2.3

How To Do It

Implementing Policies and Strategies to Enhance Broadband Development

In the past 20 years, markets have liberalized, competition has increased, and the private sector has been the primary vehicle for financing telecommunications projects, especially in profitable areas. Nonetheless, in many developing countries, significant barriers to entry persist and legacy-dominant carriers continue to control markets and distort competition. Thus the government’s primary role has been twofold: to develop policies that support and encourage private sector investment, while also seeking more effective ways to regulate dominant carriers and promote competition.

Today, most countries emphasize competition and a significant role for private sector investment to spur the growth of their broadband markets. In developed countries and some developing countries, the majority of the private investment likely comes from within the country itself. In the least financially endowed countries, however, private investment may also come from foreign sources. Governments seeking to promote broadband development in their countries should bear in mind that investors and companies around the world may be looking for opportunities to invest in good projects wherever they are located. Thus attracting foreign private investment—through appropriate incentives, a clear regulatory and legal environment, and a good development plan—may be important components of a broadband strategy.

Where governments choose to finance broadband networks, they should avoid replacing private investment or substituting for the normal operation of market mechanisms. Rather, governments should facilitate and support private sector investment and be capable of developing, promoting, and implementing timely policies based on a thorough understanding of the market. For this reason, an essential element in effectively deploying broadband is the ability to find an appropriate financing model in which government oversight and intervention are focused mainly on funding and financing only those initiatives targeted at addressing actual or expected market failures in the availability of a broadband network and at driving the early adoption of broadband services.

In addition to private sector investment and direct funding by governments, several other options exist for countries to finance broadband deployment, including government grants or subsidies to both private and public entities and partnerships where private funding is matched by government. The following sections briefly address the main ways that governments can support the financing of broadband development.

  • 2.3.1 Government Support to Enhance Private Investment

    As stated by the 2004 report of the Task Force on Financial Mechanisms for ICT for Development, the engine of ICT development and finance over the past two decades has been private sector investment, including foreign direct investment by an increasingly diverse and competitive array of multinational and regional ICT sector corporations (Task Force on Financial Mechanisms for ICT for Development 2004, 22). Companies target and provide service to profitable, high-revenue customers, neighborhoods, and regions to the detriment of those that are less commercially viable. This is the result of the tendency to see profitability and return on investment as drivers of private investment.

    In addition to the purely economic decisions involved, private investment also depends heavily on the regulatory climate. The government’s challenge is to put in place the necessary policy measures and regulatory framework to allow and encourage the deployment and financing of broadband networks as widely as possible and thus ensure not only that high-value users receive high-quality services, but also that the benefits of broadband are spread throughout all populations and areas.

    The Organisation for Economic Co-operation and Development (OECD), based on a survey of broadband policies in member states, identified particular policy initiatives that may promote broadband investments, including policies to undertake the following:

    • Improve access to passive infrastructure (conduit, poles, and ducts) and coordinate civil works as an effective means to encourage investment
    • Ensure access to rights-of-way in a fair and nondiscriminatory manner
    • Encourage and promote the installation of open access to passive infrastructure when public works are undertaken
    • Allow municipalities or utilities to enter telecommunications markets; where market distortion is a concern, policy makers could limit municipal participation to basic investments (such as the provision of dark fiber networks under open-access rules)
    • Provide greater access to spectrum (which is a significant market barrier to wireless broadband provision) and adopt more market mechanisms to promote more efficient spectrum use.
     

    Many countries have used these policies to spur the build-out of broadband networks. In Korea, for example, thanks to greater market liberalization over the past decade, several new service providers entered the telecommunications market and began to fund and deploy fiber-based networks. Many advanced broadband networks are now available, and the country has an impressive number of users.

