Donal Palcic: Eoin Reeves and I have an opinion piece in the Irish Times today on the information that emerged in relation to the government's plans for privatisation during the latest visit by the troika.
Showing posts with label Donal Palcic. Show all posts
Showing posts with label Donal Palcic. Show all posts
Tuesday, 31 January 2012
Tuesday, 17 January 2012
They're making a list, but are they checking it twice?
Donal Palcic: The Irish Times reports that the Government has drawn up a shortlist of state assets to be sold that includes its remaining stake in Aer Lingus, Dublin Port and parts of Bord Gáis and Coillte.
Eoin Reeves and I have previously commented on the potential sale of the Government’s remaining 25% stake in Aer Lingus and little has changed since then. Encouragingly, the Minister for Transport is examining how the company’s Heathrow landing slots could be protected in the event of a sale. However, shares in the airline are currently trading at about €0.64, valuing the Government’s stake at approximately €85 million, a paltry return for the Exchequer were it to sell now (to put this in perspective, the State spent an average of almost €104 million per week in 2011 just to service the national debt).
Although there is no detail as to which parts of Bord Gáis and Coillte the Government is considering the sale of, one must question how the sale of any element of either company fits in with the Government’s NewERA plan. The original NewERA plan proposes merging Coillte and Bord na Móna together to form ‘Bioenergy and Forestry Ireland’ which “will invest €900 million to become a global leader in the commercialisation of next generation bio-energy technologies for transport, home and district heating and power generation”. The plan also proposes merging Bord Gáis Networks with the existing operator of the national gas network, Gaslink. Eoin and I have previously commented on the inconsistency between the Government’s NewERA plan and its announcements in relation to potential asset sales here and here. The Government must provide more clarity on its plans for NewERA and how its existing portfolio of State assets fits within that plan.
The inclusion of Dublin Port as a candidate for privatisation is a worrying development. As the biggest and most important port in a small open economy heavily dependent on external trade, any decision on its sale must take account of the long term strategic needs of the economy. Port infrastructure is expensive to build and a long term perspective must be taken when making decisions to invest in such long-lived assets. In its submission to the Review Group on State Assets and Liabilities in 2010, Dublin Port indicated that, in order to be able to deal with projected future port volumes, €500 million in capital expenditure is necessary over the next 10-15 years, with half of that to be undertaken in the next five years. Were Dublin Port to be sold, the objectives of the new private owner may not necessarily be aligned with those of the State and there would be no certainty that the required investment would take place when needed.
Dublin Port’s submission to the Review Group sums things up best:
“In simple terms, we believe that if Dublin Port were in private ownership there would most likely be a market failure to provide essential port infrastructure. Our simple proposition in relation to a possible privatisation is as follows.
If it is accepted that Dublin Port is of national strategic importance, then some protections would need to be built in to a sale transaction to protect those national interests. However, experience has shown that even when the best minds apply themselves to structure transactions to create those protections, market forces have a way of subsequently undermining the original intentions. Were this to occur in the case of Dublin Port, there would be serious negative impacts on national competitiveness. It would be far better for the State to avoid such eventualities by not selling Dublin Port Company.”
Some of the above issues are also covered in this Irish Times interview with the Chief Executive of Dublin Port, Eamonn O’Reilly, last April.
For now, all we can do is wait for more detail of the Government’s discussions on the sale of state assets with the troika to emerge, and hope that they don’t result in short termist decisions that damage the long term interests of the country.
Eoin Reeves and I have previously commented on the potential sale of the Government’s remaining 25% stake in Aer Lingus and little has changed since then. Encouragingly, the Minister for Transport is examining how the company’s Heathrow landing slots could be protected in the event of a sale. However, shares in the airline are currently trading at about €0.64, valuing the Government’s stake at approximately €85 million, a paltry return for the Exchequer were it to sell now (to put this in perspective, the State spent an average of almost €104 million per week in 2011 just to service the national debt).
Although there is no detail as to which parts of Bord Gáis and Coillte the Government is considering the sale of, one must question how the sale of any element of either company fits in with the Government’s NewERA plan. The original NewERA plan proposes merging Coillte and Bord na Móna together to form ‘Bioenergy and Forestry Ireland’ which “will invest €900 million to become a global leader in the commercialisation of next generation bio-energy technologies for transport, home and district heating and power generation”. The plan also proposes merging Bord Gáis Networks with the existing operator of the national gas network, Gaslink. Eoin and I have previously commented on the inconsistency between the Government’s NewERA plan and its announcements in relation to potential asset sales here and here. The Government must provide more clarity on its plans for NewERA and how its existing portfolio of State assets fits within that plan.
The inclusion of Dublin Port as a candidate for privatisation is a worrying development. As the biggest and most important port in a small open economy heavily dependent on external trade, any decision on its sale must take account of the long term strategic needs of the economy. Port infrastructure is expensive to build and a long term perspective must be taken when making decisions to invest in such long-lived assets. In its submission to the Review Group on State Assets and Liabilities in 2010, Dublin Port indicated that, in order to be able to deal with projected future port volumes, €500 million in capital expenditure is necessary over the next 10-15 years, with half of that to be undertaken in the next five years. Were Dublin Port to be sold, the objectives of the new private owner may not necessarily be aligned with those of the State and there would be no certainty that the required investment would take place when needed.
Dublin Port’s submission to the Review Group sums things up best:
“In simple terms, we believe that if Dublin Port were in private ownership there would most likely be a market failure to provide essential port infrastructure. Our simple proposition in relation to a possible privatisation is as follows.
If it is accepted that Dublin Port is of national strategic importance, then some protections would need to be built in to a sale transaction to protect those national interests. However, experience has shown that even when the best minds apply themselves to structure transactions to create those protections, market forces have a way of subsequently undermining the original intentions. Were this to occur in the case of Dublin Port, there would be serious negative impacts on national competitiveness. It would be far better for the State to avoid such eventualities by not selling Dublin Port Company.”
