Promotion of investment in highspeed broadband infrastructure. Regulators arise!

Transcription

1 Promotion of investment in highspeed broadband infrastructure Regulators arise! Ohrid, May 2015 Peter Lundy (Advisor on Electronic Communications) 1

2 Outline: Key questions What tools do today s regulators have to promote high-speed broadband investment? Are these tools being applied? Have they been effective? What is the role of the State in advancing broadband? What steps should be taken for achievement of universal high-speed broadband access? 2

3 High speed broadband is a priority Under its Digital Agenda for Europe, high speed internet a key priority because it is critical to Europe's economic recovery and future prosperity A high quality digital infrastructure underpins virtually all sectors of a modern and innovative economy. It is a key factor for the EU's competitiveness The strong link between high speed internet deployment and competiveness has been recognised inside and outside Europe 3

4 WEF's Global Competitive Index score KEY MESSAGE: BROADBAND CORRELATION WITH NATIONAL COMPETITIVENESS 5.8 Correlation Fixed Broadband Penetration and Competitiveness Broadband drives competiveness Japan US Finland UK Sweden Germany Denmark Netherlands 5.2 Austria Belgium France 5 Luxembourg Korea 4.8 Ireland 4.6 Czech Rep. Spain Estonia 4.4 Poland Portugal Lithuania Italy Cyprus Hungary Slovenia Malta 4.2 Bulgaria Slovakia Latvia 4 Georgia Romania Fixed broadband lines per 100 population European Commission, 2011 A 10% increase in the broadband penetration rate results in 1 to 1.5% increase in annual GDP per-capita. Faster broadband = higher GDP growth. (Czernich et al. - University of Munich, 2009)

5 Why is high speed so important? EU target is for universal access to >30Mbps by 2020; Technology is expected to be able to provide 30 Mbps access Wireless was always assumed to be part of the mix The underlying assumption was that universal access would be provided at a fixed location (homes & workplaces) Demand for high speed broadband; The capacity of a 30 Mbps service is already stretched by increasing levels of multiple device use at home and work Increasing emphasis not only on download speed but also on other technical parameters (e.g. upload for cloud-based services, latency for financial transactions and gaming) Video and multiple uses by people and connected objects 5

6 Current average download speeds per household (19 th May 2015 at 06.00) Albania Bosnia-Herzegovina Croatia Macedonia Montenegro Serbia Turkey 9.50 Mbps Mbps Mbps Mbps 7.49 Mbps Mbps Mbps Global 23.3, EU 30.2 Singapore 123, Hong Kong 103 Romania 73, Sweden 59, Lithuania 57, Netherlands 51, Latvia 48, Denmark 47, 6 France 43, Belgium 40, Finland 38, Bulgaria 38, Hungary 37, UK 31, Germany 30 Source:

7 So why isn t everyone investing fast? In Europe, network operators have been reluctant to invest large sums in new ultrafast networks due to many factors; Unfavourable economic situation Market players are faced with diverging regulatory approaches within and across the telecommunications markets Different levels of legal and regulatory risk facing investors in each country 7

8 LEGAL AND REGULATORY RISKS FACED BY INVESTORS 1,00 Regional rankings: Overall legal and regulatory risk 0,80 0,60 0,40 0,20 0,00 8 Source:

9 Problems faced by investors Investors face a number of key challenges specifically in switching from copper to fibre; Uncertainty of demand; Consumers unwilling to pay a price premium for NGA Very high up-front investment cost; Despite the future proof nature of fibre, the initial investment is a high risk Civil works and in-building wiring are a large part of the costs Uncertain and inconsistent regulatory stances; Investors need the confidence that they can invest in more countries under predictable and welcoming conditions 9

10 Today s regulatory tools Ex-ante market regulation to improve competition; The list of relevant markets has been refined for broadband Market definition and market analysis Determination of significant market power Application of proportionate market remedies Measures for consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment Measures to reduce the cost of deploying highspeed electronic communications networks. 10 Any more?

11 Ex-ante regulation on broadband infrastructure markets Since the 2007 Relevant Markets Recommendation, several developments have occurred; Roll-out of LTE, the upgrade of cable infrastructure and deployment of fibre The use of broadband is now surpassing narrowband use An increase in the supply and demand of services and applications via the internet, including Over-The-Top (OTT) services IP technology is taking over circuit switched networks, which has implications for fixed telephony services An increase in inter-platform competition, with the upgrade of cable technologies and local fibre deployment Commission Recommendation (Sept 2014) on relevant product and service markets within the electronic communications sector 11

12 2014 Revisions to the market definitions Fixed broadband retail markets; Mass market for broadband services ( triple play ) The market for high-quality business products These remain characterised by a lack of effective competition in the absence of wholesale regulation; In particular where there is only a single fixed network capable of offering access to broadband nationwide In that case, regulatory intervention at the wholesale level is still required to address the competition failures at retail level Redefinition of the markets for wholesale inputs to fixed broadband access 12

13 2014 Revisions to the market definitions 2014 recommendations apply to; The market for wholesale network infrastructure access (market 4 from the 2007 recommendation) The wholesale broadband access market (market 5) Any markets susceptible to ex ante regulation identified by NRAs during a market analysis which substitute for these and cover the same network layers These substitute markets include; (i) (ii) (iii) (iv) (v) Access to the civil engineering infrastructure Unbundled access to the copper and fibre loops Unbundled access to the copper sub-loop Non-physical or virtual network access Wholesale broadband access (bit-stream services) over copper and fibre networks (comprising, among others, ADSL, ADSL2+, VDSL and Ethernet) 13

14 Reshaping of the markets relating to broadband services Reshaping of markets relating to broadband services The boundaries between the 2007 Markets 4 and 5 became less obvious with NGA In the revised Recommendation markets these markets (formerly markets 4-6) have been reorganised into markets 3 and 4; 3a. Wholesale local access, which is comparable to the previous market for wholesale physical unbundling, but now includes virtual unbundling, where this offers equivalent functionality 3b Wholesale central access, which includes mass-market bit-stream; and 4. Wholesale high-quality access, which will focus on business-grade service and product characteristics encompassing both terminating segments of leased lines and high-quality bit-stream Diversity of approaches by different NRAs?