    In Africa wireless broadband licenses have been granted by governments since 2004, allowing mobile operators to roll out networks capable of supporting high-speed data. Although uptake was initially slow, several factors have led to a growing number of African operators, boosting investments for 3G or 4G, including (a) more affordable international and backhaul capacity, (b) increasing competition in the mobile sector, (c) greater demand for more advanced services (for example, through the launch of e-health and e-education projects relying on mobile as well as other technologies), (d) slower growth in voice subscribers and revenues, and (e) the lack of wireline networks on the continent.*

    In some cases, private investors may also look to multilateral investment banks to assist in financing, particularly where investment proposals are perceived by potential investors as higher-risk transactions or where difficult liquidity conditions and uncertain economic prospects are seen as additional risk factors. Such conditions decrease the possibility of private financing and raise the costs of financing. In such cases, investment banks have become involved in broadband projects. The European Investment Bank, for example, is already lending an average of €2 billion each year to support broadband projects; it also develops and finances pilot projects and innovative funding schemes.

  • 2.3.2 Fiscal Support to Facilitate Broadband

    In some cases, regulatory reform and private sector investment still will not permit a government to reach its broadband development goals. In those cases, policy makers may turn to fiscal support to fill broadband development gaps. Fiscal support can be directed to a company or end users, and can be provided in a number of ways, including in the form of cash subsidies, in-kind grants, tax incentives, capital contributions, risk assumption, or other fiscal resources (Irwin 2003).

    • 2.3.2.1 Economic Justification of Fiscal Support

      Fiscal resources are limited and face competing demands from many sectors. As a result, policy makers considering providing more direct support for broadband development must carefully analyze the expected costs and benefits of providing that support. First, a persuasive case must be made that the benefits of supporting broadband development are likely to outweigh the cost to be incurred by all participating private and public sector entities, as seen from the viewpoint of the economy as a whole. Fiscal support should not be provided for components of the broadband strategy that will leave the economy worse off than without it. Second, if a component is desirable for the economy overall, it is essential to determine how much fiscal support should be provided.

      For example, the government of Australia committed in its 2008–09 budget to base its spending on infrastructure projects on rigorous cost-benefit analysis to ensure the highest economic and social returns to the nation over the long term. The national broadband network is an open-access wholesale-only network that was expected at the time to be capable of delivering fiber-based coverage at 100 Mbit/s to 93 percent of all premises and fixed wireless and satellite coverage at 12 Mbit/s to the rest. The total construction and initial maintenance cost was estimated at $A 35.7 billion, including $A 27.1 billion of equity contributed by the Australian government. A study in 2009 also estimated thatthe cost of the network would exceed it benefits by between $A 14 billion to $A 20 billion (present value in 2009). The study concluded that the investment should not be undertaken if the total cost would exceed $A 17 billion, even accounting for rising demand for broadband-enabled services and the negative outcome that the typical end user would not have access to more than 20 Mbit/s (Ergas and Robinson 2009).

      Fiscal support often involves the direct use of government money. Subsidizing investment requires cash outlays up-front that will never be recovered. Subsidizing use involves payments during a long time, possibly for the lifetime of the strategy. Investing equity in public-private partnerships (PPPs) involves cash contributions up-front that may be recovered in the long run (for example, as dividends) to the extent that the ventures are commercially successful. Long-term debt financing comprises cash outlays that may be recovered over the years, provided the beneficiaries do not default on repayment obligations.

      Fiscal support that does not involve direct use of government money also has a cost. Giving investors free use of spectrum for last-mile access has an opportunity cost related to the revenues that the government could obtain from the sale of spectrum licenses for profitable business use. Preferential taxation (for example, income tax holidays, custom duty exemptions) implies fiscal revenues forgone. On-lending international development loans and credits reduce the funding available from these sources for other initiatives in the same country.* Regulatory risk (for example, changes in the pricing rules) can be mitigated through government guarantees, which create contingent liabilities. The government can pick up part of the commercial risk of uncertain market outlook for new investments by committing to future purchases, which may result in obligations unrelated to actual need.