Some of the above issues are also covered in this Irish Times interview with the Chief Executive of Dublin Port, Eamonn O’Reilly, last April.
For now, all we can do is wait for more detail of the Government’s discussions on the sale of state assets with the troika to emerge, and hope that they don’t result in short termist decisions that damage the long term interests of the country.
Thursday, 6 October 2011
Public = Bad, Private = Good
Donal Palcic: I couldn’t let this one go. Marie O’Halloran in the Irish Times reports on Michael Noonan’s defence of the planned sale of state assets in the Dail yesterday. The opening quote in the article caught my eye:
The Minister said the European authorities believed and were backed by “any economic theory you’d like to read” that “assets in private hands will be used more efficiently for the public good than assets in public hands in general terms”.
It is a major concern that someone as important as the Minister for Finance, who is likely to make crucial decisions in relation to privatisation, makes blatantly incorrect assertions such as this. Even a cursory glance at the theoretical literature on the impact of privatisation on performance would show that the grounds for making such a claim are extremely shaky. No less than Nobel Laureate Joseph Stiglitz has stated that “the theoretical case for privatization is, at best, weak or non-existent. It is strongest in areas in which there is by now a broad consensus – areas like steel or textiles, conventional commodities in which market failures may be more limited. But by the same token, these are precisely the sectors in which abuses can most easily be controlled, appropriate incentives can best be designed, and benchmarks can most easily be set.”
In other words, privatisation can lead to improved performance when firms that are sold operate in competitive markets. Where firms operate in imperfectly competitive markets, the case for privatisation is weak at best. The regulatory structure in place and the degree of competition faced by firms in such markets are far more important determinants of performance. Numerous empirical studies on the effects of privatisation on the financial and operating performance of divested firms have been carried out in recent years. My colleague Eoin Reeves and I review a large number of these studies in our recent book and argue that, overall, the empirical evidence with regard to the impact of privatisation on enterprise performance mirrors the thrust of relevant economic theories and is inconclusive. In general, the empirical literature can be divided into two main groups: broad-based international studies which by and large find that privatisation leads to improved performance, and more in-depth country-specific studies that find more ambiguous results, and suggest that privatisation does not automatically lead to an improvement in company performance. The general conclusion we can draw from the empirical (and theoretical) evidence is that privatisation leads to improved enterprise performance in some, but not all, cases.
The Minister therefore needs to be far more careful when making wild claims that any economic theory you’d like to read shows that assets in private hands will be used more efficiently for the public good than assets in public hands. It is interesting (and worrying) that the Minister makes such comments at a time when Fine Gael’s NewERA plan which was launched last week places public enterprise at the heart of efforts to lay the foundations for economic recovery.
The Minister said the European authorities believed and were backed by “any economic theory you’d like to read” that “assets in private hands will be used more efficiently for the public good than assets in public hands in general terms”.
It is a major concern that someone as important as the Minister for Finance, who is likely to make crucial decisions in relation to privatisation, makes blatantly incorrect assertions such as this. Even a cursory glance at the theoretical literature on the impact of privatisation on performance would show that the grounds for making such a claim are extremely shaky. No less than Nobel Laureate Joseph Stiglitz has stated that “the theoretical case for privatization is, at best, weak or non-existent. It is strongest in areas in which there is by now a broad consensus – areas like steel or textiles, conventional commodities in which market failures may be more limited. But by the same token, these are precisely the sectors in which abuses can most easily be controlled, appropriate incentives can best be designed, and benchmarks can most easily be set.”
In other words, privatisation can lead to improved performance when firms that are sold operate in competitive markets. Where firms operate in imperfectly competitive markets, the case for privatisation is weak at best. The regulatory structure in place and the degree of competition faced by firms in such markets are far more important determinants of performance. Numerous empirical studies on the effects of privatisation on the financial and operating performance of divested firms have been carried out in recent years. My colleague Eoin Reeves and I review a large number of these studies in our recent book and argue that, overall, the empirical evidence with regard to the impact of privatisation on enterprise performance mirrors the thrust of relevant economic theories and is inconclusive. In general, the empirical literature can be divided into two main groups: broad-based international studies which by and large find that privatisation leads to improved performance, and more in-depth country-specific studies that find more ambiguous results, and suggest that privatisation does not automatically lead to an improvement in company performance. The general conclusion we can draw from the empirical (and theoretical) evidence is that privatisation leads to improved enterprise performance in some, but not all, cases.
The Minister therefore needs to be far more careful when making wild claims that any economic theory you’d like to read shows that assets in private hands will be used more efficiently for the public good than assets in public hands. It is interesting (and worrying) that the Minister makes such comments at a time when Fine Gael’s NewERA plan which was launched last week places public enterprise at the heart of efforts to lay the foundations for economic recovery.
Thursday, 8 September 2011
Full privatisation of Aer Lingus
Donal Palcic and Eoin Reeves: Yesterday the Minister for Transport signalled the possibility of selling the remaining 25 per cent stake in Aer Lingus (as recommended by the report of the Review Group on State Assets and Liabilities published last April). News of other planned sales, such as the sale of a partial stake in the ESB, is expected over the coming days. So does the sale of the remaining government held shares in Aer Lingus make sense? This can be assessed in terms of the government’s objectives. First, this is about raising exchequer revenues, so how much can the government expect to realise? With shares trading at 67.5 cent as of this morning (compared to the IPO price of 220 cent) a 25 per cent stake is likely to be worth in the region of €90m (leaving a lot more to be sold if the €2bn target in the programme for government is to be reached). Net revenues will of course be reduced when professional expenses and discounts are taken into account.
Are there any other advantages to be accrued from the mooted sale? The common argument in support of selling state owned enterprises (SOEs) is that performance will improve under private ownership. But Aer Lingus operates as a privately owned enterprise and is not subject to obvious political interference (a problem traditionally faced by some SOEs). So selling the remaining 25 per cent will not have any impact in terms of improving enterprise performance.
