Comment on the NGA investment case studies: Reggefiber
In the DAA workshop and the related online group, we discuss exemplary cases to thrash out the pros and cons of different NGA investment models, which could be replicated on a larger scale. Please share your views, devoting particular attention to the following points:
- What are the right commercial, financial and regulatory arrangements which make long-term NGA investment feasible?
- What elements of the case studies can serve as a role model for replication and what needs to be adapted?
- How can EC policy improve the feasibility of such models (under the current regulatory framework)? Are certain models better than others?
Below we present the first case for your comments, Reggefiber from the Netherlands. The most voted comments (through the "interesting" button) will be fed into the discussion at the Assembly.
Reggefiber (submitted by Wouter Burger)
Facts and commercial model
• Reggefiber implements a wholesale-based business model to deploy FTTH connections to households in the Netherlands. Currently, total connections amount to c. 1 million (Q1 2012) with a target of around 1.5 million by 2013 (c. 20% of households). The company started as a venture of a family of entrepreneurs with a background in construction; in 2008, the Dutch incumbent KPN acquired a stake (currently 41%, to increase to 60% in 2014).
• The model is based on a high degree of vertical separation: Reggefiber builds and operates the passive access network (layer 1), active operators deploy and operate active network elements (layer 2, Reggefiber plus currently 3 others) and downstream service providers (> 10) deliver end user services (layer 3). Reggefiber invests up to €1,000/home passed which are to be recovered over a payback period of 20 years and through a target long-term take-up rate of 60%.
• Reggefiber has developed intelligent techniques of generating high take-up rates. These comprise (1) a rigorous selection of areas based on socio-economic characteristics (2) the proactive use of demand aggregation to create enthusiasm among local residents, e. g. by opening local points of contact, proactively involving key local stakeholders such as mayors, clubs, churches, etc. and (3) a focus on smaller towns and villages where such enthusiasm spreads more easily.
• Reggefiber has innovated new ways of saving construction costs, e. g. by pre-manufacturing street cabinets which can be deployed on site with little additional works or by experimenting with laying cables in protective gutters close to the surface.
• Due to KPN's participation, Reggefiber is subject to access regulation. Reggefiber and the NRA agreed on a rulebook governing the involvement of the different parties, the access products as well as wholesale prices (publicly available). The actual investment for each new project is submitted to the NRA. The provisions set a maximum for the monthly rental rate which Reggefiber so far undercuts with an average monthly rate of €15. The rate is adjusted for inflation and varies with investment costs in a given local project.
• Access products and prices are subject to the formal standard procedures required by the regulatory framework and can be revised in each bi- or triennial regulatory review. However, the NRA seeks to sustain stable conditions for long-term investment provided Reggefiber complies with the provisions set out in the rulebook.
• A proven track record of successful projects and commercial viability that had been demonstrated in practice constituted the "proof-of-concept" which eventually secured access to first-time external (debt) financing. Key factor in long term external refinancing is a certain minimum degree of reliability and stability of project revenues and cash flows.
• Reggefiber creates a separate legal entity for each area with separate financing. In addition to this geographically ring-fenced approach, several other elements mitigate risk: (1) a sufficiently high threshold for the number of contracts concluded upfront before construction (2) harnessing the openness of the network and the presence of multiple downstream providers to achieve long term take-up accretion (3) a reduced risk of (fibre-based) duplication due to the participation of the incumbent and the attractive open wholesale model, and, as further consequence hereof, (4) minimised churn by virtue of the network's unique and superior performance features.