15 What s the diversity problem then? This problem was illustrated in a Commission communication of 2010 on market reviews under the EU Regulatory Framework. A study on the Cost of non-europe which supported the need for intervention; Inconsistent application of regulatory remedies makes markets less attractive for entry and reduces incentives to invest A lack of standardised wholesale offers fit for multinational corporations and thus increasing the operating costs for cross-border service provision These perceived impediments create barriers with a high cost; they hamper cross-border investment, reduce competition and innovation 15

16 EU 2013 Recommendation C5761 Commission Recommendation on consistent nondiscrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment Targeted regulatory approach - NRAs implement; Sufficient non-discrimination safeguards coupled with a costing methodology ensuring price stability for legacy (copper) infrastructure and thus providing a strong competitive constraint on NGA pricing So that a wholesale access price obligation for NGA networks is no longer warranted and can be withdrawn (or not imposed in the first place) This would, in turn, ensure that the right investment 16 incentives for NGA are in place

17 What did the 2013 Recommendation do? The Recommendation applies only to the market for wholesale network infrastructure access and the wholesale broadband access markets. It consists of four sets of measures covering: Non-discrimination EoIs (equivalence of inputs); Compliance monitoring of the non-discrimination obligation, using SLAs (service level agreements) and KPIs (key performance indicators); Costing methodology (BU-LRIC+); and The non-imposition of regulated wholesale prices on NGA networks (Only if the tighter non-discriminatory rules are applied then the NGA can be free of price regulation, making investment in NGA more attractive) 17

18 Recommended costing methodology Bearing in mind that fibre will progressively replace copper networks, the Recommendation says; How to calculate the costs of an NGA network How to value re-usable civil engineering assets, such as ducts How calculate the costs of wholesale copper access services The Recommendation anticipates that application of these costing methods will lead to stable wholesale copper access prices within a band between 8 and 10/ month (net of all taxes) expressed in 2012 prices This is likely to be conducive to efficient investment in NGA and to provide a safeguard to access seekers and ultimately consumers 18

19 WHO S BUYING HIGH-SPEED BROADBAND? 19 Source: European Commission

20 TECHNOLOGY OF HIGH-SPEED BROADBAND 20 Source: European Commission

21 WHO IS SUPPLYING HIGH-SPEED BROADBAND? 21 Source: European Commission

22 IS THE 2013 RECOMMENDATION WORKING? 50% NGA subscriptions - incumbent market share at EU level Jan 2012 to July % 40% 35% 30% 27,5% 25% 20% 22,1% 18,9% 21,1% 23,0% 24,5% 15% 10% 5% 0% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul Source: European Commission

23 FIXED BROADBAND MARKET SHARES IN SEE 23 Source: Cullen International

24 UNIVERSALITY MODEL FOR BROADBAND Significant infrastructure sharing required Full infrastructure competition required Subsidy required 24

25 Fixed broadband penetration (subscriptions as a % of population), January % 40% 35% 30% 25% 20% 15% 10% 5% 0% RO BG PL SK HR IT HU LV PT ES IE EL CY AT SI CZ LT EE EU FI LU SE MT UK BE DE FR NL DK Source: European Commission 25

26 Mobile broadband penetration - all active users, January % Source: Communications Committee 120% 100% 80% 60% 40% 20% 0% HU EL PT RO CY SI DE BE FR LT SK BG CZ MT EU LV NL AT HR IT IE ES PL LU UK EE DK SE FI Source: European Commission 26

27 Fixed plus mobile broadband penetration/ 100 population BROADBAND SUPPLY AND DEMAND 80 Internet and broadband penetration 70 EU Line of satisfied demand Montenegro Croatia 20 Turkey Region Serbia 10 Bosnia and Herzegovina FYR Macedonia 0 Albania Internet usage per 100 population 27 Source: Consultant analysis for EBRD 2012 Electronic Communications Comparative Assessment

28 TELECOMMUNICATIONS SECTOR INVESTMENT MIX 28 Source: Cullen International

29 ENABLERS TO INFRASTRUCTURE INVESTMENT Competitive market Demand side stimulation Regulatory enablers Enabling policy: National Broadband Plan Effectively applied subsidies State aid rules

30 Source: European Commission 30

31 Source: European Commission 31

32 COST ISSUES Investment in high-speed fixed and wireless electronic communications networks requires substantial investments A significant proportion of which is the cost of civil engineering works; Limiting some of the cost-intensive civil engineering works would make broadband roll-out more effective High financial barriers, in particular in rural areas A major part of those costs can be attributed to; Inefficiencies in the roll-out process related to the use of existing passive infrastructure (ducts, conduits, manholes, cabinets, poles, masts, antenna installations, towers and other supporting constructions) Bottlenecks related to coordination of civil works, burdensome administrative permit granting procedures Bottlenecks concerning in-building deployment of networks

