I thank the Seanad for providing time for statements on this matter. This is a really important investment for the future of the country. Since Telecom Éireann was privatised 20 years ago, we have been totally dependent on the private sector to deliver the telecommunications services we need. It has been very successful and, for 75% of the population, a very good service will be rolled out. It is on track to be delivered. Recent announcements indicate that it will be in the form of fibre to premises in urban areas. However, the other 23% of the population amounts to 1.1 million people. They are on 56,000 farms which account for 68% of all farms in the country; in 44,000 businesses, including small enterprises; 764 schools; and 540,000 premises, whether homes or businesses. It is a significant segment of the population. Given the impact of the digital transformation on our society, access to high-speed broadband will be as essential as rural electrification was many years ago. It is really important that significant parts of the community, particularly those living in more rural parts, not be cut off from full participation in the opportunities digital transformation will provide. Worse still, there is the risk that such communities will be hollowed out as activity moves towards the centres that are properly served. This is an important commitment which has been at the heart of the Project 2040 strategy to deliver compact, sustainable but connected development. We want to move away from the high concentration on Dublin city and see other parts of the country grow and thrive with strong and vibrant centres.
Since Telecom Éireann was privatised, the total spend by the State on telecommunications infrastructure has been the €400 million spent on the metropolitan area networks, MANs. From 1985 to 1996, before telecommunications services were privatised, investment by the State was running at €2 billion. We have only spent €200 million per decade in the intervening 20 years, one tenth of the earlier figure, not taking the deflated value into account. This contrasts with the level of investment in other areas in which we have rolled out significant investment. We have €11 billion in water services and close to €40 billion in road construction. We recognise the need to connect many parts of our investment strategy to make sure all parts of the community will be treated equally. It is important that we adopt this position on future participation in the use of one of the most powerful technologies.
Because state aid is involved we have to give the private sector every opportunity to carve out the parts it wants to serve. The State can only intervene in those areas where the private sector will not provide a service. Members will recall that Eir decided, after the initiation of the national broadband intervention concept, to carve out 330,000 homes and premises to which it would deliver service, which was entirely its entitlement.
With reference to evaluation, many people talk about why the gap-funded model was chosen. It was done after very careful evaluation of the alternatives. Essentially, the reason the gap-funded model was considered to be the optimum was we wanted to recognise there was a core service - it is now privately owned - and to build out from it 146,000 km of fibre that would be connected to the core, to be done in the cheapest way possible. The cheapest way possible is using the existing poles and ducts of either the ESB or Eir in most cases and the MANs structure. That clearly meant the asset we were going to create was going to involve the rolling out of fibre, predominantly on rented infrastructure from the existing provider.
The other factor that bore very heavily was not just the cost factor but also non-financial performance capacity, that is, the capacity to deliver it in a way that would be sustainable and meet the growing needs of the rural community we were seeking to serve. The very strong result of the evaluation was that it was much more preferable to have the entity that was designing, building and operating the scheme also responsible for ensuring there would be a very high take-up and that the technology and infrastructure would be future-proofed and that we not have the investor allowing the infrastructure to be run down in anticipation of a date at the end of 25 years when it would be handed back and it would no longer have influence over it. They were very important features that led to the choice of using a gap-funded model.
Nonetheless, many people ask whether there was sceptical scrutiny. We have seen, as it is in the public domain, some of the sceptical scrutiny in the Department of Public Expenditure and Reform. It was entirely its entitlement to engage in such sceptical scrutiny. A system needs that scrutiny to ensure it is robust. However, I can assure the House that, whether it was about costs, affordability, uptake projections, risks, the single bidder process or the alternatives considered, every one of those concerns was considered in triplicate. As I recall, five options were considered in 2015, while ten were considered in 2018 when, for the first time, we saw a market-tested cost emerge. Even this year, a further three options were evaluated by the team that has been doing the work. It is not the case, therefore, that we have not looked at the alternatives. We looked at the alternative technologies and ownership models, including those that would involve rolling out the service slower or breaking it up into smaller parcels. All of the options furnished have been evaluated, including the option of either using the ESB or a State agency.
