Innovative Financing Models for Rural Broadband Connectivity: The Connected Communities Initiative Experience CONTENTS Acknowledgments 4 Abbreviations 5 Glossary 6 Executive Summary 7 CHAPTER 1 Connected Communities Initiative 9 A. Rural-urban connectivity divide a persistent challenge in Europe 10 B. CCI established to help EU reach Europe 2020 Agenda and Gigabit Society goals 14 C. CCI unlocked approximately Euro 134 million in 10 communities across Europe 17 CHAPTER 2 Guide to Building the Case for Rural Broadband Projects 19 A. Making the business case for rural broadband 22 B. Best practices for financing a rural broadband project 24 1. Demand Management 26 2. Cost Management 26 3. Risk and Infrastructure Sharing 26 4. Best Practices for Financial Modelling 27 5. Time-to-Market and Other Procedural Considerations to Mitigate Project Delays 27 6. Building a Successful Investment Pitch 28 CHAPTER 3 Key Findings and Recommendations 29 A. Nature of Promoters 30 1. Small to medium-sized operators open a great opportunity to extend broadband in Europe 30 2. Community-driven initiatives are a successful model in some Member States 31 B. Type of zones and geography 32 1. Major financial and commercial risks persist in rural and gray areas 32 2 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E C. Business model 33 1. Successful CCI cases were based on neutral wholesale infrastructure models 33 D. Sources of funding 34 1. State aid rules are not clear in gray areas and in ultra-high-speed networks 34 E. There is a need to provide nonmonetary incentives to private investors 34 F. Many factors contribute to crowd out private investment 36 G. Regulators and policymakers can further facilitate rural investment 36 H. CEBF a good fit for CCI projects 38 Conclusion and Next Steps 41 LIST OF FIGURES Figure 1. Coverage of 30 Mbps broadband networks in rural and urban areas by European country, 2017 11 Figure 2. Broadband network coverage in EU rural areas by technology, 2016 and 2017 12 Figure 3. NGA broadband coverage in the EU, 2014–17 12 Figure 4. Household penetration of 100 Mbps services in EU, 2013 and 2017 13 Figure 5. NGA broadband household penetration in CCI countries, 2017 15 Figure 6. Geographic classification of the rural broadband challenge in Europe 21 Figure 7. Mapping major stakeholders involved in rural broadband projects 22 Figure 8. Six important measures for successful broadband project finance in rural areas 25 Figure 9. CEBF Selection Criteria 39 Figure 10. CEBF Risks Matrix 40 LIST OF TABLES Table 1. Projects under CCI Technical Assistance program 16 Table 2. Achievements of CCI program 17 Table 3. Key attributes across the Connected Communities Initiative portfolio 20 Table 4. Thematic stages of engagement vs. broadband project action areas 23 Table 5. CCI Methodology for reporting to investors and financiers 24 Table 6. Summary of funding sources for broadband investments in EU, 2007–20 (€ mil) 25 3 ACKNOWLEDGMENTS T his Report was prepared by a team led by Jerome Bezzina and comprising Marolla Haddad, Joulan Abdul Khalek and Petar Stoykov. The work was carried out under the general direction of Jane Treadwell. The team received guidance from Sebastiaan van der Piejl, Rajendra Singh, Xavier Muron and Marcus Bernhard Heinz. Juan Navas-Sabater and Carlo Maria Rossotto were invaluable members in the project’s execution. We would like to acknowledge the support of the European Commission, Directorate General for Com- munication Networks, Content and Technologies (DG CONNECT) who established the “Part II Europe 2020 Programmatic Single-Donor Trust Fund” under which the Connected Communities Initiative (CCI) was implemented. The team would also like to acknowledge the contributions of: Boutheina Guermazi, Elisabetta Capan- nelli, Andrea Liverani, Arup Banerji, Antonio P. Borges, Serge Randriamiharisoa, Heloise Jacqueline Monique Dubois, Patrizia Poggi, Nicole Kasongo and Daria Goldstein. An initial version of the report was presented and discussed at the “Broadband-Day: Mind the Broad- band Gap Conference” held in Brussels on 19 and 20 of November 2018. We would also like to thank the representatives of all project communities without who the CCI would have not been possible. The team apologizes to any individuals or organizations inadvertently omitted from this list. 4 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E ABBREVIATIONS ADSL asymmetric digital subscriber line ARPU average revenue per user CAPEX capital expenditure CCI Connected Communities Initiatives CEBF Connecting Europe Broadband Facility DG CONNECT Directorate General for Communication Networks, Content and Technologies EC European Commission EFSI European Fund for Strategic Investment EIB European Investment Bank ERDF European Regional Development Fund ERMES Regional Programme for the Development of ICT Infrastructures” (Friuli VG) ESIF European Structural and Investment Fund EU European Union FGV Friuli Venezia Giulia FTTC fiber-to-the-cabinet FTTB fiber-to-the-building FTTH fiber-to-the-home FVG Friuli Venezia Giulia IXP internet exchange point Mbps megabits per second MFD maximizing finance for development NGA next generation access NPBI national promotional banks and institutions OPEX operational expenditure PE private equity PPP public-private partnership RUNE Rural Network SME small and medium-sized enterprise SN Senegal SPV special purpose vehicle TA technical assistance UFD ultrafast broadband VDSL very-high-bit-rate digital subscriber line WACC weighted average cost of capital WISP wireless internet service provider Acknow ledgments 5 GLOSSARY Europe 2020 broadband  roadband-related objectives set out in the Digital Agenda for Eu- B objectives rope, one of the seven flagship initiatives of the Europe 2020 strat- egy adopted by the Commission in 2010. These objectives are (i) by 2013, to bring basic broadband to all Europeans (from 144 Kbps up to 30 Mbps); (ii) by 2020, to ensure coverage of all Europeans with fast broadband (> 30 Mbps); and (iii) by 2020, to ensure take-up of 50 % or more of European households to ultra-fast broadband (> 100 Mbps). Gigabit Society 2025 I  n September 2016, the Commission identified in a Communication objectives commonly known as the ‘Gigabit Society for 2025’ three strategic ob- jectives for 2025 that complement those set out in the Digital Agenda for 2020. Incumbent  company which used to function as a monopoly but which now A provides services competitively. Many incumbents have inherited advantages from their former monopolistic status (e.g. networks and customers). NGA N  ext Generation Access networks that can supports ultrafast broad- band speeds. These NGA are most of the time based on fiber and reaches points that are close to the premises, Fiber to the Home, Fiber to the Building, or Fiber to the Curb IXP  n Internet exchange point (IX or IXP) is the physical infrastructure A through which Internet service providers (ISPs) and content delivery networks (CDNs) exchange Internet traffic between their networks (autonomous systems). Basic broadband speeds between 144 Kbps and 30 Mbps;  Fast broadband speeds between 30 and 100 Mbps  Ultrafast broadband speeds higher than 100 Mbps  6 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E EXECUTIVE SUMMARY T he Connected Community Initiative (CCI) supports the achievements of the Europe 2020 Agen- da and the Gigabit Society targets. The initiative was established in 2015 by the European Commission, Directorate General for Communication Networks, Content and Technologies (DG CONNECT) as a single donor trust fund implemented by the World Bank. The initiative focuses on facilitating the flow of private and public investments to broadband connectivity projects and assist them in bringing their projects to a level of maturity that would enable funding from various public and private sources. The program was successful in channeling private and public funds into important broadband network deployment projects. With an overhead of only € 1 million, CCI was able to unlock approximately € 134 million. 10 projects were able to secure, or are in the process of securing, funding to construct their fiber-based broadband networks. These projects are the Rural Network (RUNE) projects in Croatia and Slovenia; ToPix project in Italy’s Piedmont region; and DSTelecom in Algarve, Alentejo, Lower Minho, and Norte regions in Portugal, Drenthe in the Netherlands, and Gran Canaria in Spain. Funding var- ied between public, private, private equity, and the Connecting Europe Broadband Facility (CEBF), or a mix of them. Thus CCI will help connect approximately 687,000 homes in remote and underserved areas of the portfolio countries. In addition to this direct impact, the CCI program generated strategic value that will continue in help- ing in bridging the connectivity gap. CCI helped building capacity for project promoters and provided them with the necessary tools to scale up their activities, it helped sensitizing policy makers on the major bottlenecks facing project promoters and contributed to the reinforcement of a pan-European network of project promoters and communities interested in the deployment of broadband infrastruc- ture projects. The experience of CCI shows that the connectivity gap in most member states is the highest in gray zones and in zones lagging in ultra-fast broadband. Where neither state aid nor private investment is feasible. These areas are not covered by state of the art networks nor do they have enough competition to boost the development of networks and services. As a result, working toward the targets under the Europe 2020 Digital Agenda and the Gigabit Society requires targeted measures that challenge the existing frameworks and attract private investment in gray and rural areas. Public financing or incentives are required to boost the financial viability of these projects. To respond, the European Commission has established several financial instruments to supplement the existing State aid or public financing provided at the national, regional, or municipal level of each country. These instruments are based mainly on EC guarantees to lower the financial risks of investments. The most important for small to medium project promoters is the Connected Europe Broadband Facility Acknow ledgments 7 (CEBF). Launched on June 27, 2018, CEBF includes de-risking instruments from EIB and EFSI; funds from national promotional banks and institutions; and private investor. The first closing reached € 420 million of assets under the management of Cube Infrastructure Management Fund, an independent infrastructure fund manager. CCI experience has shown that the challenges and opportunities in promoting broadband and ultra- fast broadband deployment in rural and gray areas are considerable. However, project promoters can improve the chances of getting funding if they take into consideration specific measures to address the following: demand management, cost management, risk and infrastructure sharing, financial model- ling, time-to-market and building a successful investment pitch. This report lays out the main findings of the CCI experience and elaborates on the factors that facili- tated or inhibited the success of broadband financing and deployment projects. These factors depend on the countries, topographies, market conditions, national framework, etc… However, many are also in common, given that the regulatory framework is similar, most gray and rural areas are in challenging topographies and financing is scarce. These challenges and opportunities constitute the basis of the rec- ommendations to be considered by the EC, national and regional governments, and regulatory bodies. In summary, support to project promoters shows that there are still major financial and commercial risks in investment in infrastructure in rural and in grey areas. State aid rules are not clear or cumber- some to abide by for incentivizing investment in gray areas and in networks of 100Mbps capacity and above. When state aid is not applicable, there is a need to provide other types of incentives to the pri- vate sector to encourage investment in these areas. Attention should be given to the rules and practices that are crowding out private investment such as the requirements for the declaration of commercial interest in gray zones, the clawback mechanism for companies benefiting from state aid, and the map- ping of grey and white zones. The technical assistance conducted by the World Bank showed that there are measures that policy makers can put take to facilitate bridging the financing gap in lagging zones. The first set of measures are to encourage small to medium sized operators to invest in networks in their communities and areas of interest and encourage community driven initiatives and provide them with subsidies, alternative financial tools and non-monetary incentives. These two models have proved to be a good platform to reduce the private sector investment gap. Pure neutral wholesale models, that are not related to any retail activities have demonstrated that they can increase service competition and mutualize invest- ments when it is not very feasible. Looking forward, project promoters and financiers can replicate the lessons learned from the CCI in their future projects/investments. But beyond replicability at the same community levels, the CCI can be scaled up and made replicable in more regions and countries in the EU, and in neighboring and EU-acceding countries. 