What are the likely downsides to the possible sale? The obvious one is that the 25 per cent stake constitutes an important degree of state influence over the island economy’s airline. We have discussed the importance of the state retaining control over strategically important industries before here and here. But suffice to say that Eircom provides an example of one of the biggest privatisation failures worldwide and this could have been avoided if the state had not relinquished complete control when it privatised the company. The lessons in relation to Aer Lingus are obvious.
One of the big strategic issues in relation to Aer Lingus concerns the Heathrow slots. The Minister for Transport stated that the strategic reasons for retaining a stake in the airline no longer exist and that the issue of Heathrow landing slots was not as important as it was since people are now using connections other than Heathrow. Aer Lingus has 23 landing slots in Heathrow. Currently 13 slots are being used on the Dublin route [BMI also operates on this route and has 4 landing slots], 4 on the Cork route, 3 on the Shannon route and 3 on the Belfast route.
Data from the UK’s Civil Aviation Authority shows that, in 2010, over 9.5 million passengers travelled from the Republic of Ireland to the UK, with just over 51 per cent of all passengers travelling to London. A quick glance at the traffic on the Dublin, Cork and Shannon to Heathrow routes for 2010 (see table above) illustrates the importance of the Heathrow link, with slightly over 44 per cent of passengers to London going through Heathrow. In general, the vast majority of passengers from Ireland to Heathrow are carried by Aer lingus (they are the sole operator from Cork and Shannon; while on the Dublin Heathrow route they operate significantly more flights than BMI).
While the number of passengers travelling to airports in London other than Heathrow has increased considerably over the years, based on the above figures for 2010, it is hard to see how the Minister can claim that the “strategic” argument for retaining a stake in Aer Lingus no longer applies. For an island nation like Ireland, which is heavily dependent on international connectivity, the Dublin/Cork/Shannon to Heathrow routes are of considerable strategic importance. Although the sale of the government’s 25 per cent stake does not mean that flights on these routes will stop overnight, it does leave the government powerless to prevent an undesirable change in ownership in the future (think Eircom).
Given the relatively small amount of cash that is likely to be raised, one must question whether this mooted proposal makes sense. Our scepticism appears to be shared by the company itself, which reportedly is not in favour of a quick sale. Moreover, Joe Gill of Bloxham sounded a sceptical note when interviewed by Matt Cooper on Today FM yesterday. Mr. Gill raised the issue of the Heathrow slots and also highlighted the difficulties posed by the company’s pension deficit (in the region of €400m). He also suggested that a special dividend by cash-rich Aer Lingus (it has cash balances of approximately €350 million) offers an easier way for the government to raise much needed cash from the company. Notwithstanding the issues that arise in forcing a special dividend one wonders if this route makes more sense than relinquishing full control over the airline.
Thursday, 21 April 2011
Palcic and Reeves on privatisation
Given the week that's in it, PE readers may be interested in a new book by Donal Palcic and Eoin Reeves, Privatisation in Ireland: Lessons from a European Economy. Further details are available here.
Monday, 19 July 2010
Costly Business: Privatisation and Exchequer Revenues
Donal Palcic and Eoin Reeves: The recent revelation that the government has established a group to report and advise on – among other things – the potential for privatising state-owned enterprises (SOEs) raises a number of important issues. These issues concern the precise rationale for any sell off, the method of sale adopted and the likely outcomes in economic and social terms.
It appears that the principal rationale for any potential privatisation is to raise revenue for the exchequer in order to deal with the country’s acute fiscal crisis. Although privatisation can raise useful revenues for the exchequer in the short- to medium-term it cannot, however, be justified on this basis alone. In a recent article published in Administration, we show that the revenues generated from privatisations, both in Ireland and abroad, are rarely maximised.
In Ireland, ten SOEs have been privatised to date and the exchequer has accrued over €8.3 billion. However, we show that the exchequer has foregone over €2.1 billion as a result of a combination of costs related to the underpricing of shares, debt write-offs, fees to advisors, underwriters etc., and the establishment of employee share ownership plans (ESOPs), which account for approximately half of the foregone revenues.
This is shown in the table below, where direct costs refer to advisory fees etc, and indirect costs refer to the cost of debt write offs and the underpricing of shares. Admittedly, the aggregate costs are dominated by the biggest divestiture to date (Eircom), however, there were questionable decisions in relation to a number of other sales. For example, when the refinery and terminal operations of the Irish National Petroleum Corporation (INPC) were sold in 2001, the sale involved a large debt write-off and other costs which amounted to €76 million. The Whitegate and Bantry assets were sold for €116 million, but six years later the new owners put the Whitegate refinery up for sale for a price of approximately €350 million.
It appears that the principal rationale for any potential privatisation is to raise revenue for the exchequer in order to deal with the country’s acute fiscal crisis. Although privatisation can raise useful revenues for the exchequer in the short- to medium-term it cannot, however, be justified on this basis alone. In a recent article published in Administration, we show that the revenues generated from privatisations, both in Ireland and abroad, are rarely maximised.
In Ireland, ten SOEs have been privatised to date and the exchequer has accrued over €8.3 billion. However, we show that the exchequer has foregone over €2.1 billion as a result of a combination of costs related to the underpricing of shares, debt write-offs, fees to advisors, underwriters etc., and the establishment of employee share ownership plans (ESOPs), which account for approximately half of the foregone revenues.
This is shown in the table below, where direct costs refer to advisory fees etc, and indirect costs refer to the cost of debt write offs and the underpricing of shares. Admittedly, the aggregate costs are dominated by the biggest divestiture to date (Eircom), however, there were questionable decisions in relation to a number of other sales. For example, when the refinery and terminal operations of the Irish National Petroleum Corporation (INPC) were sold in 2001, the sale involved a large debt write-off and other costs which amounted to €76 million. The Whitegate and Bantry assets were sold for €116 million, but six years later the new owners put the Whitegate refinery up for sale for a price of approximately €350 million.
