Business models for ducts in Sweden - summary of conclusions and recommendations The assignment from the Government and the benefits of ducting The point of departure for the Swedish Government's broadband strategy is that investments in ICT and broadband are positive for society as a whole and that broadband will increase the competitiveness of enterprises, the knowledge among the population and the level of service offered to citizens. Broadband availability furthers regional development and contributes to sustainable growth across the country. More fiber optic lines are needed in order to meet the objectives of the broadband strategy. This requires ducting, the most basic form of broadband infrastructure. Ducting is expensive, but costs can be reduced significantly by better co-location. With this report, PTS concludes its Government assignment of May 2011 regarding the examination of business conditions for ducting. According to the assignment, the final report should identify existing or potential business models with a focus on co-location between utilities and telecommunications providers, and suggest appropriate activities to enable those models. Where wired broadband would not be established on commercial grounds, every kilometer of new ducting enables the connection of around 30 potential new users. Additionally, cellular base stations can gradually be located closer and closer to end users, and competition on the basic infrastructure level can be enhanced. Although the need for ducting primarily concerns areas outside major urban districts, residential areas are still often white spaces on the broadband map. In those cases, the need for ducting varies from one area to another. Supply, demand and factors affecting business opportunities Nothing like a functioning marketplace for buying and selling broadband ducts exists today. Where so-called dark fiber is available it is primarily this wholesale product that is demanded. However, the number of deals involving ducting in general, and co-location with electricity grids in particular, could be increased. There is an unrealised potential in broadband ducting transactions that could contribute significantly to meeting the Government's broadband goals. To what extent this will happen depends on many factors. Major obstacles to ducting transactions include - Different planning horizons between energy and telecommunications providers; - Different views on the responsibilities and cost distribution of co-location; - Questions about risk and payback on investment; - Lack of information on plans; - Other transaction costs including in the technical field; - Right to compensation for land, ande related questions concerning the legal framework. Energy companies and companies that supply broadband nevertheless share a common interest in reducing the costs of infrastructure, through co-location (when digging) and by using overhead lines. Local authorities have different approaches to the coordination of excavation activities and to making available ducting for broadband. About 60 - 80 percent of the total cost of establishing optic fiber networks can be attributed to digging. By coordinating excavation activities, by co-location between energy and broadband, and where possible through sharing existing ducts, the cost of broadband can be significantly reduced. Business solutions for broadband ducting The following possible business solutions can facilitate increased co-location, use of overhead lines, and sharing of ducts. The solutions highlight the business opportunities with broadband ducting, investment incentives and opportunities to reduce transaction costs for co-location, the use of overhead lines, and duct sharing. 1. An "Infrastructure Clearinghouse" ("ICH") model means that the ICH entity initially pays for co-location of empty ducts for broadband when other infrastructure is laid down. The party laying down the infrastructure is reimbursed for the additional cost of the ducts at the time of construction. When or if an operator uses the duct for laying optic fiber, the operator pays a portion of the price to the ICH and a further portion to the party which originally built the infrastructure (thus enabling the latter to make a profit on the project). The model implies that only the ICH is taking a commercial risk in the individual case. In the longer term, the ICH can expect to make a profit on the aggregate business, although it will make losses on any ducts that will not be used by an operator. The model can be commercially viable over the longer term even with a relatively small number of transactions, and could provide opportunities for more than 600,000 new broadband users in Swedish rural areas. 2. ”Air Ducts” is a solution that involves the use of overhead lines in the so-called mediumvoltage power grid. It has become more clear which lines in the medium-voltage power grid which will remain as overhead lines for the foreseeable future, making it more interesting to locate ”air ducts” for broadband on those lines. In these cases, the placing can be done retrospectively, ie. suspension of fiber cables in the existing power lines. There is an untapped potential of up to about 35 000 km overhead line that could be used for air ducts. The medium voltage system (in-ground and air) covers almost 100 percent of all buildings in Sweden within a radius of less than 500 m. 3. Commercial renting on neutral terms. This is a market-driven solution for access to basic communications infrastructure. An investment fund makes long-term investments in communications infrastructure such as ducts. These are investments in fixed assets with predictable cash flows and high barriers to entry, and not in telecom operators. The model implies that communications infrastructure is rented out by an independent infrastructure company to all on non-discriminatory terms. The long investment horizon corresponds to a relatively safe, but low-return business case. 4. Commercial platform for coordination and management of excavation activities, etc. There are examples of companies that specialize in developing and selling services related to the management and monitoring of excavation and trenching. Different solutions are provided, such as a customer portal for the recording and monitoring of applications and notifications of excavation on publicly owned land, a customer portal for recording and monitoring of cabling, and a citizen’s portal that provides an overview of all excavation activities in a given area and other relevant information. A similar business model may be possible in Sweden. 