Tuesday, 28 June 2011

Google and the case for broadband investment

Tom McDonnell: It is too easy in these days of high drama on the European stage to forget the fundamentals that will drive our eventual economic recovery. And we will recover provided we make the right strategic decisions.

It was welcome therefore to see this intervention by Google's executive chairman Eric Schmidt. He stated yesterday:
“The thing the Government can actually do that’s hard is [to] work with the telecommunications providers to get more broadband. It’s very difficult for small businesses to do,”

“There are very few things that are better use of your money than long-term infrastructure in information technology that serves the interests of the citizens of the country.”

My own doctoral research has focussed on the development of telecommunications infrastructure in Ireland and there is a wide body of theoretical literature and empirical evidence that backs up Schmidt's claim that 'broadband' matters for a country's growth prospects.

The rate of knowledge acquisition in an economy plays an important role in the long term growth rate of that economy. Broadband internet reduces the costs associated with learning and is a facilitator of knowledge acquisition and diffusion par excellence.

It is what is known as a General Purpose Technology. That is a transformative technology like the steam engine and electricity which affects the entire economy.

And Ireland is a broadband laggard.We are at the bottom of the class with Portugal and Greece.

Fixed (wired) broadband subscriptions per 100 inhabitants in the EU15 and Norway, Iceland and Switzerland (June 2010)
Rank Country Total
1 Netherlands 37.8
2 Denmark 37.3
3 Switzerland 37.1
4 Norway 34.2
5 Luxembourg 34.1
6 Iceland 33.3
7 Sweden 31.8
8 France 31.4
9 Germany 31.3
10 United Kingdom 30.5
11 Belgium 30.0
12 Finland 26.4
13 Austria 23.0
14 Spain 22.2
15 Italy 21.3
16 Ireland 20.3
17 Portugal 18.9
18 Greece 18.7
Source: OECD

A number of factors have hampered broadband development in Ireland, for example, low population density and a geographically dispersed population.

A lack of infrastructural investment by Eircom has also contributed negatively to broadband development in this country. One reason for the lack of investment is that the company was loaded with debt in the years after privatisation. Eircom now has debt levels approaching €4 billion. This was a legacy of Leveraged Buy Outs which the state had made itself powerless to stop.

Eircom's troubled finances will prevent it from investing sufficiently in the future. Although the Government's finances are perilous, the case for state investment in broadband is strong.


Michael Taft said...

Tom - a timely post. IBEC estimates that a next generation broadband network to reach 90% of households and buisnesses would cost €2.5 billion with a return horizon of 12 years. The resources are there: the State will still have nearly €15 billion in liquid assets by 2015 (cash balances, discretionary pension fund assets, etc.). Private pension funds are looking for safe investments. Between public and private funds we have the resources to commence this investment. And the supply-side returns would be substantial, never mind the economic benefit of installing the system.

Its seems so common-sensical obvious. What's the hold up?

Tom McDonnell said...

Yearsw of policy failure and incompetence.

A next generation network is promised in the programme for government. Minister Rabbitte recently called a broadband 'summit' to develop a roadmap for broadband roll out by years end.

See here: http://www.irishtimes.com/newspaper/finance/2011/0614/1224298863725.html

The group is called the Next Generational Broadband Taskforce

See here:
and press releases here
and here

Unfortunately they wont even produce their findings until March next year (which hardly counts as 'years end'.

Donal Palcic said...

I'd be interested in reading some of your research on the topic as my own doctoral dissertation examined the impact of the Eircom privatisation on the development of broadband infrastructure in Ireland.

I have called for more State intervention in the broadband market in the past on this blog (almost two years ago here and a year and a half ago here). Others have been calling for further State investment for far longer and it is depressing to see such slow progress on this front.

Fine Gael's NewEra document sets out a blueprint of sorts for developing high-speed fibre infrastructure by the end of 2013 as part of its "Broadband 21" strategy and it will be interesting to see how the Government progresses this element of its pre-election plan.

Paul Hunt said...

Investing in broadband roll-out should be a 'no-brainer'. But why wait for Michael Taft's hoped for fiscal surplus in 2015? By establishing the electricity and gas networks as separate, financially ring-fenced, business units - or indeed as as single business unit (capturing economies of scope and scale) - the state could re-structure their financing and release €2-2.5 billion of underemployed equity to finance this broadband investment in co-operation with Eircom.

This could be done in less than 3 months. Beyond that, privatisation could be considered to release potentially a similar amount.

Michael Taft said...

Paul - the liquid assets do not represent a 'fiscal surplus'; though I should have stated the issue with more clarity. In 2011, we have liquid assets of approx. €20 billion. This will be reduced to €15 billion by 2015. We can start funding and building NGB now. We don't need to privatise; that's a distraction. We're trying to build up indigenous enterprise; you don't start that historical project by privatising some of our most successful indigenous enterprise.

Paul Hunt said...


I think you realise full well that I am not advocating immediate privatisation - even though the Government is required to consider this option under the terms of the EU/IMF MOU (but perhaps you do not recognise the legitimacy of this agreement authorised by the Dail). This, of course, allows you to ignore my main point. Which is to restructure the energy networks in line with primary EU legislation (with which Ireland agreed in the European Council), ensure they are financed efficiently and release underemployed equity.

Antoin O Lachtnain said...

I would be very careful about using eircom (or any other partner) as the engine to roll out broadband. The state could easily end up in a position where it is under pressure to bail out private entities once again, in order to protect its investment.

The government is already under pressure to give eircom's shareholders another 5 or 10 years of special tax breaks in return for them not letting the company go into administration.

I think it is wrong to say that the government was powerless to stop all the overleveraging at eircom. For a variety of reasons, they just didn't.

The reality is that UPC is the new incumbent broadband operator in Ireland.