Most agree that broadband is necessary for the Middle East and North Africa (MENA) region to achieve its potential. Examining how European institutions facilitated broadband during the last decade offers several important lessons and can guide officials in MENA through this important transition.
Few regions exemplify the importance of wide-ranging and affordable connectivity more than the Middle East and North Africa (MENA). In 2010, only 21 percent of combined households in the Southern Mediterranean countries (Algeria, Egypt, the economies of Gaza and West Bank, Jordan, Lebanon, Morocco, Syria, and Tunisia) had subscribed to mobile or fixed broadband connections. Reasons for the region’s low numbers include high prices resulting from a lack of competition; burdensome regulatory frameworks; vast areas with low population density; and gaps in infrastructure. The national backbone–meaning the interconnections among the different sub-networks–was also often substandard.
The World Bank estimates that throughout MENA, a 10 percent increase in broadband subscriptions would lead to 1.4 percent growth in GDP and a 4.3 percent increase in exports. One job created in building a network would create three additional jobs in the economy. This is crucial in a region characterized by high unemployment rates, particularly among its youth, women, and university graduates.
Urbanization and youth are uniquely favorable demographics for broadband take-up. The world has already seen that widespread use of social media and cross-border communication have been powerful enablers of social transformation. Increased access to ICT has also driven new business ventures.
Nonetheless, broadband penetration in the region remains low, and varies significantly among countries. In 2013, 10 percent of the Lebanese population had a fixed broadband subscription, while in Egypt, home of the most prominently tweeted, blogged, and texted social movement, the share is only 3.3 percent. According to a recent study by the European Investment Bank (EIB), €11 billion in investments is needed to ensure that by 2020 all Southern Mediterranean country citizens have access to broadband connections of at least 10 megabits per second (Mbps), with at least 50 percent being able to access the Internet at up to 30 Mbps.
Show MENA the money
Where will those investments come from? High-speed broadband network and New Generation Access (NGA) connections can be a very profitable business. With high take-up potential and often already existing infrastructure, the densely populated coastal areas and cities in the region are an attractive investment for private communication enterprises. In sparsely populated and distant peri-urban and rural areas, however, the rollout of broadband networks is less profitable. While the public sector will pick up a significant part of these needed investments, many governments in the region are constrained by the twin demands of limiting public expenditure and meeting an increasing number of competing demands placed on the public purse.
Public-private partnerships (PPPs) can help establish universal broadband access. In addition to being an alternative method of financing, PPPs in the broadband sector enable the public sector to access private sector expertise and technology, engendering valuable knowledge transfers. PPPs also provide the public sector with the ability to transfer risk and accelerate the rollout of the necessary infrastructure.
But PPPs are far from being a panacea for the many challenges of providing broadband access to a growing and increasingly more demanding population. A crucial determinant of a PPP’s feasibility is whether predicted demand will render the project profitable. In the Southern Mediterranean region, the potential for take-up is significant–from the private as well as the public sector. In Morocco, for instance, a new health decree will introduce online e-health services as a way to improve health care.
To understand PPPs’ potential benefits in MENA, it’s helpful to look at Europe’s experience.
Broadband PPPs in Europe
The financial crisis of 2008 exposed severe structural weaknesses in Europe’s economy, such as lagging productivity and a lack of social cohesion. Recognizing the Internet’s pivotal role in tackling these issues, the European Commission launched its Digital Agenda in 2010, setting out an ambitious NGA program that aims for all European citizens to enjoy affordable connections at 30 Mbps and for 50 percent of households to be able to access the Internet at 100 Mbps by 2020. At the time the NGA was launched, only 6.5 percent of fixed broadband lines in the EU provided surfing of up to 30 Mbps and only 1 percent of the population was surfing at up to 100 Mbps.