8 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E CHAPTER 1 CONNECTED COMMUNITIES INITIATIVE C H APTER 1 9 A. Rural-urban connectivity divide a persistent challenge in Europe Access to future-proof, ultrafast broadband infrastructure has proven a prime enabler of economic prosperity and inclusion in the current era of hyperconnectivity. The European Union’s Member States are among the most advanced in the world in the adoption of fast and ultrafast broadband services. However, the measure of adoption at the country level masks significant differences within each coun- try, especially regarding the rural-urban divide. Considering the importance of fast broadband services and their impact on competitiveness and inclusion, the European Union (EU) has set 2010 and 2016 for several targets for the uptake and coverage of fast and ultrafast broadband. These targets are included in the Europe 2020 Agenda and the Gigabit Society goals.1 Since 2010, broadband coverage has improved in Europe. However, the lack of financial viability and appetite for private investment affected the business case for deployment of, or upgrade to, the Next Generation Access networks (NGA) capable of supporting ultrafast broadband and upgradable to giga- bit connections in riskier markets. The weak business and financial case for NGA in rural areas is a consequence of, among others, low population density, lower purchasing power than in urban areas, and an aging or diminishing population. These demographic challenges often are compounded by geo- graphic challenges: remoteness, hard terrain, as in mountainous areas, islands, or subarctic regions.2 Going forward, two frontiers have yet to be reached. The first is the universal coverage of fast broad- band in rural areas. The second is the increase in the adoption of ultrafast broadband in all regions of Member States. The latest report of the European Court of Audit on broadband in 2018 concluded3: “Rural areas remain problematic in most Member States: by mid-2017 14 had fast broadband coverage in rural areas of less than 50 %. […] take-up of ultrafast broadband, only 15 % of households had subscribed to internet connections at this speed by mid-2017, against a target of 50 % by 2020”4 (Figure 1). On average, connectivity to fast broadband (speeds of 30 Mbps–100 Mbps5) in rural areas still is only approximately half of the average in the EU (47 percent versus 80 percent).6 Countries that have the biggest urban-rural gap are countries with the highest level of dispersed population including Finland and Sweden, but the gap also is high in more densely populated Member States including Bulgaria, Greece, Italy, and Spain. This gap is wider when considering the underlying infrastructure, that is, leg- acy copper networks versus NGA. In 2017, 92.4 percent of rural EU homes were connected by at least 1 fixed broadband technology, but less than 50 percent had access to NGA infrastructure.7 NGA networks connected 46.9 percent of rural EU homes, 33.2 percentage points less than total NGA coverage (Fig- ure 2). Despite some progress in rural areas, the gap is not narrowing because cities are progressing as quickly in improving their connectivity (Figure 3). Connectivity is proceeding, but the roll-out must accelerate to achieve the goal to have 100 percent of Europeans, including in rural areas, connected to fast internet by 2020.8 1 These objectives are (a) by 2013, to bring basic broadband to all Europeans (up to 30 Mbps); (b) by 2020, to ensure coverage of all Europeans with fast broadband (> 30 Mbps); and (c) by 2020, to ensure take-up of at least 50 percent or more of households to ultrafast broadband (> 100 Mbps). The targets of the Gigabit Society for 2025 are (a) to ensure connectivity of at least 1 gigabit for all main socioeconomic drivers (such as schools, transport hubs, and the main providers of public services); (b) to provide uninterrupted 5G coverage to all urban areas and all major terrestrial transport paths; and (c) to provide all European households, rural or urban, access to internet connec- tivity offering a download speed of at least 100 Mbps, upgradable to Gigabit speed. 2 https://enrd.ec.europa.eu/action-plan-rural-broadband_en. 3 http://publications.europa.eu/webpub/eca/special-reports/broadband-12-2018/en/. 4 https://www.eca.europa.eu/Lists/ECADocuments/SR18_12/SR_BROADBAND_EN.pdf. 5 Mbps = megabits per second. 6 https://enrd.ec.europa.eu/action-plan-rural-broadband_en. 7 http://ec.europa.eu/newsroom/dae/document.cfm?doc_id=52968. 8 https://enrd.ec.europa.eu/action-plan-rural-broadband_en. 10 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Figure 1. Coverage of 30 Mbps broadband networks in rural and urban areas by European country, 2017 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EU Rural Total Malta Netherlands Luxembourg Belgium United Kingdom Ireland Portugal Latvia Denmark Cyprus Czech Republic Slovenia Germany Hungary Austria Slovakia Poland Lithuania Italy Romania 14 Members Estonia States below 50% Spain France Bulgaria Sweden Croatia Greece Finland 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Target Coverage (as a % of population) 2020 Source: European Court of Audit based on European Commission data, 2018, https://www.eca.europa.eu/en/Pages/DocItem.aspx?did=45796 Reaching the targets of take-up of ultrafast broadband services (speeds of 100 Mbps and higher) is more problematic, even for Europe’s urban areas. As of mid-2017, penetration of services of 100 Mbps remained under 20 percent in 19 Member States. The average at the EU level is only 15 percent, which is much lower than the 50 percent target set for 2020 (Figure 4) C H APTER 1 11 Figure 2. Broadband network coverage in EU rural areas by technology, 2016 and 2017 100 80 60 40 20 0 DSL VDSL FTTP WiMAX Cable DOC SIS HSPA LTE Satellite 3.0 2017 2016 Source: Broadband Coverage in Europe 2017, a study by IHS Markit and Point Topic for the European Commission. Note: Broadband Coverage in Europe 2017, a study by HIS Markit and Point Topic for the European Commission. Figure 3. NGA broadband coverage in the EU, 2014–17 100 80.1 75.8 80 70.3 67.3 60 46.9 39.1 40 29.9 26.3 20 0 2014 2015 2016 2017 Total Rural Source : https://digital-agenda-data.eu/datasets/digital_agenda_scoreboard_key_indicators/visualizations. Note: https://digital-agenda-data.eu/datasets/digital_agenda_scoreboard_key_indicators/visualizations. 12 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Figure 4. Household penetration of 100 Mbps services in EU, 2013 and 2017 0% 10% 20% 30% 40% 50% EU 2013 2017 Sweden Romania Belgium Portugal Latvia Netherlands Hungary Lithuania Luxembourg Denmark Spain Ireland Finland Czech Republic United Kingdom Slovenia Poland Malta Germany France Slovakia Estonia Bulgaria Austria Italy Croatia Cyprus Greece 0% 10% 20% 30% 40% 50% Target 100 Mbps subscriptions (as% of households) 2020 Source: European Court of Audit report 2018, based on Commission data. C H APTER 1 13 B. CCI established to help EU reach Europe 2020 Agenda and Gigabit Society goals To support member states in broadband infrastructure development, the EU has provided around 6 billion euro and 15 billion euro for the periods 2007-2013 and 2014-2020 respectively for Member states to use. The 15 billion is estimated by the Broadband Audit Commission to represent around 6 % of the total investment needed. The Connected Community Initiative (CCI) was established to facilitate the efficient flow of private and public investments to broadband connectivity projects for a select number of EU communities that plan to seek funding to construct broadband networks. CCI is one of the many strategies and tools that the European Commission has deployed to support the achievements of the Europe 2020 Agenda and the Gigabit Society targets. The initiative was established in 2015 by the European Commission, Direc- torate General for Communication Networks, Content and Technologies (DG CONNECT) as a single donor trust fund implemented by the World Bank.9 The objectives of the Europe 2020 agenda align with the World Bank’s two objectives of building com- petitive and sustainable economies and reducing poverty and social exclusion. CCI is designed to maxi- mize and optimize private sector investments, a strategy that the World Bank recently has been spear- heading in most countries and sectors. This Maximizing Finance for Development (MFD) initiative was launched at the 2017 G-20 Meeting in Hamburg and is designed to crowd in, through innovative financing and policy initiatives, the private financing and expertise necessary to support the Bank’s twin goals. As highlighted in this report, attracting private investment in broadband connectivity proj- ects in Europe is, and will be, at the heart of bridging the urban-rural connectivity divide and is helping underserved communities leverage connectivity for equitable growth in Europe. In practice, CCI was designed as a technical assistance (TA) program targeting a select number of com- munities to assist them to bring their broadband connectivity projects to a level of maturity that would enable them to receive funding from a variety of public and private sources. To select the beneficiary communities, the EC published a call for expressions of interest for broadband project promoters inter- ested securing financing. Approximately 120 responses were received. With the European Commission, the World Bank devised a set of criteria to assist in the selection. The criteria reflected the objectives of the CCI as well as the potential for the highest impact in the target communities. The seven selection criteria were: 1. Growth and jobs, with a focus on rural and low-income areas 2. Scalability and replicability 3. Innovative and Green agenda 4. Gender equity 5. Emphasis on new Member States 6. Low broadband penetration 7. Linked to some of EC’s own criteria in relevant initiatives. Based on these criteria, the European Commission, in consultation with the World Bank, categorized the qualified proposals in 59 intervention logic cases, and 24 business cases. Of these, 16 proposals were selected for assistance, each presenting specific challenges and opportunities. These communities were in 8 countries––Bulgaria, Croatia, Greece, Italy, Netherlands, Portugal, Slovenia, and Spain––and 9 The full name of the trust fund is Part II Europe 2020 Programmatic Single-Donor Trust Fund (No.TF072400). The agreement was made between the EC and IBRD under contract EC Contract No 30-CE-0711009/00-22. 