Our team and three other teams have suffered this contract for three or four years, and nobody asked for it. It sticks by procurement law, state aid law and contractual law. It is a commercial contract, which needs to be commercially enforceable within the Department, through the Commercial Court or whatever. We are covering every nook and cranny of the contract and making sure on behalf of the State that it is tight. If, unfortunately, we ever end up in the Commercial Court with any commercial company, it needs to be tight. It needs to be enforceable and it needs to be possible to penalise companies if they breach the rules of the contract.
We need to understand the regulation versus the contract. In an significant market power, SMP, environment, ComReg hands down obligations on a commercial company. No state aid is involved. There is no requirement under regulation for any company to spend any money and there is no requirement on the State to spend any money. When ComReg hands down regulations it is based on the status quo, that Eircom will invest in the 300,000 premises in the knowledge that they would be regulated, but they negotiate the type of regulation with ComReg. The regulation outlined the terms and conditions last October. If ComReg finds that regulation has been breached and that it is non-compliant, the next stage is the Commercial Court. It is a very difficult process in regulation and does not cover many of the things in the contract. Let us take any of the clauses and schedules of our contracts, for example, the deployment schedule. It is page 13 before one gets to the schedules, which is the body of the requirements. The clauses are normal contractual clauses that one would find in any typical contract. When people say that the contract is complicated, the first 13 pages are standard contractual terms that one will find in typical PPPs, such as in the Building Digital UK, BDUK, contract with BT. Most of what is in those clauses was in the national broadband scheme contract with Three back in the day. It is a mixture of those which has gone through iterations to be tailored for the NBP process.
I refer to schedule 2.3, No. 97, on page 13. It refers to deployment requirements, which require the bidder to stick to milestones, quarter by quarter, year by year, for 25 years of what they have to do and when they have to do it. If they do not do X, Y, and Z, they will not be paid. That is an example of a part of this contract over which ComReg would have no jurisdiction under regulation. Schedule 2.5 contains environmental obligations which, again, ComReg would not hand down; they will be dealt with by county councils. Schedule 2.6 sets out demands on the bidder to set out a communications plan, a demand stimulation plan and a brand plan, over which ComReg would have no jurisdiction. Schedule 5.2 which is on the next page sets out wholesale prices, benchmarking and product rules. We benchmark to what ComReg does. The key point is that ComReg has no role in affordability of pricing to end users - we can discuss connection charges later. ComReg is there to regulate whatever costs Eircom believe it costs and to ensure that those are efficiently incurred costs but it has no role in the current regulatory regime to say the prices are capped and companies cannot charge customers X, Y, or Z. They are subject to retail-minus rules and to a different rule for connection charges, which was decided last October, when Eircom put forward a proposal, ComReg did not intervene and, as a result, people can be charged multiples of €170 depending on whether they change retail providers. The current connection charge is more than €170, but it can be multiples of that depending on how many switches a customer makes.
Many different rules are in the regulation and they are covered for different reasons compared to a state aided project. Under state aid, ComReg has no role to review how much is spent by the bidder on behalf of the State. It has no role in clawing back or monitoring that money. It has no legal power to do any of that; its legal powers come from regulations handed down by Europe when people are designated with market power absent state aid. That is a critical point. That adds another layer of complexity for Eircom as a business. It deals with a complex regulatory framework. I recall a meeting with a previous Eircom CEO who had not long joined and he told me that the regulation was so complicated that it was like walking into the cockpit of a plane, having never flown a plane before, but the regulatory framework handed down to telecommunications operators is a complicated area. We have reflected much of that complication in the contract because it is necessary but, unfortunately, the state aid rules handed down by the Commission means another layer of complexity is added to that which one must contract. Nobody asked for the process to be complicated, long or expensive but the rules of the Commission and of procurement law to ensure a level playing field and equal access to a procurement process by everyone who wants to participate if they qualify lend themselves to a very complicated and difficult process. In 2015, allowing all bidders equal access to the infrastructure - ESB, Eircom, Enet, masts or towers or whatever, was a very complex area to get under. The consequence of not doing that job properly was that no one would have bid because they would have felt there was no infrastructure to use, and they would not have known the pricing or products so how could they design a network? We will come to the over build of 300,000. It plays into the issue of bidders not being able to bid on something if they do not have clarity on products and pricing. That makes it very difficult.