The cost of ESOPs in the table above is calculated as the difference in the revenues received by the exchequer for the 14.9 per cent transferred to employees and the value of that stake based on the sale price of the firm. For example, in the case of the TSB, employees received a 5 per cent stake in return for accepting a transformation agreement, and purchased a further 9.9 per cent stake for €25.15 million. Based on the €430 million price paid by IL&P for the TSB, the 14.9 per cent stake was worth just over €64 million.
In the case of Eircom, employees also received a 5 per cent stake in exchange for the acceptance of a transformation agreement, and purchased a 9.9 per cent stake for €241 million. Based on the proceeds from the flotation of the government’s 50.1 per cent stake in July 1999 (which raised €4.2 billion), the 14.9 per cent stake transferred to the ESOP was worth approximately €1.25 billion. The difference between the amount received by the exchequer for the 14.9 per cent stake and its actual value amounts to over €1.01 billion.
Some degree of privatisation appears inevitable but sales will undoubtedly involve the exchequer incurring big costs in order to bring in some much-needed cash. Can this be justified? Perhaps, if there are compensating gains such as improved enterprise performance and public service delivery. However, the Irish track record is not hugely impressive in this regard.
The question of privatising public enterprises requires careful consideration of all the costs and benefits. Ideally the decision to sell these companies should be made in the context of an overall strategy for the sector, but this doesn’t exist. Instead, the issue of privatisation is under consideration as a revenue raising measure. Past experience shows us that there are reasons to be fearful about the quality of decision making in relation to the disposal of such assets. The firesale approach that appears to be imminent is a worrying development.
Friday, 29 January 2010
Running to Stand Still: Next Generation Broadband in Ireland
Donal Palcic: Forfás published its latest report on Ireland’s broadband performance last week and as usual it evoked a strong sense of déjà vu. At times I feel sorry for the good people at Forfás who work on producing such reports, who must be frustrated at making countless constructive policy recommendations year after year only to see little or no progress on their implementation. Every year, the Forfás broadband reports highlight the positive developments in the Irish broadband market but every year they are forced to concede that we are still lagging significantly behind our peers.
A quick trawl through the introductions of reports from the last few years highlights the difficulty Forfás must have in coming up with a new formula of words to describe the same problem:
Forfás Broadband Report Nov. 2004:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland continues to compare poorly for overall take-up of broadband and has slipped further behind the leading countries”.
Forfás Broadband Report Nov. 2005:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance has not improved”.
Forfás Broadband Report Dec. 2007 (referring to findings of Nov. 2006 report):
“although there had been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance continued to lag that of its competitors”.
Forfás Response to DCENR Consultation Paper on NGN (Oct. 2008):
“despite recent progress, Ireland continues to lag behind competitor regions in the range, speed and cost of broadband services. Critically, we also remain behind leading regions in developing a next generation network that will allow Irish businesses and households access to the advanced broadband services of tomorrow”.
Fast forward to the latest report and we are told that “while progress is being made in improving the cost and availability of basic broadband, Ireland is lagging at least 3 to 5 years behind competitor countries in terms of rolling out infrastructure capable of high speed next generation broadband”.
Part of the blame for our consistently poor performance must be laid at the feet of the Government. While it has (belatedly) intervened in the market through various programmes such as the County & Group Broadband Scheme, Metropolitan Area Network programme and National Broadband Scheme, these initiatives, while welcome, are simply not enough. Given the structure of the Irish telecommunications industry and its market and infrastructural characteristics, the Government needs to adopt a much stronger role in implementing effective policies and actions that will facilitate a more rapid rollout of next generation high-speed services.
ComReg also has a role to play in stimulating investment by private telecoms operators in the market. Key actions to facilitate private investment which were highlighted in the latest Forfás report are: 1) ensuring an appropriate return on investment; 2) examining the potential for infrastructure sharing and co-investment between private operators; 3) enabling wireless spectrum for the delivery of higher-speed broadband; and 4) ensuring wholesale access to Eircom’s products is made available (e.g. full local loop unbundling etc.).
While the above ComReg actions are of obvious importance in terms of the development of higher-speed services, Government actions also have a role in determining the speed at which the required private sector investment takes place. As highlighted in a number of Forfás reports, the State can play a significant role in facilitating investment.
The creation of a ‘one-stop-shop’ for State-owned broadband infrastructure would provide private operators with easier integrated access to core network infrastructure and facilitate further competition in the market. This recommendation was mooted years ago, however progress on this initiative has been painfully slow. As it stands the DCENR has established an Implementation Task Force to oversee the project and there is no indication of when we might expect to see it.
Other policy initiatives which have been suggested on a number of occasions and which have not been progressed quickly enough are: 1) making the provision of ducting in all new premises mandatory; and 2) making the provision of ducting in all relevant public works and State infrastructural development programmes mandatory (e.g. electricity, gas, rail, roads, water, sewage etc.). The latter is one area where the coordination of civil works by one utility network with all other networks would greatly lower the cost of investment for all. Indeed, the millions that will need to be spent in fixing the damage done to the road and water networks during the recent floods and cold snap present a perfect opportunity for installing ducting where feasible.
Even if all of the above was implemented tomorrow, it is far from certain that enough private investment in next generation infrastructure (particularly access infrastructure) will be stimulated, especially in rural areas. It may still be necessary for the Government to provide this infrastructure itself, or at the very least to partner with the private sector in delivering it. Failure to do so will put us at a massive competitive disadvantage to other countries in years to come.
The chief area of concern in the development of advanced high-speed broadband infrastructure in Ireland is the local access network. While investment by UPC in upgrading its cable network and investment by other companies such as Imagine in WiMAX technologies have improved things in this regard, these services are only available in certain parts of the country. Eircom’s dominance of the fixed-line market means that investment in its local access infrastructure will be of crucial importance in ensuring a more rapid rollout of next generation services across the country.
