State aid: Commission opens in-depth investigation into funding of Amsterdam broadband network

14 Giugno 2008

Summary

On May 2005, the city of Amsterdam informed the Commission about its project to invest, together with private shareholders, in the building of a local fibre access network (“fibre to the home” or FTTH) connecting 37.000 households in Amsterdam.

The network owner is Glasvezel Amsterdam CV (GNA), a company owned by private investors ING Real Estate and Reggefiber, five housing corporations and the City of Amsterdam.

The municipality invests euro 6 million on exactly the same terms as the other owners of GNA.

The passive network will be let to operator BBned. BBned invests to activate the network and as a wholesaler will sell capacity to corporations that provide services to end users, as well as operate as a retail provider through its subsidiary Bbeyond.

Such network will be provided by BBned (a subsidiary of Telecom Italia) acting both as a wholesaler, selling the possibility to provide electronic communication services to users, and as a retail provider through its subsidiary Bbeyond.

On December 2006, the European Commission opened a “formal investigation procedure” under EC Treaty state aid into the financial participation of the city of Amsterdam in the building of the above mentioned local fibre network.

Such investigation is aimed at determining whether the participation of the city of Amsterdam as investor within GNA could be interpreted as state aid, and if so, whether such aid could be compliant with competition rules.

According to the EC Treaty, in fact, not every state aid is prohibited per se.

Article 87 of the afore mentioned Treaty prohibits any aid granted by a Member State or through state resources in any form which distorts or threatens to distort competition by favouring certain firms or the production of certain goods.

The aid can take a variety of forms, for instance:

• state grants

• interests relief

• tax relief

• state guarantee or holding

• provision by the state of goods and services on preferential terms

Some forms of aid are not prohibited by art 87, including:

• aid having a social character, granted to individual consumers

• aid in case of damage caused by natural disasters or exceptional occurrences

• aid designed to promote the economic development of undeveloped areas

• aid to promote culture and heritage conservation

• aid to facilitate the execution of important projects of common European interest or to remedy a serious disturbance in the economy of a Member State.

The aim of the procedure started by the Commission is to clarify if the participation of the city of Amsterdam will contrast with the provisions of the EC Treaty or, on the contrary, it can be considered as an aid allowed by art 87.

In this respect, the Competition commissioner Neelie Kroes commented: “There would be no distortion of competition if the city of Amsterdam participates in this project like a private investor. However, at this stage, the Dutch authorities have not provided sufficient proof that this is the case. To ensure fair competition between all operators on the very competitive Dutch market, we have to look carefully into the conditions of this investment”

TABLE OF CONTENTS

Summary

1. Jurisprudence of State Aid in the Telecommunications sector

2. The Investigation Procedure

3. The Citynet Project

a) Description of the project

b) Participation of BBned in the project

c) Regulatory issues arising from the financial participation of the city of Amsterdam in the Citynet project

d) Possible implications for BBned

1. Jurisprudence of State Aid in the Telecommunications sector

Over the past years, the Commission issued a number of state aid decisions related to the promotion of broadband.

In particular cases, such as the intervention in rural and remote areas, the Commission considered the aid fully compatible with the Treaty.

In June 2005, the European Commission authorised a UK subsidy aimed at bridging the “digital divide” between different areas of Wales (IP/05/646).

The measure, co-financed by EU funds, would bring first generation broadband to underserved regions of Wales allowing citizens to exploit the benefits of broadband technologies.

One of the objectives of Broadband Wales Program, which feeds into the UK National Broadband Strategy, it to address the current gap in broadband service delivery between those communities which can currently get affordable access and those which cannot.

The Regional Innovative Broadband Support aims at correcting the “digital divide” by awarding a grant to a service provider, who will be selected via a tender, to extend first generation broadband coverage to underserved regions of Wales.

These so called “blackspot” areas are localities where broadband services are not available and that are not considered by current market players as commercially feasible in the future.

They include the thirty five telecommunications exchange areas not figuring on BT Group’s roll-out program, as well as communities that are disadvantaged for technological or topological reasons, e.g. they are located too far from an asymmetric digital subscriber line (ADSL)-enabled telecommunications exchange.

According to the Commission’s view, the aid granted is compatible with the EU Treaty rules which allow state aid to promote the economic development of certain economic areas (art 87, 3).

