FTTH Business Guide - AWT.be

In the European Union there are explicit rules (the State Aid Rules) which define
and seek to limit the circumstances in which public money can support fibre
projects. The underlying goal is to restrict public finance to those areas where the
private sector will not build or operate unaided. Despite this, public investment in
wealthy urban areas is still allowable under the rules but with certain caveats,
principally that the public sector investor must earn a commercial rate of return
even if the period of time is perhaps longer than a bank or similar private investor
would accept for projects of this type. However, in such a case the rules also
require that the State is a minority provider of finance – probably best achieved by
using a structure such as a PPP (public private partnership).
PPPs developed as a way for the private sector to fund capital projects in return
for a guaranteed future revenue stream from government. In essence public debt
is replaced with private debt that will make a more or less guaranteed return over
several years. In build and operate PPPs, the contract may be tied to the
construction and also possibly operation of a major capital asset. The original idea
was that the private sector would be better at building on time and to budget than
the public sector and would have a clear profit incentive to do so. Hospitals,
bridges and many other such projects have been funded using PPPs.
As the examples suggest there are many different configurations of PPPs and there
is no single solution – each deal is structured and negotiated on its merits.
However, the basic feature is that the State has to guarantee future revenue. It is
that future income stream which enables the private sector to fund the
construction, and possibly operation, of the project.
In FTTH projects a common approach is to define an “availability payment”, which
is money paid regularly to the project when it has been built and put into service.
If revenue from customers grows, the availability payment is reduced using a predefined
formula. An agreement may even provide a reverse payment or revenue
share to the public sector sponsor if the project is more successful than expected.
The advantage for the public sector is that cost of the project is funded out of
future budgets rather than current capital budgets. The cost is the premium for
risk and the required return that is given to private sector financiers funding the
construction. PPPs also tend to be complicated to set-up and administer and this
can make them costly.
58 www.ftthcouncil.eu