Public Investment in Access Pays Big Dividends

It is time for the third installment of the multi-part series on the granularity of the recent white paper done for Nokia (News - Alert) by Diffraction Analysis, “Government broadband plan: 5 key policy measures that proved to make a difference.  In the previous posting the focus was on public investment in backbone and aggregation.  This week attention turns to public Investment in access.

Investing in access matters

Once again the comparative numbers from the study tell the story. As the graphic below shows, countries that invest public money in fixed access see a marked increase in fixed broadband subscriptions compared to those who do not invest in fixed access.

Source (News - Alert): Nokia, Diffraction Analysis report: Government broadband plan: 5 key policy measures that proved to make a difference

This is a nice illustration of what it really means to “pay-to-grow” and for the private partners to be incentivized based on a “pay-as-you-grow” approach.  After all, the key metric for any national broadband plan is not number of miles of fiber, which is obviously an important number, or even connections, which are also very useful, but rather subscribers.  And, 30 percent growth over the comparative period above of countries that invested versus those who did not, is impressive given how short the time frame. 

In this part of the report two case studies, New Zealand and Malaysia, which interestingly are obviously both in Asia Pacifica (APAC), are cited that illustrate what can almost be characterized as a multiplier effect when it comes to investing in broadband.  

The New Zealand experience is based on that country’s decision to launch its Ultra Fast Broadband initiative in 2009. There is a light at the end of the tunnel that is approaching this ambitious project whose objective was to cover 80 percent of the population and organizations with services of up to 100 Mb/s downstream and 50 Mb/s upstream.  

It is all about fiber, and below are a few key facts:

• The government investment has been NZ $1.56 billion (roughly US$1.08 billion), managed by the purposely created entity Crown Fibre Holdings (CFH).
• The remaining 20 percent is covered by a specific rural plan using multiple technologies, financed by an NZ $ 400 million grant (US $278 million), and an additional NZ $150 million (US $1.04 million) was specifically earmarked for schools.

To create a level competitive playing field, a condition for access to the government investment was the absence of any financial ties with service providers.  As a result, the country’s largest service provider, Telecom NZ spun-off two entities:  Chorus (infrastructure wholesaler) and Telecom NZ (now Spark, retail services). Chorus and three other Local Fiber Companies (Northpower, Ultrafast Fiber and Enable) cover the targeted territory.

Reflecting what is the popular public/private model for rolling out such ambitious national broadband networks specific roles for participants were defined. They include:

• An entity called a “Local Fiber Company” (LFC) owns the infrastructure and receives the invested funds from the public and private entities.
• CFH finances the construction of the shared access and aggregation network (excluding end-user drops), that is, the “communal infrastructure.”
• Private partners finance the connection of the end users when they subscribe and buy back the corresponding “communal infrastructure” cost from CFH on a per-user basis.

This financing strategy mimics the economics of a network with 100 percent take-up for the private partner: the private operator only incurs cost when an end user is connected, on a per-user basis. As the take-up occurs, CFH’s interest in and control over the LFC gets diluted: the private partner buys back the shares from the state. This releases funds for further investments by CFH, without additional capital required from the state. It also means that ultimately the government will get all of the investment back. In short, the uptake risk is mostly supported by CFH, while the private partner supports the operational risk.

• This ambitious strategy has already started to pay off: as of September 2015, 815,000 premises were open for service with 134,000 users connected to the network.

As noted, Malaysia’s High Speed BroadBand project (HSBB) is the other case study and it has already been a success.  Here are some useful facts about it:

• The government and Telekom Malaysia (News - Alert) signed a public–private partnership agreement in September 2008. The total project cost amounted to RM 11.3 billion (US$2.90 billion), with government funding of RM 2.4 billion US$ 6.20 million), and Telekom Malaysia carrying an investment of RM 8.9 billion (US$2.28 billion).
• The rollout started in late 2008 with a mix of technologies including FTTH and very high-speed digital subscriber line (VDSL2).
• In March 2010, HSBB services were launched conjointly to a National Broadband Initiative to drive broadband adoption.
• By October 2012, the targeted 1.3 million premises had been passed with FTTH. By Q3 2014, there were 735,000 subscriptions to the network, accounting for a take-up of 57 percent on premises passed.

Telekom Malaysia, the dominant carrier in Malaya, agreed to make the network available to other operators. ement states that the incumbent shall set a fair and equitable price on a commercially negotiated basis. As of April 2014, five operators had signed up for HSBB access services, and 25 had signed up for HSBB transmission services used to enhance their own backhaul network.

As Nokia points out, the impact of using a public/private partnership to accelerate broadband deployment and adoption is tied to three core findings: 

• Tying public funding and structural separation to ensure long-term infrastructure investment
• Focusing on long-term infrastructure buildouts through FTTH technology
• Investing rather than subsidizing is a more effective use of public funds

There is more good news to come regarding the five recommendations for policy makers which have and will make a difference for speeding broadband deployments.  In fact, next time the deep dive will be on the impact of having a reasoned and reasonable regulatory framework for infrastructure sharing in place.