    • 2.3.2.2 Estimating Costs and Benefits

       In order to determine whether to move ahead with some form of fiscal support for broadband development, the costs and benefits must be determined. Economic costs and benefits of a component of the broadband strategy are valued to reflect real scarcities of goods and services. Financial analysis values costs and benefits at market prices. Both economic and financial analyses compare the situations with and without the component. Sunk costs are not taken into account.

      The principles for estimating economic and financial costs and benefits are well known, but applying these principles in practice is subject to assumptions about market and technology development. This can be a challenge, especially when some players (for example, incumbent operators) have more detailed information and analytical capabilities than others (for example, government authorities, new entrants). To some extent, this limitation can be overcome by using the calculus of costs and benefits to provide guidance on fiscal support, but relying primarily on market mechanisms (for example, minimum subsidy auctions) to reach the final decisions on support awards.

      When costs and benefits can be measured in monetary terms, economic costs and benefits can be derived from financial costs and benefits. Transfers from one part of the economy to another, such as sales taxes or customs duties, are excluded from the cost stream. Prices that are distorted by market interventions, such as unskilled labor, foreign exchange, capital, and the radio spectrum, are adjusted to reflect their real scarcity in the economy. External costs (for example, business losses resulting from digging up streets to install fiber) should be quantified, to the greatest extent possible.

      Benefits can be harder to calculate. Starting from the financial analysis of network and service providers, economic benefits can be estimated by adding consumer and producer surpluses to the revenue streams. For example, U.S. consumers have been increasingly willing to spend more money for fixed broadband connectivity than they are actually paying. This resulted in a consumer surplus of about US$32 billion in 2008, up 58 percent from about US$20 billion in 2005. Higher speed is expected to add a further US$6 billion for existing customers. The study underestimated the wider economic impact of broadband, as it excluded business users and wireless access (Dutz, Orzag, and Willig 2009).

    • 2.3.2.3 Comparing Costs and Benefits

      The net present value (NPV) of the expected benefits is the discounted monetary value of benefits minus costs over time. For the government, which values costs and benefits to reflect real scarcities in the economy, an economic NPV > 0 means the project would have a positive effect on the country’s welfare. For a private company, which values costs and benefits at market prices, NPV > 0 means the project could be commercially viable. This analysis can be applied to the broadband strategy as a whole as well as to each major separable component.

      Projects that have negative economic NPV should not be supported. Projects that have positive financial NPV do not need support. Components that have positive economic NPV but negative financial NPV would be good for the economy, but are unlikely to be undertaken as a business. Fiscal support of these components would be justified, up to a maximum support equal to the absolute value of the (negative) financial NPV. This is the amount of support that would make the component just viable commercially. Support above this level would not be justified.

    • 2.3.2.4 Types of Fiscal Support

      • 2.3.2.4.1 Private Investment

        Where government does decide to provide some type of fiscal support, the re-creation of monopolies with public support is a fundamental concern to many governments around the world, as is avoiding contributing to established carriers’ dominance and displacing private investment. The European Union (EU) supports the construction of broadband infrastructure and Internet take-up through both rural development and structural funds and has clarified the application of state aid rules on the use of public funds for broadband deployment.

        The 2009 European Commission’s Community Guidelines for the Application of State Aid Rules in Relation to Rapid Deployment of Broadband Network were drafted specifically to address concerns relating to public support, and they contain safeguards to ensure that any broadband infrastructure funded with public money does not favor existing operators, including provisions that a company receiving public moneys must provide effective open access to its competitors to allow them to compete in an equal, nondiscriminatory way (European Commission 2009). Although the state aid guidelines focus on the role of public authorities in fostering the deployment of such networks in unprofitable areas (that is, areas where private operators do not have the commercial incentives to invest), they clearly note that state aid should not replace or “crowd out” private investment. Instead, public funds should complement private operators’ investments and thereby achieve higher and faster broadband coverage. Box 2.4 provides an overview of the EU experience with the state aid guidelines.

