Connecting Europe Facility – will public stimulus prove an efective catalyst to private investment?

22 October 2012 Author: EIFonline

Edit Herczog, MEP and EIF Governor, hosted the 9 October EIF dinner debate, which focused on the Connecting Europe Facility (CEF) and Europe’s funding needs for digital infrastructure expansion.

Gabrielle Gauthey, Executive VP Global Government & Public Affairs at Alcatel-Lucent, launched her talk by highlighting the economic difficulties Europe’s telecom sector is experiencing at present. There is a growing awareness within the telecom industry just how much investment will be needed in order to modernize Europe’s infrastructure and to avoid falling even farther behind in the world market. At present there are about 180 million kilometers of laid fiber throughout the world, of which nearly 105 million kilometers is deployed in the Asian-Pacific region. “Europe is lagging behind in the dynamic of investment”, she stressed. Given the ongoing economic crisis, the CEF is needed in order to allay investor fears by offsetting market risk and to attract long-term private ICT investment through innovative public-private models. Ms. Gauthey cited New Zealand’s Ultra-Fast Broadband Initiative as an example of just such a model.

Europe needs a global vision, she observed in closing. “We need to build appropriate investment vehicles, so Europe can keep its place in the world.  If we won’t get it timely enough there might be consequences for the industry, vendors and for all innovative services in Europe.”

Next up was Robin Bienenstock, Senior Research Analyst at Bernstein. “I am here,” she remarked, “to represent money and for a couple of years I was telling my clients not to invest in European telecoms.”  There are two main reasons for this, she continued: first, there is a substantial valuation gap between US and European telecom firms, and second, the return of invested capital (ROIC) of the telecom sector as a whole (not only in Europe) is several basis points below the weight of average capital cost. These factors combine to make the European telecom industry economically value-destructive.

Bienenstock advocates a number of options to attract investment. First, she suggested incentivizing fiber deployment in urban areas. Second, looking towards more rural parts of Europe, the CEF (along with alternative investment vehicles) could prove the solution to drawing in private investors. Bienenstock urged policymakers to make a clear distinction regarding the underlying layer of real infrastructure. Enormous incremental investment may be achieved by offering RAB (Regulatory Asset Base) low-yield, low-risk returns. Furthermore, she recommends regional trials of these novel funding models which the CEF is intended to empower in order to prove the underlying assumptions. Successful trials will do much to offset investor fears about rural investments.

On the last point, Ms. Bienenstock stressed that for telecoms there is only a business case for building fiber in about 25% of Europe. To make a valid business case in the remaining 75% either regulatory changes will be needed or else the assurances and incentives provided by the CEF.

The evening’s closing speaker wasRoberto Viola, Deputy Director General at DG CONNECT. He opened by asserting his strong view that if the CEF is not approved in full, at minimum 50 million European consumers will be denied access to broadband and many European SMEs will not be in a position to take advantage of cloud computing. 

Mr. Viola emphasized that the CEF represents a cohesive strategy for broadband deployment. From the regulatory perspective the proposal seeks to stabilize cash flows within the telecom industry by making their economic environment more predictable.

At present, Europeans enjoy low-cost and open internet access. However, this model turns out to be better for the consumer than for the providers. Viola suggested that public authorities must pay their share in order to maintain this. Mr. Viola emphasized the degree to which the CEF can help, both in maintaining open network access and in expanding into more rural areas.

He pointed out that at the moment the telecoms industry is deadlocked. Shareholders, unsatisfied with market conditions, are demanding short-term returns. Telecom firms feel pressured to placate investors by giving out dividends. This creates a situation where capital is being diverted from potential infrastructure improvements. In light of this, Viola continued, the European Commission’s CEF proposal is intended to reassure the market by showing that policymakers will treat broadband as an essential utility.  

Mr. Viola closed his speech with an earnest appeal, arguing that to neglect investment in broadband infrastructure will prove to be a mistake with tremendous consequences, both for the member states and for future European competiveness as a whole.

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