector, the provision of terminal equipment, is fully liberalised and no licence is required.
Apart from the second GSM operator, licensed service providers are not currently entitled to provide or use infrastructures, other than lines leased from Telecom Éireann, satellite networks or cable television networks, for the transmission of the services which they are licensed to provide.
Having briefly outlined the current position regarding telecommunications in Ireland, I will indicate the main features of the Government's programme for the achievement of our objectives for the sector. The main elements are: the further development of Telecom Éireann as a major player, providing high quality telecommunications services in both monopoly services and emerging competitive markets; the establishment of an independent regulator for the telecommunications sector; and the liberalisation of the market to allow full competition.
To accelerate the further development of Telecom Éireann the Government and the company have agreed it should form a strategic alliance with a major telecommunications operator. Furthermore, it was agreed the best way to secure a successful long-term strategic alliance would be to enable the partner to take an equity stake in Telecom Éireann. The Government and Telecom Éireann sought a partner which would have the necessary commercial and technological experience and capabilities and commitment to support the company in growing and developing its business.
The Government approved a mandate for negotiation of a strategic alliance in July 1995 and, following an open and competitive selection process, the Government in July of this year approved the signature of an alliance agreement with KPN/Telia. The details of the selection process and the main features of the agreement with KPN/Telia have already been outlined in the House so it is not necessary to go into detail on these issues.
The second major element of the Government's strategy for the sector is the establishment of an independent regulator. Up to now, the regulation of the sector has been a function of the Minister. The Minister is, at the same time, the shareholder of the major player in the market and responsible for the overall development of the sector. With the emergence of competition in the Irish telecommunications market, it is appropriate that the regulation of the sector be seen to be independent from the Minister's shareholding and sectoral development functions. This separation is also a feature of telecommunications development in most of our EU partners and a requirement of pending EU legislation. It is all the more appropriate given the strategic alliance deal in which the Minister, as Telecom Éireann shareholder, will have a shareholding relationship with a consortium of international public telecommunications operators.
The legislative measures necessary to establish the regulator are outlined in the Bill. I will elaborate on these provisions later. It is the Government's intention to establish a multi-sector regulator covering energy and communications at a later date when the drafting of necessary legislative provisions is completed. The functions of the telecommunications regulator will be subsumed into this body on, or shortly after, the establishment of the multi-sector regulator.
The third element of the Government's strategy for the development of the telecommunications sector is the liberalisation of the market to allow full competition. The Government has decided to remove all remaining restrictions on full competition so that the market will be fully liberalised by 1 January 2000. While full liberalisation will take place from 1 January 1998 in the European Union, some member states, including Ireland, have the possibility of deferring liberalisation for up to five years. The Government has decided not to avail of the full five years in order that the benefits of competition can be experienced as soon as possible. However, the Government was concerned to ensure that when full competition is allowed Ireland should have a strong national telecommunications operator in Telecom Éireann, capable of withstanding the rigours of competition and growing further in that area. The Government believes the ongoing transformation and development of Telecom Éireann as a customer-focused and market-oriented company will have reached the stage by the year 2000 where it will be in a position to compete against new entrants to the liberalised Irish telecommunications market.
This Bill is aimed at putting in place some of these key steps in achieving the Government's objectives for the telecommunications sector. The measures in the Bill can be grouped into three main areas. First, the Bill provides for the establishment of the director of telecommunications regulation and transfers the Minister's existing telecommunications regulatory functions to the director. Second, it will make the necessary legislative amendments to permit the strategic alliance agreement with KPN/Telia and the share transactions which will underpin the deal. In this regard, it makes some changes to the relationship between the Government and Telecom Éireann that are appropriate to a situation where the company has shareholders other than the Government. Third, the Bill provides for a new method of telecommunications tariff control, initially by the Minister and ultimately by the director of telecommunications regulation.
The establishment of the office of the director of telecommunications regulation is provided for in section 2 and further provisions regarding the director are set out in the First Schedule. The director will be in a position within the Civil Service and the appointment will be for a period of up to six years. Section 5 requires the Minister to provide, in consultation with the Minister for Finance, staff, premises, equipment and other resources required by the director for the performance of his or her functions.
The office of the director will accordingly be staffed with Civil Service staff transferred from the Department of Transport, Energy and Communications but the director will have power to acquire externally sourced staff subject to approval of overall staff numbers by the Minister for Finance. While the Bill provides that the Minister may delegate his powers in relation to the transferred staff to the director, thereby giving the director full control over those staff, the Government has decided that the Civil Service staff will be seconded to the office of the director and thus will nominally remain officers of the Minister. The position will be reviewed in the context of the establishment of the multi-sector regulator and the integration of the director's functions with those of the multi-sector regulator.
