How (not) to spend it

In times of austerity programmes and tight budgets, one might be forgiven for paying only passing attention to the European Commission’s (EC) Guidelines on State Aid for broadband networks (the Guidelines), the most recent version of which was published in January this year. 

However, with the dramatic cuts to the EC’s ‘Connecting Europe Facility’, it will be down to national governments (or regional or local authorities) to fund broadband projects where the public policy case is strong but private investment is falling short of what is required.  There seems to be widespread agreement that broadband infrastructure projects can generate large public benefits, but business cases remain challenging.  Broadband speeds above 30Mbps for everyone – and half of the population subscribing to services with speeds of 100Mbps or more by 2020 – may only be achievable with some public money.  Without support, the ambitious targets set out in the Digital Agenda for Europe are in danger of remaining a pipe dream. 

Any such funding of broadband networks, however, will have to be compatible with the EU’s State Aid rules.  The Guidelines aim to provide some clarification about how these rules would apply to the funding of broadband projects.  The express objective is to facilitate well-designed aid targeted at market failure.  The ultimate aim is to have higher levels of broadband coverage and penetration than would otherwise be the case while minimising any risk of distortions to competition. 

The dos and don’ts of public funding

To this end, the Guidelines distil a number of requirements that public funding of broadband projects will have to meet from the basic principles used in the assessment of state aid.  For example, the projects that are funded should lead to a step-change in connectivity rather than just marginal improvements.  Funding schemes should be subject to a time limit – normally four years or less.  There should be clear pre-defined objectives for each project and, for certain schemes, their effectiveness in realising the pre-defined objectives must be evaluated ex post.

The networks that are built with the help of taxpayer’s money must offer wholesale access to third parties, regardless of whether they would be obliged to do so under the regulatory framework as a result of having Significant Market Power (SMP).  The network provider should offer a “wider range of wholesale access products than those mandated by a NRAs under sectoral regulation” and “wholesale access should be granted as early as possible before starting the network operation.”1  For a vertically integrated network operator, this would mean at least six months before the launch of retail services.  Wholesale access should be offered for a period of at least seven years (after which the normal regulatory provisions would apply).

Last but not least, there might need to be claw-back provisions in place that ensure that any unexpected upside (such as greater-than-expected profits) is shared with the body that provided the public funding.2   

A whiter shade of black

The Guidelines also retain the distinction between white, grey and black areas, but also differentiate between ‘basic broadband’ and Next Generation Access (NGA) networks.  The latter networks rely wholly or partly on optical elements and provide access services with ‘enhanced characteristics’ over basic broadband, such as substantially higher upload speeds.  For each type of network, white areas are those where the respective service is currently unavailable, and where there are no commercial plans for commencing supply in the foreseeable future.  In those areas, providing public funding for deployment of broadband services should not conflict with state aid rules.  Conversely, black areas are those where two or more networks are currently in operation, or will be deployed in the near future.  They are very likely to be no-go areas for the purposes of public funding.  Grey areas have one network provider, and the compatibility of public funding with the rules would need to be assessed on a case-by-case basis.

Acknowledging the fact that the commercial rationale for rolling out ultra-fast broadband connections to the premise may be lacking even in the most attractive areas, the Guidelines make clear that state aid may be used even in black NGA areas to serve the DA targets.  This is limited to projects that will bring speeds of more than 100Mbps to customers and provided that some additional conditions are met, including that:

  • there are no existing fibre-to-the-premises (FTTP) networks, nor any plans for their deployment;
  • there are no investment plans of commercial operators that would lead to competitive provision of ultra-fast services in the near future; and that
  • the network receiving funds is based on an open architecture and will be operated on a wholesale-only basis.

Of course, all the other conditions attached to projects that receive public funding would still apply. 

The most bang for the public buck?

At first sight, all of these conditions and requirements seem reasonable.  Where taxpayer’s money is spent on broadband infrastructure, it seems only right that this infrastructure should be available to all who want to use it, in whichever way they want to obtain access, and at the lowest possible prices.  Similarly, the provider of funding being entitled to a reasonable share in any unexpected upside seems a reasonable requirement.

However, a closer look suggests that imposing those conditions has a potentially large downside where public funding is provided as a complement to private investment.  A small injection of public money might make a marginal business case viable in principle, but the additional and much stronger access obligations that are triggered by the public funding would work in the opposite direction.  Similarly, claw-back provisions that give the funding body a share in the upside mean that the net present value of expected future revenue streams that a private investor will take into account in its investment decision is suddenly smaller.  Put differently, accepting a little help from the public purse may have a substantial detrimental impact on the business case of a private investor considering making an investment.  The public sector would be giving with one hand, but taking away with the other. 

The change that accepting public funding brings about is most obvious in the case of using taxpayers’ money to promote ultra-fast broadband services: the Guidelines suggest that an FTTP project in black NGA areas that relies at least in some part on public funds will have to be run on a wholesale-only basis.  This in itself could make accepting help from the public sector a rather unattractive proposition.  Under these conditions, the fact that state aid is available for giving the roll-out of ultra-fast networks the push to meet the DA targets has very little practical impact.

How to spend it?

The main problem with the Guidelines seems to be that little, if any, consideration is given to the fact that public funds might be most effectively used to boost marginal business cases.  The principles as set out do not appear to deal particularly well with the case where public and private investment complement one another, and where the private component accounts for a larger share of the total investment.  In these cases, the Guidelines suggest that public funds are more of a poison pill – taking taxpayers’ money means that the business case could be heading a long way south.

This means that projects that end up relying on public support are likely to need a good deal more public money than might have been the case had the consequences of accepting public funds been more proportionate.  The natural consequence of the Guidelines is that projects are more likely to be either (largely) publicly funded, or to rely entirely on private investments.  This would imply a larger likelihood of public funding replacing private investment in cases where in principle only a small boost would have been needed, which in itself would raise concerns under the state aid rules: public funding in this case would likely exceed the minimum necessary to correct the market failure.   Public support for the deployment of ultra-fast networks may be possible, but whether it will actually find any takers is rather questionable.

An obvious way of addressing these concerns would be to make additional obligations more proportionate to the contribution being made by public funds.  Projects that require only a small boost should not need to change fundamentally in nature, for example from a vertically integrated network operation to one that has to be run on a wholesale-only basis.  This may require a more complex assessment of public funding projects on a case-by-case basis but, on the other hand, it might allow the same amount of public money to go a longer way…

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Footnotes

  1. Paragraph 78(g) of the Guidelines. []
  2. Such claw-backs would arise in the case where the funding has been provided ex ante that turns out to be larger than would have been required under the principles that govern the compensation for the provision of Services of General Economic Interest (SGEI).  They would form part of a financing model that does not entirely rely on ex-ante provision of funds, but employs a mix of ex-ante and ex-post funding (see paragraph 78(i) of the of the Guidelines). []

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