33 EXAMPLE PROJECT: CARINTHIA REGION, SLOVENIA km of ducts and 1,100 km of cables - 3,400+ households and 200 public points covered - Network type: P2P FTTH - Financing: 70% public funds, 30% private funds - Deadline: 18 months - Date of completion: September Project value: 14.6m EUR

34 PROJECT DATA: CARINTHIA REGION Cost structure of the project Project preparation & technical documentation 7 % Consents and permissions 2 % Construction works 50 % Fitting and equipment for existing facilities 1 % Installation works including material 28 % Supervision 2 % Entry into infrastructure register 1 % Passive equipment 2 % Active euipment 2 % %

35 CROSS-SECTOR INVOLVEMENT Synergies across sectors may significantly reduce the need for civil works for the deployment of electronic communications networks Reduction of the social and environmental costs linked to them, such as pollution, nuisances and traffic congestion Existing physical infrastructures suitable to host electronic communications network elements can include; Physical networks for the provision of electricity, gas, water and sewage and drainage systems, heating and transport services Transport services, including railways, roads, ports and airports

36 EU DIRECTIVE 2014/61 Directive on measures to reduce the cost of deploying high-speed electronic communications networks. Objective: Measures aiming at increasing efficiency in the use of existing infrastructures and at reducing costs and obstacles in carrying out new civil engineering works; a substantial contribution to ensuring a fast and extensive deployment of high-speed electronic communications networks.. while maintaining effective competition without adversely affecting the safety, security and smooth operation of the existing public infrastructure

37 BUT WE HAVE BEEN THERE BEFORE? Some EU countries have previously adopted measures to reduce the costs of broadband rollout, however; These measures remain scattered Differences in regulatory requirements sometimes prevent cooperation across utilities and may raise barriers to entry for new network operators Finally, the initiatives at Member State level do not always seem to be holistic It is essential to take action across the whole roll-out process, and across sectors, in order to achieve a coherent and signifcant impact

38 AN EFFECTIVE MARKET FOR PHYSICAL INFRASTRUCTURE The Directive aims at creating a market for physical infrastructure Therefore, any electronic communications or utilities operator may enter this market and offer access to its physical infrastructure 'Physical infrastructure means any element of a network which is intended to host other elements of a network without becoming itself an active element of the network, such as; Pipes, masts, ducts, inspection chambers, manholes, cabinets, buildings or entries to buildings, antenna installations, towers and poles Cables, including dark fibre

39 MAIN PROVISIONS ALL OPERATORS Obligations for access any operator is obliged to give access to its physical infrastructure on request from providers of high-speed broadband Transparency - operators must provide information on its physical infrastructure and allow site surveys Transparency and co-ordination of planned civil works Permit granting via a single information point Access to in-building physical infrastructure and wiring Safeguards including information security and dispute resolution

40 LEGAL/ REGULATORY PROVISIONS - EXAMPLE Law on Electronic Communications 2014 in Republic of Macedonia, Chapter 9 Construction of Electronic Communications Networks and Associated Facilities ; Standards and technical specifications Planning, construction and maintenance High speed broadband access point for buildings Radio corridors Definition of entity managing infrastructure (also Law on Cadastre) Single information point Co-ordination of construction works Other provisions

41 HOW IS THIS IMPLEMENTED? Network operators: Energy, water; transport & other utilities operators and providers of public communications networks Competent body for single information point, coordinating point for works and dispute resolution Competent body for issuing construction permits Building owners and developers The necessary procedures and regulations will be most effective only if this is implemented on a collaborative basis

42 THE DIFFICULT PART OF THE REGULATOR S ROLE In the event of a disagreement during the commercial negotiation, each party should be able to call on a dispute settlement body at national level to impose a solution on the parties, in order to avoid unjustified refusals to deal or the imposition of unreasonable conditions When determining prices for granting access, the dispute settlement body should ensure that the access provider has a fair opportunity to recover its costs incurred in providing access to its physical infrastructure, taking into account; Specific national conditions A fair opportunity for cost recovery taking into account any previous imposition of remedies by the regulator

43 THE DIFFICULT PART OF THE REGULATOR S ROLE The dispute settlement body should also take into account the impact of the requested access on the business plan of the access provider, including; The investments made by the access provider to whom the access is requested, In particular investments made in the physical infrastructure to which the access is requested. In the specific case of access to physical infrastructures of public communications network providers, the investments made in such infrastructure will directly contribute to the objectives of the Digital Agenda Downstream competition may be influenced by free-riding

44 THE EASY PART? Promoting easy access to information on the country s physical infrastructures available in the area of deployment Such minimum information should make it possible to assess the potential for using existing infrastructure in a specific area Promoting easy access to permit granting and coordination of civil works

45 THE SINGLE INFORMATION POINT In view of the number of stakeholders involved, and in order to facilitate access to information (on available physical infrastructures) also across sectors and borders, such minimum information should be made available via a single information point The single information point should allow access to minimum information already available in electronic format Subject to limitations; To ensure network security and integrity In particular that of critical infrastructure Or to safeguard legitimate operating and business secrets

46 IMPLEMENTING THE SINGLE INFORMATION POINT Member States may require every public sector body holding, in electronic format, the minimum information concerning the physical infrastructure of a network operator to make it available via the single information point by before 1/1/2017 Member States shall require such public sector bodies to make it available, upon request, to undertakings providing or authorised to provide public communications networks Any update to that information and any new element received by the public sector body shall be made available to the single information point within two months from the date of its receipt