Eircom’s new owner, STT, appears to be establishing a more cordial and cooperative relationship with ComReg and has indicated that it plans to invest in Eircom’s network and intends to stay in Ireland for the long term. The recent move to drop Eircom’s legal case against ComReg’s decision to lower the monthly charge for shared line LLU services from €8.41 to €0.77 reinforces the view that the company will be more cooperative with the regulator than under previous owners. That said it is hard to see how STT plans to undertake significant investment in Eircom’s network given its approximate €4 billion debt burden. Indeed, S&P recently put Eircom’s rating of B on ‘creditwatch negative’ and warned that the company could breach covenants on some of its debt in the next year.
The EU has changed its State Aid rules to facilitate joint public-private investment in broadband infrastructure in both rural and urban areas. Governments in other European countries have recognised the importance of investment in fibre-based next generation networks by intervening in their telecoms markets. For example, last year, Finland (a country with a similar urbanisation rate as Ireland) made universal minimum internet access speeds a legal requirement. The Finnish government committed to a minimum speed of 1Mb/s per second from July of this year and 100Mb/s by 2015. Another example is the UK, where the British Government has set up a Next Generation Access fund (to come from a £0.50 monthly levy on all telephone landlines). The approximate £1 billion in funds that the levy generates will be used to facilitate the installation of fibre-optic cable in rural and suburban areas where it might otherwise have been unprofitable for the private sector to invest.
Further afield, the Australian Government has announced a multi-billion fibre-to-the-home project which will provide 100Mb/s connections to 90% of homes over the next eight years. The project is to be run as a joint venture with the private sector where the State will own a minimum of 51% of the project. In Singapore, the Government is providing almost US$500 million for a joint venture project with a private sector company to construct the passive infrastructure for a national next generation broadband network. A further US$166 million in funding is being provided for a separate joint venture with Starhub, a subsidiary of Eircom’s new owner STT, to build and operate the active infrastructure for the national network and will be competed by 2015.
It is clear that other countries realise the strategic importance of high-speed broadband and are taking steps to ensure their countries don’t fall behind. What is worrying for Ireland is that we are already behind many of the above countries as it stands and cannot afford to fall further behind through inaction. While many of the policy and regulatory actions mentioned earlier, if implemented, could do much to facilitate improved private investment in infrastructure, Ireland can ill afford to wait and see if the required investment will take place, and at the required pace. The Irish Government needs to become more proactive and play a stronger role in the development of Ireland’s next generation broadband infrastructure, particularly at the local access level. This requires either direct investment by the State or co-investment with the private sector (Eircom’s dire financial situation could provide an opportunity for the Government to step in and make a deal with the company in relation to its network infrastructure). Maybe then future Forfás reports won’t need to perennially point out that we lag competitor countries in terms of our broadband performance.
A quick trawl through the introductions of reports from the last few years highlights the difficulty Forfás must have in coming up with a new formula of words to describe the same problem:
Forfás Broadband Report Nov. 2004:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland continues to compare poorly for overall take-up of broadband and has slipped further behind the leading countries”.
Forfás Broadband Report Nov. 2005:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance has not improved”.
Forfás Broadband Report Dec. 2007 (referring to findings of Nov. 2006 report):
“although there had been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance continued to lag that of its competitors”.
Forfás Response to DCENR Consultation Paper on NGN (Oct. 2008):
“despite recent progress, Ireland continues to lag behind competitor regions in the range, speed and cost of broadband services. Critically, we also remain behind leading regions in developing a next generation network that will allow Irish businesses and households access to the advanced broadband services of tomorrow”.
Fast forward to the latest report and we are told that “while progress is being made in improving the cost and availability of basic broadband, Ireland is lagging at least 3 to 5 years behind competitor countries in terms of rolling out infrastructure capable of high speed next generation broadband”.
Part of the blame for our consistently poor performance must be laid at the feet of the Government. While it has (belatedly) intervened in the market through various programmes such as the County & Group Broadband Scheme, Metropolitan Area Network programme and National Broadband Scheme, these initiatives, while welcome, are simply not enough. Given the structure of the Irish telecommunications industry and its market and infrastructural characteristics, the Government needs to adopt a much stronger role in implementing effective policies and actions that will facilitate a more rapid rollout of next generation high-speed services.
ComReg also has a role to play in stimulating investment by private telecoms operators in the market. Key actions to facilitate private investment which were highlighted in the latest Forfás report are: 1) ensuring an appropriate return on investment; 2) examining the potential for infrastructure sharing and co-investment between private operators; 3) enabling wireless spectrum for the delivery of higher-speed broadband; and 4) ensuring wholesale access to Eircom’s products is made available (e.g. full local loop unbundling etc.).
While the above ComReg actions are of obvious importance in terms of the development of higher-speed services, Government actions also have a role in determining the speed at which the required private sector investment takes place. As highlighted in a number of Forfás reports, the State can play a significant role in facilitating investment.
The creation of a ‘one-stop-shop’ for State-owned broadband infrastructure would provide private operators with easier integrated access to core network infrastructure and facilitate further competition in the market. This recommendation was mooted years ago, however progress on this initiative has been painfully slow. As it stands the DCENR has established an Implementation Task Force to oversee the project and there is no indication of when we might expect to see it.
Other policy initiatives which have been suggested on a number of occasions and which have not been progressed quickly enough are: 1) making the provision of ducting in all new premises mandatory; and 2) making the provision of ducting in all relevant public works and State infrastructural development programmes mandatory (e.g. electricity, gas, rail, roads, water, sewage etc.). The latter is one area where the coordination of civil works by one utility network with all other networks would greatly lower the cost of investment for all. Indeed, the millions that will need to be spent in fixing the damage done to the road and water networks during the recent floods and cold snap present a perfect opportunity for installing ducting where feasible.
Even if all of the above was implemented tomorrow, it is far from certain that enough private investment in next generation infrastructure (particularly access infrastructure) will be stimulated, especially in rural areas. It may still be necessary for the Government to provide this infrastructure itself, or at the very least to partner with the private sector in delivering it. Failure to do so will put us at a massive competitive disadvantage to other countries in years to come.