In addition, the Welsh authorities adopted a series of measures to ensure that the aid granted are kept to a minimum and do not distort competition to an extent which is contrary to the common interest (for example, the project does not favour a specific technology, enables open access for third parties and contains a rebate mechanism under which a progressive reimbursement of public funds is envisaged as demand picks up.)

In November 2004, the Commission approved public funding of broadband projects in France, Scotland and East Midlands (IP/04/1371); also in those cases the aids granted was considered compatible with EU rules.

As far as France is concerned, the Commission decided that, under certain conditions, the public co-funding for an open broadband infrastructure constitutes compensation for the provision of a Service of General Economic Interest and, for this reason, it can not be considered as a state aid.

The notified project aimed at enabling Telecom operators to provide broadband services on non-discriminatory basis, through the construction and exploitation of a public open access broadband communications network.

The building of the afore-mentioned infrastructure will be implemented thanks to a public service delegation in the form of a concession under French law.

Selected through an open tender procedure, the concession holder will act as a wholesale operator providing various wholesale services to operators but will not offer services to end users.

In order to stimulate competition, client operators will, inter alia, also be able to lease dark fibre from the wholesale provider.

According to the Commission, the region concerned consisted mainly of rural and remote areas.

As a consequence, the Commission qualified the access to broadband services for all citizens as a Service of General Economic Interest, absolutely in line with the provisions of art. 87 of the EC Treaty.

As regards the Scotland and East Midland projects, the Commission authorised, under EU state aid rules, the financing, by public authorities, of two projects aimed at developing the diffusion of broadband services in the United Kingdom.

Depending on the outcome of the public tenders and the availability of funding, the public authorities will provide financing to both projects, for instance up to 1.9 million pounds in the East Midlands.

Both projects involved the provision of end-to-end services beyond the mere provision of infrastructure enabling the access to these services.

According to the Commission, the above mentioned measures had the only purpose to develop and to foster the use of broadband services in remote and under-developed areas.

Besides, the UK authorities implemented a multitude of safeguards which ensuring that the aid amounts granted are minimized and do not distort competition to an extent which is contrary to the common interest.

Both UK projects are carried out through open tenders, foresee wholesale access provisions and do not favour a specific technology.

In April 2005, the European Commission, has considered compatible with art 87 of the EC Treaty, a Spanish subsidy scheme aimed at promoting investments in broadband communications in rural and undeveloped areas (IP/05/398).

The project, thank to the co-financing of EU funds, will improve the availability of access to high- speed communication services for people living in underserved regions of Spain.

According to the Commission, the aid granted was not likely to cause distortion of competition within Member States, being absolutely compatible with EC Treaty rules.

The Commission concluded that the subsidies provided had the only aim to develop the use of broadband services in geographically disadvantaged areas of Spain correcting, in this way, the “digital divide”.

In addition, the Spanish authorities implemented a number of safeguards to ensure that the aid amounts granted are kept to a minimum and do not distort competition to an extent which is contrary to the common interest.

For example, the scheme does not favour a specific technology, foresees that projects will be selected through open tenders and enables open access for third party providers.

More recently, on June 2006, the European Commission has authorised, under EC Treaty state aid rules a broadband initiative by the Latvian authorities (IP/ 06/775).

The Latvian project has been considered by the Commission, similar to the ones of Wales and Spain.

More particularly, the measure promotes, by means of direct grants, investment in broadband infrastructure capable of providing retail broadband services (at a minimum speed of 256kbps downstream - with a possibility to upgrade to 2Mbps - and at least 128kbps upstream) in rural and remote areas of Latvia that are currently not served by broadband providers.

The Latvian authorities expect that the development of broadband in rural and remote areas, which are currently characterised by low levels of economic activity, below-average per capita income and high unemployment will significantly improve the living conditions and contribute to the economic development of these disadvantaged areas.

The Latvian project will be co-financed by EU structural funds.

As shown in the first part of this work, in fact, EC Treaty state aid rules (Article 87(3)(c)) allow subsidies for the development of certain economic activities or of certain economic areas provided there is no overall negative effect on competition.

In other cases, the Commission adopted a more restrictive behaviour as for the state aid in the telecommunication sector.

In particular, we have to take into consideration the case related to the city of Appingeadam (IP/06/1013).

This was the first time that the Commission declared a subsidy for a broadband network incompatible with the state aid rules

In July 2006, the Commission prohibited under EC Treaty state aid rules, public funding for the construction of a fibre access network in the Dutch city of Appingeadam.

