Private Members' Business. - Telecommunications (Miscellaneous Provisions) Bill, 1996: Second Stage (Resumed).
Thursday, 26 September 1996
Dáil Éireann Debate
Mr. O'Malley: Before the debate was adjourned I was saying that Irish Governments traditionally have been reluctant to promote competition in these State dominated industries in the fields of transport, energy and telecommunications particularly but we are being forced to do so by European directives. It has taken an outside body to tell us what was good for us, even though it was obvious what we should have done and what we should still do.
The establishment of an independent office for the regulation of the telecommunications industry is a significant departure from traditional policy and as such I welcome it, even if it is forced on us against the wishes of, presumably, the Government and the Department by European requirements. It will, I hope, mean direct responsibility for regulation is removed from ministerial control. Independent regulation on its own will  not lead to increased competition; that will require political will which I do not see in the present Government. The State controlled Telecom Éireann dominates the telecommunications sector in this country and currently it faces competition in some areas of its business, for instance, in international calls, and it will soon face competition in others, such as mobile phone services.
Essentially the company's control of the Irish telecommunications network means that it will be the dominant player in the overall market for a considerable time yet. Irish consumers are paying an unduly high price for the maintenance and protection of this State monopoly. This is apparent from the results of the survey published yesterday by the Telephone Users' Advisory Group. That survey showed that Ireland has the highest home telephone rental fee in Europe. It also showed that we have the highest charges for both local and internal trunk telephone calls in Europe. Monopolies, particularly unregulated State monopolies such as this, are an expensive luxury in any economy. This survey clearly illustrates that in so far as telecommunications in Ireland are concerned.
As long as Telecom Éireann controls the country's basic telecommunications infrastructure the movement towards full competition will be slow. This does not have to be the case. The Government could take decisive action to encourage the rapid development of competition in the Irish telecommunications sector. The best way to do this would be to separate Cablelink from Telecom Éireann.
Cable television companies are now recognised as the most natural competitors to telecommunications companies in deregulated markets. With direct access to huge numbers of homes and businesses, modern technology allows them to supply a range of telephone and telecommunications services as well as television signals. Cable television is set to become the key piece of information infrastructure for domestic consumers and for small and medium enterprises  during the coming years. For example, in Northern Ireland the company which has won the cable licence for that region has already announced its intention to compete aggressively against British Telecom in that market. Consumers will benefit from significant reductions in charges.
This Bill, by virtue of section 7, envisages only increases in already penal charges. Unfortunately, the reductions in Northern Ireland will not be copied in the South. Cablelink, the most obvious competitor in the mainstream telephone services market, is effectively controlled by Telecom Éireann which owns 75 per cent of it. The other 25 per cent is also controlled by the State through RTE.
It is estimated that for an investment of £30 million-£50 million the Cablelink infrastructure could be upgraded to compete fully with Telecom Éireann in voice telephony and other services. As long as Cablelink is owned by Telecom Éireann this will not happen. There is no reason Telecom should invest money in a subsidiary to enable it to compete with its core business. Monopolies do not function in that way. Cablelink should be allowed to operate as an independent company. It would then be in a position to develop as an innovative and aggressive player in the Irish telecommunications market, offering strong competition to Telecom Éireann and providing a real choice for hundreds of thousands of consumers. Some years ago when I was Minister for Industry and Commerce I sought to achieve that but could not prevail against the Fianna Fáil and the Department's desire to hand Telecom Éireann a total monopoly with no potential competitors.
Ideally, the Cablelink company should also be privatised in addition to Telecom Éireann. This would benefit the taxpayer in two ways: first, the sale of the company would net several hundred million pounds for the Exchequer and, second, the State would not be required to fund that company's heavy capital investment requirement in the years to come. The best option would  be to float the business on the Stock Exchange. This would allow the company to remain under Irish control and ownership while giving it independent access to an unlimited supply of new capital.
