There are three main purposes of this Bill, which are: to provide for the establishment of an independent regulator for the telecommunications sector; enable the sale of equity in Telecom Éireann, thus allowing the formation of the equity based strategic alliance with the KPN/Telia consortium to be completed, and provide for a new system for the control of telecommunications tariffs. These provisions represent significant changes in the legislative base underpinning the telecommunications sector in Ireland and they will have a major impact on its future development. The Bill lays the foundation for the transition to competitive markets in the provision of telecommunications services and is designed to enable Telecom Éireann to meet the challenges it faces in that new competitive environment. Before outlining the provisions of the Bill, I will explain the background to the legislative proposals contained in it in order that the significance of these proposals will be better appreciated.
The telecommunications industry is a rapidly evolving sector throughout the world and it will have an increasingly important role to play in all aspects of modern society. There are a number of forces driving this rapid change. Developments in technology are increasing capacity, reducing costs and extending the range of services on offer. The growth of the services sector throughout the world requires an increasing number of information transfers. Communications are becoming a necessity in the modern world, not only for economic reasons but also for social, personal and leisure purposes. Taken together, these forces of change are calling into question the current structure of the telecommunications industry and are creating new opportunities and threats for all players in that industry.
In the past the most widespread organisational structure for telecommunications was an integrated State-owned monopoly operating solely in the home market. Arguably this was the most efficient system available, given the state of the technology, investment risk, resources and the state of economic and market development at the time. New service providers now have the technical and economic means to compete against the public telecommunications operator. Alternative telecommunications networks can be developed and operated separately but be integrated with the public network. The globalisation of business requires advanced international services. Growing demand for telecommunications services requires speedy responses to customer needs.
Governments throughout the world are responding to and facilitating these developments by restructuring the ownership and control of telecommunications operators and by opening markets to competition. These developments are facilitating, and are being facilitated by, the development of the information society which will fundamentally transform major aspects of the modern world: work, lifestyles and Government services. The information society is generating a wealth of debate and study worldwide. There are many uncertainties about the nature of the evolution of the information society at present, but it is clear that it will generate opportunities and threats for economies in addition to telecommunications operators. It is important that Ireland seek to maximise the opportunities presented by the information society and minimise the threats. It is also clear that a top-class telecommunications sector is required if Ireland is to capitalise on the opportunities presented by the information society.
The Government's key objective 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. In adopting a strategy for the achievement of this objective, the Government must have regard to the policies of the European Union on the sector and implement the agreed EU legislative provisions. The European Commission has been the driving force behind the liberalisation of telecommunications in the European Union.
The liberalisation process commenced in the latter part of the 1980s when the Commission proposed, and the Council adopted, a first tentative step involving the removal of monopoly rights in relation to the supply of terminal equipment. However, political agreement on full liberalisation of services was not achieved until June 1993 when the Council of Ministers agreed that the key voice telephony market would be opened to the full rigours of competition from 1 January 1998, in the EU generally, but with scope for deferment for certain member states including Ireland. A further political agreement was reached in December 1994 on a similar timeframe for liberalisation of the telecommunications infrastructure.
The Commission adopted a series of directives which provide for the removal of monopoly and special rights in the sector on a phased basis. Data and value added services were liberalised in 1990, satellite telecommunications services in 1994 and mobile telecommunications services in 1995. Provision was also made to enable cable television network operators to provide services other than voice telephony over their networks. A directive is now in place which obliges member states to implement full liberalisation by 1 January 1998, subject to the deferment provisions which apply to Ireland and others.
The actual process of achieving the transition of the sector, from the traditional monopoly structure to a competitive regime, requires the development and implementation of a comprehensive regulatory package. The task of developing the regulatory package to ensure that competition is effective and that regulatory measures are uniform throughout the Union falls to the Council and the Parliament. This package includes, in particular, measures to ensure that new service providers have access to the networks of dominant market players, namely, the former monopoly operators. It also includes the establishment of a framework for commercial agreements between competing operators to ensure inter-operability of networks and services. A further element of the package is to ensure the provision of universal service on a clearly costed and transparent basis. Finally, it is proposed to ensure a harmonised approach to the licensing of telecommunications services to ensure there are no bureaucratic barriers to market access. During the course of the Irish Presidency, the Minister is actively pursuing these initiatives so that they can be adopted at EU level and transposed into national legislation before liberalisation.