47 IMPLEMENTING THE CO-ORDINATION OF CIVIL WORKS Every network operator performing civil works, should meet any reasonable request to coordinate civil works made by undertakings with a view to deploying elements of high-speed electronic communications networks Such request shall be met provided that; (a) this will not entail any additional costs for the initially envisaged civil works (b) this will not impede control over the coordination of the works; and (c) the request is filed at least one month before the submission of the final project for permit granting Rules on apportioning the costs associated with the coordination of civil works Exemptions if they are duly reasoned

48 INFORMATION REQUIREMENTS FOR CIVIL WORKS In order to negotiate agreements on coordination of civil works, network operators should make available the following minimum information This information is required for on-going or planned civil works related to its physical infrastructure for which a permit has been granted, a permit granting procedure is pending, or where permit granting is envisaged in the following six months; (a) The location and the type of works (b) The network elements involved (c) The estimated date for starting the works and their duration; and (d) A contact point

49 GRANTING OF PERMITS All relevant information concerning the conditions and procedures applicable for granting permits should be available via the single information point For civil works needed with a view to deploying elements of high-speed electronic communications networks, Information concerning exemptions applicable to such elements as regards some or all permits required under national law Applications for deploying elements of high-speed electronic communications networks should be via the single information point

50 BUILDINGS In order to roll out high-speed electronic communications networks, new multi-dwelling buildings and multi-dwelling buildings subject to major renovation should be equipped with an access point, by which the provider may access the in-building infrastructure Building developers should foresee that empty ducts are provided from every dwelling to the access point, located in or outside the multidwelling building Regulators should promote a voluntary broadband- ready label for buildings equipped with such infrastructure and an access point

51 IMPLEMENTING THE BUILDING ACCESS POINTS For all newly constructed buildings for which applications for building permits have been submitted after 31 December 2016; At the end-user's location, are equipped with a highspeed-ready in-building physical infrastructure, up to the network termination points Multi-dwelling buildings are equipped with an access point The same obligation applies in the event of major renovation works Buildings shall be eligible to receive the voluntary broadband-ready label Some exemptions allowed if duly reasoned

52 ACCESS TO EXISTING IN-BUILDING PHYSICAL INFRASTRUCTURE Every public communications network provider has the right to access any existing in-building physical infrastructure with a view to deploying a high- speed electronic communications network Any holder of a right to use the access point and the in-building physical infrastructure meets all reasonable requests for access from public communications network providers under fair and non- discriminatory terms and conditions, including price, where appropriate Some exemptions and a dispute resolution procedure

53 FACILITATION ROLE OF REGULATORS Transparency in advance of planned civil works by network operators themselves, or via single information points should be incentivised In particular for areas of greatest utility (i.e. especially rural areas to promote broadband infrastructure) By redirecting operators to such information whenever available Remove any constraints (regulatory or informal) preventing as a general rule the negotiation among network operators with a view to coordinating such works in order to deploy highspeed electronic communications networks

54 BOLDLY INTO THE BROADBAND ERA? Fixed broadband penetration has already overtaken basic fixed-line penetration in some countries Kosovo has a fixed line penetration of 4.5% and already a fixed broadband penetration of 8.4% Macedonia fixed broadband is set to overtake basic fixed line penetration in 2015 Mobile broadband penetration is starting to reach the high levels already achieved by basic mobile penetration in many countries Finland 123% penetration of mobile broadband, Sweden 110% and Denmark 107% This has not been done using traditional universal service approaches 54

55 NATIONAL STEPS FOR SUCCESSFUL BROADBAND ACHIEVEMENT Broadband Plan Choice of Infrastructure Choice of Investment Model Choice of Business Model Choice of Finance Tool Action Plan and Execution

56 STEPS TO INFRASTRUCTURE INVESTMENT Broadband plan; A national plan with clear targets, discussed and agreed with stakeholders Infrastructure plan; Looking at options a new future proof fibre network, or an upgrade to existing infrastructures? Spectrum plan to support the broadband plan Investment model; What roles do the public and private sectors play in construction, operation and ownership? Business model; Which is the best business model to ensure competition, coverage, sustainability and return on investment Vertically integrated? Wholesale open-access only? Financing model; Who contributes in terms of capital, expenses and assets? Action plan and execution; Clear responsibilities, milestones and monitoring to ensure the Broadband Plan is achieved

57 Coordination of investments; Civil works fully or partially financed by public means should aim to maximise the positive collective outcome Telecommunications networks Roads, streets, railroads, waterways Electricity, gas, remote heating networks Water supply networks

58 COOPERATION: NEW ROAD, NEW CABLES AND EMPTY DUCTS

59 COOPERATION: JOINT CONSTRUCTION IN RURAL AREAS

60 WHAT ABOUT STATE-AID RULES? The role of the EU state aid rules is to channel public funding to areas where private companies have no commercial incentives to invest, i.e. The high costs of deploying broadband networks The low population density or the low levels of economic activities State aid can have a crucial role to extend adequate broadband services to all citizens in rural areas and in small villages

61 UNIVERSALITY MODEL FOR BROADBAND Significant infrastructure sharing required Full infrastructure competition required Subsidy required 61

62 DOES STATE-AID DISTORT THE MARKET? EU State aid rules seek to prevent state investments from distorting competitive markets Avoids the re-creation of old monopolies with public support Any broadband infrastructure funded or part funded with public money does not favour existing operator; A company that receives public monies needs to provide effective open access to its competitors to allow them to compete in an equal, non-discriminatory way The Guidelines also require that state aid funding projects respect the principle of technological neutrality without favouring a priori any given technological solution It is normal to have claw-back procedures to ensure that if the scheme turns out more profitable than defined at the start, the state gets the benefit