The chief area of concern in the development of advanced high-speed broadband infrastructure in Ireland is the local access network. While investment by UPC in upgrading its cable network and investment by other companies such as Imagine in WiMAX technologies have improved things in this regard, these services are only available in certain parts of the country. Eircom’s dominance of the fixed-line market means that investment in its local access infrastructure will be of crucial importance in ensuring a more rapid rollout of next generation services across the country.
Eircom’s new owner, STT, appears to be establishing a more cordial and cooperative relationship with ComReg and has indicated that it plans to invest in Eircom’s network and intends to stay in Ireland for the long term. The recent move to drop Eircom’s legal case against ComReg’s decision to lower the monthly charge for shared line LLU services from €8.41 to €0.77 reinforces the view that the company will be more cooperative with the regulator than under previous owners. That said it is hard to see how STT plans to undertake significant investment in Eircom’s network given its approximate €4 billion debt burden. Indeed, S&P recently put Eircom’s rating of B on ‘creditwatch negative’ and warned that the company could breach covenants on some of its debt in the next year.
The EU has changed its State Aid rules to facilitate joint public-private investment in broadband infrastructure in both rural and urban areas. Governments in other European countries have recognised the importance of investment in fibre-based next generation networks by intervening in their telecoms markets. For example, last year, Finland (a country with a similar urbanisation rate as Ireland) made universal minimum internet access speeds a legal requirement. The Finnish government committed to a minimum speed of 1Mb/s per second from July of this year and 100Mb/s by 2015. Another example is the UK, where the British Government has set up a Next Generation Access fund (to come from a £0.50 monthly levy on all telephone landlines). The approximate £1 billion in funds that the levy generates will be used to facilitate the installation of fibre-optic cable in rural and suburban areas where it might otherwise have been unprofitable for the private sector to invest.
Further afield, the Australian Government has announced a multi-billion fibre-to-the-home project which will provide 100Mb/s connections to 90% of homes over the next eight years. The project is to be run as a joint venture with the private sector where the State will own a minimum of 51% of the project. In Singapore, the Government is providing almost US$500 million for a joint venture project with a private sector company to construct the passive infrastructure for a national next generation broadband network. A further US$166 million in funding is being provided for a separate joint venture with Starhub, a subsidiary of Eircom’s new owner STT, to build and operate the active infrastructure for the national network and will be competed by 2015.
It is clear that other countries realise the strategic importance of high-speed broadband and are taking steps to ensure their countries don’t fall behind. What is worrying for Ireland is that we are already behind many of the above countries as it stands and cannot afford to fall further behind through inaction. While many of the policy and regulatory actions mentioned earlier, if implemented, could do much to facilitate improved private investment in infrastructure, Ireland can ill afford to wait and see if the required investment will take place, and at the required pace. The Irish Government needs to become more proactive and play a stronger role in the development of Ireland’s next generation broadband infrastructure, particularly at the local access level. This requires either direct investment by the State or co-investment with the private sector (Eircom’s dire financial situation could provide an opportunity for the Government to step in and make a deal with the company in relation to its network infrastructure). Maybe then future Forfás reports won’t need to perennially point out that we lag competitor countries in terms of our broadband performance.
Thursday, 6 August 2009
STT bid for Eircom
Donal Palcic: The fifth change of ownership of Eircom now appears imminent with Singapore Technologies Telemedia (STT) very likely to make a deal to acquire the company in the coming days. While STT's latest offer price is not known, it is unlikely to be significantly higher than its original bid of just under €110 million given the scale of Eircom's debt that it would assume.
The STT bid was backed by Eircom's ESOT who favoured an industry player over other private equity investor bids. The hope is that an industry player will make a long-term commitment to the company and invest in Eircom's ageing network.
Since STT's bid for Eircom now appears inevitable, and a Government deal to acquire Eircom's network infrastructure which I argued for in a previous post is now wishful thinking, what will now happen to one of our country's most strategic assets is very much up in the air.
While the hope is that STT will make the required investment in Eircom's network infrastructure, STT is a commercial operation that will demand a return on its investment. It is also taking on an enormous amount of debt. It is therefore hard to see STT investing on the scale (and at the speed) required.
The Government still has an important role to play in the development of our national telecoms network assets. It needs to maximise the use of its current fragmented portfolio of assets by amalgamating their ownership/management and providing 'one-stop-shop' access to these assets on an open wholesale basis. Creating a State-owned telecoms network utility to manage these assets would seem like the best option to achieve this. The ownership of any newly built infrastructure (ducting laid down as part of road construction and other civil engineering projects) should also be transferred to this new network utility company. In addition, the company could itself invest in infrastructure in areas where it deemed it necessary, removing the need for the Government to foot the bill for projects such as the MANs.
Sadly, I fear that the Government will keep following its 'do minimum' and 'let's wait and see what happens' approach, Eircom's new owners are unlikely to invest heavily in its network, and Ireland's telecoms infrastructure and broadband services will continue to fall further behind her European peers.
The STT bid was backed by Eircom's ESOT who favoured an industry player over other private equity investor bids. The hope is that an industry player will make a long-term commitment to the company and invest in Eircom's ageing network.
Since STT's bid for Eircom now appears inevitable, and a Government deal to acquire Eircom's network infrastructure which I argued for in a previous post is now wishful thinking, what will now happen to one of our country's most strategic assets is very much up in the air.
While the hope is that STT will make the required investment in Eircom's network infrastructure, STT is a commercial operation that will demand a return on its investment. It is also taking on an enormous amount of debt. It is therefore hard to see STT investing on the scale (and at the speed) required.
The Government still has an important role to play in the development of our national telecoms network assets. It needs to maximise the use of its current fragmented portfolio of assets by amalgamating their ownership/management and providing 'one-stop-shop' access to these assets on an open wholesale basis. Creating a State-owned telecoms network utility to manage these assets would seem like the best option to achieve this. The ownership of any newly built infrastructure (ducting laid down as part of road construction and other civil engineering projects) should also be transferred to this new network utility company. In addition, the company could itself invest in infrastructure in areas where it deemed it necessary, removing the need for the Government to foot the bill for projects such as the MANs.