5. Existing IT platforms are developed further. Today, Ledningskollen, run by the PTS, and CESAR run by the Swedish Urban Network Association (SSNf) exist. These are not purely speaking marketplaces for ducting, but could in different ways be used to convey information and facilitate transactions. Today, Ledningskollen is used mainly to avoid digging off cables by providing information about the location of those cables. The system’s functionality does, however, provide for more types of services. Ledningskollen can be developed to identify colocation possibilities for ducting. CESAR’s business has recently taken off. Work is also underway to develop that platform further. The solutions do not necessarily preclude each other, but rather to varying degrees focus on - risk; - investment horizon, and - transaction costs. Overall, the solutions address core problems associated with these concepts. The business solutions can interact with each other through a number of combinations, such as by ICH using Ledningskollen or a commercial IT platform to identify and carry out transactions. ”Air ducting” could be identified by an improved version of Ledningskollen, and re-sold or brokered by the ICH, and a commercial lessor of ducting could use Ledningskollen or the ICH to identify and transact business. What should the government do? Municipalities and the state alike need to create conditions for business with ducts. Municipalities In order to achieve the Government's broadband goals it is very important for municipalities to develop and implement their own broadband strategies. This will help the efficient use and development of the necessary broadband infrastructure within the municipality. Local authorities should as far as possible ensure that their ducting - in terms of energy and broadband - can be used by i.a. telecommunications carriers. Both as landowner and network owner the municipality should be neutral and work towards making ducting available. Access should be given on reasonable and non-discriminatory terms. Municipalities have the opportunity to mandate coordination and co-location when someone intends to invest in infrastructure. Municipalities can also look at various other ways to contribute to coordination and the dissemination of information. Also at the regional level, possibilities for joint investment, coordination and co-location could improve (see below regarding counties). Municipalities can support local community groups in their work in several ways, including through public information and support on planning and land access issues, management and transfer of the network. They can provide help in aggregating demand from village communities by managing contacts with the authorities and the regional government. Municipalities can also ensure access to available resources such as ducting, thereby reducing the cost of establishing the network. Municipalities can finally take local community groups’ interests into account when new infrastructure investments are to be made. The State Preconditions for an Infrastructure Clearinghouse – including organisation, funding, criteria for individual investments in ducts, and the ICH’s brokerage role - should be further investigated. Possible ways of funding include private equity, special EU co-financing, and existing forms of financial support (support under the EU’s rural development program, and the so-called ducting regulation). If considered appropriate, it can be achieved within the framework of a public-private partnership. The Government’s Broadband Forum has proposed a special government inquiry into land issues related to broadband deployment, and possible efficiency improvements. PTS supports that such an investigation is made and recommends that issues related to both energy and electronic communications networks are included within its scope. The Swedish Transport Administration should be asked to contribute to ducting for broadband being laid when infrastructure is built or rebuilt. It should also make available existing duct space to third parties. Furthermore, the Transport Administration should make use of Ledningskollen. It should also be ensured that the Transport Administration and other government bodies interact with the ICH if or when such a model is put into operation. The County Administrative Board has an important role to take at the regional level by contributing to coordination among local players. It can support them through strategy, planning, procurement support and coordination efforts. The County Administrative Boards should be instructed to develop guidelines and planning for broadband investments that municipalities can use in their work. A collaboration between counties should help comparability by coordinating work in a similar way throughout the country. PTS can play an important role in the process of development and implementation of municipal broadband strategies by sharing tools and knowledge. The Authority is considering a pilot project with a county and 4-5 municipalities to improve skills – regarding ducting and other related broadband deployment issues – at the regional level, and in order to identify success factors for how to work in a county in order to get closer to the Government's broadband target. The above project should include development and evaluation of Ledningskollen for the coordination of ducting projects. Such a development - including testing and evaluation - should in any case take place through a pilot study of a future ducting coordination platform. Financial support provided for in the ducting regulation may be given both for the excavation of ducts and for the suspension of cables in overhead power lines, so-called airborne ducting. Information efforts of the PTS and the responsible County Administrative Board (Örebro) should include the fact that aid also can be granted for airborne ducting. It should be examined whether the regulation should be amended so that aid is made conditional on reserving duct space for any additional third parties. The Government’s Broadband Forum has addressed a number of aspects which are within the scope of this report, and has made several suggestions as to how problems around ducting should be dealt with. Solution proposals include financial compensation for coordination, with the possible inclusion of mandatory extra ducting, development of Ledningskollen, regional coordination, municipal broadband strategies, and land access issues. PTS supports continuing with these issues in the way that the Government’s Broadband Forum suggests.