Telecommunications infrastructure is becoming increasingly popular with infrastructure investors. But while there is plenty of private capital available for the purchasing of operational towers, for example, you could argue not nearly the same amount is available for the financing of high-speed broadband infrastructure, especially for smaller projects in rural or remote areas.
The European Commission (EC) and the European Investment Bank (EIB) are keenly aware of this gap, which is why they are setting up an innovative fund, using public money to mitigate risk in the hopes of crowding in private sector capital for some of these smaller and arguably riskier projects. They are also tapping private fund managers to run the 20-year fund, with an official call for expressions of interest to be launched by the EIB in early May.
“We had people coming to us with projects saying there was a lot of grant financing available, but not enough long-term financing for more commercial projects. We realised at that point that smaller market projects don’t need grants and that they would be quite happy to have access to long-term financing,” recalls Anna Krzyzanowska, head of the broadband unit at the EC’s DG Connect, on the fund’s origins.
Krzyzanowska explains the European broadband market is mostly made up of big telecommunication companies, which, until now, have mostly built projects at their own pace wherever they see market interest. This invariably meant that only projects providing a certain type of return went ahead, with all others being financed through grants.
“This was a big company’s game for a very long time,” says Krzyzanowska. “We see the emergence of extremely nimble and dynamic companies that can defend their business models quite well […] they have slightly lower costs but they also struggle with typical smaller company problems, such as a lack of reach.”
The EC and the EIB’s new broadband fund, which is targeting a first and potentially final close of between €400 million and €500 million in the fourth quarter of the year, wants to ensure those smaller companies and projects get a fair shot. To secure private capital for what is essentially a market segment in the making, the EC and the EIB are looking to contribute €100 million of risk-mitigating capital each, with the remaining €200 million to €300 million coming from the private sector.
The EC’s investment in the fund’s C shares will bear the brunt of the risk, essentially acting as a first-loss piece. Next in line is the EIB’s (and potentially other investors’) commitment to the fund’s B shares. Finally, investors (private capital, international financial institutions or national development banks) who commit preferred equity to the vehicle’s A shares will be the most protected.
“We act as a patient investor, willing to take the risk. We are the last ones to be paid and we will take the return that comes at the end. If it’s a good return, then I hope the next fund will happen without us,” Krzyzanowska adds.
The main risks attached to these smaller projects are competition – the possibility that another broadband provider will also target an area that cannot sustain two companies – and a slower than expected ramp-up period, which might frustrate return expectations, explains Krzyzanowska. In addition, “big companies very often have a change of heart once they see smaller companies investing in a particular area,” she points out.
What the fund will not do, though, is “invest in projects that are non-starters – otherwise we wouldn’t be acting as providers of long-term financing, but rather as providers of a hidden grant,” stresses Krzyzanowska.
“Economists are convinced that broadband substantially contributed to Europe’s productivity growth in the past and that high-speed internet will have a similar effect in the future. We can no longer afford to exclude rural or remote areas simply because there is a funding gap for ultra-fast broadband in some EU regions,” summarises Wilhelm Molterer, managing director of the European Fund for Strategic Investments.