        In the context of market reform, good practice in financing universal access projects using public financing other than funds in international jurisdictions includes the practice of setting out rules or guidelines on the provision of public funding for universal service and access. The EU state aid guidelines for funding broadband assist in bringing universal access and service through the presence of clear rules that do the following:

        • Facilitate next-generation access (NGA) and broadband investments from public funds in order to bring broadband connectivity to underserved areas
        • Enable the rapid deployment of broadband and especially NGA networks, thus avoiding the creation of a new digital divide
        • Due to the conditions laid down for the granting of state aid (such as open access, open tenders), allow the maintenance of competition, thus helping to ensure better and more broadband services.

        Although historically funding decisions could be made on a case-by-case basis in the EU, in light of the significant level of investments, it has been recognized that all stakeholders require a level of certainty—hence the need for the guidelines.

        BOX 2.4
        Experience in the European Union with State Aid for Financing Broadband

        Source: Box taken from European Commission and ITU 2011.

        In the United Kingdom, for example, the government set a goal in 2009 of ensuring 100 percent access to next-generation broadband and planned to support the rollout of fiber-based broadband and other next-generation technologies via a tax on telephone lines (United Kingdom, Department for Business Innovation and Skills 2009). Since then, BT has started initiatives to roll out fiber broadband to most of the United Kingdom by 2015. However, BT has made clear that, without some form of public sector support, it will not provide fiber coverage beyond around two-thirds of households. It noted that such support could come from national funding or regional funding combined with local partnerships to deploy networks in specific areas (Lomas 2010). Within this context, BT has announced plans to roll out superfast fiber broadband to unprofitable areas with the help of European funding. The European Regional Development Fund’s Convergence Program is investing XXX53.5 million, or just over 40 percent of the total funding, with BT providing XXX78.5 million (France 2011).

      • 2.3.2.4.2 Direct Government Intervention

        Market-based investments should be the mainstay for broadband deployment, but some degree of direct government funding may be required to enable and complement the market, particularly in areas that are not considered economically viable by private operators. The form of this more direct intervention will vary from country to country. In many countries, subsidies are used to underpin private sector investment.

        Some governments have effectively used subsidies and other financial incentives to spur broadband deployment. Canada, Germany, Greece, Korea, Malaysia, Portugal, Singapore, the United Kingdom, and the United States have all announced plans to undertake and are implementing substantial direct government funding for network infrastructure development. In some countries (for example, the United States, the United Kingdom, Canada, Germany, Portugal, and Finland) measures to expand broadband access and to bolster connection speeds have been included in the country’s planned economic stimulus packages. Most of these plans seek to speed up existing links to build faster wireline and wireless next-generation networks. Countries are spending public funding for rolling out high-speed networks to areas that are underserved or unserved by commercial ISPs. In other countries, however, the debate over public financing is not over how much to contribute to broadband efforts, but rather how to cut budgets in line with the economic realities of 2011. In such a context, funding for broadband may assume lesser importance compared to other, more important, social and economic goals. Consequently, the focus on finding private sector–led solutions is likely to increase.

        A few governments are pushing the build-out of broadband networks through direct investment by a government-backed company specifically tasked with building new networks. In most, if not all, cases, these government-led efforts will deliver only wholesale services that service providers can then use to offer retail services. In April 2009, for example, Australian Prime Minister Kevin Rudd announced that the government would commit $A 43 billion (US$30 billion) to building a national broadband network across Australia, with wireline services reaching 93 percent of the population and wireless or satellite broadband networks serving the other 7 percent. In March 2011 Qatar announced a similar plan to build a fiber to the home network to reach 95 percent of the population by 2015, with a government-backed company focusing on supplying the passive infrastructure for the network.* In 2007 the Rwandan government awarded a US$7.7 million contract to Korea Telecom to construct a wireless broadband network that was the first of its kind in Africa (Malakata 2009). By 2012, the government plans to make broadband Internet access available to more than 4 million Rwandans through the new wireless network and the Kigali Metropolitan Network project.

