A “European” co-investment to develop fibre in Italy

This past year, so complex and devastating for the economic system of many countries, has highlighted how much the resilience of a country depends on the degree of development of its digital infrastructure. A country with state-of-the-art and well-developed networks has been able to ensure greater continuity in the activities of businesses, in land management, in school and university education and, therefore, in the management of everyday life. Where such infrastructures are still poorly developed, this has not always been possible, exacerbating the – sometimes even more serious – problems of inequality between areas and between people.

The need therefore arises for each country to equip itself with increasingly future-proof infrastructures and, therefore, communication networks that allow ultra-fast connections at very high capacity.

On this aspect, Italy has not excelled: in the last report of the European Commission (2020 DESI Report), Italy recorded a coverage of ultra-high-capacity networks significantly lower than the European average (30% vs. 44%).The last two years, however, have marked a change of pace, with an acceleration in investments in ultra-fast networks, both by TIM – the national incumbent operator – and by Open Fiber, an operator created in 2017 as a wholesale-only company, i.e. specialised only in the implementation phase of such infrastructures.

There is no doubt that investment in these ultra-fast networks is a positive factor for a country’s economy: several studies show that these investments generate a positive effect on economic growth. On other economic dimensions, such as employment, education or business growth, the results are less clear-cut but significant. For example, there is no doubt that ultra-fast networks boost businesses’ growth and productivity, but they also make markets larger and increase the risk of exit for those who cannot cope with the increased competitive pressure.

In this context, any public policy intervention or private choice to strengthen the digital infrastructure of a country that is still far from adequate coverage, such as Italy, is extremely important and to be welcomed.

To encourage the deployment of ultra-fast fibre connections across Europe, in 2018 the European Union adopted a new regulatory framework, the new European Electronic Communications Code (EECC), with measures aimed at providing market players with strong investment incentives. To stimulate investment while preserving a competitive environment, the EECC includes the possibility for a telephone operator to share the burden of investment in ultra-fast networks with other operators, i.e. agreements to “co-invest” in the deployment of new high-speed broadband infrastructure can be set up.

Co-investment opportunities by operators have recently become an important topic of discussion in the European debate. Co-investment is seen as a solution to the financial constraints faced by companies and to the asymmetric risk allocation between incumbents and entrants, risks which have always slowed down the launch of new fibre infrastructure. In addition, these agreements are designed to accelerate the transition from the old copper technology to the new fibre networks and, depending on their type, guarantee the maintenance of a form of infrastructure competition that is fundamental for the evolution of the market.

In this regard, today’s news saw the formalisation of a Co-Investment Agreement between TIM, the investment company KKR and Fastweb, to create a company called FiberCop, which will in turn incorporate Flash Fiber, already jointly controlled by TIM and Fastweb. The co-investment is open to all other operators which wish to join.

TIM will transfer to FiberCop substantially all assets, liabilities and agreements comprising its access network (i.e. the section of the network from street cabinets to buildings, including verticals, both in copper and in fibre), together with its 80% stake in Flash Fiber. Simultaneously with the creation of the company, Fastweb will contribute its entire 20% share in Flash Fiber in exchange for a 4.5% stake in FiberCop. The rest of the company will be controlled by the financial company KKR through its subsidiary Teemo Bidco S.a.r.l. The operator Tiscali has also decided to participate in the project as a co-investor in specific areas of the country. The objective of this agreement is to achieve fibre coverage (with FTTH technology) in 56% of Italian households (76% if we consider only the grey and black areas) distributed in 1,610 municipalities by 2025.

The economic literature on the matter highlights how these Co-Investment Agreements can lead to a faster coverage of the country with ultra-fast networks and, therefore, a faster migration from traditional copper to fibre networks. This, without necessarily reducing the competitive pressure at retail level on new ultra-wideband connection services. It follows that promoting forms of co-investment in the new fibre networks can lead to achieving the objective of increasing coverage and take-up of ultra-fast connections and favouring the consolidation of infrastructure competition.

This FiberCop project for Italy is therefore to be welcomed, as are all similar projects in Europe. Wherever applied, Co-Investment Agreements have led to an increase in FTTH network coverage and increased the level of retail competition between operators. In Spain, there have been as many as 6 different Co-Investment Agreements between companies from 2012 to 2020, and Spain is now one of the countries with the most fibre network coverage in Europe. In France, for example, there is empirical evidence showing that not only have these agreements increased fibre coverage in the country, but they have also led to increased competitive pressure between companies with a reduction in the incumbent’s market share. In Portugal, there have been 5 such agreements and they have led to a good level of coverage in the country, with Co-Investment Agreements and wholesale-only operators operating in specific areas of the country.

FiberCop is an open agreement, as expressly provided for in Article 76 of the New Code, and therefore could potentially be extended to include additional operators. This implies that anyone can apply to join the agreement and indicate in which areas of the country they prefer to co-invest. The only constraint is that the agreement must have a municipal dimension.

The new European code also provides guidelines for the economic conditions for using the future network. These conditions for access to the infrastructure built by the special purpose vehicle FiberCop are the same for all co-investors, thus ensuring equal treatment for each participant in the agreement.  There are also minimum capacity purchase clauses which allow the risks and burdens of the investment to be shared between the partners, thus reducing the overall risk for each individual investor. There are also differentiated conditions for operators which decide to enter the agreement at a later stage, with different conditions to take account of the different “risk” borne by the first subscribers to the agreement. Finally, there are also conditions of access to the infrastructure for alternative operators which are not investors on commercial and, therefore, negotiated terms. The agreement, as provided for by the Code, will be subject to a market test by the sectoral regulatory authority, AGCOM, which will assess the sustainability of the economic conditions of use of the new infrastructure and its impact on the competitiveness of the sector. Following this test, the agreement will become operational.

The hope is that such an agreement, the first of its kind in Italy, will effectively speed up fibre coverage in our country, which is a basic precondition for the further development of all the applications that can be used on this network, not only for citizens but also for businesses in our country.

Carlo Cambini is Professor of Applied Economics at the Turin Polytechnic. His work focuses on the functioning of communications and digital markets.