The municipality of Appingedam was interested in the building of a glass fibre access network (Fibre to the Home, FttH) in the Dutch town.

According to the municipality, both ESSENT, which is the second largest cable operator in the Netherlands, and the incumbent KNP, provide broadband access in Appingedam but they don’t guarantee “advanced broadband services”.

As a consequence, the municipality decided to invest in the project because market players were not willing to invest in the FTTH network in the Dutch city as the expected return on investment was not sufficient to justify the investment itself on market terms.

After local court action by ESSENT at the end of 2004, the Dutch authority (OPTA, independent regulator for post and electronic communications) notified the measure to the Commission in spring 2005 for approval under the state aid rules, through a formal complaint.

By letter dated 20 October 2005, the Commission informed the Dutch authorities that it had decided to initiate the formal investigation procedure laid down in Article 88 of the EC Treaty, to assess whether the public funding for the fibre access network complies with competition rules (Article 87 of the EC Treaty).

The investigation confirmed the presence of state aid as the terms of the investment envisaged by the municipality did not correspond to market conditions.

Afterwards, the Commission tried to analyse whether there could be an objective justification for the public funding.

It was found that in Appingedam various broadband offers were already provided over two existing networks (KPN and cable), at prices similar to those of other regions in The Netherlands, although the broadband services provided were not entirely comparable with the services which could be offered over the planned network.

The construction of an additional network with state funding would address neither a market failure nor a cohesion problem causing an important overlap of network coverage and services offered between existing networks and the envisaged measure.

According to the Commission, it was absolutely difficult to envisage any applications or services for citizens and business which could not be deployed using broadband services delivered over the existing network. The degree of substitutability between retail and wholesale services delivered over the envisaged FTTH network and the existing network was very high.

Hence, the potential distortion of competition by the measure was expected to remain very high.

As a consequence, as the measure does not fulfil the criteria provided by art 87 (3) of the EC Treaty, the Commission could not allow the Dutch authorities to subsidise this project.

Since the construction of the network had not yet started, no aid had to be recovered.

In this respect the Competition Commissioner Neelie Kroes commented: “Public support for broadband communications can bring benefits to citizens and businesses and improve economic competitiveness. The Commission has already approved several such schemes. However, on the basis of the information currently available, I am not convinced that the Appingedam project is either necessary or proportionate given the existing infrastructure for the delivery of broadband services.”

2. The Investigation Procedure

As already specified (please see point 1), any aid granted by a Member State or through State resources which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, is incompatible with the common market.

It is very important to take into consideration the procedure followed by the Commission as far as the granting of state aids is concerned.

Any plans to grant new aid must be notified to the Commission with sufficient notice time by the Member State concerned, which is required to provide all necessary information in order to enable the Commission to make a decision. Where the Commission considers that the information provided by the Member State is incomplete, it may request all necessary additional information.

Any notifiable aid must not be put into effect before the Commission has taken or is deemed to have taken a decision authorising it (standstill clause).

Where, after a preliminary examination, the Commission finds that the notified measure raises doubts as to its compatibility with the common market, it will decide to initiate formal investigation proceedings pursuant to Article 88(2) of the Treaty.

The decision will summarise the relevant issues of fact and law, include a preliminary assessment by the Commission of the proposed measure and set out the doubts as to its compatibility with the common market.

The Member State concerned and interested parties may submit comments within a period of one month, which may be extended by the Commission.

The formal investigation proceedings will be closed by means of a decision.

The Commission may find that:

• the notified measure does not constitute aid;

• the doubts as to the compatibility of the notified measure with the common market have been removed and the aid is compatible with the common market (positive decision).

• The Commission may attach to a positive decision conditions subject to which aid may be considered compatible and lay down obligations to enable compliance with the decision to be monitored (conditional decision);

• the notified measure is incompatible with the common market and may not be put into effect (negative decision).

If the Member State fails to comply with a conditional or negative decision, the Commission may refer the matter directly to the Court of Justice.

The Member State concerned may withdraw the notification before the Commission has taken a final decision.

It may also amend an aid that has already been notified and approved.

The Commission may revoke a decision where it was based on incorrect information.

Unlawful aid

Where the Commission has in its possession information from whatever source regarding possible unlawful aid, it will examine that information without delay.

It may request information from the Member State concerned.

The Commission may, after giving the Member State concerned the opportunity to submit its comments, adopt a decision requiring the Member State to suspend any unlawful aid (suspension injunction).