Sections 3 and 4 sets out the functions of the director. The functions are those transferred from the Minister under section 4 as well as further functions conferred by the Bill. The director's functions will mainly involve the issuing and enforcement of licences for telecommunications service providers, for the use of the radio frequency spectrum, including the use of the spectrum for broadcasting, and cable television infrastructure. The director will also have responsibility for tariff regulation after the first tariff order is made by the Minister. I will outline the tariff regulation provisions later. The Bill includes powers, in section 12, for the director to appoint authorised officers to obtain information necessary for the performance of the director's functions.
The Bill provides that the director shall be independent in the exercise of his or her functions. This is a key principle underlying the establishment of the office of director. Consistent with this principle, section 6 provides for the financing of the costs by the director in exercising his or her functions. The director will retain fees which are payable under the transferred licensing functions and may also impose a levy on providers of telecommunications services. The levy will be raised through a levy order by the director and used to meet the director's expenses. It will also be used for the payment by the Minister of Ireland's membership charges to international telecommunications organisations. The director will only be permitted to retain the amounts which are necessary to meet the costs of providing the regulatory services and if there is any surplus it will be surrendered to the Exchequer.
The second main purpose of the Bill, to which I referred earlier, is to provide for the Telecom Éireann strategic alliance. Section 8 removes restrictions contained in the Postal and Telecommunications Services Act, 1983, on the issue and transfer of shares in Telecom Éireann, thereby enabling Telecom Éireann's strategic partner to take an equity stake in the company. The section places a lower limit on the shareholding of the Minister and the Minister for Finance in the company: their aggregate shareholding shall not be reduced to less than a majority of the issued share capital. Section 9 enables the Ministers and the company to enter into agreements related to the sale and issue of equity in the company. Such agreements may cover a wide range of issues connected with governance of the company, investments and other matters. The strategic alliance arrangement with the KPN/Telia consortium involves three agreements: a share purchase agreement, under which the consortium will acquire its equity stake in the company, a shareholders' agreement, which set out the framework for the relationship between the Ministers and the consortium in regard to the governance of Telecom Éireann, and an agreement on strategic co-operation setting out the contributions to be made by the consortium to Telecom Éireann at strategic and operational levels.
An important component of the strategic alliance transaction and in the achievement of the benefits of the alliance is the opportunity which will be afforded to the staff of Telecom Éireann to share in the growth of the company. Section 8 enables the company to issue, and the Ministers to transfer, shares in the company for the purpose of employee shareholding schemes. As part of the mandate for the strategic alliance negotiations which the Government approved at the start of the process, the Government indicated that, subject to certain conditions, they were willing to consider setting aside up to 5 per cent of the share capital for an employee shareholding scheme. The Government's intention is that the terms under which the shares will be issued will be to encourage active participation by employees as shareholders in the company and that the scheme should facilitate the change management process within the company leading to the continued improvement of the company's customer service, quality and commercial success. Detailed negotiations with the staff on the restructuring of the company and on employee shareholding have yet to take place. I am aware that staff representatives have expressed interest in a larger employee shareholding. If negotiations result in an agreement among all parties, including the strategic partner, which would assist in the future development of the company and if such an agreement involved practical and feasible arrangements by the staff to purchase at full value shares in excess of 5 per cent I will be prepared to put appropriate proposals to Government.
Section 10 of the Bill also relates to the strategic alliance issue. It modifies the Worker Participation (State Enterprises) Acts, 1977 and 1988, in relation to the number of employee directors to be appointed to Telecom Éireann. Currently, under those Acts, the number of employee directors of Telecome Éireann is one-third of the total number of directors of the company, which has been set at 12. The Government has agreed in the context of the strategic alliance transaction that the partner will be entitled to appoint three directors to a board of 12. In order to preserve the Minister's majority position on the board to reflect the Government's majority shareholding, the Government has agreed in the context of the transaction to reduce the number of employee directors to a number which does not exceed one-third of the number which the Minister is otherwise entitled to appoint. Accordingly, the Government has agreed that the Minister should appoint seven, including the chairman and the chief executive, and that the number of employee directors to be appointed under the worker participation Acts should be two.
