National fibre strategies: decisive steps needed

July 2013 | SPECIAL REPORT: Infrastructure & project finance

Financier Worldwide Magazine

There are clear socioeconomic benefits from investments into advanced telecommunication networks, as high-speed broadband contributes to the diversity and strength of economies. However, significant investment into fibre is now necessary as it is no longer possible to modernise and upgrade the fundamental copper-based networks. The investments needed are vast, and many countries have yet to come up with an approach that balances national economic interests, free-market economics and a healthy telecommunications industry.

This article provides an overview of five national fibre models that governments around the globe have been following to reap the benefits from fibre and an assessment of which models are the most likely to fulfil national fibre goals.

Broadband as key lever for economic growth

Advanced high-speed telecommunication networks have long been considered a key foundation of healthy economies. With the explosion of internet-based business and an increasing reliance on real-time remote communication, social network marketing and Cloud services, the digital economy has become fundamental to economic growth in every country.

We have conducted studies that confirm the links between broadband services and economic growth. Improvements in broadband infrastructure create jobs, increase household income and permanently boost GDP. Ultra-fast broadband also drives critical diversification of economies, as small and medium businesses are among the first to benefit from new services.

Great macroeconomics, but what is the business case?

The challenge now is how to attain the clear national economic benefits of the latest fibre infrastructure while managing the considerable investment required. The best approach to meet this challenge remains unclear in many countries.

The best solution for national fibre involves well-dug trenches that are maintainable, can be reconfigured and expanded, offer the latest technology and present options to accommodate new technology in the future. This is not cheap and even in the favourable situation of dense cities, the business case typically heads for 15 year-plus breakeven.

The European Union, for example, has set ambitious targets in its ‘Digital Agenda’ of at least 50 percent of households using broadband connections of 100 Mbps or more. The fibre investment needed to achieve this is estimated to be approximately €200bn. To date only approximately 11 percent of this investment has been made or announced, indicating a huge gap between needed and effected investments.

The situation presents regulators with an unfamiliar challenge. After 30 years or more of breaking national monopolies, there is now a growing opinion and sound argument that too much infrastructure competition is holding back fibre deployment, which in turn is hurting consumers and the wider economy. If governments want the macroeconomic advantages of fibre, then a degree of industry coordination and stimulation of demand need to be part of their policy-making.

Five national fibre models

We have concluded a global survey of national fibre strategies in nearly 50 countries. From this study, we identified five models that governments around the globe have been following to reap the benefits from fibre. These models vary in terms of the degree of public investment to support fibre deployment and regulatory intensity. Underpinning the models are the specific national factors that play a significant role in which model is chosen or prevails, especially in terms of the level of network competition.

Model 1 – Private investment, unregulated. In this model, service providers are free to invest in fibre where they deem suitable. Little to no regulatory pressure to unbundle to competitors is applied, and regulated prices are not enforced.

Model 2 – Graded government support, incumbent led. In Model 2, the incumbent operator, usually still with a significant government investment stake or a high level of influence, is mandated to roll out an extensive national fibre network. Public money is involved directly or indirectly, and some regulation is applied to create a competitive environment. Japan is a good example of this model.

Model 3 – Graded government support, private led. While similar to Model 2, in Model 3 the government has distanced itself from the incumbent. Importantly, the government drives and partially funds a national fibre agenda through all the players in the market. These models generally deliver high levels of fibre penetration and coverage, allowing free market forces to operate where they naturally would and public money to be focused efficiently on areas where free market forces would not deliver fibre. France is a good example of this model.

Model 4 – Government-controlled fibre. In this model, the government takes a full hands-on approach to creating and, in some cases, operating a national fibre network. With such models, the government agenda for a digital economy is the focus, and the objective of policy and regulation is to openly offer and possibly transfer the infrastructure to the communication service providers in the country for commercial service operation. Australia is a well-fitting example of this model.

Model 5 – Private investment and heavy regulation. With its focus on private investment, Model 5 assumes strong competition and easy access to financing. Further, this model then applies open access and regulated price controls so that other, usually smaller, operators can offer services without the burden of heavy infrastructure investment. The intended result is considerable infrastructure competition that drives low prices for highly specialised services. The overall European telecom regulatory position is a good example of this model; however, individual countries within Europe often follow significantly different models in their local markets.

Which national fibre strategy to choose?

In the global survey of national fibre strategies, there were leading and lagging examples for each model. It is necessary to identify the best model for a specific national market condition and apply that model well. While no model is strictly good or bad, there are some general observations that can be made about the various models.

Model 1 tends to encourage less than efficient parallel infrastructures and hence investments, which with better coordination could achieve higher coverage at no extra cost. Network investments are focused first on densely populated areas, gradually expanding to less populated areas, while rural areas and the digital divide remain a public issue.

Model 4, while probably resulting in the most uniform and widespread infrastructure, will do so in a slower and perhaps less financially efficient way. Lack of competition tends to create inefficiencies both in terms of infrastructure and services.

Model 5 generally does not deliver fibre on any scale. The heavy investments and long pay-back periods involved, coupled with the uncertainty of service take-up rates due to competing infrastructures and the probability of low service prices, clearly discourages those who have the technical capabilities to build such networks.

The most promising models, Model 2 and Model 3, which adopt a hybrid approach, generally achieve the highest levels of penetration and do so in a more timely and financially efficient way than other models. The hybrid approach is a combination of free market competition, graded government coordination and geographically targeted public investment open to competitive bid. The difference between the two models is the level of competition in the market. Model 3 is applicable for highly competitive markets with multiple players with balanced competitive positions, and Model 2 where a government-controlled, heavily influenced incumbent is dominant.

Decisive steps needed to support economic growth

The telecom industry, governments and regulators need to move decisively to fibre in order to support future economic growth. Left purely to a free market model, nations will witness a digital divide; while some areas are not served at all, other areas have a patchwork of duplicated hot spots that are localised in city centres with potentially sub-optimal infrastructures. More differentiated regulation is now required that recognises appropriate levels of regulatory intensity at infrastructure and service competition levels. Ultra-broadband is an essential infrastructure for national competitiveness, and public policy must encourage an investment-friendly environment to ensure that fibre is deployed nationwide.

Andrea Faggiano is a principal and Karim Taga is a managing partner at Arthur D. Little. Mr Faggiano can be contacted on +39 335 784 4995 or by email: faggiano.andrea@adlittle.com. Mr Taga can be contacted on +43 664 230 71 89 or by email: taga.karim@adlittle.com.

Andrea Faggiano and Karim Taga

Arthur D. Little