In the same way, the Commission may adopt a decision requiring the Member State provisionally to recover any unlawful aid until it has taken a decision on the compatibility of the aid with the common market (recovery injunction) if the following criteria are fulfilled:

• according to an established practice, there are no doubts about the aid character of the measure concerned, and

• there is an urgency to act,

• there is a serious risk of substantial and irreparable damage to a competitor.

The Commission may authorise the Member State to couple the refunding of the aid paid illegally with the payment of rescue aid to the firm concerned.

If the Member State fails to comply with any of the above-mentioned injunctions, the Commission is entitled to refer the matter to the Court of Justice and apply for a declaration that the failure to comply constitutes an infringement of the Treaty.

Where negative decisions are taken in cases of unlawful aid, the Commission will decide that the Member State concerned must take all necessary measures to recover the aid from the recipient (recovery decision).

The Commission would not require recovery of the aid if this were contrary to a general principle of Community law.

The powers of the Commission to recover aid will be subject to a limitation period of ten years.

The Commission may obtain all necessary information from the Member State concerned for the review, in cooperation with the Member State, of existing aid schemes pursuant to Article 88(1) (ex-Article 93(1)) of the Treaty.

Where it concludes that an existing aid scheme is not or is no longer compatible with the common market, it will issue a recommendation proposing appropriate measures to the Member State concerned. The recommendation may propose, in particular:

• substantive amendment of the aid scheme,

• introduction of procedural requirements,

• abolition of the aid scheme.

Any interested party may submit comments following a Commission decision to initiate the formal investigation procedure and may inform the Commission of any alleged unlawful aid and any alleged misuse of aid.

Where the Commission has serious doubts as to whether decisions not to raise objections, positive decisions or conditional decisions are being complied with, the Member State concerned must allow the Commission to undertake on-site monitoring visits.

The officials authorised by the Commission to check compliance will be empowered:

• to enter any premises and land of the undertaking concerned;

• to ask for oral explanations on the spot;

• to examine books and other business records and take or demand copies.

Officials authorised by the Member State in whose territory the monitoring visit is to be made may be present at the monitoring visit.

Member States must send the Commission annual reports on all existing aid schemes with regard to which no specific reporting obligations have been imposed by a Commission decision.

The Commission will be assisted by an Advisory Committee on State Aid, composed of the representatives of the Member States and chaired by the representative of the Commission.

The Committee must, among other things, be consulted before the Commission adopts any implementing provision concerning the form, content and other details of notifications, or annual reports.

3. The Citynet Project

A) Description of the project

In October 2006, the Dutch company Glasvezel Amsterdam CV (GNA) started the roll out of its FTTH (fibre to the home) network to about 40.000 addresses in Amsterdam within the broader fibre-to-the.-home (FTTH) project – potentially the largest in Europe- that aims to reach 420.000 homes and business by 2013 at cost of Euro 300m.

The fibre network will be run on open network principles, promoting services competition by giving any service providers fair and equal access to high-speed broadband infrastructure.

On 23 December 2005, the Amsterdam City Council voted unanimously on the deployment of the first phase of the Citynet project.

The network is structured in three separate layers:

• a passive fibre infrastructure from the central office to the hoe or business

• an active layer providing transparent, open access

• a group of broadband service and application providers contracting with end users to provide services

The shareholders of GNA are the commercial daughters of five Amsterdam housing corporations (1/3 of the shares), investors (ING Real Estate and Reggefiber, 1/3 of the shares), and the city of Amsterdam (1/3 of the shares).

B) Participation of BBned in the project

The building of the network has been granted to the BAM/DRAKA/VAN DEN BERG consortium and BBned, a subsidiary of Telecom Italia, which won the European selection on the investment.

The network of BBned is one of largest DSL-networks in the Netherlands with 85 percent coverage. It provides the open access layer basing its ROI model on a four-year period.

By keeping its cost base low - aided by automated provisioning systems -the company can work within a price model that compares favourably with competing ADSL and cable operators.

Currently, the cost to Dutch subscribers for a typical triple-play service is €50, or €42 excluding VAT.

The business model used in the CityNet project is aimed at dividing that available income by the three layers, with €14 going to the passive layer, €14 to the operator (BBned), and €14 to the service provider.

BBned is working with service providers that are looking to create attractive packages.

It is helping to kick start the market by offering service providers a two-year contract with the first year free.