63 DOES A STATE-FUNDED NETWORK FAVOUR THE NEWER, SMALLER OPERATORS? So what if a telecoms service provider free rides on a new backhaul network, or a state owned water or electricity infrastructure? Rules on apportioning the costs associated with the coordinated deployment; Rapid resolution of disputes concerning the negotiation of those coordination agreements under proportionate, fair and non-discriminatory terms Also, it should be possible for the state to reserve capacity for electronic communications networks even in the absence of specific requests, with a view to meeting future demand for physical infrastructures to maximise the value of civil works

64 EU STATE-AID GUIDELINES FOR HIGH SPEED BROADBAND Guidelines were first adopted in 2009 The 2013 broadband guidelines outline the rules and conditions on how public funding could be provided to build broadband networks in line with the EU state aid rules See EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks (2013/C 25/01)

65 SINGLE DIGITAL MARKET STRATEGY FOR EUROPE The new (6 th May 2015) announcement from the Commission on the Single Digital Market proposes further measures to create the right conditions for digital networks and services to flourish ; Advanced digital networks and innovative services Updating of the telecom rules Consistent objectives and criteria for spectrum assignment The coordinated release of the 700 MHz band How to cover the most inaccessible areas and to realise public-interest objectives Recognises that the competitive market is a key driver of investment in telecoms networks

66 BROADBAND SPECTRUM SCENE Alternative ways to oblige companies to fast development in rural areas; For example, oblige the companies to put spectrum coverage in remotest areas first, before being allowed to roll out in the more profitable areas This means lower spectrum receipts but faster Digital Agenda gains; Broadband penetration GDP gain Spectrum productivity gain The need for consistency of regulatory approach; Spectrum fee structure and licence durations Territorial coverage obligations Tradability, capping, neutrality Wholesale access to mobile networks

67 Desired impact of government intervention Without intervention With intervention Demand Demand Investment Investment years years Investment follows demand. Government achieves its esociety objectives in Yr 5 Investment stimulates demand. Government achieves its esociety objectives in Yr 2

68 MACRO-ECONOMIC STIMULUS FROM BROADBAND Every 10% increase in fixed broadband penetration is associated with a rise of 1% to 1.5% rise in GDP per capita EU fixed broadband penetration (2013) was 28.8 per 100 population Country Penetration gap with EU (% points) Country GDP (Euro Bn) GDP impact at 1% (Euro M p.a.) GDP impact at 1.5% (Euro M p.a.) Albania BiH Croatia Kosovo Macedonia Montenegro Serbia Turkey ,161 15,242 Region stimulus: 11,634 17,451

69 INVESTMENT PAYBACK Number of years to pay pack investment of 1,000 per household EU fixed broadband penetration (2013) was 28.8 per 100 population Country Households Investment at Euro 1k per household (Euro m) Benefit to GDP p.a. (Euro m) Investment to pay-back period (Years) Albania 740, BiH 1,055,000 1, Croatia 1,639,000 1, Kosovo 297, Macedonia 548, Montenegro 195, Serbia 2,497,000 2, Turkey 19,607,000 19,607 10, ,578 11,

70 LESSONS FROM EU EXPERIENCE OF UNIVERSAL BROADBAND IMPLEMENTATION Significant investments in fixed and mobile infrastructure are required to move to next stage of broadband roll out (to meet the Digital Agenda targets for >=30Mbps and >100Mbps broadband) Clear economic and social benefits from broadband investment Cooperation between private operators and policy makers and regulators is critical to making progress Reduce the barriers to investment Cut the red tape and investments will happen faster Consistency of approach across the EU

71 CONCLUSIONS KEY MESSAGES The old approach to universal service will not work for achieving universal high speed broadband The required approach is investment led, technologically and competitively neutral Requires creative investment models with private investment plus a range of government intervention, PPP and gap funding options Requires good co-operation on investment; A clear and accepted National Broadband Plan With supporting regulatory enablers With supporting demand-side stimulation With supporting state aid rules

72 Some case studies: Ireland Greece Slovak Republic Slovenia Macedonia Georgia Armenia. Comments are most welcome: 72

73 BROADBAND TARGETS: ENLARGEMENT COUNTRIES

74 THE IRISH CASE STUDY ON NATIONAL BROADBAND STRATEGY Taskforce of Industry CEOs, Regulators and Government Four Main topics: Barriers to Investment Spectrum Policy Demand Stimulation Role of the State

75 IRISH INDUSTRY/POLICY COOPERATION HAS BEEN SUCCESSFUL IN ADDRESSING THE CHALLENGES OF BROADBAND ROLL OUT Plan aims to meet and exceed Digital Agenda targets Proposes permanent group to oversee the implementation of broadband plan from public and private sectors Proposes Public-Private investment of 375ml to address rural broadband roll out Proposes changes to planning laws to remove barriers to infrastructure roll out Proposes demand stimulation initiatives particularly in small business

76 IRELAND FIBRE ON ELECTRICITY POLES Siro

77 STATE AID SUBSIDIES There are a large number of cases that have been granted state aid to accelerate investment in broadband infrastructure There are three types of model; Direct intervention with state ownership Public Private Partnership (PPP) Incentive based (gap funding) for private investors

78 DIRECT INTERVENTION MODEL For building of passive infrastructures, such as multi-operator cable ducts and dark fibre. Includes linking public administration sites as well as access to serve households This model encompasses two phases, each characterised by a specific tender procedure. In the first phase, a contractor will be selected to build a new infrastructure which will be completely funded by public resources. The newly built infrastructures will be owned by the public authority. Once infrastructures are completed, a subsequent tender procedure will be conducted in order to select a concessionaire that will be in charge of the commercial exploitation of the optical fibres and will have to allow all access seekers to connect to the newly built network at equal and nondiscriminatory conditions for its entire life. This condition will apply even in case of changes in the ownership of the infrastructure. Commercial operators will then be able to offer NGA services to final users, bearing the commercial risks of the retail commercial activity