14 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E possessed many of the selection criteria. For instance, Croatia has one of the biggest gaps in broadband between rural and urban areas (Figure 5), while the communities in the Netherlands presented an in- novative approach to rural connectivity with a potential of scalability and replicability. Under CCI, projects were also encouraged to aggregate and engage in cross-border operations to in- crease economies of scale and facilitate funding. For instance, after the intervention of CCI, 3 border- ing project communities in Croatia, Italy, and Slovenia were advised to aggregate their operations in 1 project. This aggregation resulted in the RUNE (Rural Network), a greenfield broadband wholesale operation that spans both Croatia and Slovenia, with future plans to provide services in Northeastern Italy. Other projects such as those in Portugal also were aggregated under one umbrella. Investors then were able to finance a single wholesale operator that then engaged in operations in multiple coverage areas across the country. Figure 5. NGA broadband household penetration in CCI countries, 2017 100 98.3 98.4 95.2 90 86.8 85.0 83.2 80 78.5 80.1 74.6 67.4 70 60 53.9 50 46.9 49.6 39.2 37.4 40 30 25.0 20 16.1 13.7 10 0 Netherlands Portugal Italy Spain Slovenia European Bulgaria Croatia Greece Union Total Rural Source: https://digital-agenda-data.eu/. The World Bank team followed a standardized methodology in assisting all communities and was based on international best practice in broadband infrastructure finance. The methodology guided the overall implementation of the TA program but also took into consideration the specific technical, commercial, and legal requirements of European communities for potential funding opportunities. Each project un- der CCI passed through the three phases of technical assistance depending on their level of maturity. • Phase 1 includes overall project scoping and pre-appraisal. • Phase 2 consists of a full broadband infrastructure project appraisal including: –– Assessing institutional capacity and risk environment –– Setting up the Selected Project’s overall timeline and key milestones to project completion –– Assessing demand for services, pre-existing and planned infrastructure, mapping –– Preparing documents required to finance applications including State Aid Rules, Choice of Business Model, Financing Plan, Business Plan –– Preparing financing plan that includes projected rollout costs and revenues for the first 15 years and anticipated funding need and availability –– Aggregation study (where chosen) to estimate financial benefits of aggregation. C H APTER 1 15 • Phase 3 focuses on Project Financing through transaction advisory and investor outreach: –– Preparing legal study/advice on issues such as procurement or State aid –– Providing support for European Structural and Investment Funds (ESIF), European Invest- ment Bank (EIB), or other financial institution funding when needed –– Advising on financial structures, design of PPP models. A more detailed description of the program’s methodology appears in chapter 2. A detailed description of each of the CCI projects is included in individual case studies. Table 1. Projects under CCI Technical Assistance program Country Project Name Region Bulgaria Connected Rila and Rhodope Pazardzhik Bulgaria High-Speed Broadband Access Network National Greece Greece National Broadband Plan​ National Greece Greece Sarantoporo​ Sarantaporo Greece Western Greece Region​ Region of Western Greece Spain Ultrafast Gran Canaria Gran Canaria Netherlands Netherlands: Oldambt and Drenthe Regions Oldambt Netherlands Netherlands: Oldambt and Drenthe Regions Drenthe Italy Ultrafast Broadband (UFB) in Friuli Venezia Giulia (FVG) Friuli Venezia Giulia Italy Piemonte Connected Piedmont Connecting Portugal: DSTelecom High-Speed Wireline Portugal Algarve Broadband Network Connecting Portugal: DSTelecom High-Speed Wireline Portugal Lower Minho Broadband Network Connecting Portugal: DSTelecom High-Speed Wireline Portugal Alentejo Broadband Network Connecting Portugal: DSTelecom High-Speed Wireline Portugal Norte Broadband Network Croatia Rural Network (RUNE) Croatia and Slovenia Croatia Slovenia Rural Network (RUNE) Croatia and Slovenia Slovenia 16 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E C. CCI unlocked approximately Euro 134 million in 10 communities across Europe For three years, the CCI has assisted 16 communities in building their business and financial case. Over the 3 years, 4 projects were dropped due to the lack of responsiveness of the project promoters, or other reasons that fell outside the scope of work of the CCI. Therefore, over CCI’s 3 years, these 16 projects were closely followed and supported according to their needs, requests, and responsiveness. The program was successful in channeling private and public funds into important broadband network deployment projects. With an overhead of only € 1 million, CCI was able to unlock approximately € 134 million. 10 of the 16 projects were able to secure, or are in the process of securing, funding to construct their fiber-based broadband networks. These projects are the Rural Network (RUNE) projects in Croa- tia and Slovenia; ToPix project in Italy’s Piedmont region; and DSTelecom projects in Algarve, Alentejo, Lower Minho, and Norte regions in Portugal, Drenthe in the Netherlands and Gran Canaria in Spain. Funding varied between public funds, private funds, private equity funds and the CEBF and or a mix of them. This direct investment has had a high leverage effect on the funded projects. The CCI Technical Assistance will help connect a total of approximately 687,000 homes in remote and underserved areas of the portfolio countries. Table 2 summarizes the expected impacts of CCI’s assistance and the funds invested on the selected communities. Table 2. Achievements of CCI program Expected outcome: Country that secured Investment made Projects name / region Source of investment Number of households investment through CCI through CCI potentially connected Spain Gran Canaria undisclosed Private undisclosed Netherlands Oldambt € 24 million Private + municipal funds 17,000 Netherlands Drenthe Italy Topix in Piedmont undisclosed CEBF + Private Portugal DSTtelecom in Algarve DSTtelecom in Lower Portugal Minho € 50 million Private equity funds 300,000 Portugal DSTtelecom in Altenjo Portugal DSTtelecom in Norte Rural Network (RUNE) Croatia € 30 million CEBF 135,000 Croatia & Slovenia Rural Network (RUNE) Slovenia € 30 million CEBF 235,000 Croatia & Slovenia Total   € 134 million   687,000 C H APTER 1 17 In addition to this direct impact, the CCI program has generated considerable value added that will continue helping rural project promoters and policymakers in bridging the connectivity gap. These indirect achievements are: Building capacities of project promoters: The program provided project promoters with many tools that they can use to grow their businesses and even support other members of their communities. This learning experience honed project promoters’ capabilities to develop business plans; evaluate regulato- ry, policy and business risks; and cater to financiers’ demands. Skills developed include assessing local, national and regional rules and regulations; understanding the needs of the investors; analyzing and assessing the risks that could affect investors’ decisions; developing business and financial models; understanding the technologies best suited to achieve the goals; and understanding State aid rules and how they affect projects. CCI also has helped project promoters and communities to identify the critical stakeholders who can support their projects and initiate a dialogue and exchange with policymakers and stakeholders at the European Commission level. Most notably, CCI helped project promoters identify and address potential investors, and liaise with the EC to understand the implications of competition rules and regulations for the viability of their business plans. Sensitizing policymakers: The value created by CCI extends to the policymakers at the regional, na- tional, and subnational levels. By experiencing hands-on the bottlenecks faced by project promoters, CCI was able to distill the lessons and communicate them to policymakers at the EU level. This report and the many meetings and consultations that the CCI team conducted in the last three years have increased awareness of the challenges and bottlenecks faced by project promoters in Europe. Fostering an active best practices community: CCI contributed to the reinforcement of a pan-Europe- an network of communities interested in developing best practices for deployment and governance of broadband infrastructure projects. Given its increasing number of projects that use the MFD strategy in many countries, the World Bank Group also has benefited from the CCI experience and can apply it to support the implementation of similar investment projects in other countries, for instance, Jordan and Senegal. This replicability in neighboring countries also is facilitating the harmonization of regu- latory and policy practices beyond the EU. 18 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E CHAPTER 2 GUIDE TO BUILDING THE CASE FOR RURAL BROADBAND PROJECTS C H APTER 2 19 T he Connected Communities Initiative was designed as a bespoke initiative to address Europe’s rural and suburban broadband challenge. The CCI portfolio consisted of several projects that brought diverse broadband challenges. Compared to cities, many rural and suburban areas are characterized by low average population densities and relatively weak consumer demand (in purchas- ing power) for broadband and ultrafast broadband. Nevertheless, the specific geographic conditions of these areas played an important role in defining whether broadband infrastructure projects would be commercially feasible. This realization has opened the door to a nuanced understanding of Europe’s rural and ultrafast broadband challenge––one that provides room for more diversity in the challenges to be addressed and in the tools to address them. The projects brought forward under CCI can be categorized under island localities, mountainous re- gions, city suburbs or large towns, and deep rural areas. Each geographic category brings a specific set of challenges and advantages to broadband coverage. For example, the main challenges for the island community of Gran Canaria were to provide reliable coverage for areas of the island that were season- ally populated during peak tourist times and to meet the very high costs of connecting to the global communication networks via undersea cables. The mountainous region of Piedmont faced prohibitive costs for broadband infrastructure civil works required to connect mountain villages. City suburbs in Portugal faced the challenges of having only one legacy operator that provided broadband services and the high cost of duplicating infrastructure in the presence of relatively weak demand. Deep rural areas in Slovenia and Croatia are difficult places to commercially deploy wholesale fiber-to-home projects without certain subscription guarantees from the public. Table 3. Key attributes across the Connected Communities Initiative portfolio Project State Aid Across Coverage of Issue Wholesale Geography Promoter Involved Borders Gray Areas Italy – Piedmont NGO No No Yes Yes Rural Mountainous Italy – FVG Public Yes No Yes Yes Suburban RUNE (Croatia and Private No Yes Yes Yes Deep Rural Slovenia) DSTelecom Portugal (4 project Private No No Yes Yes Suburban communities) Gran Canaria Public No No Yes No Rural/Island (Spain) Region of Western NGO No No Yes No Rural/Island Greece Public No No Yes No Rural Mountainous Sarantaporo Drenthe and Oldambt Public No No Yes No Deep Rural (Netherlands) 20 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Figure 6. Geographic classification of the rural broadband challenge in Europe Islands Mountains Large Towns Large Towns - High cost of - High cost of - Legacy operator - High cost of terrestrial Cost-Based undersea terrestrial makes infrastructure connectivity due to connectivity connectivity due duplication costly long distance to difficult terrain Challenges - Seasonal - Low density - Difficult to deploy - Sparsely populated Demanded-Based demand populated towns under State aid rules and dispersed villages - State aid where - Wireless solutions - Leapfrog in connectiv- - Signed agreements Opportunities applicable - Infrastructure-sharing ity speed and quality with households - Demand (e.g. highways) - Competition and - Aerial broadband Aggregation customer churning - Grand Canaria - Piedmont region Italy - Friuli Venezia Giulia - RUNE (Slovenia and CCI Communities (Spain) - Sarantaporo Greece region Italy Croatia) - DSTelecom Portugal - Drenthe Netherlands The geography of broadband coverage areas played a large role in determining the nature of the tech- nology used and the commercial success of various CCI projects. Although different geographic areas present a different set of challenges, conversely, similar areas can be used as an archetype to address the broadband challenge. Different stakeholders also put forward a unique set of challenges and opportunities for the successful commercial deployment of high-speed internet projects. Three categories of stakeholders were involved in the various CCI projects: government institutions, private sector players, and