Public Investment in Broadband – a Balancing Act

by John de Ridder
Last year, we discussed how North Carolina and Tennessee were putting a stop to public broadband investment competing with private investment^[i]. Meanwhile at the other extreme, the Australian Government is making a massive public investment in a national fiber access network (the NBN). SNG’s new white paper, EU Guidelines for Public Investment in Broadband, reviews the rules proposed in Europe (EU)^[ii] for a more sensible division of roles between private and public investment in broadband.

Tennessee is one of 19 states in the USA that have adopted legislation restricting municipal development of broadband networks. In spite of the tremendous service provided, legislation allowing the publicly-owned Electric Power Board (EPB) to offer broadband services outside of its electricity distribution footprint was aborted.

The urge to curb unfair competition from public enterprises and prevent crowding-out private investment is understandable. But blanket prohibitions on public sector investment ignore the benefits of public entities being able to address market failure, which of course leads to missed opportunities for economic development.

At the other extreme, Australia has gone over the top, not only crowding out private investment but also forcing existing private cable networks to be closed at the expense of infrastructure competition.

When is public investment good?

There are two arguments for public funding:

• Market Failure – When markets without public intervention fail to deliver an outcome that would yield the highest possible welfare for society. For example, socially profitable investments are not undertaken because some benefits cannot be taken into account in a private business case (externalities), and/or

• Equity – When Governments choose to intervene to correct social or regional inequalities generated by a market outcome. For example, lack of investment in a region with limited market demand and/or high costs is not an indication of a market failure if it there are insufficient public benefits, but Governments may want to see investment take place anyway for social reasons (e.g. bridging the digital divide).

But to be a “good” public investment, government must not only make a case in market failure and/or equity but also it must implement the policy with least distortion to market mechanisms. In this context, the new EU state aid rules say that Member States may invest only if a number of conditions are met (see our white paper on how EPB and the NBN stack-up against these conditions).

Where is public investment bad?

Assuming that the case for a good public investment has been made, it may not apply to all parts of the network or every region.The EU stops public investment crowding out private investment by defining “go” areas and “no-go” areas:

Go areas have no broadband infrastructure now or in the near future (3 years).

No-Go areas have at least two basic broadband network providers (facilities-based; not sharing one copper network), so it can be assumed that there is no market failure.

Of course, there are also contentious grey areas, which apply to our EPB and NBN examples.

Grey areas are those in which one network operator is present and another network is unlikely to be developed in the near future. A single operator may provide a suboptimal combination of service quality and prices.

A fine balance

In George Orwell’s book « Animal Farm, » the pigs led a rebellion to the chant of « 4 legs good, 2 legs bad » – which might be echoed in « private investment good, public investment bad. » When the pigs ruled the farm and learned to stand on two feet, the rule became « 2 legs good, four legs bad » – but when you read the book, you see that this wrong too. The market mechanism (private investment) is preferred. But there will always be a need for public investment (either direct or by subsidy) where socially desirable investment cannot be justified by a private business case (including the grey areas). The issue then is how to identify when and where public investment is appropriate. To get the balance right, both the US and Australia would benefit from studying EU guidelines on state aid for broadband networks.

Click here to read the white paper >>

^[i] Public versus Private Investment in Broadband, May 31, 2011. Published in Bandwidth www.sngroup.com/public-versus-private-investment-in-broadband