It is worth saying because a lot has been suggested about it that the ESB entered the tendering process. It was one of the three bidders which went through the first phase. However, at a certain point, it decided that it would not proceed. Clearly, in a fair and equitable tendering process one cannot, with one tenderer having dropped out, go back to that tenderer at a later stage as it would not be fair and equitable to those who had continued. Therefore, one would have to end that process before one could consider the ESB. Having ended the process, it is very clear under state aid rules that one would be obliged to initiate a fresh procurement process. It is not open to the State to allocate a state aid package of any sort to an economic entity, certainly not one which is a commercial State-sponsored body operating in the marketplace. One would have to have a fresh procurement process. As to the outcome at the end of such a procurement process which would take two and a half to three years, we would not know who would win - it could be the ESB or some other agency - but we would have lost considerable time.
The other point is that the ESB went a fair distance with its application; therefore, we know a fair amount about its cost structure. There is no reason to believe the cost structure being delivered by the ESB would be cheaper than that offered by Eir, which continued on in the competition, or Granahan McCourt. Both Eir and Granahan McCourt made comparable bids in terms of cost.
If Senators wish, I can go into the system of evaluation of the alternatives and the review of costs. I should also comment on the issues of risk which have been raised. We have adopted a novel approach to risk in this area, which I believe is prudent. Under the contract, the core cost figure we have negotiated is €2.1 billion, but we have recognised that there are certain risk factors. Through a number of elements of the contract, we have contingency funds agreed to which are capped from the State's point of view. They cannot exceed €480 million, excluding VAT, and can only be drawn upon in the event that audited events occur that trigger the drawdown. Therefore, we have been very careful to ensure that, unlike on other projects that have been subject to criticism, the State will in no way be exposed to any escalation in cost or any disappointment in the take-up of the scheme.
Some commentators have suggested take-up might be very low. First, I have no reason to believe the take-up in rural areas will be lower than in urban areas. It is very important to make the point that should it happen, the risk will be entirely carried by the provider, not the State. By contrast, if the take-up is better than projected, the State will claw back 60% of the extra profits earned. What we have done in the contract is we have gone through the risks with a very fine tooth comb. That was absolutely appropriate when there was only one bidder remaining. We have looked at international benchmarks, evaluated each cost element and each risk and negotiated and nailed down the limits of our risk on the project.
It is also worth saying that at the end of the project we will have a relatively small private company. If it hits its projections, the company will have a turnover of €150 million in 25 years' time. Therefore, it will be less than one tenth of the size of Eircom, which already has a turnover of €1.3 billion and is growing significantly. This will be a very small player. That puts in context some of the commentary on the initial equity and the responsibilities of the company. The successful bidder will be responsible for meeting €2.4 billion of the overall cost of designing, building and operating the scheme. The State is committed to providing €2.1 billion in a good outcome or, in the worst case, €2.6 billion. Of course, some of the €2.4 billion will be delivered by its initial equity - €175 million - and its working capital - €45 million - but the balance it will have to provide either by putting in more equity, raising further loan capital or earning user fees. It is very important to note that it will have that exposure. If there is disappointment on the cost or take-up front, it is the company which will carry the risk. It is important to put the matter in context.
This will not be, as some have described it, a monopoly company operating in a way in which it can rip off the public. This company will be confined to being a wholesale provider and, therefore, it cannot enter the retail market and compete with others. It will be obliged to provide open access to the networks so any one of the existing private providers will be able to go on to this network and deliver services. The company will have a capped fee. It only can earn, from those who subscribe, €100 for a connection and €30 per month for usage. That is a control fee based identically on the ComReg control fee that applies in urban areas. The company will operate in a very regulated market.
In addition, we are putting in place a very detailed governance arrangement to which it has signed up. We will have access not only to the detailed cost returns where the State will ride shotgun to ensure that the €480 million contingency fund is not drawn upon except in entirely justifiable circumstances - we will police that - we will also have information about the operation of the company. We will have an appointee to the board. The work of this company will be to deliver on a Government contract. This is unlike other scenarios where a public interest director has been put in place. There has been some concern about the role of a public interest director, for example, for a bank because a bank's role is to make a profit for its shareholders. This company's role is to deliver on a Government contract.