79 EXAMPLES GREECE: Broadband in rural areas: 161m Covers 5,085 rural areas with population of 525,956 residents (5% of the total population) The ownership of the infrastructure will remain public, the construction, management and operation of the network will be awarded to a winning contractor through an open tender process The winning contractor will only offer wholesale services and will not be able to offer retail broadband services The targeted areas will be divided in three lots of equal population size, geographical characteristics and estimated costs. Each of them shall be awarded to a different bidder

80 SLOVAK REPUBLIC STATE AID CASE: 113M Target areas: Slovak authorities conducted a detailed mapping and coverage analysis to identify the target areas where state intervention is necessary ( white areas ) Benefits: Measure will cover 729 municipalities where no adequate broadband services are available (330,000 population) Backhaul fibre lines will be placed where no such infrastructure is currently available and where there are no commercial plans of private operators to undertake such investments within the next three years. Will lower entry costs for private firms to serve population with retail services via competitive access networks in the municipalities

81 PPP MODEL A Public-Private Partnership (for example in the form of a joint venture) with a public partner holding initial participation and supervisory and control powers. The private partner is chosen through an open tender procedure. The private parties interested in taking part are required to provide a precise business plan in line with the preliminary project designed in the call for tender. In particular, the bidders have to indicate in their offers; (i) the type of network they propose to rollout, and the foreseen cost (ii) the amount they request from the public partner and the level of their own contribution to roll out the network. The partnership will roll out and operate the new infrastructure which will remain in its ownership, but could be offered for sale

82 PPP open-access FTTH projects by GVO

83 LESSONS FROM SLOVENIA: 1ST PHASE - 1st phase ( ): 45 million euro of public funds (EU ERDF & national) were invested in the development of broadband networks mostly for FTTH under PPP scheme projects were financed that connected 15,400+ households in mostly rural areas. The biggest projects were concluded (by GVO) in no more than 18 months. - First tender is closed, public funds were received by the local communities to invest them as public share in PPP.

84 LESSONS FROM SLOVENIA: 2ND PHASE - 2nd phase ( ): 37 million euro of public funds (EU ERDF & national) were invested in the development of broadband networks mostly for FTTH under PPP scheme. - 5 projects were financed that connected 13,500+ households in mostly rural areas. The biggest projects were concluded (by GVO) in no more than 18 months. - Second tender is closed. GVO concluded its projects in November 2012, some projects by other private investors are yet to be concluded.

85 LESSONS FROM SLOVENIA: BUSINESS MODEL 1. PPP model with local community as a public partner and (for example) GVO as private partner. 2. Public partner invests public funds and grants right to use public roads to lay cables. 3. Private partner designs and builds the network in 18 months and invests private share of the total investment. 4. Private partner operates the network for 20 years (concession period) and charges usage and operating fee.

86 LESSONS FROM SLOVENIA: BUSINESS MODEL (CONT.) 5. Usage and operating fee (UOF) is charged to service providers on a non-profit basis. 6. All interested service providers can use the network under the same conditions (open network). 7. If UOF > OPEX + amortisation of private part then the surplus is paid as a concession to public partner. 8. Concessionaire must report quarterly to the national Agency for Post and Electronic communication about the # of active users and network-based income. 9. After 20 years the network is completely transferred to local community.

87 GAP FUNDING MODEL "Incentive-based" (gap funding) The third model follows successful state aid schemes already implemented (for example in several Italian regions) State funds are granted to a commercial operator selected through a public tender to complete the NGA infrastructure in the under-served areas. Bidders will be required to contribute at least 30% of the total investment and will be required to make clear in their offers: The operational costs and use of its own infrastructural investments The expected revenues, the expected penetration (also possible in terms of "homes passed") Certain claw back may be sought from the state in the form of taking any excess profits The beneficiary will retain ownership of the funded infrastructures (private ownership)

88 PRIVATE INVESTMENT BUSINESS CASE (REGIONAL PROJECT) Illustration of Broadband Investment and Subsidy Scheme: Provide High Capacity Fibre Backbone to Villages in the Region (200 Points of Presence) All figures in millions of US Dollars Year Initial Capital Investment 20.0 Operating Costs Total Costs Present Value of Costs Revenues Present Value of Revenues Net Present Value (NPV) This means that the investment will not take place without subsidy Hurdle NPV 2.00 This is the NPV required by the private investor to go ahead This is the amount that the investor bids to receive the government Subsidy required 3.76 subsidy Internal Rate of Return 6%

89 DESIGN OF THE COMPETITIVE BIDDING PROCESS 1. Submission of existing operators 5-year network expansion plans 2. Identification of priority target geographical areas for Year 1 Repeat for Yr 2 etc 3. Consultation with local communities on their service needs 4. Calculation of maximum Budget allowed for each target Area 5. Announcement of Invitations to Tender giving minimum qualification requirements 6. Bid reception and award of licences 7. Monitoring of compliance

90 STATE AID OUTSIDE THE EU - EXAMPLE Georgia proposal: Georgia is a competitive market but no broadband investment is foreseen into the more remote rural areas Total population 4m with c10% living in the remote areas Use state aid to accelerate broadband infrastructure to remote population Additional population coverage of around 440,000 Total state aid of 150m will be needed (based on Slovak costs per connection) GDP gains averaging 45m per year - pay back in approx. 4 years