That quotation is taken from the document “Shaping our Future” published recently by Forfás, the Government's advisory body for industrial development which is part of the Department of Enterprise and Employment. The steering committee which oversaw the production of that report included representatives of Government, the business sector and the trade union movement. The document was launched with considerable fanfare and the impression was clearly given that it represented official Government policy. Yet the Minister for Transport, Energy and Communications appears to be moving in the opposite direction. When he announced the sale of a 20 per cent stake in Telecom Éireann to KPN-Telia it became clear that Cablelink was to remain part of Telecom. This means that one company will, in effect, continue to control two separate information monopolies. I ask the Minister to reconsider this decision. If he is genuinely concerned about promoting competition then there is no reason he should not proceed with the demerger of Cablelink. If he goes ahead with his present plan then he is missing a great opportunity to increase consumer choice and reduce consumer costs. I understand that the European Commission is looking at the question of Telecom's ownership of Cablelink. I note that Mr.  Herbert Ungerer of the Competition Directorate DGIV in Brussels has publicly questioned Telecom's continued control of Cablelink, particularly as Telecom has unfortunately been given a derogation to preserve its monopoly and voice telephony until the year 2000. It would be embarrassing if, yet again, we are to be forced by pressure from Brussels to do the right thing which we are not prepared to do voluntarily. Surely the rights of consumers, both private and commercial, must be addressed in the decision-making process. The rights of consumers come last in the decision-making process in which we are now engaged.
The Bill stipulates that while part of Telecom Éireann may be sold to the private sector the State is to retain a majority shareholding in the company. Why should this be the case? Section 8 (2) which provides for that is a disgrace. There is no longer any rationale for State control by ownership of the telecommunications industry. All over the world Governments are coming to this realisation. In Britain, New Zealand and even in the former Communist countries of Eastern Europe it is recognised that telecommunications is a commercial business which should be regulated by Government but not owned by them. The fact that telecommunications is a vital industry is no argument for State control through ownership. The same used to be said of the Irish Sugar Company, Irish Life and the B & I Line but the State has long since ceded control of these firms to the private sector and everyone has gained from that including, above all, the employees.
This ideological obsession with State ownership has cost us dear in terms of Telecom Éireann's so-called strategic alliance which is merely a euphemism for partial minority privatisation. It was the Government's insistence on continuing State control which scared away potential bidders for the Telecom stake. Companies such as British Telecom were simply not interested in becoming minority partners in a State controlled company, particularly one with the  record of Telecom Éireann. In the end the Government was effectively left with one bidder. It seems incredible that we had to pay consultants £5 million in fees to assist competing bids when there was only one bid to be considered. Why does the Government want to retain control of Telecom Éireann? The State has nothing to offer in management terms, otherwise it would not have sought what it calls a strategic partner for the company. Equally the State has nothing to offer in terms of capital, otherwise it would not be selling part of the company.
I could understand a sensible strategy, whereby the Government sold its holding in the company in tranches, gradually reducing its stake over a number of years. This is what successfully happened in Irish Sugar-Greencore and Irish Life. However, such a move is not planned with regard to Telecom Éireann. Continuing State control of the telecommunications industry is deliberately included in the Bill. What does the Government think it has to contribute to the long-term development of the company that the private sector cannot offer? The only justification for it appears to be ideological and related to the welfare of trade unions and their officials.
I question the manner in which the sale of the stake in Telecom Éireann has been handled. The Exchequer received a nominal £1 from the sale of Irish Steel. It will not receive anything from the sale of 20 per cent of Telecom Éireann. The purchase price of £183 million will be reinvested in the company. Effectively, this means the buyers, KPN-Telia, will get their money back. Any proceeds from the sale of a further 15 per cent of the company of KPN-Telia will be swallowed up in meeting the State's obligations to the Telecom Éireann pension fund, where the liability is vast and measured in many hundreds of millions of pounds.
KPN-Telia's option over the remaining 15 per cent apparently cost it nothing. This means the State is locked  into an arrangement whereby the Dutch-Swedish consortium has an effective lock on Telecom Éireann's long-term future. Without paying the Government a penny, is has, for all practical purposes, secured effective control of what is perhaps the State's most valuable commercial asset. It is ironic also that control of Telecom Éireann should now pass to foreign ownership. In other countries, governments have sold their telecommunications networks by floating them on their stock exchanges.
For example, in New Zealand, the Government pocketed £2 billion from the flotation of the New Zealand Telecom Corporation. If Ireland had followed that route, Irish investors would have had an opportunity to purchase shares in Telecom Éireann. The company would have remained in Irish hands and under Irish control. It is a strange state of affairs when Irish pension funds can put their members' money into British Telecom and the telecom companies in New Zealand and Hong Kong, but they are precluded by the Government from investing in Telecom Éireann.