Then there is the matter of wholesale access on number G, and what Eir has referred to as an added complexity of additional standards of service which needs to be applied. We dispute the added level of service.
Under state aid rules, paragraph (g) of section 78 says subsidised companies, which are different from regulated companies, should provide a wider range of wholesale access products than those mandated by NRAs under sectoral regulation to operators with significant market power. In this case, it would be Eir. That is because the aid beneficiary is using not just its own resources but taxpayers' money to deploy its own infrastructure. The rules provide that such wholesale access should be granted as early as possible before starting the network operation. That will include dark fibre, full unbundling, virtual unbundling access, bitstream and the entire suite of products retailers and wholesalers will expect this network to provide. If someone wants to deviate from that, the European Commission will say "No". One cannot deviate from that because it is state aid. When one is in a regulatory environment, a regulator and an incumbent can generally negotiate because they need to reach an outcome. We are somewhat shackled, which is the right word, but appropriately so because state aid is involved and the rules of the European Commission apply.
If Ireland approached the Commission and asked if it really needed X and Y, the first thing it would say would be that if Ireland was exempted, Germany, France and Italy would have to be exempted too. The rules are the rules and they were set out in 2013. As far as the Commission is concerned, they constitute a legal instrument and it does not deviate from them. It will not allow a member state to deviate. We have to get a European Commission state aid decision or we will not be able to spend any state aid. Until that decision is awarded to Ireland, which we expect it will shortly be, the state aid cannot be spent. It is a circular thing. One could say we do not have to abide by these rules, but if one does not, one will never get a state aid decision. Under the rules, one has to run a thorough, open access procurement process which one ensures can be competitive. The Commission provides for the event in which that process is not competitive. It does so because across Europe, there have been uncompetitive processes. We have used the UK as an example before, but it is across the board. I saw a presentation seven or eight years ago from DG Competition which said 80% of state aid projects went to incumbents. The rule of thumb was that the incumbent generally won because it held all the cards. That is normally what happens in a process because the incumbent will have economies of scale and an advantage over others. The Commission is trying, through these rules, to rebalance that and it places a significant burden on member states to achieve it. That is exactly what we did. We followed the Commission's rules and today we have an operator that does not own the poles and ducts entering a process to use them. It is a regulated operator and comfort is being taken from that fact. It will go forward to propose to build a network on those poles and ducts.
In terms of how the Commission says one deals with a single bidder process, that is referred to in paragraph (i) of the section. It provides that monitoring and clawback mechanisms are an absolute requirement. One must monitor and that goes back to the onerous obligations in our contract in terms of clawback. As such, the Commission has envisaged a single bidder process. I go back to the UK and everything else. In that event, the Commission refers to a scenario in which future costs and revenue developments are surrounded by a high degree of uncertainty, which some might say they are here, and there is a strong asymmetry of information. With a Department and network operators and providers in the market, they are the experts and we are the authority and sometimes an asymmetry of information can exist. In that case, the Commission says the public authority, namely, the Department, may wish also to adopt a financing model which is not entirely ex ante but which is rather a mix of ex ante and ex post. An example would be clawbacks to allow balanced sharing of unanticipated gains. As Mr. Griffin said, we have a €2 billion subsidy for the bidder and we have a contingency set aside of €480 million. As we have explained before, that is all based on a thorough clawback mechanism on build costs, unanticipated gains in terms of excess profits for the operators and on the value of the business at the end. That is part of the process. The Commission does not set out the percentages but rather says it is up to the member state to negotiate the best possible percentages which we believe we have in the circumstances while balancing the incentives for the operator to maximise the output of the network and its success on a commercial basis.
People are being unfair in alluding to an unnecessarily complex and protracted process that has been unfair to some bidders. We do not believe so. It required substantial bidders with deep pockets to bid and that has cost a great deal of money. That is just the nature of the process. We are still at it. After 2016, 2017 and 2018, there is nothing we have done that people in other member states would not have had to do.