Friday, October 05, 2012

The Connecting Europe Facility (CEF) & broadband investment

Earlier this week the European Commission convened a high-level conference in relation to its proposals for the Connecting Europe Facility (CEF). The CEF is a €50billion plan for strategic infrastructure investment in transport, energy and broadband infrastructures - see this video clip for a brief overview.

It is intended that CEF investments will plug the gaps that would not be filled if the market or existing public sector instruments were the only options. Strong support for the proposals was expressed at the conference. From the related press release:
"During the event speakers and participants appreciated the innovative character and important added value that the Connecting Europe Facility would provide. The Connecting Europe Facility would help getting strategic infrastructure off the ground that helps "Europe to compete and to grow" in a globalised world, in line with the Europe 2020 strategy and the recently agreed Compact for Growth. Without it, participants agreed, many necessary infrastructure investments in transport, energy and internet in the EU would not happen if dealt with purely at national level. This is particularly true in the on-going crisis, which hampers for example bank lending for infrastructure investment. Most participants expect significant private investments thanks to innovative financial instruments linked to the Connecting Europe Facility, like project bonds, and the longer term orientations and planning security it provides."
Just over €9billion will support investment in broadband infrastructure. Neelie Kroes, Vice-President of the European Commission responsible for the Digital Agenda, delivered this speech at the event:
"The CEF sets aside nine billion euros for digital public services and high-speed broadband. Today I want to make three points. First, the money for broadband - one billion euros per year - is an investment worth making. ICT investment is the most productive you can get; it builds growth and it creates jobs. For example, in Germany alone, up to 2020, broadband upgrade plans could boost the economy by 170 billion euros, and create nearly a million jobs. And no wonder! Think of the extra services fast broadband enables. In the EU, eProcurement could save 100 billion euros a year; cloud computing 250 billion. E-Health, eGovernment, smart cities: they can generate jobs, improve lives, and make public funds work harder. All of those innovations are worth investing in: but they all need fast internet. The fact is we are far from hitting the ceiling of Internet innovation. Let's not tie ourselves down with slow connections. Second: remember financial instruments attract significant private sector leverage: so every cent works around seven times harder. Every Member State will get back more total investment than they put in. And remember, a financial instrument isn't a donation, it's a loan. The EU budget gets its money back: with interest. In fact, I want all the broadband funding via those financial instruments. For maximum leverage, coverage, and taxpayer value. Third: you only get those benefits at EU scale. Through the EIB; and using EU-wide funding schemes to draw in long-term investors, such as institutions like the Caisse des Dépôts. National funding alone doesn't offer markets the same economies of scale, or diversity of risk; and it won't attract as much public and private funding. If this support isn't European, it won't happen."
More in a similar vein on her blog. Further information about the CEF and the "financial instruments" mentioned above is available in this overview. The European Commission expects the majority of CEF investment in broadband to be in the form of these instruments, rather than grants:
"...sparsely inhabited areas (so called “white” areas), where the business case is less evident will rely on Structural Funds and other national/regional public grants. CEF Digital will intervene in the so-called “grey” areas in the middle, using financial instruments to help mitigate the risks, and thereby making these high-speed broadband projects commercially viable...In contrast to the domains of transport and energy, CEF Digital will deploy predominantly financial instruments to roll-out the high-speed network throughout Europe, rather than focusing on grants. Grants, however, will be used for technical assistance and for the development of Digital Services; hence CEF Digital will be managed in close coordination with the Structural Funds, which offer grant support."
Project Bonds are envisaged as the main financial instrument for the CEF:
"The Europe 2020 Project Bond Initiative, for which the pilot phase has been launched in 2012, is envisaged to become the main EU instrument to help the promoters of individual infrastructure projects attract private sector investors, in particular insurance companies and pension funds. This initiative will enable the issuance by project companies of long-term well-rated bonds instead of relying only on bank lending. The participation of the European Commission and the EIB (European Investment Bank) will mitigate some of the risk associated with a project bond issued to finance a specific project. Member States, infrastructure managers or companies will therefore be able to access a competitive source of finance and consequently improve the cost of financing such projects."
