CEF: Future proofing the EU economy

ONIEB workshopHigh speed broaband – a platform for innovationFilippo Munisteri, DG CONNECT19 September 2012

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Europe’s economic future requires smart, sustainable and fully interconnected transport, energy and digital networks => key for the Europe 2020 Strategy.Effective interconnection of networks can only be achieved at the European level, guaranteeing minimum cost to all citizens.CEF aims at supporting infrastructures with a European and Single Market dimension, targeting EU support on priority networks to be implemented by 2020 where European action is most warranted.CEF aims at building an environment conducive to private investment and develop instruments that will be attractive vehicles for specialised infrastructure investors.CEF seeks to find common solutions for all sectors, wherever possible and practical.Smart performance indicators common to CEF aligned on Europe 2020 strategy and 20-20-20 energy and climate change objectives, as well as specific sectoral objectives and indicators.

CEF: Policy rationale

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CEF: a common approach to growth…

• Letter by 12 Prime Ministers (UK, NL, IT, EE, LV, FI, IE, CZ, SK, ES, SE, PL) 20 February 2012(…) we must step up our efforts to create a truly digital single market by 2015. (…) We must (…) continue our efforts to build modern infrastructure to provide better broadband coverage and take-up and extend and promote e-government services to simplify the start up and running of businesses and aid the mobility of workers.

• G8/G20 DeauvilleThe global digital economy has served as a powerful economic driver and engine of growth and innovation. Broadband Internet access is an essential infrastructure for participation in today's economy

• European Council 1-2 March 2012In particular, efforts will continue in order to (…) complete the Digital Single Market by 2015, in particular by adopting measures to boost confidence in on-line trade and by providing better broadband coverage, including by reducing the cost of high-speed broadband infrastructure;

• A. Merkel quote from BITKOM (5 March 2012)The best technical possibilities, (…) will remain hidden if the visible connections do not exist and data cannot get transferred. This is why infrastructure is bread and butter, to allow people access to these technical developments.

CEF: Policy rationale

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…to specific political requests

CEF digital networks: Policy rationale

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. Broadband deployment:» Through a portfolio of projects enabling fast and ultra-fast internet access» Europe 2020 broadband objectives (access: 100% of households at 30

Mbps; use: 50% of households at 100 Mbps)» Market driven (i.e beyond the grants logic) through credit enhancement,

involvement of private sector operators and institutional investors. Cross-border ICT digital services» Common digital service architectures in line with Digital Single Market logic» Grants to project consortia and procurement of European platforms» No changes required to existing national platforms» Move on-line and render European key services of public interest such as:

• High-speed backbone connections for public administrations (sTESTA..) • Cross-border delivery of e-Government services to European citizens (E-ID, e-

Health)• Support the Digital Single Market by removing barriers to companies operating

cross-border (e-Procurement, e-Invoicing, e-Signature)• Enabling open data access to public sector information and multilingual services• Internet Safety for Kids and security through coordination of European CERTs

Why CEF: Broadband drives competiveness

Correlation Fixed Broadband Penetration and Competitiveness

4

4.2

4.4

4.6

4.8

5

5.2

5.4

5.6

5.8

0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45

Fixed broadband lines per 100 population

WEF

's G

loba

l Com

petit

ive

Inde

x sc

ore

DenmarkNetherlands

KoreaLuxembourg

Sweden

Germany

FranceBelgium

UKFinland

Malta

USJapan

Austria

Estonia

Ireland

SloveniaCyprus

Spain

Italy

Czech Rep.

HungaryLithuaniaPortugal

LatviaSlovakia

Poland

Bulgaria

Romania

"An increase in the broadband penetration rate by 10percentage points raises annual growth in per-capita GDP by 0.9 to 1.5

percentage points". Faster broadband = higher growth. (Czernich et al. - CESIFO WORKING PAPER NO. 2861, Ifo Institute for Economic Research, 2009) 5

Why CEF: Broadband creates jobs

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2.6 jobs are created by the Internet for every job lost (McKinsey, 2011, SME survey)

…demand is soaring from citizens…

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2Mbps

8Mbps

25Mbps

100Mbps

VoIP

Online radio

eHealth: Remote

Diagnostic Examination

Fastinternet

browsing

Standard def TV

MPEG4P2P file-sharing

eHealth: Virtual Care Unit

HD telepresence

HDTV

HD education fast downloads

Multiple application

usage

Standard def TV

MPEG2

Dow

nstre

am b

andw

idth

requ

irem

ents

Source: Analysis based on Broadband Stakeholder Group

…and business…

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Three applications for which SMEs will need high-speed broadband:- Cloud computing: separates IT resources from the devices used

to access them. By 2015 it will be a $85 bn business, with market doubling every two years. Cloud-based solutions reduce costs and create new markets.

- Internet of Things: sensors embedded in physical objects become linked and connected to the internet. This generates enormous volumes of data (remote health monitoring, smart grids). Connected IoT nodes grow at 35% annually. This creates new ways for companies to manage information and reduce costs.

- Big data: as databases become massive and complexity increases, it creates new markets for companies to handle data, reducing search time for clients. The European public sector could witness annual productivity gains of €255 bn. in the next decade.