nonprofit associa- tions. Each stakeholder category has a different set of incentives and desirable targets for broadband deployment. Government players can be divided into central government initiatives such as that in Greece and mu- nicipal authority initiatives such as that in the Friuli Venezia Giulia region of Italy. Central government initiatives that target broadband white areas (areas with no current or foreseeable next-generation internet access) usually have earmarked budgets and are driven at the national level. Municipal-level initiatives usually have less budgetary autonomy and require coordination with central government institutions and regulatory organizations. From the experience of CCI, both types of initiatives can be very effective in addressing broadband coverage if proper ownership and prioritization have already been made at a political level. C H APTER 2 21 Figure 7. Mapping major stakeholders involved in rural broadband projects Public Private Community - Central government authority - Telcos, ISPs, diversified - Local IXPs, *NGOs community Players - Municipal industrial groups organizations - Addressing market failures, - Commercial return at par with - Improved internet access for State aid, Internet for industry standards community Incentives government departments - New Market - Improved ICT services - Friuli Venezia Giulia (Italy) - DSTelecom (Portugal) - TOPIX (Piedmont, Italy) CCI - Greece National Plan - RUNE (Slovenia and Croatia) - Sarantaporo Greece Communities - Gran Canaria (Spain) Note: *IXP = internet exchange point. Private sector players include telecommunications companies, internet service providers (ISPs), and other diversified industrial groups that have a clear commercial advantage to engage in broadband in- frastructure civil works. From the experience of CCI with DSTelecom in Portugal, working with private companies can prove very effective in attracting financiers and investors who are more confident invest- ing in projects carried out by companies with a clear balance sheet and history of operations. Smaller private service providers such RUNE in Croatia and Slovenia face difficulties in attracting investments because they do not have such track records. These difficulties facing smaller private providers lead one to believe that addressing the broadband challenge in Europe requires a more nuanced funding approach, especially if SMEs are to play their role in addressing the broadband coverage gap. The intervention of the Connected Communities Initiative has been structured to take into consider- ation both the local topographical considerations of broadband projects and the incentives and vested interests of the project communities involved. The following section outlines the overall approach fol- lowed in creating bankable broadband infrastructure projects in rural and suburban Europe. A. Making the business case for rural broadband Based on the diverse set of challenges presented and stakeholders involved under the Connected Com- munities Initiative, the following methodological approach was designed to help communities build a bankable business case for their respective broadband infrastructure projects. Projects involved in CCI received support in two stages, a process that can be used as a blueprint to build the business case for future rural broadband projects. • Stage 1. Project Appraisal: Bringing projects to a level of maturity that will improve their ability to receive funding under various European and/or private financing schemes. • Stage 2. Transaction Advisory: Advisory for communities that wish to move forward with a specific funding opportunity. 22 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E More details about specific areas of engagement (action areas) under each stage are highlighted below: Table 4. Thematic stages of engagement vs. broadband project action areas Stage 1. Project Appraisal Stage 2. Transaction Advisory Preliminary project mapping and stakeholder analysis 4. Legal Support 2. Structuring project and preparing appraisal documents 5. Transaction Advisory 3. Feasibility Study A more detailed description of each action area follows. Action Area 1. Preliminary Project Mapping and Stakeholder Analysis This action area includes connecting with local communities, discussing possible plans for project ag- gregation, assessing the current situation on the ground and agreeing on a timeline to complete project. Action Area 1 results in a deliverable in the form of a short report. This report assesses four aspects of a broadband project: • Technical Scope: Project’s technical soundness • Implementation Arrangements: Ability to implement investment project • Operation Arrangements: Ability to operate the project once finalized • Broadband Market Demand: Current and future broadband market conditions. Action Area 2. Broadband Project Structuring and Preparation of Appraisal Documents Based on findings in Action Area 1, Action Area 2 appraises projects according to their specific funding needs. This appraisal includes assessing the chosen broadband business model and investment plan. This appraisal results in a deliverable in the form of a second report. The report will cover four aspects: • Institutional Arrangements: Assessment of the institutional framework surrounding the chosen broadband business model and investment plan • Procurement: Assessment of the project promoter’s capacity to carry out high quality procurement • Legal Requirements: Assessment of legal aspects surrounding project implementation • Environmental Impact: Assessment of all environmental impacts of project. Action Area 3. Financial Feasibility Study Action Area 3 assesses the project’s broadband investment model according to a financial feasibility plan that can project costs and benefits over the next 15 years. This assessment results in a deliverable in the form of a financial model that addresses the two main points: • Investment Costs: Modelling the project’s investment costs. • Profitability: Assessment of project’s long-term profitability. C H APTER 2 23 Action Area 4. Legal (Ad-Hoc) Support for Projects That Require Additional Legal Assistance This action area involves preparing legal studies only when required. An example would be procure- ment for State aid in projects that require further legal analysis. Action Area 5. Transaction Advisory This action area involves deliberating with institutional investors and relevant counterparts in the project to facilitate the implementation of project financing. Action Area 5 involves direct technical advice provided to relevant counterparts responsible for project implementation. The above work program results in three deliverables in the form of reports that can serve as useful tools for investors and financiers: Initial Assessment Report, Intermediate Report. and Final Report. Table 5 presents how the findings of the work program are included in each of these assessment re- ports. These reports have been designed to provide as much information as possible to investors who might be interested in financing broadband network deployment and operation. Table 5. CCI Methodology for reporting to investors and financiers Initial Assessment Report Intermediate Report Final Report Preliminary Mapping: Appraisal + Feasibility Study: Ad-Hoc Legal Studies + Transaction Advisory: -- Technical scope -- Institutional arrangements -- Legal Study (ad-hoc/where required) --Implementation arrangements -- Procurement -- Recommendations for project -- Operation arrangements -- Legal requirements -- implementation -- Broadband market demand -- Environmental impact -- Investment costs -- Profitability By following this work program, CCI was able to successfully structure broadband infrastructure proj- ects in coverage area and overall investment size, in addition to identifying possible commercial chal- lenges and their respective mitigating measures. When presented to investors and financiers, this work program has proved useful for the overall successful financing of broadband projects. The next section outlines the overall approach to financing rural broadband projects in addition to best practices gar- nered from the experience of CCI. B. Best practices for financing a rural broadband project Based on the experience of CCI, broadband project promoters in rural and suburban Europe have a wide variety of financing opportunities. The main categories of financiers usually involved in broad- band infrastructure finance are European funding facilities (such as CEF10), European financial insti- tutions (such as the European Bank for Reconstruction and Development, or EBRD), private equity funds, funds specialized in infrastructure finance, private banks, captive financial institutions of large industrial groups or infrastructure equipment providers, government funds, municipal funds, or State aid (where applicable). 10 “The Connecting Europe Facility (CEF) is the funding instrument for the trans-European networks (TEN) in the fields of transport, energy and telecommunications, the CEF sectors.” https://ec.europa.eu/info/business-economy-euro/growth-and-investment/financing-investment/connecting-europe-facility-cef-financial-instruments_en. 24 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Table 6. Summary of funding sources for broadband investments in EU, 2007–20 (€ mil) Amount in programme period (million euro) Source of funding Type of support 2014-2020 2007-2013 European Structural and Investment Funds (Esif): 6 019 2 456 -- European Regional Development Fund (ERDF) Grants 921 282 -- European Agricultural Fund for Rural Development (EAFRD) Grants European Fund Strategic Investments (EFSI)* Loans 2 032 - Connocting Europe Facility (CEF) -- CEF Debt instrument Loans 16 -- WIFI4EU Initiative Grants 120 Connecting Europe Broadband Fund (CEBF), of which Equity 240 -- from the Commission 100 -- from the EIB and EFSI 140 European Investment Bank (EIB) Loans 5 600 Total available 14 948 2 738 * EFSI amounts are as of end of June 2017. Source: ECA analysis based on Cmmission and EIB data. Financing broadband infrastructure in rural areas cannot be carried out with the same commercial frame- works and expected rates of return that are seen in more developed urban markets. Due to their low pop- ulation density, rural areas yield lower rates of return than those that urban commercial operators would expect. Financial due diligence of these projects should take into account this differing rural-urban rate of return and be able to benchmark the return on investment on a less aggressive yield curve. Nevertheless, in the absence of clearer commercial guidelines for large financial institutions, it is dif- ficult to see large broadband investments taking place in rural areas. Broadband project promoters often find themselves inside a viscous funding cycle in which investors demand equity commitments from project stakeholders and project stakeholders demand funding commitments from investors. This dynamic is typical when funding broadband projects in rural areas due to lower average rates of return and higher perceived risk by all parties. Despite this reality, CCI experience has shown that project promoters can drastically improve the chances of getting funding if they take into consideration six specific measures. These measures are: demand man- agement, cost management, risk and infrastructure sharing, best practices for financial modelling, time- to-market and other procedural considerations, and building a successful investment pitch (Figure 8). Figure 8. Six important measures for successful broadband project finance in rural areas 1. Demand Management 2. Cost Management 3. Risk and Infrastructure Sharing 4. Best Practices for Financial Modeling 5. Time-to-market and Other Procedural Considerations 6. Building a Successful Investment Pitch C H APTER 2 25 1. Demand Management In greenfield broadband projects, the risk of weak customer uptake after the network has been built is one of the main challenges facing financiers, who are looking to sustainably fund a project and safe- guard their returns. This scenario is especially common in rural areas in which the risk of low customer uptake is magnified due to low population densities. One important component of RUNE’s business model is the signing of “promissory contracts” with customers before the network is built out to their residential clusters. By signing these contracts, cus- tomers agree to register for internet