91 PAYBACK FOR STATE FUNDING OF BROADBAND INFRASTRUCTURE State funding injection 150m Cumulative funding 150m 150m 150m 150m 150m Broadband penetration gain +1% +2% +3% +4% GDP gain* + 17m + 35m + 55m + 76m Cumulative GDP gain + 17m + 52m + 106m + 182m Payback - 150m - 133m - 98m - 44m + 32m * Based on Georgian GDP of 12Bn in 2013 growing at 4% per annum plus a broadband stimulus of 0.14% for every 1% increase in penetration

92 Scenario Points of Presence COST ESTIMATES National capital cost estimates (based on sample in a rural region of Armenia) Description of Regional Broadband Network Reach Capital Cost Cost of Local Acesss Network 1 Fibre to the Village $100m 1,000 High 2 More than 1 Point of Presence in each village 3 Pushing fibre closer to the customer $110m 1,300 Medium $220m 3,400 Low

93 HOW WOULD THE INVESTMENT WORK? Option 1: Direct intervention and PPP; Tender for private sector network provider (the winner being the tender who bids the lowest cost). Public sector or PPP ownership and operation Regional projects, which could be awarded to different bidders Government uses the networks, and the operator in each region offers wholesale backhaul capacity to all retail service providers Option 2: Gap financing; Tender for government subsidy (the winner being the private investor that asks for the lowest subsidy). Private sector ownership and operation. Regional projects with separate or combinatorial tenders. Each region receives only the subsidy that it needs. Linkage with government use is more problematical; the government services need to be the subject of a separate government tender

94 EU STATE AID RULES The objective of state aid is to support economic development State aid can only play an effective role if it is targeted on the most disadvantaged regions, where the competitive market fails to invest in sufficient infrastructure within a required timescale The advantages of the state aid must exceed the disadvantages of potential distortion of competition State aid Guidelines for Broadband*; Technological neutrality use the most cost effective technology Ultra-fast broadband networks to achieve the EU Digital Agenda objective of >100 Mbps Step change in connectivity public owned networks can only be financed if they provide a substantial improvement over existing networks Reinforcement of open access networks any network with public funds included must be truly open so that competition is ensured at the retail level Transparency publication of documents, centralised database for existing infrastructure, and ex-post reporting obligations Normal to have safeguards that publicly owned networks are privatised within a given time * see

95 NEXT STEPS FOR MACEDONIA? The new Law on Electronic Communications has all you need to provide the regulatory enablers to investment, except; Still question marks over rights of way/ joint construction? The universal service provisions are traditional Macedonia needs a National Broadband Plan Digital Agenda targets Infrastructure atlas with the investment plans of operators >100Mbps capability Defined white areas A defined fund targeted at white areas use the existing USF? Cooperation with government on demand side measures and formulation of state aid rules Spectrum plan to back up the Broadband Plan

96 NEW ERA INFRASTRUCTURE FOR BROADBAND SUPPLY CHAIN International connectivity National backbone Last mile access Access devices and retail services Economic case Good Good/ medium Varies urban/ rural Consumer affordability issues FTTx, 3G, 4G/LTE, Smartphone and PC radio/ satellite FWA, satellite driven Technology Fibre, satellite Fibre/ microwave Competition Yes Yes Yes Yes Ownership Largely private Multiple models Private, with some public involvement Government Not generally required intervention Types of initiative Creation of international hubbing Case for initiatives to improve outreach to rural areas Government owned or PPP infrastructure or fully private Reduce local barriers to entry, demand side initiatives Reduce rights of way barriers, ensure access to backbone networks, release of spectrum Private Direct assistance with devices and egovernment Demand - side initiatives Regulatory tools Removal of dominance in data exchange and international data capacity Single Wholesale Network or coexisting with private infrastructure? Infrastructure access. Rural coverage conditions in spectrum awards RTTE Directive Role of wholesale Illustrative models Source: Consultant analysis Very high High Medium PPP models Rural broadband schemes 96

97 MARKET COMPETITIVENESS The IMD Competitiveness Index* measures the competitiveness of nations by analysing how they create a competitive business environment; Economic performance Government efficiency Business efficiency Infrastructure Macedonia s ranking is 63 in world terms, Hungary is 60 and Romania is 59. In SEE, Turkey is 45, Montenegro 67, Slovenia 70, Croatia 77, Serbia 94 and Albania 97. Macedonia is above some EU countries Slovenia (70), Slovak Republic (75), Croatia (77) and Greece (81) See

98 ICT DEVELOPMENT STATUS ICT Development Index* (IDI) is a composite index combining 11 indicators into one benchmark measure that serves to monitor and compare developments in ICT; Level and evolution over time Progress in ICT development Digital divide The extent to which countries can make use of ICT based on capacities and skills Macedonia s ranking is 60 in world terms, Romania is 58, Serbia is 50, Bulgaria is 49, Hungary 46, Greece 39 and Croatia 37, Slovenia is 34 Below are Montenegro 67, Turkey is 68, Bosnia 69 and Albania 84 Macedonia is below all EU countries * see

99 DEMAND SIDE STIMULATION ICT readiness (infrastructure and access) % of schools with internet % of rural population with at least 3G coverage % of businesses buying and selling goods on line ICT usage % of citizens that have never used the internet % of citizens buying on-line % of citizens using egovernment ICT capacity (eskills)* % of ICT qualified teachers Coalition for digital jobs European coding initiative Certification using the ecompetence framework see ec.europa.eu/digital-agenda/en/our-goals/pillar-vi-enhancingdigital-literacy-skills-and-inclusion