It is clear that developments at EU level require fundamental changes in the regulation and administration of telecommunications in Ireland. These changes must take place against the background of the Government's objective of achieving a top quality telecommunications sector for Ireland. Before outlining the strategy which is being pursued to achieve this objective and the role of this Bill in this strategy, I will 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. The company has the exclusive privilege of offering, providing and maintaining the public telecommunications network and voice telephony services. In addition, Telecom 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 EU member states. However, investment continues to be required to meet the growing demand for new services such as mobile communications and to enhance the ability of the network to provide widespread advanced services. In particular, this requires further investment in the customer access network.
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 has 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.
Apart from Telecom Éireann, the Irish telecommunications sector includes a number of other service providers. These operators are entitled under licence to provide services that are outside Telecom Éireann's exclusive privilege. Approximately 40 per cent 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 wish to 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 customer focused company, providing high quality telecommunications services; the establishment of an independent regulator for the telecommunications sector and the liberalisation of the market to allow competition to take place.
In order to accelerate the further development of Telecom Éireann the Government and the company have agreed that it should form a strategic alliance with a major telecommunications operator. Furthermore, it was agreed that 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, 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 approved the signature of an alliance agreement with KPN/Telia in July of this year. This agreement involves the payment by the KPN/Telia consortium of £183 million for an initial 20 per cent stake in Telecom Éireann, the payment of a further £200 million for a further 15 per cent at the option of the consortium after three years and, finally, through a profit-sharing scheme, the State will receive 60 per cent of the gain on the consortium's investment over a certain threshold. This sharing formula will apply to the entire stake purchased by the consortium. It is expected that, based on the likely business performance of Telecom Éireann over the three years, the deal will produce overall proceeds to the State in excess of £500 million.
A key element of the deal is the fact that 85 separate strategic initiatives have been agreed between Telecom Éireann and the consortium. These provide a comprehensive strategic support programme involving technical support, expert and managerial assistance, software and system improvements across all business categories.
This is a very good deal and on the basis of the financial return from this deal, it is an excellent outcome for the State, the company and the Irish public. Adding the value the company will receive in strategic benefits from the deal, it is an even better outcome. I would like to take this opportunity to compliment the Minister and the officials who negotiated the strategic alliance agreement for a job well done.
The second major element of the Government's strategy for the sector is the establishment of an independent regulator. To date, 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 is 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 a feature of telecommunications development in most of our EU partners and is also a requirement of pending EU legislation. It is all the more appropriate, given the strategic alliance deal in which the Minister, as Telecom Éireann's shareholder, will have a shareholding relationship with a consortium of international public telecommunications operators.
The third element of the Government's strategy for the development of the telecommunications sector is the liberalisation of the market to allow competition in all areas of the sector. The Government has decided to remove all remaining restrictions on 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 EU, 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 by all consumers 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 situation.
The Government believes that the ongoing transformation and development of Telecom Éireann as a customer focused and market oriented company will have reached the stage by 2000 where it will be in a position to effectively compete against new entrants to the liberalised Irish telecommunications market. On that basis, the Government has sought a derogation from the EU Commission in relation to certain aspects of the liberalisation programme so that full liberalisation of all aspects of the market will take place in Ireland from 1 January 2000. The Commission's decision is expected shortly.
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 contained in the Bill can be grouped into three main areas. First, the Bill provides for the establishment of the director of telecommunications regulation and it transfers the Minister's existing telecommunications regulatory functions to the director. Second, it makes 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 telecommunication 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 of the Bill and further provisions regarding the director are set out in the First Schedule. The post of director will be 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 be staffed by 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 the approval of overall staff numbers by the Minister for Finance.
