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Network Sharing: PPP models in global broadband deployment

September 01, 2015

The increasing broadband penetration across rural and remote areas has been challenging for governments across the globe. While infrastructure projects associated with the segment are proving to be essential for extending socio-economic benefits to the population, they make a poor business case for private players. This is because rural areas require significant investments for setting up broadband networks while gaining comparatively low returns.

Moreover, governments are also proving to be inefficient in setting up such massive networks on their own, which is leading to delays in the provisioning of services. To resolve this dilemma, public-private partnerships (PPP) are increasingly being adopted to meet a range of infrastructural requirements by sharing the risks and returns of projects. The PPP route has led to greater levels of rural penetration and also helped reduce the implementation times of broadband projects.

tele.net takes a look at the various PPP models that have been deployed globally to provide broadband access, along with their advantages, disadvantages and success stories…

Private DBO model

Under this model, private players are involved in designing, building and operating broadband infrastructure. The role of the government is limited to funding the project while the private operator retains control over network assets. A key advantage of this approach is that the risk burden of the public sector is minimised while the private company benefits from owning infrastructure with minimal government interference. On the downside, the entire operational risk lies with the operator.

To improve the business case of such projects, the government typically provides a grant fund to part-subsidise the cost of building broadband infrastructure. It also applies strict controls to monitor adherence to network quality and take-up targets in return for the grant fund. In Europe, for example, the state-aid-mandated “claw-back rules” prevent network operators from making excessive profits. This approach ensures that operators have a strong financial incentive for constructing networks as per the required technical standards. Thus, for this model to be successful, government monitoring is critical in achieving value for money and an effective outcome.

The private design, build and operate (DBO) model has been successfully deployed in two ongoing broadband projects in the UK: the Mobile Infrastructure project and the Superfast Cornwall project. Under the Mobile Infrastructure project, the UK government is aiming to improve mobile coverage in remote areas by 2016. The Superfast Cornwall project, under the European Union Convergence programme, leverages the resources and expertise of British Telecom to deploy next-generation broadband (fiber-to-the-premises [FTTP] and fiber-to-the-curb [FTTC]) at a minimum 80 per cent of the region’s households and businesses by 2015.

JV model

In several broadband projects, private sector players often split ownership with state-run counterparts. The initial financial investment in this model typically comes from the government, to encourage interest from private entities. Thereafter, the total costs of deploying network infrastructure and its associated systems and processes are undertaken by all participating entities of the joint venture (JV). Depending on the private and public sector capital investments, the rewards and risks of the project are shared.

This model allows the government to have more control in the initial stages of designing and constructing a project. Later, the private participants take greater responsibility for making the project profitable. However, JVs for broadband are not common, owing to the ownership complications that may arise. At times, the government may divest its shareholding in the JV to recover part of its early investment. Such JVs also need to take into account local tax considerations and the extent to which the government wants to hold shares and voting rights.

An example of this model is Italy’s Metroweb, which is a special purpose vehicle (SPV) where network ownership is split between public and private firms. The SPV was set up to tackle the issue of Telecom Italia’s lack of investments in fibre infrastructure. Italy’s local gas and electricity utility company A2A and telecom service provider e.Biscom jointly formed Metroweb to accelerate the roll-out of a large metropolitan fibre network. At present, Metroweb owns a 3,200 km fibre network, extending across almost the whole municipality of Milan and Northern Italy.

Public outsourcing model

In the public outsourcing model, unlike the DBO and JV models, the investment is undertaken entirely by the government, which awards contracts to private sector firms for constructing and operating broadband projects in return for payments at previously agreed milestones. These contracts typically last for 10 to 15 years, after which a contractor may be appointed through the competitive bidding route to operate the network. The government retains ownership and bears the entire financial risk of the project. This approach allows it to have greater control over network designs. Otherwise, it is only able to define clear performance milestones like network roll-out time-scales and service level take-ups, which are included in the contractual terms. If these norms are not met, the private operators face fines or penalties.

Public outsourcing has been deployed across several countries, including underdeveloped as well as developed markets. The National ICT Broadband Backbone (NICTBB) project in Tanzania has been highly successful in improving coverage and making mobile services more accessible across the country. According to industry reports, the NICTBB project has been successful in extending services like e-commerce, m-commerce, e-banking, e-education and e-governance since the commencement of its operations. The public outsourcing model has been deployed in three major broadband projects in South Africa and in several European projects as well, such as the Auvergne project in France, the Metropolitan Area Networks project in Ireland and the Shetland Interconnector project in the UK.

Public DBO model

The public DBO investment model is an extension of the public outsourcing model and it requires a higher contribution from the government with minimum private sector involvement. Under this model, a private firm is awarded the contract for designing and building network infrastructure on behalf of the government. However, the government sets up a separate public-owned company responsible for the management and operation of the broadband network. This model is typically used when it is not possible to attract any interest from the private sector.

As compared to other PPP models, the government bears the highest risk burden in the public DBO model as it takes on the responsibility of financing as well as operations. However, this approach allows it to have greater control over the project design as well as the network’s technical and service performance criteria. Thus, the public-owned company takes on the responsibility of meeting performance milestones.

A recent example of this model is the Qatar National Broadband Network (QNBN). While Qatar has been successful in achieving high broadband penetration rates, it has lagged behing in broadband speeds and quality. In 2011, the Qatar government established the QNBN with the aim of rolling out a nationwide open access high speed broadband fibre-to-the-home network. The progress of the QNBN has been very slow due to operational complexities in the network roll-out caused by the company’s tie-ups with several operators. Another key example of this set-up is the Asturcon FTTP project in Spain, which is a 100 per cent public owned and operated network that has now received interest from national operator Orange. The project has been successful in providing broadband services to 56,000 premises in 46 villages and 15 industrial parks. It is also starting to provide services to the regional government premises.

Case for India

The primary challenges that India faces in broadband deployment is the growing dependence on spectrum for providing data services, which often puts pressure on operators due to the high spectrum charges. Fibre, as an alternative, can resolve these infrastructural and sustainability issues to help build a digital economy. At present, the government’s flagship fibre-based broadband project, the National Optical Fibre Network (NOFN), requires a reassessment if its ambitious targets are to be met. The project, which aims to connect 250,000 gram panchayats by 2017, has been severely delayed due to cost overruns and the lack of efficiency in project implementation. The government is now mulling over the various ways in which private entities can be brought in so that the targets are met in a timely manner. Private participation will bring about faster roll-out of networks along with innovations in the market and operations to encourage the uptake of services in rural areas. Going forward, such financial and contractual PPP models will need to be considered for facilitating private participation in the NOFN project. In turn, these collaborative efforts will help in optimal utilisation of existing and new fibre networks and in increasing business productivity.

 
 

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