The operation of Project Bonds is explained in more detail in the example on page 7 of the overview; essentially, CEF funding will provide capital contributions to the EIB as a "risk cushion", to cover a portion of the EIB's risk in financing eligible projects. Individual projects can then raise funds by selling project bonds to capital market investors, the involvement of the EIB ensuring projects are an attractive investment proposition. This mechanism could prove more timely and have a bigger impact than grants (or gap funding?), given the current economic climate and state aid considerations:
"The credit shortage and the new regulatory requirements of Basel III currently limit the appetite of commercial banks for exposure to infrastructure financing. CEF Digital will enable the European Investment Bank (EIB) to fill this gap by taking on more risk in the broadband infrastructure sector. Thanks to these financial instruments, the CEF will be almost budget-neutral and have a high leverage effect (one Euro of EU investment will trigger between 5 and 10 Euro of private investment). Operators, in particular those where the investment climate is particularly harsh, will in turn benefit from lower interest rates due to the EIB’s AAA rating. Time-to-market with CEF is likely to be much shorter than with structural funds, if only because support through financial instruments does not qualify as state-aid, clearances for which can easily take up to two years."
The CEF overview document is clear on the importance of investment in broadband infrastructure:
"High-speed broadband investments create jobs in the short term as they are installed, but the transformative impact is in their boost to productivity, in the modernisation of public administration, and in the improvements to the quality of life by tackling the exclusion of isolated communities, or by enabling new applications in eHealth. High-speed broadband investments generate a higher sustainable level of employment in all sectors of the economy; according to the OECD, an increase in 10% of broadband take-up in any year results in a growth of 1.5% in labour productivity over the following five years. 
Ten years ago, dial-up was the standard, DSL was under development and neither YouTube, nor Facebook or Skype existed. Without basic broadband, these platforms would have never been created. We cannot predict which new platforms will be developed by 2020, but one thing is clear: they will need more bandwidth than we have now. High Definition TelePresence requires at least 24 Mbps, eHealth applications need up to 100 Mbps, and cloud computing depends on high-speed symmetrical connections. Just as dial-up is now obsolete, first generation broadband networks will soon become a relic of the past and Europe cannot lag behind."
CEF proposals are expected to be adopted before the end of 2013. On the same day, Neelie Kroes gave a closely related speech at the ETNO FT 2012 CEO summit, flagging the great potential of broadband as an investment opportunity:
"...(we) need to show investors that the European telecoms sector represents a growth story. A sound long term investment, and a credible way to rebuild our economy. Overcoming that chilling factor is our main challenge, going beyond the finer details of this or that regulation. This growth story is waiting to be told. Just look at how, over recent decades, people have taken to new technology: and valued its benefits. Many products that ten years ago were a luxury, are now lifestyle essentials: which people don't think twice about spending money on. Just look at all the new products and services that could come onto the market in future, from cloud computing to connected TV, online Universities to virtual operating theatres, smart cities to the Internet of Things. Think how much value those will add to people's lives, businesses' bottom line, government services. And how much they will be prepared to pay to get that value, via fast broadband services...(we need) to make investors confident that fast broadband networks are safe, profitable, and worthwhile"
Her words about the efforts being taken to ensure the right European regulatory framework for network operators, as set out in July 2012, offer an interesting counterpoint to the recent issues over the roll-out of 4G services in the UK:
"...this isn't a squabble about who gets a bigger or smaller share of the pie. It's about making the pie bigger. The more people get ultrafast access, the more they will demand new online applications; the more market players will supply them; the more their neighbours, families and friends will see those great benefits. And the more demand will soar. As demand grows, will create a growing business in supplying connectivity: and boost revenues. That's good for you, it's good for consumers, it's good for the economy: and that's the environment we are creating."
ETNO's statement in support of the Connecting Europe Facility proposals is available here.

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