      • 2.3.2.4.3 Public-Private Partnership Models

        Apart from implementing policies and regulations to ensure competition (between networks or services), the public sector can promote broadband development by sharing financial, technical, or operational risks with the private sector. Indeed, experience has shown that, in some cases, private sector–only development, or direct government or subsidy funding, may not be sufficient to reach the most remote areas, provide the most bandwidth-intensive services, or provide ongoing public funding, even with “smart subsidies.”* Within this context, many countries are now adopting approaches that combine public and private sector skills and resources, as well as combining public financing with some form of matching funding from private investors. This approach helps to reduce investment risk, while also recognizing that market participation is essential to the financial sustainability of projects. PPPs are also increasingly being considered as a solution for ICT development, including for broadband backbones and the supply of transmission bandwidth sufficient to catalyze advanced broadband applications.

        In Africa, for example, much attention has been given in recent years to the funding and financing of projects aimed at bringing more affordable broadband connectivity to the continent by means of submarine cables, regional fiber optic backbones, and satellites. Such projects have generally been financed through a mixture of public and private sector funding. In 2010, for example, Alcatel-Lucent was selected by Africa Coast to Europe (ACE), a consortium of 20 operators and governments, to build a submarine cable network that will link 23 African countries to Europe.* The system will be over 17,000 kilometers long and capable of transmitting data between the African continent and Europe at initial speeds of 40 Gbit/s.

        In Finland the main objective of the December 2008 plan for 2009–15 is to ensure that more than 99 percent of the population in permanent places of residence, as well as businesses and public administration offices, are no farther than 2 kilometers from a 100 Mbit/s fiber optic or cable network. The government expects telecommunications operators to increase the rate of coverage to 94 percent by 2015, depending on market conditions, while public finances will be used to extend services to sparsely populated areas where commercial projects may not be viable, bringing coverage to the target of 99 percent. The plan stipulates that, where public financial intervention is required, it should be in the form of public-private partnerships, with federal funding only being allocated to projects deemed not viable for 100 percent private investment. The plan limits such interventions, providing that the federal subsidy amount cannot exceed one-third of the total project cost, with additional EU and municipal support capped at another one-third, thereby requiring private participants to invest at least one-third of the cost.

        Spain has relied greatly on inputs from the private sector through PPPs. Of the public funds used, €31 million were structural funds and €53 million were zero-interest public credits. Operators invested about €280 million. The funded projects use asymmetric digital subscriber line (ADSL), WiMAX, and satellite technologies depending on geography, rollout dates, and available technologies. The government set the minimum download speed at 256 kbit/s, and prices were capped at a “reasonable fee.”

        Malaysia’s 2006 MyICMS Strategy also set out several goals for broadband services as well as strategies to achieve them.* The government is funding a fiber optic network under a public-private partnership with Telekom Malaysia that is aimed at connecting about 2.2 million urban households by 2012. Under the terms of the agreement, government committed to investing RM 2.4 billion (US$700 million) in the project over 10 years, with Telekom Malaysia committing to covering the remaining costs.

      • 2.3.2.4.4 Local Efforts, Bottom-up Networks

        There are also some interesting examples of how local efforts or bottom-up networks have resulted in the financing of broadband deployment. Module 4, Universal Access and Service, of the infoDev ICT Regulation Toolkit, for example, notes that the emergence of municipal broadband networks provides an additional source of financing, from local governments, for ICT service development.* The toolkit highlights the Pirai municipal network in Brazil as a successful initiative that was based on the needs of the municipal authority and included e-government, education, and public access, with a range of application support and development activities. The project established numerous broadband access nodes that allowed all local government offices and most public schools, libraries, and general public access points to be connected. Initially, all financing was provided by the municipal government. A commercial enterprise was later established, but continues to be funded and supported by the municipality.