Sadly, I fear that the Government will keep following its 'do minimum' and 'let's wait and see what happens' approach, Eircom's new owners are unlikely to invest heavily in its network, and Ireland's telecoms infrastructure and broadband services will continue to fall further behind her European peers.
Thursday, 30 July 2009
Guest post by Donal Palcic: Next Generation Broadband and the Smart Economy
Donal Palcic: I read with interest the recent first report of the DCENR’s Knowledge Society Strategy process (entitled Technology Actions to Support the Smart Economy). The report claims that Ireland is now one of the “most advanced countries in the world for wireless and mobile broadband technologies” and that a “competitive market is delivering broadband speeds for Irish consumers from a range of broadband providers”. The report goes on to detail a number of action areas that will deliver the critical next generation network (NGN) infrastructure necessary for the development of a smart economy. The majority of the report then devotes most of its space to describing initiatives such as the recently announced Exemplar network.
Nowhere in this report are any of the key issues surrounding the development of a true NGN mentioned or discussed. The report’s claim that we have a competitive broadband market is also highly questionable given Eircom’s dominance of the fixed-line market and Ireland’s perennial position towards the lower end of most EU/OECD broadband scorecards. The Forfás response to last year’s NGN consultation paper shows that Ireland is currently not well placed to take advantage of future trends in broadband. Although the number of broadband subscribers has increased significantly since 2005, Ireland’s relative position has not improved as other countries are moving ahead at an even faster rate. The fastest speeds available in Ireland currently lag those of our European counterparts while the cost of our fastest broadband services is relatively higher.
A quick perusal of the latest ComReg quarterly market data (for Q1 2009) shows that there are now over 1.27 million broadband subscribers in Ireland. An examination of the breakdown of broadband subscriber numbers by subscription type presents some interesting facts:
DSL subscribers make up approximately 53% of overall broadband subscribers in Ireland, while the mobile broadband market, which has recorded explosive growth in recent years (over 90% increase in subscribers over the past year alone), accounts for some 28% of subscribers. Eircom dominates the DSL market where it provides 96.6% of DSL access either directly (Eircom retail) or indirectly (wholesale bitstream). Only 3.4% of DSL access is from unbundled local loops (LLU), which is significantly behind the EU average where LLU constitutes 44% of all lines supplied by competitors (ECTA Broadband Scorecard Q3 2008). The lack of local loop unbundling and the high price of line rental charged by Eircom is arguably a significant factor behind the considerable growth in mobile broadband subscribers (particularly in the residential market) and further evidence of Eircom’s dominance in the fixed-line market.
So where do we actually stand in terms of developing a next generation network? The Knowledge Society Strategy report ignores the most important obstacle to developing a NGN in Ireland, namely Eircom’s fixed-line network and the critical local loop (last mile) infrastructure. The last mile is a key area of concern given the lack of investment by Eircom in this area. The current local loop infrastructure, which is largely twisted pair copper, is fast becoming incapable of delivering currently available bandwidth-intensive services. The services of the future (3D TV etc.) will require even higher levels of bandwidth. While cable operators such as UPC are investing in infrastructure capable of providing speeds of up to 100Mbps, such services are only available to a relatively small (mainly urban) portion of society. In order to develop a true NGN, the deeper rollout of fibre across the national network (i.e. to the kerb (cabinet), to the home etc.) is necessary. Eircom’s local loop infrastructure thus constitutes the most significant bottleneck in the future development of next generation broadband services.
Two possible options available to the Government are:
1) Take Eircom’s network infrastructure back under public ownership (or if a deal on obtaining the network alone cannot be reached, take Eircom as a whole back under public ownership, separate the network element from the remaining business elements which can then be sold off while retaining the network). Eircom’s fixed line network should then be amalgamated with the entire portfolio of State telecoms assets (MANs, NBS, and the telecoms networks of the ESB, Bord Gáis, Irish Rail etc.) and managed by a new State-owned telecoms network company. The new company can then provide network services to private operators on an open-access basis across every level of infrastructure (first, middle and last mile).
2) Amalgamate all of the existing State telecoms assets under a new public network utility as above and construct a new national NGN in a greenfield approach.
Option 1 need not cost the Exchequer significant sums of money. A new State-owned telecoms network utility will be able to finance investment through revenues generated and its own borrowings. Eircom is currently up for grabs for approximately €100 million. While there are obvious issues surrounding the level of Eircom’s approximate €4 billion debt, the strategic importance of Eircom’s network is simply too large for the Government not to take radical action now and bring Eircom’s network back under public ownership. A failure to do so will simply ensure that Ireland falls further behind her European and international counterparts. Even if the Government has to take on some part of Eircom’s debt in order to obtain the network, this does not have to add to our ever increasing national debt and can be managed by the new State-owned network. When Telecom Éireann was corporatised from the Civil Service back in 1984 it inherited a loss-making business, approximately IRP£1 billion in debt and a network in dire need of investment. As a commercial public enterprise, it returned the company to profitability within four years, spent significant sums of money upgrading the network and managed to deleverage its balance sheet, all without any assistance from the Exchequer.
While Option 2 does not involve taking Eircom’s network back under public ownership (and therefore taking on some/all of Eircom’s considerable debt), the problem of access to, and investment in, the local loop infrastructure remains. Given that the local loop is currently one of the key barriers to the development of high speed broadband services, Option 1 is arguably superior to Option 2.
Provision of access to a fully integrated national telecoms network on an open wholesale basis would facilitate increased customer choice without any requirement for the Government to re-enter the business of telecoms service provision. It would also facilitate improved competition amongst service providers and equitable investment in infrastructure, whereby a State-owned network company can be mandated to invest in rural areas, preventing the deepening ‘digital divide’ which is already occurring as private operators only invest in more economically attractive, densely populated urban areas.
