I thank the Chairman.
As well as a two-page statement, we circulated a short presentation on ESB's involvement in the national broadband plan, ESB's involvement in the telecoms industry in Ireland generally, the establishment of SIRO, our delivery vehicle, an introduction to the broadband plan and the timelines that were key to that, the commercial challenges and the key decisions that led to our withdrawal from this process over two years ago, and some summary conclusions.
We first got involved in the telecoms business back in 2003, when we ran fibre on the overhead transmission network with a northern ring which covered north of Leinster with a T up into County Donegal. There was a southern ring which covered most of south Leinster and much of south Munster. That was a backhaul network, which basically means it was similar to a motorway network, and all the major retail companies Eir, Enet, Virgin and BT were customers of that network since 2003.
A diagram in the submission shows the lower voltage system - the 40,000 or 38,000 volt system. We have approximately 700 stations all over the country. One can take it that any town in Ireland with a population greater than 3,000 to 4,000 people has one of those stations. Another diagram represents the medium voltage system - the 10,000 to 20,000 volt system, which ultimately brings electricity to every home in the country. We have approximately 90,000 km of that network.
We had this idea that as well as being the provider of the backhaul network utilising the electricity network on a larger scale gave us greater commercial opportunities in the telecoms business. We looked at it in a lot more detail in 2014 because the European Union had produced the digital agenda for Europe. It was the first time that the whole issue of the replacement of the historical copper networks had been addressed in terms of a new type of high-speed broadband network and what would be required in the more modern economies to deliver both the uptake and the download speeds that both residential customers as well as commercial and industrial customers would work with into the future. Ireland at that time was lagging behind the European average in terms of the take-up rates, the availability and the speeds available to customers in Ireland at that time. We decided there was an opportunity there but we had to make a decision as a company as to what level we would get involved in this business. On the one hand, we could simply lease out the electricity network to a telecoms operator while on the other we could do end to end and do the infrastructure, the wholesale, and the retail.
We discounted both of those extremes and landed in a position that we would become an infrastructure company through a joint venture with another telecoms company. The reason was we did not have real experience in the mass telecoms market, nor did we know enough about telecoms pricing or about the telecoms industry, as such. At that point, we went into a very extensive procurement process that lasted more than 12 months. At the end of it, Vodafone was the preferred candidate and it joined up with ESB to form this new company called SIRO. The structure of SIRO is that there is a joint venture agreement between the two main shareholders, ESB and Vodafone. SIRO has a separate agreement with ESB Networks called the network access agreement which contain the terms and conditions by which SIRO must abide in order to access the electricity network to string the fibre on the network.
That company was set up in 2016 and is functioning at fairly optimum speed since mid-2016 or the start of 2017. Since then it has passed nearly 250,000 homes with broadband network, or 242,000 homes to be exact. We have connected more than 42,000 customers. The target for this phase of the business plan for SIRO, being funded by both shareholders, is to pass 450,000 homes. This represents an investment of not far off €500 million in the telecoms infrastructure business in Ireland. We were the first retailer to offer a 500 Mbps and a gigabit service to the residential sector. We considered the company to be best in class in service delivery and there are nearly 14 retailers operating on the SIRO networks at this time. It has been a tremendous success.
The phase one concentrated on the 50 towns outside the main cities, particularly outside Dublin. Once that is completed, the shareholders will discuss the options for a phase two. To date, the business has been very successful and has met the key metrics set in terms of a formal business plan.
There was then talk of a national broadband plan. I have provided a diagram of Ireland and members can see the comparators. What is in blue in the diagram is what is not in the intervention area. The areas and premises in the intervention area are coloured light brown and orange. Those 757,000 homes are in the two coloured areas.
The different colours represent the fact that initially there were to be two lots. If we compare SIRO's challenge with the challenge of developing and rolling out a national broadband plan, SIRO's plan was to cover 450,000 homes, while the national broadband plan, NBP, was to cover 757,000 homes. SIRO intended to roll out about 1,300 km of fibre, while the NBP plan, based on our technical design, would have required nearly 77,000 km of fibre. That is an extraordinary structural, engineering and project management challenge. The amount underground was minuscule in the NBP. The reason for the State putting a national broadband plan in place was that it would not be commercial for any of the key operators to go into these rural locations and roll out fibre in the hope the customer take-up and revenue from it would generate an adequate return from the investment over 20 or 25 years. Some stimulus was needed. To do it in the way we were going to do the technical design would have involved very close to 600 mini-exchanges throughout the country. They would have been based in our 38Kv sub-stations and medium voltage sub-stations. That was the level of network design required to ensure the required broadband speeds set down by the Department in the tender documents could be met for every single household on the island. That would have required an extensive amount of fibre in the intervention area.
