Following commitments made in the 2016 Autumn statement, are we on the cusp of a full fibre wave?
In the 2016 Autumn Statement, Philip Hammond, the UK Chancellor of the Exchequer announced the UK Government’s commitment to spread fibre networks and 5G across Britain; an approach very much in line with a general push towards passive access remedies by policymakers. Following on from this there is undoubtedly a buzz in the sector, with Alternative Network (AltNet) ISPs such as CityFibre, Hyperoptic and Gigaclear well positioned to capitalise on this positive sentiment. But are we on the cusp of a full fibre wave? And do infrastructure investors really think there is a place in their portfolios for these "emerging utility" broadband assets?
The UK’s starting point
According to international press, the UK performs poorly against its global competitors for broadband availability and household access to the most up to date technology. This is particularly evident, it is said, in comparison to the “ultra-fasts” (South Korea, global leader for a number of years, and European leader, Norway). Contrary to common perception, however, the UK’s broadband metrics are not as disastrous as the press would have you believe. Moreover, it is not entirely clear that superfast broadband is as transformative as has been claimed, or that "full fibre" nations are genuinely reaping major societal benefits, at this stage at least. The argument that fibre to the home (FTTH) opponents present is that GDP growth is a cause of higher broadband penetration, rather than vice versa. That is not to say, however, that there is no commercial case for fibre. The UK is a heavily service-oriented economy which (particularly as a result of the UK’s impending exit from the European Union) is both heavily reliant on digital networks and is competing with markets with high speed digital infrastructure. In this world, there are undoubtedly significant positives arising from superfast broadband - for example in terms national competitiveness, education attainment or the benefits for traffic congestion and the environment linked to increased teleworking.
UK Government initiatives
Unlike the Irish Government’s heavy direct investment approach, and in light of current levels of private investment in the sector, the UK Government has opted for a softer approach to transforming broadband access. This is to be achieved via the Superfast Broadband Programme, with the stated objective that everyone in the UK should be able to access broadband speeds of at least 2 Mbps, with 97% of the UK having access to far greater speeds (at least 24Mbps) by 2019 (up from 95% by 2017). At the heart of the UK’s industrial and digital strategy is the development and uptake of next generation digital infrastructure - including ‘full fibre’ and 5G.
In an effort to increase the availability of affordable capital to further the quick expansion of ultrafast broadband networks and to encourage infrastructure competition, August 2016 saw the announcement of the establishment of the Digital Infrastructure Investment Fund. This is a vehicle to be created by the UK Treasury, through which the UK Government will invest alongside the private sector in businesses or projects operating in and around the UK broadband sector. The Digital Infrastructure Investment Fund is intended to be sizeable - growing to nearly £1.5bn by 2021. This, combined with the work of the Broadband Stakeholders Group (the UK Government’s broadband advisory forum), and the introduction of 100% business rates relief for new full-fibre infrastructure for five years from 01 April 2017 all demonstrate strong political support for the sector, which may also set a path for capital deployment by other infrastructure investors.
Infrastructure investor appetite
The general consensus is that the UK Government’s initiatives have improved market sentiment to broadband infrastructure, creating positive "mood music", to which investors are starting to respond. Investor attitude certainly seems to be that broadband infrastructure is an exciting asset class; not least because nowadays a strong home data connection is increasingly viewed as being as necessary to modern life as water and electricity. But are these efforts enough to convince those infrastructure investors with a history of favouring more traditional assets (stable, predictable, long-term cashflow producing assets with proven technologies) that digital infrastructure is a genuine infrastructure, and not a (perhaps more speculative) telecoms play? And, importantly, do these investors see a first mover advantage, leading them to allocate capital now?
This ultimately comes down to a question of risk and return. The potential for return is significant, for the reasons set out above - but the risks are also significant. The risk of overbuild remains real (although a move from vertical to open access layered models means this is reduced), as does construction risk and the risks associated with rapid technological change. Penetration risk (in terms of speed of uptake as opposed to the percentage of ultimate user coverage) and the lack of accurate data in order to inform investment decisions are also live issues. So too are the risks of sometimes lower rates of return from rural and remote areas and, finally, the asset class’s susceptibility to policy or regulatory changes. Moreover, whilst digital infrastructure investment may well be a good investment, long term, it does not follow that it necessarily merits rushing in today. After all, technology (generally) gets cheaper, and associated risks decrease, over time.
For now, therefore, assuming (as we expect) no change in policy post the upcoming general election, it seems that investment activity in the UK will continue in the same vein as in the recent past; indirect investment by way of corporate debt (rather than project finance) as with the European Investment Bank’s £21m loan to Hyperoptic and direct equity investments in AltNets such as the recent InfraCapital follow-up investment in Gigaclear. Whilst there may not be an imminent tsunami of investment from the infrastructure investment community, the level of government support, the scale of the opportunity and the increasing familiarity of the sector with this specific asset type will doubtless lead to a diminution of risk, and so increasing investor appetite, over time.
Simmons & Simmons has a market leading telecoms infrastructure practice made up of innovative Funds, Project Finance and TMT lawyers.
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