service with a list of ISPs during a certain timeframe after their house is connected to the network. Failure to comply obligates a customer to pay a fee. This simple and innovative instrument reduces the uptake risk associated with broadband projects in deep rural areas and boosts its commercial feasibility. Weak demand in rural and suburban areas can be mitigated by performing proper demand analysis before network deployment to ensure that the areas covered have the highest amount of potential broadband subscribers. Other measures to gauge demand are to carry out customer demand surveys by independent contractors that can be presented to investors as a part of the financial case for the project. Stimulating market demand also can occur by enabling households to take part in partially financing their FTTH projects to help ensure higher subscription rates after the network is rolled out. 2. Cost Management Civil works make up nearly two-thirds of the overall cost of broadband network deployment and serve as a low-hanging fruit for cost management. Yearly operating costs of a wholesale operator make up another sizeable portion of the overall broadband bill. By focusing on these two categories of costs, CCI experience has shown that much can be done to reduce the overall cost of broadband roll-out, thereby improving the business case. In particular, choosing innovative drilling technologies and maintaining a lean employment structure for the operators tasked to manage the network will reduce costs. Drilling technologies for laying out fiber optic cables in the ground come in a variety of forms. CCI experience has shown that project promoters who inquired about more advanced technologies were able to achieve substantial cost savings. However, not all drilling technologies are permitted equally across EU Mem- ber States. Maintaining lean structures for wholesale operators has proved another important avenue for cost reduction. The main bulk of operating expenditure for wholesale broadband operations comes from maintenance fees paid to make sure the network is always up and running. Creating a lean operation that allows for flexible, responsive, and rapid maintenance without employee redundancy is key to cre- ating operational expenditure (OPEX) efficiencies. Experience also has shown that aerial deployment of fiber optic cables in the last mile of the access network can drastically reduce costs. Aerial deployment in deep rural areas can be done using alternative infrastructure such as power lines. CCI experience has shown that such alternative methods sometimes can be crucial in making an access-level project financially sustainable. Project promoters also are advised to consult EU rules to reduce the cost of high-speed broadband deployment. More details can be found in the Directive on Measures to Reduce the Cost of Deploying High-Speed Electronic Communications Networks (2014/61/EU). 3. Risk and Infrastructure Sharing Risk-sharing with other retail operators improves broadband financing opportunities in rural areas. DSTelecom’s broadband investment is based on a business model in which the broadband infrastructure 26 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E provider (DSTelecom in this case) shares a certain percentage of the customer uptake risk with retail internet service providers who are interested in expanding into the areas covered by the project. The retail operators agree to pay the infrastructure provider for a certain number of subscribers for a speci- fied amount of time, no matter what the actual penetration rate turns out to be. Using this mechanism, DSTelecom has been able to conduct fruitful discussions with retail operators. Leveraging existing alternative telecommunications infrastructure also can drastically decrease the cost of broadband finance. Alternative infrastructure is classified as communication infrastructure used for non-telecom purposes such as (a) optical ground wire cables deployed on energy transmission lines or (b) passive infrastructure that can be used to deploy new telecom networks such as ducts, roads, and power lines. In both cases, there are two main challenges to leverage such infrastructure for broadband access. The first is the infrastructure owner’s lack of technical expertise in setting up and managing a broadband network. The second is the additional cost of administering the network (customer support and maintenance) with existing resources. However, for example, in the case of Top-IX, by benefiting from the experience of a neutral broadband operator, both network management and administration can be taken care of. Thus, the alternative infrastructure owner can further monetize her/his assets without worrying about increasing overhead costs, and a wholesale broadband service provider is able to expand the reach of his/her network. Such win-win scenarios are likely to help attract more alternative infrastructure owners to participate in offering broadband services. Sharing fiber optic infrastructure and rights of way or passive ducts over non-telecom infrastructure networks such as roads, highways, and powerlines can drastically reduce the overall cost of broadband network deployment, thereby improving its commercial prospects. 4. Best Practices for Financial Modelling Diligently carrying out financial modelling can help project promoters better structure their projects and significantly improve chances of financing. By their very nature, financial models can only approx- imate how the overall commercial performance of a certain venture takes place. However, certain mea- sures not only can improve the credibility of such models for investors but also enable project promoters to benefit from such models as a tool for the successful financial management of their projects. Under CCI, financial models were built according to industry standards. The main attributes of such models include a costing page, revenue page, demand analysis page, cash flow analysis, and sensitivity analysis. Costing is broken down into capital expenditures (civil works, cost of active equipment, cost of raw materials) and operating expenditures (electricity, rent, wages). Revenue usually is determined according to level of assumed market penetration. Demand analysis enables a revenue model to reach a reasonable assumption regarding market penetration. The cash flow model collates all the information generated in the costing page and revenue page and lays them out over a certain period, usually 10 years. Finally, the sensitivity analysis measures how the overall financial viability of the project would perform if specific variables were changed, Variables could be market penetration, cost of deployment, wages, or others. Proper financial modelling carried out by project promoters can make it much easier for financiers to study and further assess projects for funding. 5. Time-to-Market and Other Procedural Considerations to Mitigate Project Delays To avoid prevent unnecessary delays that could compromise the business case, from the beginning, project promoters should clearly map out and anticipate different timeframes for applying for funds and other regulatory and/or institutional procedures. In many instances, project promoters are required C H APTER 2 27 to deploy within a specified period to ensure the commercial viability of their projects or due to finan- cial constraints raised by other project stakeholders and partners. CCI’s experience has shown that applying for broadband funding involves stringent procedural mechanisms that often take months to complete. Project promoters are advised to become very familiar with all these procedures. From the ex- perience of CCI, it could be seen that, on average, after due diligence has been completed, a broadband project takes 6 months to 1 year to be funded. This long delay was exactly the case of two communities under CCI. In many instances, broadband project promoters have been constrained by operating expenses, competitive considerations, and other constraints. These constraints demand a more rapid project preparation life-cycle from scoping through due diligence to applying for funds. When preparing broadband projects in rural areas, best practice has been to involve financiers in project preparation from the early stages. Financiers can clarify any financial and business case requirements early on, which can help streamline the financing process at a later stage. In addition, discussing with municipal authorities, where relevant, or local town ag- glomerations to sort out any serious rights-of-way issues also would streamline the project preparation timeline and avoid any last-minute delays. 6. Building a Successful Investment Pitch Investment pitches are among the most potent tools to generate strong interest from financiers to fund a project. Pitches (a presentation to investors by project promoters about a certain broadband invest- ment opportunity) are not only an opportunity for a project promoter to clearly lay out the financial fundamentals of a broadband project but also an opportunity for investors to meet project promoters in person and get a sense of their business savvy and personal ability to steer their investment toward commercial success. From experience with CCI, successful investment pitches always tell an inspiring story of the reasons that the project promoter is asking for funds and refer clearly to past success stories, current balance sheets, and/or financial agreements related to the project in discussion. An investment pitch should include six sections: • Details about past operations of the company or entity applying for funding with clear bal- ance sheet references if possible • Details about the new market targeted under the broadband project and the reasons that it is a new growth opportunity • Presentation of project scope, coverage area, technology used, business and financial mode • Details of any independent or third party due diligence that has been carried out • List of project stakeholders and partners including any binding or nonbinding signed let- ters of intent to participate or partially finance the project • Details about other shareholders and overall corporate structure. Each of these elements proved useful when applying for funding. For example, the experience with RUNE showed a circular challenge in which investors are demanding equity commitments from proj- ect stakeholders while project stakeholders are demanding funding commitments from investors. This circle is typical when funding broadband projects in rural areas due to the unconventional commercial nature of the investment activity (lower rates of return, higher risk). To address this challenge, RUNE project promoters produced binding and nonbinding letters of intent from a wide group of industry stakeholders that greatly bolstered their credibility and overall pitch when negotiating with financiers. Such letters of intent also proved useful to other communities working under CCI and can be consid- ered as a key element of any investment pitch. 