SIRO was formed in 2014. From mid-2014 to 2015 there was a lot of discussion with the Department on the strategy and mapping for the NBP. Much of it was about technical issues, the number of houses and the accuracy of the mapping in the intervention area. In mid-2015 there was a draft strategy and in December 2015 the Department published the revised strategy and the updated map and commenced the procurement process. At the time most of the emphasis was on the technical and mapping side and not much on the commercial contract. In quarters 1 and 2 of 2016 we prepared a detailed pre-qualification submission to show that we had the financial support of our parents and the ability to build, operate and manage large-scale networks.
In June 2016 the Department pre-qualified the bidders and progressed to the formal procurement process. That was the first time we got sight of the commercial contract and its conditions. In December 2016 the Department advised bidders that there could be 300,000 premises removed from the contract owing to a commitment by Eir that it would do these premises on a commercial basis and that there would be no need for any subvention or State funding for them. That had an impact on the business case on which we had been working from a technical point of view and from the point of view of the potential revenues that could have been generated from the original subvention area to what would be a revised subvention area, minus the 300,000 homes. Nevertheless, we asked for additional time from the Department to redo the technical design because we had to go back and start from scratch. I can explain later the impact of the 300,000 figure on the business case. As we progressed, following the withdrawal of the 300,000 premises and with certain challenges in the construct of the commercial contract associated with the NBP, we met the Department on several occasions. In September 2017, following more urgent meetings, we asked it specifically to consider certain requests that would have made the possibility of presenting a commercial business case less challenging than it was. While it did move on some issues and tried to help us on others, at the end it was not enough. Following two years of fairly intensive involvement by a not insignificant number of staff and outside help in the ESB, a decision was taken by both shareholders in SIRO that it would not fit with what they had hoped for and in September 2017 we advised the Department that we were formally withdrawing from the process.
The commercial challenges associated with a significant infrastructural job such as a national broadband plan can be broken down into four parts. Above the line are the costs, the cost to build the network. It is very extensive. I was reminded at the start by one of the guys working on the project that the length of fibre required to serve all homes in rural Ireland, 80,000 km, is roughly twice around the world, but it is a one-off cost that has to be managed. The second part is the day to day cost of managing that level of telecommunications equipment, managing the maintenance of the equipment, all fault repairs, the information technology, IT, systems and the billing systems. To match it, there is the amount of revenue from each customer and, most critically, the number of customers who will connect to the system. There was a point when the number of customers was in the region of 800,000 when we would have been quite positive about the business, but when the 300,000 premises were removed, it had a very serious impact on the potential and projected revenues over the ten, 20 or 30 years of the project. That is what made it really challenging.
The key issues that forced SIRO and its shareholders to withdraw from the NBP process approximately two years ago were the removal of the 300,000 premises, the risk apportionment within the structure of the contract, the financial viability of the contract simply owing to the risk apportionment within it, issues with the use of alternate networks, an issue we can discuss, and the rebalancing risk. When we entered the project in 2015, we entered with high expectations and in very good faith. We put together a really good team of people to get into a level of detail on the project by which many at senior level in the ESB and Vodafone were astounded. Mr. Mahon and his team did that work. The reduction of the intervention area by 300,000 premises had a material impact on the project. Throughout 2017 we were really challenged as a business to make a business plan that would meet the financial criteria set by both shareholders. In quarter 3, following significant engagement with the Department, we were left with no choice but to withdraw from the NBP. The ESB has since moved on. It has been two years since anybody in the ESB or Vodafone has worked on the national broadband plan. It is amazing what happens within two years. In the ESB our focus is on delivery of our Brighter Future strategy in working with and supporting the Government in the implementation of its recently announced climate action plan.