There is no reason Telecom Éireann could not have been privatised via the public floatation mechanism. There is pent up demand for quality new stock issues among Irish institutional and private investors. The Minister for Finance frequently encourages the Irish investment community to put more money into Irish companies, but how can they do so if they are not given the chance? Why should it be necessary to continue to rely on public investment and borrowing of public money when there is almost unlimited private money to make the same investment at no cost to the Exchequer and with no resulting increase in the national debt? A well managed and independent Telecom Éireann would have been in a position to command the confidence of international institutional investors. The company could then have pursued a strategic alliance on its own terms without any Government interference. The  Exchequer would have benefited substantially in terms of privatisation receipts and Telecom Éireann would have been in a position to fund itself in common with any other commercial organisation. It is a great pity for the company and the investment community in Ireland that this route was not followed. The insistence on continued Government control of Telecom Éireann in the Bill is all the more surprising given the State's poor record as a strategic manager of the company.
Under State ownership, essential cost cutting at Telecom Éireann has been continually postponed, much to the detriment of the company's long-term commercial prospects. By the company's estimates, it is carrying excess costs of more than £100 million a year. As a virtual monopoly, Telecom Éireann is able to pass these costs on to consumers, keeping Irish prices above those in the UK and damaging the competitiveness of the economy in the process. Despite being lumbered with £100 million of unnecessary additional costs, the company was still able to deliver an operating profit of £218 million in its last financial year. This represents an operating margin of 20 per cent.
Failure to tackle the problem of rationalisation has left us in difficulty. KPN-Telia is likely to insist that the necessary cost cutting measures are implemented at a brisk pace. De-manning Telecom Éireann will dramatically increase profits and boost the value of the company. In a few years time, KPN-Telia's stake in the company will have risen to a strategic 35 per cent. This will effectively shut out all other bidders and leave KPN-Telia ideally placed as the sole bidder to purchase out right control of the company. The clever New Zealanders received £2 billion from the sale of their telecom company, but it is unlikely the Exchequer will ever see a fraction of that amount from the disposal of Telecom Éireann, although it is probably worth more than the New Zealand company.
 It is recognised by all competitors that telecommunications will play a vital role in determining industrial competitiveness in future years. The pace of technological change in the industry will be rapid. In State controlled companies, strategic decisions are made ultimately by bureaucrats and politicians. Experience tells us such companies are not the best equipped to cope with the needs of a fast changing market. We should not be afraid of competition, as we so patently are afraid. Instead, we should welcome it.
The UK has already given itself a huge competitive advantage over all other European countries through the thorough manner in which it has deregulated its telecommunications market. This gives it an important card to play in attracting mobile investment projects in the services sector. We should seek to emulate the British achievements in this area. American companies will not be attracted to Ireland by the prospect of dealing with a largely State owned company which controls two telecommunications monopolies.
In terms of employment and prosperity, we have a huge amount to gain from the deregulation of the telecommunications market and the ending of direct State involvement in the sector. We should enthusiastically pursue this option, not seeking to protect State monopolies by postponing competition as has been done for years, a policy which the Bill perpetuates.
Regarding definitions in the Bill, I note that, in section 6 (1), providers of telecommunications services are not defined, but telecommunications service is defined in extraordinarily broad terms in section 7 (1). It is so broad that it includes virtually any form of communication. I hope this is not an attempt to extend and deepen State control of the telecommunications industry with a view to protecting Telecom Éireann's monopoly in the long-term. We have nothing to lose and much to gain by promoting competition in telecommunications. In the interests of consumers, I  urge the Minister to promote competition and not to frustrate it as the Minister's strategy subtlety does.
I re-echo Deputy Brennan's observation earlier that the Labour Party and the successors in title to Official Sinn Féin appear, incredibly, to have absented themselves from the debate. We have been told, semi-officially, that they will not be contributing to the debate. That is remarkable. I would like the Tánaiste, Deputy Spring, the Minister for Social Welfare, Deputy De Rossa, or another left-wing theologian to reply to what I said and point out where, if anywhere, I am wrong. I would also like them to outline the benefits that would accrue to this country from continued State ownership of telecommunications when Hungary, the Czech Republic, the Slovak Republic, Poland, former East Germany, the Baltic Republics and, possibly, Romania and Bulgaria believe the State has nothing to contribute to efficiency or competitiveness by retaining ownership of telecommunications. As this is an open ended debate I invite them to come in and let us hear what they have to say. In the absence of that, there can be no argument for maintaining the status quo, as essentially we are trying to do, with only minor changes. The status quo has not served us well, it will not serve us well and, as our neighbours and competitors change rapidly, we will be left a long way behind if we fail to do likewise.
Mr. Hogan: I am bemused by Deputy O'Malley's concluding remarks about ideology on the State sector. Not long ago he was a Minister and leader of a political party in Government with a party with whom, perhaps, he regards holds a similar ideology. I do not know if Fianna Fáil agree with Deputy O'Malley's view on the sale in full of Telecom Éireann.