100 REGULATORY ENABLERS Market definition, analysis, determination of Significant Market Power and application of market remedies; The application of this EU-wide competition enhancing technique has already reduced the number of markets that are subject to ex-ante regulation from 18 (2003) to 7 (2007) to 5 (2014) This means that markets are becoming increasingly competitive and thus more attractive to investors Specific open wholesale access obligations Infrastructure sharing (construction and joint use) Planning and construction laws, access to public and private property, excessive bureaucracy Infrastructure database with central information point EU Directive 2014/61 On measures to reduce the cost of deploying high-speed electronic communications networks

101 MACEDONIA: MOBILE BROADBAND TRAFFIC Data transmission Number of active subscribers Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/

102 INVESTMENT DECISIONS WHICH COUNTRIES? Factor Country 1 Country 2 Country 3 Profit potential Political/ social risk? Legal and regulatory risk? Time to market?? Even with equal profit potential and political stability, investment is strongest in markets with lower legal and regulatory risk

103 Fixed proadband penetration per 100 population TIME TO MARKET EASE OF ACCESS 30 How does broadband penetration depend on competitors being allowed wholesale access? Estonia 25 Cyprus Slovenia 20 Czech Latvia Lithuania Hungary Croatia Kazakhstan Romania Serbia Montenegro Bosnia Slovakia Turkey Macedonia Poland Bulgaria 5 Countries allowing only limited access Countries allowing more open access 0 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 Extent of wholesale access allowed 103 Source: Consultant analysis

104 Background questions What is the point of universal service? The characteristics of the market have changed Monopoly to competition Public to private investment Traditional services to broadband Competition and investment are now the accepted priorities Market failure What are we trying to achieve? What is the current position? Where do we go from here? What if we just did nothing? 104

105 Traditional approaches to universal service Focus on basic services at an affordable price, so. What is the definition of basic service What is an affordable price? Traditionally, basic service was defined as A fixed connection to the public voice network Capability for basic data (fax, low speed internet) Public payphones Directories Free access to emergency services Services for the disadvantaged Traditionally, affordable meant the average price nationally, sometimes subsidised by other services or by a compensation fund 105

106 TRADITIONAL MODEL FOR UNIVERSAL SERVICE Define universal service obligation (basic services) Assign one or more universal service providers Establish a universal service compensation fund Define who contributes to the fund and how much Universal service providers calculate cost burden Regulator decides on subsidy payment and monitors implementation

107 Fixed line penetration per 100 population DOES CHEAP LINE RENTAL IMPROVE UNIVERSALITY? 40 Croatia Serbia Montenegro Turkey Macedonia Kazakhstan BiH Albania Kosovo Line rental per month (EUR) 107 Source: Consultant analysis

108 Total fixed plus mobile penetration DOES IT DEPEND ON AFFORDABILITY? Market Penetration and relative GDP/capita 250 Montenegro 200 Albania Serbia Croatia 150 FYR Macedonia 100 Bosnia and Herzegovina Turkey % 10% 20% 30% 40% 50% 60% 70% GDP/ Capita relative to EU 108 Source: Consultant analysis for 2012 EBRD Electronic Communications Comparative Assessment

109 INVESTORS FACE A NUMBER OF KEY CHALLENGES SPECIFICALLY IN SWITCHING FROM COPPER TO FIBRE

110 Fixed broadband household take-up OTHER MACRO ISSUES IMPACT INVESTMENT: COUNTRIES WITH A LARGE PROPORTION OF THE POPULATION LIVING IN URBAN AREAS APPEAR TO HAVE HIGHER LEVELS OF FIXED BROADBAND TAKE-UP Fixed broadband take-up is likely to be higher in urban areas than rural areas for a number of reasons: Greater broadband availability due to the lower cost per household to roll out fixed infrastructure in urban areas Higher ICT literacy Higher household incomes and therefore greater affordability Graphic has used population distribution data to calculate the cost of rolling out broadband infrastructure to those in areas where it is not commercially viable to provide a service These are typically the most rural areas (in the UK referred to as the final third ) However, it is worth noting that some Eastern European countries have very low labour rates, so the cost of providing coverage in these rural areas will vary greatly across borders. Urban population and broadband take-up* 100% 90% 80% 70% 60% 50% 40% 30% 20% FR SI AT IE PT CY EE FI GR CZ LT IT HU RO LV SK PL BG NL BE DK LU UK SE DE MT ES 10% 0% 50% 60% 70% 80% 90% 100% Proportion of population living in urban areas Typically, countries with the largest proportions of rural citizens will require greater intervention from the authorities if take-up is to be increased in these areas Source: Analysys Mason, Euromonitor *Urban areas as defined by Euromonitor, 2012

111 Fixed broadband household take-up OTHER MACRO ISSUES IMPACTING INVESTMENT: DEMAND STIMULATION: ICT LITERACY A KEY CHALLENGE TO BROADBAND TAKE UP 100% 90% 80% 70% 60% 50% 40% 30% BG GR RO CYPT LT HU BE FR SI UK MT AT DE ES IT IE EE LV SK PL FI CZ NL DK LU SE 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% PC penetration In many countries, it appears that low broadband take-up is associated with low PC ownership. As prices of equipment fall, it is likely that this will increase, which could rapidly drive broadband take-up. There appear to be few wellestablished government-backed initiatives to increase ICT literacy or PC ownership

112 EU PROPOSALS FOR REDUCING COSTS OF INVESTMENT

113 EU PROPOSALS FOR REDUCING COSTS OF INVESTMENT