28 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E CHAPTER 3 KEY FINDINGS AND RECOMMENDATIONS C H APTER 3 29 D espite the many measures put in place by the European Commission and national and local governments. extending broadband and ultrafast broadband connectivity to remote and rural areas in Europe is a persisting challenge. These measures have been successful in reaching the goal of universal access to basic broadband services in most Member States, primarily in white zones, in which private investment is not viable. However, to reach the next frontier in Europe, bridging the rural urban divide and achieving higher coverage of networks able to provide 100 Mbps connection and more are required. The European Court of Auditors found that “…the Europe 2020 targets will not all be achieved. Rural areas, where there is less incentive for the private sector to invest in broadband provision, remain less well connected than cities, and take-up of ultrafast broadband is significantly behind target.” The connectivity gap is the highest in gray areas, where neither State aid support nor private investment is feasible. These areas are not covered by state of the art networks nor do they have enough competition to boost the develop- ment of the networks and services. As a result, working toward the targets under the Europe 2020 Dig- ital Agenda and the Gigabit Society requires targeted measures that challenge the existing frameworks and attract private investment in gray and rural areas. The challenges and opportunities in promoting broadband and ultrafast broadband deployment in ru- ral and gray areas vary depending on the country, the topologies, and the market conditions. This chapter lays out the main findings of the CCI experience regarding factors that facilitated or inhibited the success of broadband financing and deployment projects. These challenges and opportunities are categorized along the projects’ key attributes elaborated in chapter 2, i.e: –– Nature of project promoters (private or public) –– Type of zones and geography (gray or white, suburban, rural and deep rural ) –– Business model (wholesale or not) –– Sources of funding (state aid or private) These constitute the basis of the recommendations to be considered by the EC, national and regional governments, and regulatory bodies. A. Nature of Promoters 1. Small to medium-sized operators open a great opportunity to extend broadband in Europe Small and medium-sized service providers and project promoters play a pioneering role in expanding ultrafast broadband in rural and gray areas in Europe. These telecom operators have the tools and right incentives to cover deep rural areas with NGA broadband access. Three CCI projects illustrate the importance of this type of market player. All three operators are nascent service providers that were involved either in smaller broadband operations or in broadband-related operations. The summary of the characteristics of SME market players follows: • Their profit horizon is typically more modest than larger and more established operators that have stringent fiduciary and disbursement requirements toward their institutional investors. • They have the advantage of knowing more deeply the regions that they serve. They have relationships with local stakeholders so can help increase demand for ultrafast broadband initiatives. For instance, both RUNE in Slovenia and Drenthe in the Netherlands based 30 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E their commercial plans on collecting expressions of interest from residents and aggregating demand to alleviate the commercial risk in these rural areas. In Piedmont, Top-IX worked with the local community as an important cornerstone of its business model. Hosting mul- tiple open town-hall meetings and explaining to local communities upcoming infrastruc- ture works in their local provinces helped streamline the broadband deployment process. Convening town-halls and reaching out to local communities also helped build strong municipal support for projects, which is crucial to drive a successful network deployment. • Smaller operators have no legacy networks, which makes them agile, that is, able to adopt new technologies and innovative ways to address local challenges. Many communities in rural and suburban Europe are provided internet by a telecom incumbent that relies on its legacy position in the market. In this case, demand for NGA services may lag due to the absence of forward-looking internet service providers with a strong drive for service-level innovation. For instance, RUNE uses a technical solution adapted to the needs of the zones in Slovenia that it serves, and ToPix bases its business model on the existing internet ex- change point (IXP) infrastructure. • Local and community-driven initiatives are more involved in supporting the broadband development of their regions. The key benefits are the interconnection with local public administrations, support for local SMEs and wireless internet service providers (WISPs), and partnership with universities and research institutes. For instance, ToPix already is connecting public schools to its network. However, smaller and less established operators face the constraint of being riskier for financiers. The size of the projects limits the appetite of private investors. For instance, in the RUNE projects, the balance sheet of the initial company was too small for the financier to consider equity contribution or accept the risk of a lower return. ToPix initially reached out to EIB to finance the project with debt but then switched to equity due to limited (according to EIB standards) project size. In both cases, investors considered the project’s strengths to be its technical team, its local relations, and its current customer base. Recommendation 1: ➔➔EC should increase awareness of the importance of small to medium-size operators as a primary channel to achieve the Europe 2020 Agenda and Gigabit Society goals. Thus, EC and national and regional governments should dedicate resources and revise policies and regulations to reduce the financial risk for SME operators deploy- ing broadband infrastructure in rural and remote areas. 2. Community-driven initiatives are a successful model in some Member States Most projects selected under this program were designed to use a top-down approach by which existing players or governments institutions planned to extend coverage of ultrafast broadband to underserved areas. In contrast, one community project in the Netherlands has opted for a bottom-up approach, which proved very successful in ensuring coverage and expansion of ultrafast broadband services. Several local initiatives in Drenthe have spearheaded local projects to deploy ultrafast networks in their communities, comprising inhabitants and local entrepreneurs. By mid-2016, approximately 45 initiatives had taken off. Over time, to achieve better economies of scale, some initiatives merged, and smaller initiatives started to join larger adjacent ones. The business case often is based on communities collecting letters of intent from inhabitants to show the real demand, in both white and gray areas, and to justify the deployment of wholesale access networks. The capital expenditure (CAPEX) per home is C H APTER 3 31 approximately € 1000 whereas the average CAPEX in the more rural areas tends to be higher: €1500–€ 4000 per home. Commercial deployment in the rural communities required funding to fill the gap be- tween what people were ready to pay and the actual cost of network deployment. To achieve financial viability, several business model variants were used: • A one-time contribution by the beneficiaries • Monthly surcharge on the telecom package to which beneficiaries subscribed • Soft loans or subsidies provided by the province. As a result, in the Netherlands, the current FTTH penetration often is higher in the rural areas, in which local initiatives and private funding are active to deploy FTTH, than in the major cities in the Western Netherlands. Recommendation 2: ➔➔EC should increase awareness among policymakers of the success of communi- ty-driven investment initiatives, such as in the Drenthe province in the Neth- erlands, in boosting connectivity in rural and dispersed areas. The Netherlands experience provides several examples of financing and risk-sharing models that can be adopted by other communities: risk sharing with the subscriber; and/or soft loans and subsidies from the local municipalities/province. Regional and national resourc- es should be made more available to communities that have demonstrated high demand for broadband infrastructure. B. Type of zones and geography 1. Major financial and commercial risks persist in rural and gray areas High investment costs and low demand are at the core of the challenges faced by broadband projects in rural and remote areas. The low Average Revenue per User (ARPU) compared to the dense areas of Europe makes it difficult for commercial operators to realize the return they would expect from a tele- com infrastructure investment. In addition, broadband projects in gray areas are characterized by a perceived risk of weak customer uptake because customers already have internet access, often through copper connections. This demand does not present a sufficient business case for operators to upgrade connectivity, that is, to invest in fiber-to-the-home (FTTH) or fiber-to-the-building (FTTB) to replace the copper loop and upgrade fiber-to-the-cabinet (FTTC) connections in certain places. Competition in gray areas also is weak, which stifles service-level innovation and further development of the network. To mitigate these risks, two CCI projects, RUNE and DSTelecom, relied on infrastructure sharing and demand aggregation (chapter 3, section on risk and infrastructure sharing). In other instances, bot- tom-up community-driven initiatives, such as those in the Drenthe province in the Netherlands, used the aggregation of demand at the household level and used the model of risk-sharing with the potential subscribers. 32 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Recommendation 3: ➔➔Gray areas that have limited NGA infrastructure and limited competition between operators are at risk of being left behind and lagging the newly connected white areas. These gray areas do not present a sufficient business case for investing in, and upgrading to, ultrahigh speed infrastructure. Thus, densification of 100 Mbps connectivity in gray areas should be a policy priority for the EC and national gov- ernments toward meeting Europe 2020 objectives. Models of cost and risk sharing are important factors in making deployment of ultrafast broadband in gray area more attractive. These models include risk sharing with operators and aggregating demand at the user level. C. Business model 1. Successful CCI cases were based on neutral wholesale infrastructure models Most projects that succeeded in attracting funding and or government support were based on a whole- sale model, such as regulated open access networks. However, since they are not in white areas, these networks are not subject to regulations. For instance, RUNE is providing bitstream access to all major operators in Slovenia. TOPIX’s business plan is based on a pure network access wholesale model that will cater to the demand of regional and national telecom service providers. Going beyond wholesale network design, in both examples, network providers never have, and are not planning to, provide retail services to customers. Knowing this reinforces trust of operators in the neutrality and fairness of the network provider so attracts more service providers interested in providing ultrafast broadband services in these communities while not bearing the full risk of deployment. The strict separation between wholesale and retail services has been a major success factor in the expan- sion of DSTs operation in several regions of Portugal. Initially, DST was a construction company that ex- panded its business to construct fiber networks through two white area publicly funded projects. The Por- tuguese authorities have awarded concessions to several companies, including DST, to cover several white areas in Portugal. Given that DST is the only provider that is not involved in retail service provision, it was the only provider not involved in disputes with other operators. The regulator is now dealing with several inter-operators disputes that involve unfair treatment and preferential access to wholesale networks. Recommendation 4: ➔➔Regulators and policymakers should encourage more players that may not have had a longstanding history in telecommunications operations but that aim to operate truly neutral wholesale infrastructure. This is the case in rural areas or gray areas that are not subject to ex-ante regulation and in which fair access to infrastructure and subsequent competition among retail operators can be achieved through a neu- tral wholesale infrastructure operator that does not have any affiliation with retail services. C H APTER 3 33 D. Sources of funding 1. State aid rules are not clear in gray areas and in ultra-high-speed networks As is other investment, public investment in broadband by Member States is subject to State aid rules designed to limit crowding out private investment. The broadband State aid guidelines, adopted in 2009 and revised in January 2013, define public intervention schemes according to the classification of white, gray, and black areas. These rules apply to investments in networks of 30 Mbps and above. State funding of white area networks has been implemented in many Member States and has contributed greatly to increase uptake of broadband in rural and remote areas. However, application of these rules still is com- plex for gray areas that have at least one operator that provides broadband services, which in most cases still relies on legacy copper