Initially speeds of 100Mbit/s will be available.

Some providers plan to offer IPTV channels alongside analogue TV.

Others would compete on price, offering two years’ service for the price of one; others would compete on symmetrical bandwidth and offer 15Mbit/s packages for the same price as a 2Mbps DSL line. With 100Mbit/s available, a typical package for a residential user might comprise 30Mbit/s Internet access, a flat fee for voice, plus 50 channels of digital TV, including four High Definition TV channels, for around €40.

New services are beginning to emerge, such as plans to stream concerts and events from theatres and other venues in the city. There are also plans to stream, free of charge, the first 15 minutes of a play as a teaser, a means of enticing people to then book for a full theatre performance.

Bandwidth underpinned by service-level agreements (SLAs) will allow a range of services targeted at small and medium-sized enterprises, such as VPNs and applications including videoconferencing and IP-based video security.

C) Regulatory issues arising from the financial participation of Amsterdam to the Citynet project

Within different areas in the Netherlands (Appingedam, Amsterdam), a variety of FTTH networks have recently been developed thanks to public participation, even if they do not qualify as regions with underdeveloped infrastructure.

According to art. 87 of the EC Treaty, there are three options for public involvement in such regions:

1. to participate as a private investor (“market investor principle”)

2. to invest in the passive infrastructure and open access up to all interested private parties on non-discriminatory terms.

3. the local government should intend to deliver services as part of general economic interest.

In the case of Amsterdam Citynet, the ”market investor principle” (points 1 and 2) has been carefully followed.

The shareholders of GNA, in fact, have all invested under the same conditions in a profitable business with an acceptable risk/reward.

Citynet has structured the operation of its network using the so called “open-network” concept.

BBned, the wholesale operator selected to run the fibre network, was selected by competitive tender and the wholesale contract specifies that all service providers must be able to purchase transport capacity on non- discriminatory terms and conditions. In addition, other telecom operators can use Citynet’s fibre network to offer their own services.

By using the criterion of non-replicable assets, FTTH networks in local municipalities can be characterised as a new infrastructure which is aimed at providing new services which should be exempted fro ex ante regulation.

Consequently, to justify public investments in these networks in particular in “black areas” (areas characterised by high demand which support a competitive supply), their compatibility with article 87 should be guaranteed. [According to the regulatory framework in force, the access FTTH is not subjected to ex ante regulation. See also: B.M. SADOWSKI, M.DE ROOIJ , J. SMITS, Departement of Technology Management « State aid, open access and market size : two cases of fifth network implementation in Dutch municipalities », Working Paper 06 September 2006]

D) Possible implications for BBned

The Citynet project is currently under the scrutiny of the European Commission.

The Commission might decide that the project is compatible with the provisions of art 87; in that case the project would continue without prejudice to the parties involved.

Should the Commission conclude its investigation with a negative or conditional decision, the decision of the Commission would have consequences not only for the Member State involved but also for the other entities taking part in the Project, including BBned.

If the financial participation of Amsterdam were defined as an unlawful aid by the Commission, the city would have to comply with all the injunctions of the Commission itself, withdrawing its financial participation in the project to avoid a formal compliant before the Court of Justice.

As a consequence, the relevant entities involved in the Project should be obliged to refund the unlawful state aid already received.

4. Commission’s Conclusions

The European Commission approved the investment by the municipality of Amsterdam and other shareholders in a glass fibre telecommunications network in the Dutch city. After the in depth investigation launched in December 2006 the Commission concluded that the municipality participates in the project on the same terms as would a market investor.

Therefore the Commission has concluded that no state aid is involved.

Competition Commissioner Neelie Kroes commented: “Business activities of public authorities in the liberalised electronic communications sector have to be analysed carefully because of the potentially distortive effect of any state aid on the business of private operators, especially in metropolitan areas.

However, in this particular case, our investigation found that the municipality of Amsterdam invests on market terms and that several private parties make significant investments in the project."

According to the Commission ‘s point of view, the two private companies active in the sector, invested on equal terms with the municipality.

In particular, all investing parties would have to support any losses in the event of an underperforming business. The structure of the new company ensures that the private investors have significant stakes in the project in a setup where no single shareholder can exert sole control over the company. Together with the detailed analysis of the business plan, these elements provided sufficient evidence for the Commission to conclude that the investment is conform to the market economy investor principle and therefore does not involve state aid.