        Local governments have also been instrumental in driving broadband deployments (Box 2.5). A 2010 study notes that in some European countries (e.g., the Netherlands and Italy), municipal involvement is the result of incumbent carriers’ reluctance to deploy networks in areas with less chance of investment return, increasing demand for broadband services, and a perception that broadband networks may serve to reduce the digital divide and stimulate economic growth (Nucciarelli, Sadowski, and Achard, 2010). This, the study claims, has led some European municipalities to become more directly involved in broadband network deveopment.

        In Italy Terrecablate Siena, a publicly owned carrier, participated in the Terrecablate consortium (Societá Terrecablate Reti e Servizi S.r.l., which was created in 2005 and encompassed the Province of Siena, including 36 municipalities and three mountain communities). The project is funded with public money and aims at maximizing access to connectivity within rural areas.

        In the Netherlands the Draadloos Groningen (Wireless Groningen) Foundation signed an agreement in 2009 with Unwired Holding to deploy and manage a citywide wireless broadband network. The project began as an “anchor tenant” model in which the four founding members (the Municipality of Groningen, the Hanzehogeschool Groningen, the University of Groningen, and the University Medical Center) agreed to fund the network in return for being able to use if for their own communications and services. Each of the initial members agreed to contribute €1 million over four years, which is aimed at guaranteeing the initial financial stability of the network in its start-up phase, as well as demonstrating the network’s ability to deliver a wide range of services. The plan also calls for Draadloos Groningen and Unwired Holding to sell access to the network to government agencies, businesses and consumers.

        BOX 2.5
        Municipal Broadband Initiatives in Italy and the Netherlands

        Sources: Nucciarelli, Sadowski, and Achard 2010; Vos 2009.

      • 2.3.2.4.5 Universal Service Funds for Broadband

        In the past, many countries defined their universal service funds (USFs) in a way that gave priority to providing voice telephony (traditionally provided over wireline) services to unserved or underserved regions. Recently, however, some countries have revised their definitions and the scope of the funds to include broadband, mobile telephony, or Internet access. For example, the EU and the United States are adding resources to existing rural development funds or USFs to accommodate broadband. Some countries have turned or are considering turning broadband provision into a universal service obligation and are reforming their universal service policies. Other countries are contracting commercial providers to build the network with service obligations through a competitive bidding process (for example, France, Ireland, Japan, and Singapore). Chapter 4 discusses these issues in more detail.

    • 2.3.2.5 Comparing Alternative Instruments

      Not all fiscal support instruments are equally effective. They differ primarily in terms of accuracy and also regarding transparency, targeting, cost, and sustainability.

      Table 2.5 illustrates which instruments of fiscal support can help to overcome each type of obstacle to broadband development ahead of or beyond the market (that is, their effectiveness in addressing specific impediments to broadband development).* For example, subsidizing investment is particularly effective at reducing investors’ costs and also can help to overcome financial market failures. Alternatively, subsidizing the use of broadband is an effective way to increase revenues by making service affordable to people who otherwise would not buy the service; however, it can also enhance competition among firms in the provision of services and reduce commercial risk by building up demand that otherwise would materialize at some point in the future as incomes rise and costs decline. The choice of instrument can be further narrowed down by considering the transparency of the instrument’s cost and its ability to target specified categories of beneficiaries effectively.

      Objective

      Subsidy of investment

      Subsidy use and devices

      Rights-of-way, spectrum

      Preferential taxation

      Equity investment

      Long-term loans

      On-lending international loans

      Partial risk guarantees

      Reduce costs

                     

      Increase revenues

                     

      Facilitate competition

                     

      Improve business environment

                     

      Address financial market failures

                     

      Reduce regulatory and political risk

                     

      Reduce commercial risk

           
      TABLE 2.5
      Effectiveness of Fiscal Support for Broadband Development

      Source: Telecommunications Management Group, adapted from Irwin 2003.

      Note: The dark shading depicts areas where the instrument is particularly effective, while the light shading illustrates additional effects.