networks. Although the rules initially were devised to achieve the 30 Mbps targets, it is not clear whether these rules apply to networks of 100 Mbps and the Gigabit Society targets. In principle, for State aid in gray areas, the EC must carry out a more detailed analysis to verify whether State intervention is needed. The 2018 report of the European Court of Audit on broadband11 concluded: “…some Member States interpret the State aid guidelines differently: they take the view that public funding is prohibited when the intervention increases the speed beyond 30 Mbps in black and gray areas. This difference of interpretation has led to Member States choosing not to use public investment to support oper- ators in black and gray areas.” Furthermore, the time to assess State aid in gray areas is lengthy, making the application of these rules to commercially driven projects not attractive. Thus, the next frontier in EC broadband policies must re-examine State aid rules and incentives that govern gray areas and networks of 100 Mbps and more. The uncertainty of the application of State aid to gray areas contributes, among others, to limit the available private investment, since, in the absence of incentives, private investors are less willing to absorb the total commercial and financial risks. Recommendation 5: ➔➔The European Commission through DG Competition and DGCNECT should clarify the existing State aid rules in gray areas and in networks beyond 100 Mbps. In addi- tion, State aid rules and procedures for this type of investment can be reconsidered to incentivize more private-public partnership. E. There is a need to provide nonmonetary incentives to private investors The initial aim of the Friuli-Venezia Giulia (FVG) GANDHI project in Italy was to attract investment to densify and upgrade access networks up to 100 Mbps speed in gray areas in the FVG region, in which, de facto, no State aid funding is allowed. This barring of State aid limits the region’s tools to attract 11 http://publications.europa.eu/webpub/eca/special-reports/broadband-12-2018/en/. 34 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E competition and investment and put these areas at a risk of becoming the next white areas in NGA access in 2020. Thus, the regional government wanted to issue a tender document to solicit interest from opera- tors. The types of incentives that the government could include in these tenders were the subject of debate in the region and with the European Commission Directorate General for Competition. The FVG region’s questions were whether certain incentives constitute State aid and whether the incentives would require a special assessment from the DG competition. The incentives that the project was considering were: 1. Access to the publicly owned ERMES network12 2. Facilitate network deployment through right of ways for roads owned by FVG region 3. Demand stimulation such as • Support welfare activities through vouchers • Include local stakeholders (families and firms), and facilitate local interest groups to aggre- gate demand • Facilitate the convergence of the interest of investors with the interest of operators 4. Public-private partnership (PPP) structure through a special purpose vehicle (SPV): FVG to offer debt/quasi-equity or equity investment limited to 12.5 percent shares. The FVG projects had to change course with the change in local governments and the uncertainty of the policies that the national government wants to adopt in gray areas. Consequently the questions of incentives were not concluded. However, the FVG case shows that the strict definition of State aid rules is limiting investment in moderately risky projects for which some incentives are needed to make the business and financial case appealing. In contrast, the local Drenthe government has actively supported local FTTH deployment initiatives. VerbindDrenthe stimulates local initiatives to merge and combine forces to realize economies of scale. Recently, VerbindDrenthe requested a single network design for all initiatives in Drenthe to improve economies of scale and compatibility between the different initiatives. In 2014 the Drenthe province provided a subsidy of approximately € 200,000/year to establish the broadband platform “VerbindDren- the” (Connect Drenthe) to share knowledge and expertise among the various local community initia- tives. VerbindDrenthe assists the local community initiatives with the following phased approach: A. Start up B. Aggregate demand C. Consult market D. Obtain financing E. Select contractor F. Deploy G. Connect. Recommendation 6: ➔➔A more streamlined and direct line of communications can be established between DG competition and local authorities to discuss and clarify the rules of incentives in gray areas, and whether there is leeway for local authority to apply in certain non-State aid investment projects. DG CNECT and Competition also can study the possibility of easing the restriction on the incentives that governments can provide to private operators to incentivize investment in moderately risky projects. 12 Publicly owned “Regional Programme for the Development of ICT Infrastructure,” Friuli-Venezia Giulia. C H APTER 3 35 F. Many factors contribute to crowd out private investment Declaration of commercial interest: The classification of gray areas is subject to the declaration of commercial interest to deploy broadband network. However, the declaration requires proof of financial feasibility and solid proof of funding. At the same time, the financial industry is reluctant to declare interest in funding projects in which there is uncertainty whether the zones under consideration are white or gray. This uncertainty was a considerable problem and delayed the RUNE project. Claw-back mechanisms: The claw-back mechanisms and the internal rate of return (IRR) they are based on impact the viability of projects and of operations that are funded through both public and private funds. The claw-back mechanism requirements stated in the State aid guidelines (particularly paragraph 26) pose a risk to the development of public-private partnerships (PPP) in broadband in- vestment projects. For instance, in Slovenia, the calculated weighted average cost of capital (WACC) is lower that what is expected as a good return form financing industry, impacting the profitability of the operation. In addition, the rules of the WACC calculation, and which part of the business it applies to, discourage private investments in operations that are partly funded by State aid. Gray areas most often mixed with white areas in rural Europe: For instance, in the Drenthe and Gron- ingen provinces in the Netherlands, the white areas (no next-generation access provider capable to deliver 30+ Mbps) are not contiguous areas but are very much mixed with gray areas (in which only one-next generation access provider can deliver 30+ Mbps). Village centers often have either FTTH, cable internet, or very-high-bit-rate digital subscriber line (VDSL); whereas the homes outside the village centers typically have only asymmetric digital subscriber line (ADSL) at low throughput speed. The differentiation between gray areas and white areas is challenging. To connect white areas, the infrastructure must pass many homes in gray areas, which typically are served by DSL and some- times also by the cable TV provider. Member States enjoy a wide margin of discretion in their mapping methodologies. Many questions concerning the mapping methodology chosen. Its implications for the financial and commercial viability of projects remain unresolved and should be subject to consideration in the EU framework as well as at a national level. These implications pertain mainly to whether the mapping should be based on inhabited households, postal code, or premises level. Recommendation 7: ➔➔EC and governments should study the rules and regulations that contribute to crowd- ing out private investments in Europe’s rural and gray areas. These regulations can in- clude declaration of commercial interest, claw-back mechanisms’ return requirements, and zoning across Member States. Policymakers also can streamline guidelines on how to, where possible, minimize such constraints on small to medium-sized operators. G. Regulators and policymakers can further facilitate rural investment Open dialogue with regulators and proactive coordination crucial to advance projects: From the experience of DSTelecom, discussions with ANACOM13 under the CCI program were invaluable in providing more 13 “Autoridade Nacional de Comunicações is Portugal’s national regulatory authority for the communications sector…” (Wikipedia.org) 36 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E insight regarding the coverage classification of the areas under consideration for infrastructure deploy- ment. ANACOM provided detailed information regarding the proper classification of these areas (white, gray, black) in a timely, open, and transparent manner. The regulator also provided guidance regarding competition requirements and State aid considerations in these areas that proved very valuable to DST- elecom in structuring its overall broadband intervention in line with the existing regulatory framework. Without data and clarification regarding certain regulations, the project would not have been able to move forward. Recommendation 8: ➔➔Regulators should make rules and regulations that clear and transparent, especially for smaller operators, who might not have the resources to obtain all the clarity they need on mapping, zoning, government plans, State aid guidelines, and others. Lack of clarity regarding cross-border interconnection rules weakens rural NGA business case: One challenging aspect for a cross-border wholesale internet infrastructure project is a lack of clarity re- garding interconnection and other rules and regulations across/among countries. In RUNE’s case, the interconnection between ISPs running on the network in both Croatia and Slovenia remained ambig- uous to both commercial providers and interested investors. Ambiguity further weakens the business case of cross-border broadband projects because it limits operators from accurately projecting the com- mercial advantages to be realized from deploying their services to customer groups across borders. Recommendation 9: ➔➔Regulators and policymakers should more closely coordinate the rules and regula- tions that would enable operators to cover cross-border towns and areas in rural and remote areas that otherwise, and if covered separately, would not have the scale needed for investment in networks. Time-to-market considerations: Most beneficiaries under the CCI program have expressed concerns about lengthy time-to-market. Bringing the initial proposal to a mature and bankable one took 1.5 years to 2 years. In many instances, creating the overall investment environment to support broad- band interventions in the rural and suburban areas of Europe has not moved at the same pace as that of commercial operators, which are constrained by running expenses and competitive pressure. These constraints demand a more rapid project life cycle for broadband investments in underserved areas for several reasons. The main complex bottlenecks encountered by project promoters were lack of un- derstanding of the needs and requirements of the financial industry, or compliance with regulations. In addition, during this period, the market had evolved, and the national government had issued new strategies and regulations that affected the initial proposal. For instance, in 2017, the Italian govern- ment decided to award the development of nation-wide broadband access to a single provider: Open Fiber. Top-IX had to mitigate this risk by focusing on a complementary rollout strategy in coordination with Open Fiber, rather than in direct competition. The deployment plan of Open Fiber has not yet been disclosed, which deepens the risk for these project promoters. Recommendation 10: ➔➔Where possible, EC and governments can provide guidance to project promoters on the overall requirements of the different financing tools that the latter might consid- er. This report presents one such means of increasing this knowledge. C H APTER 3 37 Local and national governments: Coordination by local government with central government authorities regarding connectivity and infrastructure issues is key, especially for autonomous regions in Europe. Local government should frame local projects to align with national objectives to facilitate implementa- tion. In the case of FVG, no progress was made because most infrastructure investment decisions were made by central governments. Recommendation 11: ➔➔Project promoters and local and national governments should establish a clearer view on what regulations apply at the national level and what the potential deci- sions are that local governments can take that might diverge from them. Project promoters also should be aware and establish such contact to make sure projects abide by, and make use of, all applicable regulations and resources. H. CEBF a good fit for CCI projects The CCI target areas are primarily rural or gray and, in most cases, are not attractive to solely private investment. Public financing or incentives are required to boost the financial viability of these projects. To respond, the European Commission has established several financial instruments to supplement the existing State aid or public financing provided at the national, regional, or municipal level of each country. These instruments are based mainly on EC guarantees to lower the financial risks of invest- ments. Three main channels, and a combination of them, are available to finance broadband projects: 1. European Fund for Strategic Investment (EFSI) has a scope broader than broadband connec- tivity and targets projects of ideally more than € 50 million. 