Mr. Hogan: Perhaps Deputy Brennan would indicate if he agrees with the policies enumerated by a member of a  party which may be a potential partner for Fianna Fáil in Government at some time in the future. Deputy O'Malley was selective in the historic cases he outlined. I recall Mr. Hynes, a former chief executive of Telecom Éireann, indicating sweeping changes in the company when a Fianna Fáil-Progressive Democrats Government was in office. He was unceremoniously sacked by the then Minister for Transport, Energy and Communications for suggesting that there was over-manning in Telecom Éireann and that sweeping changes were necessary to make the company more competitive. Why did Deputy O'Malley not intervene at that time?
Mr. Hogan: He allowed the Minister to sack him. If his beliefs were as strong then as they are now, he should have taken action. This Government does not have the type of ideological hang-ups about privatisation Deputy O'Malley suggests. Members will recall that in the past year and a half Irish Steel and the remaining shares in Irish Life were sold and we are now talking about the partial sale of Telecom Éireann to enable it meet the competitive challenges which it will inevitably face from various companies here and in the EU that would like to have a foothold in our telecommunications market. I believe all political parties accept the need for the £500 million from the sale of part of Telecom Éireann to be pumped into the company to make it more efficient. Its enormous capital investment, which was badly needed, has put a strain on its finances. Members will recall when people had to wait four or five years to have a telephone installed but, fortunately, successive Governments have ensured that is no longer the case. I am sure we could all tell anecdotal stories about various Ministers of State and many Members will recall the answers Mark Killilea provided for the installation of telephones during election campaigns but, fortunately, that is no longer necessary.
 The State's investment in the telecommunications system over many years has been of enormous benefit to consumers and the economy in general. As a peripheral nation, we probably require a better telecommunications network than any country in the European Union to sell our products effectively and efficiently on the European and world stages.
The purpose of this Bill is to bring about the transformation of Telecom Éireann and prepare it for competition. This will be achieved through a strategic alliance deal agreed with KPN-Telia. The deal will involve that consortium acquiring a stake of up to 35 per cent in Telecom Éireann over a three year period. The financial terms are expected to produce total proceeds to the State in excess of £500 million, something on which Deputy Brennan poured cold water. This money will be available through a profit sharing formula to further strengthen the company. It will allow the State capture 60 per cent of the increase in value of the Telecom Éireann shares above a certain threshold.
KNP-Telia will pay the State an initial £183 million towards a 20 per cent stake in the company and an additional £200 million over the next three years as they exercise options for a further 15 per cent of shares. The partner will make further payments to the State in respect of both the 20 per cent stake and the 15 per cent of shares purchased under option, subject to the growth of the company. Under the profit sharing formula, all profits will be shared 60:40 between the State and KNP-Telia after the consortium has earned an agreed return on its investment.
The structure of this deal will allow the State, the company and the strategic partner to benefit from the significant contribution which KPN-Telia will bring to the company and our telecommunications sector. Through this deal KPN-Telia are committed to investing substantial human and strategic resources in the company to allow it realise fully  its development potential. This will ensure that we will become one of the more progressive countries in Europe in terms of price, quality and technologically advanced services. KPN-Telia will provided a comprehensive strategic support programme for Telecom Éireann which will consist of technical support, expert and managerial assistance, software and systems improvements covering mainstream telephony, data services and mobile and multi-media services. These are important developments in the area of communications which have not been developed to their full potential by Telecom Éireann.
A total of 85 separate strategic initiatives have been agreed between KPN-Telia and Telecom Éireann. I understand a team of experts and managers will be available as required, amounting to an equivalent of up to 100 man years of effort spread over the next few years to hammer out the various multimedia developments I outlined.
The KPN-Telia consortium is backed by the resources of Unisource and Uniworld which will enable Telecom Éireann provide worldwide interconnections on best terms to assist Irish industry and business, something to which Deputy O'Malley and others should have referred. The two companies are among the world leaders in terms of quality and efficiency. They bring a good track record to the task facing them here because of their accomplishments in their markets. In seeking a partner for Telecom Éireann the Government wanted a pattern that would fit well with its strategy and hold similar views on its strategic direction for the future. The KPN-Telia group has fit that strategic pattern.