I am aware of the possible implications from an employee representation point of view of a reduction of employee directors from four to two. However, this solution was driven by the need to preserve effective control of the State's majority shareholding, the representational interests of the strategic partner, the objective of maintaining a small to medium sized board for the purpose of effective governance and the need to have meaningful employee representation at the key decision making forum in respect of company operations. I am, however, open to any suggestions, proposals or amendments that may emerge from consultations with the trade unions involved and interested parties as to how the employee issue could evolve. If agreement is reached and if such agreement requires changes to the text of the Bill, new proposals could be introduced on Committee Stage or, if some form of agreement could not be reached quickly, the matter could be dealt with in subsequent legislative proposals during 1997. I would like to emphasise that State representation on the board is also being reduced and employee director representation is being kept at the highest level possible consistent with the need for majority control by the State as majority shareholder on a 12 person board.
The third main purpose of the Bill which I mentioned earlier is to introduce a new method of regulating telecommuncations tariffs. Currently the Postal and Telecommunications Services Act, 1983, allows Telecom Éireann to set rates and other terms and conditions for its telecommunications services but the company must obtain the Minister's approval for price increases. Service providers licensed to provide services outside Telecome Éireann's exclusive privilege are not subject to price control. The Government believes that tariff regulation remains necessary for services offered in markets which have not reached a sufficient level of competition to ensure that tariffs will remain at reasonable levels. However, regulation of the tariffs for such services should enable Telecom Éireann to position itself for a competitive environment by giving it flexibility to adjust tariffs to better reflect its costs while, at the same time, capturing for consumers a share of the benefits of increased efficiency and driving overall tariffs in Ireland closer to relevant international comparisons.
After reviewing the various approaches, the Government has decided to employ a "price cap" type system of tariff regulation for services that are not subject to full competition. The price cap is a common tool of price control in markets approaching liberalisation where there is a need to ensure that consumer benefit from price reductions while at the same time affording the telecommunications operator the opportunity to restructure charges in advance of competition. Under the price cap system, charges are limited for defined ‘baskets' of services but the service provider has some flexibility to adjust tariffs for individual services within the baskets. This confers freedom to restructure tariffs with reference to growing competition as well as strong incentive to increase efficiency. Section 7 provides that the Minister may make an order specifying a price cap for a specified basket of telecommunications services provided by a company. The price cap order will specify that the combined prices of the services included in the basket will not increase beyond a specified level and this level will be set at a certain percentage below the consumer price index. This will ensure that prices will fall in nominal as well as real terms. This function will be transferred to the director along with the Minister's other regulatory functions. However, to allow companies a stable environment in which to implement business plans, any price cap order which is in force at the time of the transfer will not be subject to review the director until two years after it is made and then only at the request of the Minister. However, the director may modify the order on the basis of that review. Five years after the price cap order has been made by the Minister, the director may review and modify the order on his or her own initiative.
Apart from the three main areas covered by the Bill, which I have just outlined, it also makes technical amendments to the Postal and Telecommunications Services Act, 1983 regarding the pension arrangements for persons who were members of the staff of the former Department of Posts and Telegraph and who retired or died before the day on which the transfer of staff from that Department to Telecom Éireann and An Post took place. The amendments underpin practical arrangements which have been put in place for the discharge of the liability of the Minister for Finance relating to those pre-vesting day pensioners of Telecom Éireann and An Post.
The remaining provisions deal with offences and penalties for breaches of provisions repeals of provisions of certain enactments, the procedure for laying of orders before the Houses of the Oireachtas, the payment of the expenses of the Minister in the administration of the Act and the commencement provisions. In relation to the repeals, these are required mainly to update the corporate governance framework applying to Telecom Éireann having regard to the strategic alliance. A number of the provisions of the Postal and Telecommunications Services Act, 1983 which apply jointly to Telecom Éireann and to An Post are being repealed in so far as they relate to Telecom Éireann only. As regards commencement of the Act, section 17 provides that the Minister may by order bring different provisions of the Act into force at different times but at the latest the whole Act will come into force ninety days after it is passed.
I have outlined the background to and the main provisions. I would draw the attention of the House to the fact that the telecommunications sector is undergoing an unprecedented period of growth and development. This sector is becoming increasingly important as a facilitator of economic and social growth and wellbeing. The Government has decided that the telecommunications sector in Ireland must be in the top quartile of international indicators of price competitiveness, quality and availability by the end of this decade. The steps provided for in this Bill are essential to enable this target to be achieved. I commend this Bill to the House.