2. European Investment Bank (EIB) uses a variety of loans and financial instruments to invest in broadband projects that correspond to the risk level and size of projects. However, the CCI experience shows that EIB is interested in projects larger/less risky than the average CCI communities’ projects. EIB also can use EFSI funds to fund broadband projects.14 3. Connecting Europe Broadband Facility (CEBF) is one of the main financing facilities that can cater to small to medium sized rural projects. Launched on June 27, 2018, CEBF includes de-risking instruments from EIB and EFSI; funds from national promotional banks and institu- tions15; and private investor. The first closing reached € 420 million of assets under the manage- ment of Cube Infrastructure Management Fund, an independent infrastructure fund manager. Up to now, CCI successfully attracted funding from CEBF, which targets investment capacity of €1 million to € 30 million through a variety of equity and quasi-equity instruments. CEBF’s investment guidelines also aligned with many of the proposed projects (Figure 1): • Areas located in white or gray zones • Projects that can help achieve the Europe 2020 Agenda and the Europe Gigabit Society targets • Preference for open access wholesale networks • Preference for networks providing >100 Mbps. 14 From 2015 to 2017, EIB provided € 2.0 billion of EFSI to finance projects related to broadband. The team examined a project to increase broadband coverage using fiber. EFSI financed the project for approximately 25 percent of the total EIB amount. The EFSI loan was € 500 million of a total project cost of € 1.8 billion. The team found three major weaknesses in this project: (a) The project did not focus on under-served areas. Instead, it increased high-speed broadband coverage mainly in areas that already were commercially viable, such as cities. (b) The team did not find evidence that EFSI was the best financing tool. In fact, this project could have been financed directly by an EIB loan because of its size and the areas in which it deployed broadband. (c) For certain areas, the project already had received close to € 400 million of grants from the ERDF, reducing the risk for the EIB. 15 “…NPBIs…are legal entities carrying out professional financial, development[al,] and promotional activities, which have been mandated by a Member State at the central, regional, or local level.” (www.eib.org/en/about/partners/npbis/index.htm) 38 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E Figure 9. CEBF Selection Criteria STANDARD CASE ALTERNATIVES Contribution to Gigabit Society Yes Asset nature Greenfield Brownfield with extension projects Country EU + Nor + Ice Euro zone More often Less often Ownership Private STRATEGY Stake Minority Majority at onset Investment structure Capital increase Mezz - Junior debt Transaction sourcing Proprietary Public Ticket Size €10M-€20M €1M-€10M or €20M-€30M Investment environment Private Concession - PPP Regulatory Environment More favorable Less favorable Future proof Yes 4G or 5G (sole/complement) Sattelite, LD Technology FTTH (submarine) TECHNOLOGY Passive and Active Network Service provider as complement to passive/ Network Layer Passive only active network Network Type Access + Backhaul Backbone, MAN, Ancillary Access speed 100 Mb/s and above 30 Mb/s and above Business model Open Access, Wholesale Open Acces with some retail activity Market size 200,000 Homes 10,000 to 500,000 Homes Penetration rate 75% (end of plan) 50% and above Market Share 100% (de facto monopoly) 40% and above ARPU (wholesale) € 15 >€8 Yes, € 300 euros per home passed and IRU No above Yes but mitigated (demand Traffic Risk aggregation, take or pay contract) Construction risk Yes but mitigated (EPC contract) CAPEX per Home passed € 500 < € 800 BUSINESS CAPEX per Home connected € 200 < € 500 IRR 14% > 10% Holding period 12 years 7 to 20 years EBITDA margin 55% > 25% Maintenance CAPEX (% Rev) 20% < 30% Payback period 8 years < 12 years Maximum financing need € 50M < € 100M Yield 2-4% (after year 4) 2% and above after year 8 Subsidies No Yes At exit (market consolidation/ Liquidity incumbent/infra fund) Source: Cube Infrastructure Investment Managers. C H APTER 3 39 At the same time, CEBF is a private equity (PE) fund with private limited partners that seek returns on their investment. Therefore, it is a fund that assesses financial viability based on a traditional risks matrix and investment strategies of PE funds in infrastructure investment. The CEBF manager, Cube, assesses broadband projects according to six criteria (Figure 10). Figure 10. CEBF Risks Matrix Risk Description Mitigant -- Delay in construction -- Low complexity Construction -- Cost overrruns -- Turnkey contracts -- Substitution risk -- Mobile complementarity Technology -- Obsolescence -- Radio technology opportunity -- Regulatory environment -- Upfront subsidies Change in regulations -- Change in subsidies policy -- Legall security -- Inflation, interest rate -- Low elasticity product Macro -- Political risk, etc. -- Relatively less affected Competition -- New entrants overlaying -- Investment rural/semi-dense -- Gauging demand a priori -- Penetration rate Demand and User -- Demand agregation -- ARPU -- Take or Pay Source: Cube Infrastructure Investment Managers Note: ARPU = average revenue per user, that is, total revenue divided by number of subscribers. The combination of the private investors and public funds enables CEBF to invest in projects with higher risks. On average, for the same CCI project, a private equity fund would require at least a 4 per- centage point higher return than CEBF is seeking. This advantage presents a tremendous opportunity for small to medium-size projects to finance their projects and simultaneously help Europe achieve its targets in rural areas and for ultrafast broadband infrastructure. However, an important mismatch remains between the expectations of SME project promoters and the requirement of a PE such as CEBF. This mismatch is mainly the requirements for an exit strategy. Project promoters of this size are not willing to relinquish ownership of the operation, even after 10 or 15 years. In contrast, an exit strategy that would trigger a liquidity event is at the heart of the deci- sion-making of private investors. This liquidity event could take the shape of (a) a partial sale, which would be very risky and improbable; or (b) the complete sale of the operation, which is one of the main liquidity events that CEBF is discussing with project promoters. Recommendation 12: ➔➔CEBF is a good match for the types of projects supported by the CCI. The success of this fund so far points to the need for the EC to (a) increase awareness of CEBF and other financing tools and their requirements among communities across Europe, through programs such as CCI; and (b) foresee the need to replenish the fund or establish additional funds to cater to the needs of small to medium-sized operators that are investing in rural and suburban areas in Europe. 40 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E CONCLUSION AND NEXT STEPS C H APTER 3 41 D espite the amounts of public investment injected in white areas and the tools that the EC and Member States have made available to the private operators, the urban-rural connectivity divide in Europe is a persistent challenge. The major problems remain in the rural and gray areas and in the upgrade to ultrafast broadband networks. The development of both market segments is crucial to achieve the Europe 2020 Agenda and the Gigabit Society goals. Special attention should be given to these markets. With an overhead of less than 1 percent, the CCI program was able to secure more than € 138 million of financing for 10 rural projects in Europe and thus helped to bridge the connectivity gap in rural Europe. Even more important, the CCI program helped operationalize the new CEBF financing tools, accelerat- ing the funding of riskier broadband investment projects by building a pipeline of eligible projects and supporting them in building their business cases to align with the current market requirements and demands. The experience of CCI shows that investment in ultrafast broadband in rural and gray areas is increas- ingly challenging. At the same time, innovative SME business models, technical solutions, financial support, and community initiatives are speeding up this process. These factors present an opportunity for Europe to bridge the rural gap as intended. Beyond these models––CEBF and programs such as CCI––policymakers need to study and reconsider certain aspects of the regulations governing public and private investment in the gray areas. In addition, EC institutions, local and national governments, and regulators should be more proactive in clarifying the regulations, providing guidance to project promoters, and maximizing incentives to private investment in these areas. Looking forward, project promoters and financiers can replicate the lessons learned from the CCI in their future projects/investments. The CCI program has developed customizable templates that each operator can use to (a) build a detailed financial model that facilitates due diligence for interested infrastructure funds or investors; (b) develop a complete business, financial, and technical model for appraisal; (c) assess risks; and (d) design a pitch to investors. These resources will help speed up project development by enabling financiers to make faster assessments of the business and financial case. For instance, these components of the CCI program have been picked up by numerous financiers including CEBF. The fund has expressed that such a first-level financial analysis with all the documentation attached makes it much easier for specialized funds to conduct business in the European broadband investment space. Beyond replicability at the same community levels, the CCI can be scaled up and made replicable in more regions and countries in the EU, and in neighboring and EU-acceding countries. The small-scale CCI program has proved highly efficient in time and overhead in getting project promoters ready to deploy in rural areas in Europe. After being scaled up, its results will be even more far-reaching as the program will help (a) bridge the gap in more countries and communities more quickly and effectively; (b) establish a working protocol and procedures with financiers at the EU level that can benefit all proj- ect promoters simultaneously; (c) better understand the EC framework for State aid and/or funding of gray areas; and (d) share business, technical, and financial know-how among projects. Finally, this analysis and the experience of CCI can benefit other emerging markets and neighboring countries. For instance, this initiative can be replicated in eastern Europe and the Balkans, where the framework resembles the EC framework, and where European financiers could be interested in the promising potential growth of these markets. 42 I N N OVATI V E FI N A NC I NG M O D E L S F OR RURA L B ROA D B A ND C ONNECTIV IT Y: TH E C O NNECTED C OMMUNITIES INITI ATIV E EXPERIENC E