Contrary to what some Members said, this is a worthwhile deal for the country and for Telecom Éireann. The amount involved is reasonable for a 35 per cent stake in a company that has a large debt and has undergone enormous capital investment and it must get a return on that investment. Taking into account the worldwide connections Telecom  Éireann will be afforded in this consortium through Unisource and Uniworld, Irish businesses will have an opportunity to be even more competitive as it will assist them in the communications sector and keep costs down.
I also welcome the Government's decision to ensure the regulator is independent. Consumers, whether household or business, should have a regulator or ombudsman to deal effectively with matters relating to charges. It is crucial to have an independent person dealing with those issues so I am glad section 2 states that this will be the case. The ombudsman system, which has been established in Ireland for a number of years, is working reasonably well for consumers and a suitably independent person, such as the regulator under this legislation, will provide the consumer with protection from companies which may not pass on the benefits of growth and competition as they should. I look forward to scrutinising the regulator's work so that consumers and business people who regularly use telecommunications will receive the benefits.
ESAT is a welcome addition to the telecommunications industry. When the bids for the mobile licence were made and decided on, I was disappointed that Fianna Fáil and the Progressive Democrats had difficulty accepting the competition was above board or that the result was a testimony to ESAT's capacity, as an Irish company in an international consortium, to outbid others and win the second mobile licence. I congratulate ESAT on the strides it is making in the Irish telecommunications market. It is providing necessary competition for Telecom Éireann which will mean an even better environment for consumers. It is important for consumers that there are sharp-edged companies like ESAT, prepared to take on the challenge of competing in the telecommunications business. It appears to be making great strides at present.
I have great sympathy with Deputy O'Malley's remarks about Cablelink.  For some reason, Telecom Éireann and RTE have acquired shares in this company and I question the need for their involvement. There are peripheral reasons for their wanting a controlling interest but Cablelink should be able to stand on its own and make links with international consortia in telecommunications and communications generally without recourse to Irish State companies. I have no difficulty in reviewing Cablelink's place in the telecommunication and television market.
One of the great bones of contention concerning telecommunications in rural areas is the proliferation of masts in scenic places and my parliamentary colleagues in Kilkenny and I attended various meeting on this subject recently. Telecom, ESAT and RTE have decided to locate installations between 30 and 60 feet high in sensitive, scenic areas where householders would have difficulty getting planning permission from the local authority. I ask the Minister to insist that his policy of co-sharing arrangement between these companies is implemented. It is not acceptable that each company feels it should have different sites within a small area in order to retain its independence. Arrangements should be entered into to minimise the number of masts erected around the country and the companies should share facilities to that end.
Local people also have fears, well-founded or not, about the emission of non-ionising radiation. The Radiological Protection Institute has the necessary expertise, as an established independent authority, to reassure the public on the safety or otherwise of these installations. The Leas-Cheann Comhairle represents a mountainous region where there is a difficulty with signals and these installations are causing community groups concern, much of which stems from anecodotal conversation about radiation. It should be monitored by an independent authority such as the RPI.
I congratulate the Minister for Transport, Energy and Communications for bringing the legislation before the  House. Selling a stake in a State company is a long and protracted process, as other Members who have been involved in such schemes will testify. It takes time not only to set up the deal but to negotiate it and put it in legislative form. The Minister has got a reasonable deal. Telecom will benefit enormously from the sale of this 35 per cent stake. The State will still have a controlling interest but that may not always be the case as the legislation can be reviewed. If further developments in telecommunications are required, any future Government will have to take that on board to ensure the broadest range of communications are available to the Irish consumer, the company delivering the service is competitive and the consumer receives the benefit of lower charges from increasing competition with which these companies must inevitably cope.
The independence of the regulator is crucial in protecting the consumer. An Irish controlling interest in regulating these charges is important to many who have lobbied various politicians and Governments to ensure charges are minimised. Because of the emergence of competition over the last year or two Telecom Éireann has had to look more closely at what it can do to reduce charges, generate greater efficiency and pass on extra benefits, which it had not done to date. I hope the independent regulator will, like the Ombudsman, play a major role in protecting the citizen and ensuring a competitive telecommunications sector for individuals and businesses. Accordingly, I have pleasure in supporting this legislation. Undoubtedly, there will be many opportunities to review this Bill but the sale of the 35 per cent is a good first step in protecting the jobs of Telecom employees and the company itself, and in obtaining a return on the huge investment made over the years.
Mr. R. Burke: Listening to Deputy Hogan I wondered if we were debating the same proposal. He portrayed this  deal as the Minister finding a diamond mine when he is really involved in a fire sale which borders on national sabotage in terms of finance, the national interest and the long-term job potential of the telecommunications industry if properly organised.
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