Sections 3 and 4 set 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 the tariff order is made by the Minister. I will outline the tariff regulation provisions later. Section 12 of the Bill includes powers for the director to appoint authorised officers to obtain information necessary for the performance of the director's functions under the Act.
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 of the Bill provides for the financing of the costs incurred 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 made by the director and will be 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 — any surplus will be surrendered to the Exchequer.
Even though the independence of the director in the performance of his or her functions is assured, there are sufficient provisions to ensure the appropriate accountability of the director. These include the requirement on the director to submit an annual report to the Minister and the laying of this report before the Houses of the Oireachtas, the audit of the annual accounts of the director by the Comptroller and Auditor General and the control by the Minister for Finance over the number of staff in the director's office. Furthermore, the Minister retains policy responsibility for the overall development of the sector.
The second main purpose of the Bill is to provide for Telecom Éireann's strategic alliance. Section 8 of the Bill removes restrictions contained in the Postal and Telecommunications Services Act, 1983, on the issue and transfer of shares in Telecom Éireann, thereby enabling its 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 Minister and the company to enter into agreements relating 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 sets out the framework for the relationship between the Minister 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 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, it indicated that, subject to certain conditions, it was 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 continued improvement of the company's customer service, quality and commercial success. Detailed negotiations with the staff on the 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 the future development of the company and if such an agreement involved practical and feasible arrangements by the staff to purchase shares in excess of 5 per cent, the Minister will be prepared to put appropriate proposals to Government.
Section 10 of the Bill provides for the restructuring of the worker participation on the board of Telecom Éireann in the light of the strategic alliance. 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. Under those Acts, the number of employee directors of Telecom Éireann is one third of the total number of directors of the company, which has been set at 12.
In restructuring the board, the Government sought a solution which would satisfy the need to preserve effective control for 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. On the basis of agreement with the strategic partner and following intensive discussions with the trade unions in Telecom Éireann, the Government has agreed a board structure as follows: seven members, including the chairman and the chief executive, appointed by the Minister, three members appointed by the strategic partner, four employee representatives of which either two will be appointed under the Worker Participation (State Enterprises) Acts, 1977 and 1988, or one will be so appointed where a member is appointed under an employee shareholding scheme established under section 8(3) of the Bill. The other two employee representatives will be two alternate employee directors who will be entitled to attend all board meetings but not to vote except in the absence of an employee director or the employee shareholding scheme director where one is appointed. These alternate directors will be appointed on the basis of the results of an election under the Worker Participation (State Enterprises) Acts, 1977 and 1988.
This formula ensures the maintenance of the Government's majority voting position on the board, the strategic partner's representation and four seats remaining at the table for the employees.
The third main purpose of the Bill is to introduce a new method of regulating telecommunications tariffs. 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 Telecom 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. This is to provide an incentive, in the absence of competition, to improve efficiency in the provision of those services and, thereby, reduce tariffs. 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 customers 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 a strong incentive to increase efficiency.
Section 7 of the Bill provides that the Minister may make an order specifying a price cap for a specified basket of telecommunications services provided by the 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 real terms.
This function will be transferred to the director along with the Minister's other regulatory functions. However, in order 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 by 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 initiative.
The first price-cap order, which I expect to be made by the Minister on 1 January 1997, will specify an adjustment factor of 6 per cent. This means that Telecom Éireann's prices will fall by at least 6 per cent in real terms each year for the period of the price-cap. Over the five year period of the price cap, Telecom Éireann's prices will fall by at least 30 per cent in real terms. These reductions will apply to all consumers, whether they be domestic or business.
Apart from the three main areas covered by the Bill, which I have just outlined, the Bill 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 Telegraphs 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 of the Bill deal with offences and penalties for breaches of provisions of the Act, repeals of provisions of certain enactments, the procedure for the 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 90 days after it is passed.
I have outlined the background to and the main provisions of the Bill. In conclusion, I would like to draw the attention of Senators 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 which are provided for in this Bill are essential to enable this target to be achieved and I commend this Bill to the Seanad.