Given the rapid pace of technological development and the constantly increasing information needs of business and society, our telecoms infrastructure is as important, if not more important, than other strategically important infrastructure such as our road and rail networks. Simply put, high-speed broadband is now a necessity for everything from economic growth to social inclusion. While the initiatives outlined in the DCENR’s latest Smart Economy report are to be welcomed, the issue with the local loop infrastructure is far more important. If the Government acts now it can create a realistic physical platform for a truly competitive telecoms market and the basis for growth towards a smart economy, and in doing so facilitate Ireland’s future economic growth once it emerges from the current crisis.
Dr. Donal Palcic lectures in economics at the University of Limerick
Nowhere in this report are any of the key issues surrounding the development of a true NGN mentioned or discussed. The report’s claim that we have a competitive broadband market is also highly questionable given Eircom’s dominance of the fixed-line market and Ireland’s perennial position towards the lower end of most EU/OECD broadband scorecards. The Forfás response to last year’s NGN consultation paper shows that Ireland is currently not well placed to take advantage of future trends in broadband. Although the number of broadband subscribers has increased significantly since 2005, Ireland’s relative position has not improved as other countries are moving ahead at an even faster rate. The fastest speeds available in Ireland currently lag those of our European counterparts while the cost of our fastest broadband services is relatively higher.
A quick perusal of the latest ComReg quarterly market data (for Q1 2009) shows that there are now over 1.27 million broadband subscribers in Ireland. An examination of the breakdown of broadband subscriber numbers by subscription type presents some interesting facts:
DSL subscribers make up approximately 53% of overall broadband subscribers in Ireland, while the mobile broadband market, which has recorded explosive growth in recent years (over 90% increase in subscribers over the past year alone), accounts for some 28% of subscribers. Eircom dominates the DSL market where it provides 96.6% of DSL access either directly (Eircom retail) or indirectly (wholesale bitstream). Only 3.4% of DSL access is from unbundled local loops (LLU), which is significantly behind the EU average where LLU constitutes 44% of all lines supplied by competitors (ECTA Broadband Scorecard Q3 2008). The lack of local loop unbundling and the high price of line rental charged by Eircom is arguably a significant factor behind the considerable growth in mobile broadband subscribers (particularly in the residential market) and further evidence of Eircom’s dominance in the fixed-line market.So where do we actually stand in terms of developing a next generation network? The Knowledge Society Strategy report ignores the most important obstacle to developing a NGN in Ireland, namely Eircom’s fixed-line network and the critical local loop (last mile) infrastructure. The last mile is a key area of concern given the lack of investment by Eircom in this area. The current local loop infrastructure, which is largely twisted pair copper, is fast becoming incapable of delivering currently available bandwidth-intensive services. The services of the future (3D TV etc.) will require even higher levels of bandwidth. While cable operators such as UPC are investing in infrastructure capable of providing speeds of up to 100Mbps, such services are only available to a relatively small (mainly urban) portion of society. In order to develop a true NGN, the deeper rollout of fibre across the national network (i.e. to the kerb (cabinet), to the home etc.) is necessary. Eircom’s local loop infrastructure thus constitutes the most significant bottleneck in the future development of next generation broadband services.
Two possible options available to the Government are:
1) Take Eircom’s network infrastructure back under public ownership (or if a deal on obtaining the network alone cannot be reached, take Eircom as a whole back under public ownership, separate the network element from the remaining business elements which can then be sold off while retaining the network). Eircom’s fixed line network should then be amalgamated with the entire portfolio of State telecoms assets (MANs, NBS, and the telecoms networks of the ESB, Bord Gáis, Irish Rail etc.) and managed by a new State-owned telecoms network company. The new company can then provide network services to private operators on an open-access basis across every level of infrastructure (first, middle and last mile).
2) Amalgamate all of the existing State telecoms assets under a new public network utility as above and construct a new national NGN in a greenfield approach.
Option 1 need not cost the Exchequer significant sums of money. A new State-owned telecoms network utility will be able to finance investment through revenues generated and its own borrowings. Eircom is currently up for grabs for approximately €100 million. While there are obvious issues surrounding the level of Eircom’s approximate €4 billion debt, the strategic importance of Eircom’s network is simply too large for the Government not to take radical action now and bring Eircom’s network back under public ownership. A failure to do so will simply ensure that Ireland falls further behind her European and international counterparts. Even if the Government has to take on some part of Eircom’s debt in order to obtain the network, this does not have to add to our ever increasing national debt and can be managed by the new State-owned network. When Telecom Éireann was corporatised from the Civil Service back in 1984 it inherited a loss-making business, approximately IRP£1 billion in debt and a network in dire need of investment. As a commercial public enterprise, it returned the company to profitability within four years, spent significant sums of money upgrading the network and managed to deleverage its balance sheet, all without any assistance from the Exchequer.
While Option 2 does not involve taking Eircom’s network back under public ownership (and therefore taking on some/all of Eircom’s considerable debt), the problem of access to, and investment in, the local loop infrastructure remains. Given that the local loop is currently one of the key barriers to the development of high speed broadband services, Option 1 is arguably superior to Option 2.
Provision of access to a fully integrated national telecoms network on an open wholesale basis would facilitate increased customer choice without any requirement for the Government to re-enter the business of telecoms service provision. It would also facilitate improved competition amongst service providers and equitable investment in infrastructure, whereby a State-owned network company can be mandated to invest in rural areas, preventing the deepening ‘digital divide’ which is already occurring as private operators only invest in more economically attractive, densely populated urban areas.
Given the rapid pace of technological development and the constantly increasing information needs of business and society, our telecoms infrastructure is as important, if not more important, than other strategically important infrastructure such as our road and rail networks. Simply put, high-speed broadband is now a necessity for everything from economic growth to social inclusion. While the initiatives outlined in the DCENR’s latest Smart Economy report are to be welcomed, the issue with the local loop infrastructure is far more important. If the Government acts now it can create a realistic physical platform for a truly competitive telecoms market and the basis for growth towards a smart economy, and in doing so facilitate Ireland’s future economic growth once it emerges from the current crisis.
Dr. Donal Palcic lectures in economics at the University of Limerick
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