Source McKinsey (2011)

…but supply is still lagging behind

Is Europe investing enough?

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the EU scores against the Digital Agenda targets reflect supply gap

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…supply is still missing

EC strategy for NGA investment• Focus: Incentivising private NGA infrastructure investment

by improving risk-return trade-off

Recalibrate regulatory instruments:• Cost reduction measures• Cost methodologies• Rec. on non-discrimination

EU enhanced project-financing facilities:

• Connecting Europe Facility

Increases private investor returns

Reduce private investor risk

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Making it happen

VP Kroes statement 12/7/12 MFF proposal 2014-2020

What we finance

• For broadband:• Mapping, planning, feasibility studies

=> Grants• Broadband roll-out => Financial

instruments

• For digital services:• Promotion and policy support =>

grants

Broadband (1)

• Potential beneficiaries:• Telecoms (incumbent or new entrant)• Utilities• Regional bodies, including municipalities• New alliances and partnerships, including

equipment providers• PPPs

Broadband (2)

No business case: => grants (Structural funds)

Where strengthening of business case possible: through financial instruments Loans Guarantees Bonds (project bond pilot) Equity (infrastructure investment funds)

Digital Service Infrastructures

Smart energy services• Linking energy and telecoms infrastructure

Safety and security• Safer internet for children online• Critical information infrastructures

eGovernment• eHealth• eIdentification for secure transactions• Setting up a business across borders• eJustice (information on justice systems and

improving access to justice throughout the EU)

Access to public sector information, digitised cultural goods and to multilingual services

An example: Europeana

Broadband (2) Revenue potential, but risk of revenue stream (too) high:

EC/EIB "underwrite" part of project risk through financial instruments (FIs)

Debt-related: Loans, guarantees, project bonds Equity (infrastructure investment funds)

Design of CEF FIs to be tested – Project Bonds pilot scheme

Areas without viable business case: grants (direct EU contribution to costs)

CEF: how does it work

CEF: EC assumes project risk

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• No risk for EU budget beyond commitment: no guarantee entered in EU budget. Residual risk stays with financial partner.

• Financial partners to decide on projects to be supported, but the eligibility criteria determined by the Guidelines and WPs, on 1st come 1st served basis.

• Blending of FI from CEF and grants from Structural funds and other EU/MS sources possible to optimise the impact of the project.

• Flexibility: different project sizes to receive support through different financial instruments.

• Project Bonds: projects requiring higher project size eg €50 million.• Smaller size PB projects (e.g. €10 million) can receive support if

aggregated (eg “repackaged” by financial partner in a single instrument)

• Use of other instruments dedicated to smaller size projects (e.g. equity, debt)

Financial instruments under CEF

• The leverage effect measures the capacity of mobilising private capital. It is higher for FI, than for grants (typically in 50% co-financing);

• In the on-going RSFF programme: leverage effect is 14x. LGTT (Loan Guarantee instrument for Trans-European Transport): leverage effect 40x;

• CEF proposal: a conservative 6x estimate adopted.

Leverage effect

CEF funds, split leverage factor amount leveraged (bn.€) Additional households covered (mln.)2 bn. Grants, 5 bn. Fis 6x 42 33.61 bn. Grants, 6 bn. Fis 6x 45.5 36.42 bn. Grants, 5 bn. Fis 8x 52 41.61 bn. Grants, 6 bn. Fis 8x 57.5 46

Some scenarios

Based on a simplifying assumption of €1,250 of average cost per line for all households

Project bonds (PBI): The concept Designed to enhance the rating of senior debt of projects,

ideally to single A Funded or unfunded subordinated tranche provided by EIB

with the support of the EU budget Subordinated tranche maximum 20% of senior debt▶ Cushion for senior debt service if project risks materialise

For ICT: EC budget €20 million for 2013, pipeline building begins this autumn

Intended to facilitate creation of liquid and mainstream infrastructure asset class

EC project-financing (1) - PBI

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Project bonds

Source: DG ECFIN21

Project bonds (PBI): The concept

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ICT networks and digital services

deployment

Direct job

creation

Indirect job

creation

GDP

Smart grids

Savings for

Gov’tsSmart

buildings

Tele

monitoring

Education

Tele

working

Labour prod.

+10% bb penetration => +1.5% lab. prod growth

+10% in bb household penetration => +0.9-1.5% GDP

157 m€/year in ES from eCadastre. EU wide E-procurement: €50 Bn. savings

Bb coverage accelerated the take-up of entrepreneurship in ICT by 54% (general 8%)

Bb-enabled smart grid services =>€850 bn. in gross energy savings (US)

Up to -70% energy use in new office buildings using broadband connections

€27.89 bn. benefit from tele monitoring/e-health (0.299% of EU GDP)

+5% bb => + $4.3 bn. GDP and +40,000 jobs in education in the US

Homeworkers took on average a 1/4 days sick leave a year than their office attending counterparts

+2.7 m. man-year jobs and €152 bn. of added value to the EU economy

Broadband impacts and spillovers

Thank you for your attention

Filippo.Munisteri@ec.europa.euEuropean Commission, DG CONNECT, Unit B5 – Broadband

BU33 2/38, Tel: +32 (2) 298 72 46