There are additional protections for the State. We only pay on completion of the roll-out. We will pay in arrears so we will only have paid whatever sums are drawn down from the €2.1 billion as and when the homes or premises have been passed and connections have been made. We do not pay upfront. We will not give out money to a private company. We will pay for the verifiable rolling out of fibre on the network, as required. As I have mentioned, we have built up clawbacks. Not only will there be a clawback on profits, but there will be a clawback in the event that its terminal value is greater than expected or that it is sold at any point before the 25 years are up.
The reason we have chosen this model is that while the State is stepping in to make sure that the 146,000 km of fibre are rolled out to those 1.1 million people, importantly, we want to do so in a way that leaves this network able to stand on its own two feet at the end of the process. This company is committing not only to run the service during the 25 years when there will be State support but also for ten years beyond that without State support. That is an indication of its commitment.
The advantage of that model is being seen in that the minimum contract that we specified was a 30 Mbps service. This company will start on day one with 150 Mbps service and will, by year ten, deliver 500 Mbps of service. The private sector is recognising that if it is to operate this network successfully then the service will have to be future-proofed and it will have to deliver it to the highest standards that are required.
Some Senators may also be interested in the benefit-to-cost ratio that has attracted some commentary. The ratio has been established on the most conservative of assumptions about the time savings that people will make based on their existing activity on the Internet, and the existing level of remote homeworking, which is 4% for white-collar workers. The ratio is based on small numbers as follows: less than 10% of farmers adopting digital technology to improve the operation of their works; a small proportion of sole traders using digital technology to transform their business; and a low assumption about the job creation potential that will come from those 100,000 enterprises in the area and the potential new enterprises to come. Those elements have been conservatively measured and, even so, the benefit exceeds the cost by 30%. The reason we are doing this is not to sustain remote working at 4% or existing levels of activity on the Internet. We are providing this scheme in order that remote working can grow and people can have a better lifestyle and use remote working more. Multinationals will only allow their workers to work remotely if they have secure access such that fibre provides them; they will not do so over a wireless network.
We are looking at a future where digital education, remote diagnosis and remote monitoring of a person's health condition will be available online. This could be a valuable way for people to improve their lifestyle as a result of having technology of this nature. This decision is much like many of the visionary decisions that were made in the past that were opposed by the Department of Finance such as the introduction of free second level education. Let us also recall the benefits that were yielded by free second level education by a visionary Government and Minister who was not a Minister of my party. These were visionary decisions, which were rightly taken by Government in the face of criticism from hard-working public servants, including probably one of the best public servants that the country has ever seen in Dr. T.K. Whitaker. However, Governments have to make decisions based on what they believe is best.
There has been some commentary that it will take seven years to roll out the scheme but that is based entirely on an objective evaluation of the contract and the capacity of the network to be prepared to roll out the 146,000 km in an efficient way. If I had stood over something that was not contractually underpinned, Senators would rightly accuse me of trying to present a rosy picture. By contrast, we have in this roll-out a situation where if the company fails to meet its obligations, it will face financial penalties in failing to meet milestones. Indeed, at the three important checkpoints - 30%, 60% and 100% roll-out - the company could forfeit its entire ownership of the scheme if it falls behind by 12 months.
I came to office with a fresh pair of eyes last October to examine the scheme anew. Based on my considerable experience not only in politics but in my former profession, if we want to achieve the goal of universal access to high-speed broadband, the only cheaper alternative is to leave some people behind and decide we are not going to provide the service universally. All the alternatives either impose greater cost or higher risk. We have forensically gone through this using an arm's-length evaluation. All of the evaluation was not conducted with political involvement. It was done by experts brought in to assist the Department to make this decision. All of the evaluations were done objectively and were not based on any political evaluation.
Finally, this involves a large sum over 25 years. It will represent at peak perhaps between €300 million and €400 million in the highest year and then trail off. It is a significant investment but it is an investment that is intrinsic to the vision that has been set out in the national capital plan and Project Ireland 2040. Our decision to provide for this project will not in any way encroach on the delivery of the other projects listed in the national development plan.
