How long did it take your smartphone or tablet to display this story? If it was more than a couple of seconds, well, you probably aren’t reading this. Imagine living in an area far from the main urban centres where the internet is always slow. Then imagine trying to run a business with a connection that moves as fast as treacle.
Few of us give much thought to the infrastructure which enables us to lead our online lives wherever we happen to be. Yet, for people in rural areas, internet access can be problematic. In sparsely populated areas where there are relatively few customers, there is often only one service provider who has little incentive to upgrade cables and other infrastructure. That means connections don’t get faster. Other providers are deterred from investing as, in addition to the fact that telecoms projects can take a long time to pay back, the returns are perceived to be insufficient because there aren’t many customers.
Broadband infrastructure fund responds to a market failure
The CEF Broadband Fund responds to this failure of the broadband market in rural areas. The Fund, a partnership between the European Investment Bank and the European Commission’s Connecting Europe Facility, incentivises investors to fund extension of the availability of broadband in particular in remote areas.
“If the CEF Broadband Fund is successful in supporting rural projects, other dedicated equity funds could be set up to plug the gaps in the European market for private sector financial support to digital projects,” says Harald Gruber, head of the EIB’s Digital Economy division.
Connecting Europe aims to ensure that by 2020 all EU households have a high-speed broadband internet connection and that 50% of households will be able to benefit from ultra-high speed access services.
High projected rural use
The Fund will test the idea that, despite the relatively low population density, the take-up rate of high speed internet services in rural areas will be significant – possibly as high as 80% of households that have access to fibre. That’s because, in most cases, the projects supported by the Fund will represent the only available option for broadband access.
The Fund aims to raise EUR 500 million to mobilise some EUR 3 billion of investment in broadband infrastructure projects. It is structured to offer a high degree of protection to private investors who are prepared to put money into rural projects.
Cutting risk for private investors
The highest risk layer of the fund, a contribution from the Connecting Europe Facility, will absorb the first of any losses. Losses beyond that are taken by a contribution from the EIB with a guarantee under the Investment Plan for Europe’s European Fund for Strategic Investments. The EFSI guarantee is vital in ensuring the Fund gets off the ground. Without it, the EIB wouldn’t be able to finance a project with such a high risk profile.
These first two layers effectively shield contributions to the final layer. Those are made by national promotional banks and private investors. This should make the fund especially attractive to private investors. It protects private investments from the largest risks, in return for the commitment from private investors to the long payback periods typical of relatively small telecoms projects.
The EIB is in the process of appointing a manager for the Fund and aims to start financing deals in 2017. Says Gruber, “It shows that the perspective for infrastructure is for the long term. It could quite simply transform the way we finance the digital sector.”