EU endorses public funding for municipal broadband

The European Commission has decided that the public co-funding of an open broadband infrastructure in Limousin, France constitutes compensation for the provision of a “Service of General Economic Interest” and is not state aid. The project has a total budget of €85 million and will be co-financed by EU funds. The scheme will enable telecom operators to provide broadband services to residential users, businesses and public authorities on a transparent and non-discriminatory basis.

Competition Commissioner Neelie Kroes commented: “I am glad we could agree that this project does not constitute state aid. This public-private partnership delivers broadband access to citizens and businesses in Limousin, harnessing competition in the electronic communications markets and improving the competitiveness of the region.”

The construction and operation of the broadband infrastructure will be implemented by means of a “public service delegation” in the form of a concession under French law. Selected through a public procurement procedure, the concession holder will provide various wholesale services to retail operators but not services to end users. To encourage competition, retail operators will, inter alia, also be able to lease from the wholesale provider so-called “dark fibre” (i.e. a plain fibre-optic cable with no optical transmission equipment – operators may add their own equipment and build their own network, retaining complete control over the fibre). The Commission has taken into account the fact that Limousin consists mainly of rural and remote areas, and that access to broadband services offered by existing market operators in Limousin is insufficient to meet the population’s essential needs.

The Commission has therefore accepted that access to broadband services for all citizens be qualified as a Service of General Economic Interest (SGEI) in the region. However, this is only valid for investments linked to the wholesale provision of network infrastructure and not for retail broadband services offered to end users. The latter may include many different forms of services which do not necessarily qualify as SGEI. The Commission considers that the public co-funding of the infrastructure constitutes compensation for the provision of an SGEI and hence is not state aid because the project fulfils the four criteria established by the Court of Justice in the Altmark ruling (24 July 2003, in Case C-280/00).

According to this ruling, compensation for a public service obligation does not constitute state aid if:

(1) the beneficiary is given a clearly defined public service mission;

(2) the compensation payments are based on objective and transparent criteria established in advance;

(3) the compensation (including a reasonable profit) does not exceed the cost incurred in the discharge of the public service minus the revenues earned with providing the service; and

(4) the beneficiary is chosen in a public tender or compensation does not exceed the costs of a well-run undertaking that is adequately equipped with the means to provide the public service.

The Commission already adopted a similar decision in November 2004 concerning the public funding of a broadband project in the Pyrénées Atlantiques (see IP/04/1371).

The measure is in line with Community priorities in the eEurope 2005 Action Plan see (see IP/04/626) and the i2010 initiative.

(Source: European Commission, IP/05/530, 3 May 2005)

My comments:

Note the similarities of the Limousin model to the Philadelphia wholesale model. In both instances, there is an entity that will build a network (wireless in Philadelphia, fiber in Limousin) which it will wholesale on a non-discriminatory basis to service providers. The difference is that in Limousin, the public entity is allowed by the European Commission to use tax money (because it is deemed to have met the criteria set forth in the Altmark case). In Philadelphia, the city is not using public funds and therefore has to create a non-profit organization to commission the buildout of the wireless network. Limousin, by contrast, is a rural area with hardly any broadband access; in Philadelphia, there is Internet access but it is not true broadband, the service is expensive relative to what providers are charging in Europe and Asia, and it is only available in 60% of the city. They are forced to spend tax money to build the network.

The advantage of the open wholesale model is that it allows a multiplicity of providers on the network, each of which will be competing for customers. The effect will be to create a competitive marketplace for broadband services. This is not the model being followed by a number of US cities such as Madison (Wisconsin), Tempe (Arizona) and Minneapolis (Minnesota), all of which have decided that they want one service provider to build the network and deliver service. In my opinion, the latter resembles the cable franchise model, which has resulted only in higher cable fees and lousy service. However, it is too early to tell which model works better. Municipalities should decide which one suits them better and try it out. In time, we will have a better idea of what works and what does not.

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Further analysis:

Those of you not familiar with EU law should understand the paranoia of EU lawmakers concerning “state aid”. In the past, countries such as France (and not only France) would give huge subsidies to “national champions” such as France Telecom in the form of guaranteed loans. The effect is to shore up a French company, perhaps an inefficient and poorly performing business, at the expense of a German or Dutch competitor. This is prohibited under EU law because it harms the free flow of goods and services in the EU.

So, every time an EU Member State uses public funds for a purpose that would seem to benefit their local companies – in this case, spending tax money to build out a fiber network that could potentially benefit France Telecom (because FT does not have to spend money to build it by itself) to the exclusion of service providers from other countries, the alarm bells go off in the EC Competition Directorate-General. This is why they have strict rules on what constitutes permissible state aid and what does not.

I recommend that you read “State Aid Rules and Public Funding of Broadband”, which appears on pages 8 to 15 of the Competition Policy Newsletter, Spring 2005 published by the EC Competition Directorate-General (warning: it is a 128-page document, but you only need to read these eight pages). In the article, you will see that one of the EC’s fears is that a country like France will spend huge amounts of taxpayer money to build out a broadband network that will be used exclusively by their incumbent operator, France Telecom. On page 11, it says:

The funding of a network belonging to one operator that may restrict access to competitors, would risk foreclosing the market from new entrants in the medium term. On the contrary, public intervention should not create monopoly positions and should ensure open and non-discriminatory access to the financed network.

That is why the EC insists upon the wholesale model, which is what Philadelphia is following. Can the US adopt rules similar to these as a compromise between the anti- and pro-municipal broadband groups? Note that the deployment of a broadband network by a governmental entity does not exclude the local telecom operator; indeed the same operator, whether it is a France Telecom or a Verizon can lease access from the owner of the network (the municipality or the region) and deliver broadband services. The telecom operator may be relieved to know that someone else is building the network and that they don’t have to spend their own money. That is why I do not understand the opposition of Qwest, SBC and Verizon to broadband deployments in rural areas where there is little or no broadband infrastructure.

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Comments

  1. Excellent analysis, Esmee! Wonder what you think of the Appingedam Model, that Neelie just sent to the paper bin.