Europe changes tune on broadband

Comment: Faith in financial principles are not always well-founded.

The European Commission has announced a $67 billion fund for infrastructure. David Havyatt investigates what the decision means for Europe and the comparison drawn to Australia's National Broadband Network.

Having returned from a tour of Europe recently, shadow communications minister Malcolm Turnbull echoed the opinions of one very senior European official: "From our point of view, your policy seems completely crazy Mr Turnbull".

The implication, of course, was that the official was talking about current Australian Government policy - the National Broadband Network - not Turnbull's own broadband plan (whatever that actually is).

Turnbull has used the quote several times over past weeks to support his claim of relatively low government outlays on broadband infrastructure in European countries.

A similar comparison to Australian policy from the Economist Intelligence Unit considered all infrastructure investments equal and did not distinguish between provision of debt, equity or grants. This method is flawed.

The Australian outlay is entirely equity finance intended to provide a return at least equal to the Government's cost of funds, while governments elsewhere around the world intend to stimulate private investments through grant programs untied to any direct returns for the public sector.

A new European plan

Turnbull's claim and the comparison provided by the EIU has since been unhinged by the European Commission's announcement on October 19 to spend €50 billion ($A67 billion) on an infrastructure fund dubbed "Connecting Europe". 

Of this, €9.2 billion is allocated to supporting high-speed digital networks.

In an analysis supporting the plan, the commission found;

"As part of the Digital Agenda, every European should have access to basic broadband by 2013 and fast and ultra-fast broadband by 2020...

The investment needs for achieving these objectives are estimated at up to €270 billion. However, in the absence of Union intervention, private sector investment is expected to be not more than €50 billion for the period until 2020."

The resulting €220 billion gap, the commission found, would need to be fielded by public stimulation for investment, as "social benefits from investment in digital infrastructures by far exceeds the private incentive for investment".

Of the funding allocated to digital networks, €7 billion will be available for investment in high-speed broadband infrastructure which "could leverage a total of between €50 and 100 billion of public and private investment".

An expectation private sector companies would provide between seven and 14 times the fund's contribution is a lot more than the one-for-one investment originally hoped for in Australia and planned for in New Zealand.

Reconsidering the investment ladder

At the start of October, the European Commission also commenced a consultation aimed at costing wholesale access prices.

Commissioner Neelie Kroes suggested a model of two elements;

"First, a general approach that would, in principle and after a certain time, gradually lower the access prices for largely depreciated copper networks.

Second, the possibility of derogating from or adapting this general approach where the incumbents credibly commit to invest in fibre networks in a relevant time frame, while at the same time promoting the switch-off of the old copper networks once the next generation infrastructure is in place.

Indeed, I have seen evidence that the gradual switch-off of copper could reduce the cost to such a degree that new fibre investments break even in under 10 years. And thus align the interests of investors and long-term financing providers."

This is a radical departure for Europe, which was the initial bastion of the "ladder of investment" approach that copper access prices should start low to facilitate entry, then grow to force entrants to make investment decisions.

The Europeans now seem set on a strategy of distorting access prices and making direct investments hoping for a large multiplier effect.

Opinion is divided over the proposal. A Wall Street Journal columnist thinks that competition from cable operators is all the incentive incumbent telcos need.

The executive director of the European Telecoms Association, however, warns that the proposal runs the risk of increasing fibre prices, noting "all that investors need is a fair return, not excessive profits".

One thing is certain: Telstra's shareholders would have been far angrier if the Australian Government planned to reduce the access price for copper as an incentive for new fibre investment.

Meanwhile, economist Steve Keen has noted that the European plan to provide government funds to improve bank balance sheets is a totally illogical plan. You get a far better outcome, he says, by putting the money directly into economic activity – of which building broadband networks are a good example

Turnbull carries a reputation in politics as a businessman, garnered through his career in merchant banking including as a partner at Goldman Sachs. The fact that his former employer has again entered loss-making territory is surely evidence that the principles of finance he espouses are no longer applicable.

The European official quoted by Turnbull would be well advised to contrast the broadband policies being pursued in Australia and Europe and wonder whether their faith in banks and markets is well-founded.