Elsevier

Telecommunications Policy

Volume 34, Issue 9, October 2010, Pages 528-539
Telecommunications Policy

Long term risk sharing contracts as an approach to establish public–private partnerships for investment into next generation access networks

https://doi.org/10.1016/j.telpol.2010.07.011Get rights and content

Abstract

This paper develops an investment/pricing model for the deployment of basic broadband networks which, along with other applications, is applicable to public–private partnership projects. In particular, a new investment model is suggested to be used for finance deployment over a longer term by enabling both private and public investors to participate in the roll-out of next generation access (NGA) infrastructure. This so-called “long-term risk sharing concept” has several notable benefits compared with the traditional regulatory approach. Above all, the model enables both private operators and public authorities to share the risk of investing in NGA infrastructure. Thus the model offers a way for public authorities to achieve a timely and countrywide roll-out of NGA networks, including in areas where NGA investment would otherwise not occur.

Introduction

The telecommunications sector is at the beginning of a new era. The roll-out of new access networks, so called next generation access (NGA) networks is driven by technological developments and increasing demand for high speed broadband services. For the first time numerous operators compete with each other right from the beginning in the building of such infrastructure (Pupillo, 2008). Yet, although the issue of NGA network roll-out is on the agenda for some years, in many countries investment in NGAs is so far rather limited. While former incumbents originally proposed huge investments in the roll-out of broadband infrastructure,2 they have recently become very cautious. In some countries operators are only now in the planning process of deploying fibre in their access networks. The reasons for this are manifold, one of them being that in many areas the deployment of an NGA network is just not profitable.3

It is for this reason that governments and/or local authorities increasingly subsidise new networks or participate in public–private partnerships (PPP) for the deployment of NGA broadband infrastructure.4 Examples of public–private partnerships could be public services or public utilities which regularly replace their electric wires or their gas pipes which enables them to deploy fibre infrastructure at the same time on low cost levels. A key feature of such PPP-projects is that the funding of a project in a pre-defined geographical area occurs from the private and the public sector, thus distributing the investment risk between both parties. Thereby the role of the public partner can either be to construct and manage a publicly owned NGA infrastructure or to financially support the construction of a privately owned NGA network.5 The advantage of such projects is that the public partner can define the objectives to be attained in terms of public interest, while at the same time benefiting from the private sector’s management and operational experience. Yet, when granting state funds public authorities must adhere to the European and national state aid regulations with regard to funding local infrastructures (Gómez-Barroso & Feijóo, 2009, p. 8). In particular, it must be ensured that state aid does neither undermine the incentives of market operators to invest in broadband in the first place nor distort competition between different operators.

In this paper an investment-pricing model for the deployment of basic broadband networks is developed which is applicable to PPP-projects. In particular, a new investment model is suggested to be used to finance deployment over a longer term by enabling both private and public investors to participate in the roll-out of NGA infrastructure. This so-called “long-term risk-sharing concept” (LTRSC) has several notable benefits compared to the traditional regulatory approach, where contract durations are usually restricted and wholesale rates are regulated on a cost basis. Above all, the model enables both private operators and public authorities to share the risk of investing in NGA infrastructure. Thereby the model offers a way for public authorities to achieve a timely and countrywide roll-out of NGA networks, also in areas where NGA investment would otherwise not occur.

The paper is organised as follows: the first section explains the challenges of public–private partnerships for NGA networks. Thereby the requirements to be met in order for state aid to be in line with EU legislation are laid down. Assuming that in certain areas the establishment of a NGA infrastructure will not take place without public financial support it is argued that long-term risk-sharing contracts are an effective approach to address this problem. The main section elaborates the concept of “long-term risk-sharing contracts”. Starting with an outline of requirements to be met by long-term risk-sharing contracts, a pricing model for such contracts is developed. The model uses an example for calculating the price and the duration of such contracts. In the final section it will be shown that the model not only meets the requirements for public funding at the European level, it also meets the objectives of creating an investment-friendly environment for NGA roll-out and ensuring competitive telecom markets under public–private partnerships.

Section snippets

Challenges of public–private partnerships for NGA networks

Today’s regulatory challenge in an NGA environment is to allow for new and flexible forms of regulations avoiding under-investment. This is because NGA investments bear a very high risk due to the fact that future penetration rates and the willingness to pay for fibre access are uncertain (Fredebeul-Krein & Steingröver, 2009, p. 96).6 Given the high level of market and regulatory uncertainty, a deviation of the private and the social investment

Modelling long-term risk-sharing contracts

In this section, the model as such is presented. Starting with some assumptions for the model the various steps to be carried out in order to calculate both prices and duration on long-term risk-sharing models are elaborated. For the calculation as such, forecasts on the number of active lines and the expected average return per user (ARPU) are required. In addition, annual total costs are essential for the price calculation. Once such information is available prices of both long-term and

Long-term risk-sharing contracts as an appropriate approach to establish public–private partnerships

Public–private partnerships often face the problem of giving an advantage to certain undertakings and thus being selective and distorting competition. This is because governments financially supporting the deployment of broadband projects usually make their decisions on the basis of imperfect information. On the other hand, if a government does not support the establishment of NGA infrastructures in many geographic areas such infrastructure will never evolve. If long-term risk-sharing contracts

Conclusion

Market uncertainty in terms of demand for higher bandwidth, willingness to pay and alternative infrastructure development combined with regulatory uncertainty regarding future wholesale and retail regulation negatively affect private investment decisions as to future NGA infrastructure. Especially local authorities from rural areas fear that they will be left behind. Given the reluctance of private investors to roll-out NGA infrastructure in less densely populated areas effective ways have to

References (22)

  • B.M. Sadowski et al.

    Providing incentives for private investment in municipal broadband networks: Evidence from the Netherlands

    Telecommunications Policy

    (2009)
  • Broadband Stakeholder Group (2007). Pipe dreams? Prospects for next generation broadband deployment in the UK....
  • Elixmann, D., Neumann, K. -H., & Plückebaum, T. (2008). The economics of next generation access – Final Report. Report...
  • European Commission (2008). Draft Commission Recommendation of […] on regulated access to Next Generation Access...
  • European Commission (2009a). European Electronic Communications Regulation and Markets 2008 (14th Report)....
  • European Commission (2009b). European Electronic Communications Regulation and Markets 2008 (14th Report)....
  • European Commission (2009c). Community guidelines for the application of state aid rules in relation to rapid...
  • M.L. Fijnvandraat

    Shedding light on the black hole: The roll-out of broadband access networks by private investors

    (2008)
  • Fredebeul-Krein, M. (2009). Encouraging competition and investment into next generation access networks: The case of...
  • M. Fredebeul-Krein et al.

    Next generation access networks: Why is there a higher risk of investment and how to deal with it?

  • J.S. Gans et al.

    Access holidays and the timing of infrastructure investment

    The Economic Record

    (2004)
  • Cited by (0)

    1

    Tel.: +49 228 700 1511 fax: +49 228 700 1507.

    View full text