Public financial institutions have been instrumental in closing the gap. The European Investment Bank, for instance, has extensive experience in financing broadband projects, bringing its know-how and capacity to bear on deals. Projects have typically been supported through lending, grants, or through blending debt finance with EU grants. Europe’s rural and peri-urban areas have benefited particularly from EU funding, including bringing broadband to remote regions of Scotland, rural Poland, and economically disenfranchised areas of Italy. In France, the EIB provided a €72 million loan to finance a publicly-owned, privately operated ultra-fast broadband network in the region of Haute-Savoie. A similar project was carried out in the Polish region of Świętokrzyskie.
In 2012, the European PPP Expertise Centre (EPEC) examined a number of these projects to try to determine which PPP models are better suited to the sector, and when PPPs are most appropriate. The study found four prevalent PPP archetypes in Europe’s broadband sector. These models represent a range of options for combining public and private investment, and offer differing levels of involvement, commitment, and retained risk by the public sector. Each model is applicable in different circumstances, depending on the scope of the required infrastructure, the specific aims of the public sector, and the investment/risk appetite of potential private sector partners.
In each of the PPP models and corresponding examples described, the project varies in the level of risk transfer and financial contribution from the private sector. These European examples highlight points that may be useful as MENA plans its broadband strategy:
PPPs offer benefits in addition to financing PPPs encourage innovative approaches.
They are also able to address the issue of migrating customers from slower, copper-based infrastructure. PPPs will help to ensure that networks are accessible and price levels remain competitive and fair. As the demand for access to digital data continues to increase exponentially, the increase in access speeds will be very welcome. Less populated and remoter parts of the MENA region should not have to face a “digital divide.” The PPP models discussed in this article suggest that solutions that can prevent this.
NGA PPP contracts pose different challenges than PPPs in other sectors
It is much easier to predict demand and forecast growth for services in a mature sector, such as transport. Broadband is a new service, and it is difficult to predict the current demand and future growth. The broadband value chain is more complex and involves setting up retail and application providers. It also carries a significant technology risk because the broadband technology chosen could be threatened by other technologies during the lifetime of the project. Attitudes to PPPs also vary by country, depending on prior experience in using the mechanism and the market’s appetite for risk.
Taking a long-term view on funding and planning
To attract the level of investment required to achieve universal broadband access in the MENA region, significant private sector investment will be crucial. Broadband PPP projects are most likely to be attractive to investors, such as pension funds, which are looking for low but steady annual return over a long period from a business with a steady cash flow. The speed of network rollout once the funds and contractors are in place depends on the size and complexity of the project.
There is no “best” model for a PPP in the broadband sector
The correct model needs to be assessed case by case, taking into account the scale and scope of the project, availability of existing infrastructure, and level of competition. However, the following should be ensured:
- The PPP model should maximize to the extent possible the use of existing infrastructure.
- The PPP model should maximize the use of private sector investment.
- The PPP model should maximize the competition–through, for instance, a wholesale-only obligation.
- The PPP model should not lead to over-subsidization of the private sector while the risk is taken by the public sector.
A favorable political, regulatory, and institutional environment is crucial for the success of broadband PPPs
A necessary condition for the successful implementation of broadband PPPs in the Southern Mediterranean countries is creating a favorable regulatory and institutional environment. A number of challenges exist in the regulation of NGA Internet access. These include the need to promote competition–for example, by ensuring consistent application of costing methodologies and pricing principles across different wholesale products and safeguarding access to broadband infrastructure for companies without physical assets.
PPP projects need to provide an environment that encourages potentially competing providers to become wholesale customers of the PPP-developed network, and discourage the establishment of alternative infrastructure or a separate network. This means that the network must be open and flexible to enable innovation by service providers at price levels that are competitive and fair.
There also needs to be a high level of certainty that customers will migrate to the new network. The threat from the copper network can be mitigated by incorporating the closure of the existing copper infrastructure as part of the PPP project. This requires the PPP to ensure that regulatory conditions supporting existing services are met, and the participation of the incumbent operator is needed.
Most of the countries in the Southern Mediterranean region have civil law jurisdictions that rely on written laws. PPPs here are more likely to be successful when they are governed by specific laws and regulations, thereby increasing investor confidence and creating an investment-friendly environment. Currently, the only country in the region with a specific PPP law is Egypt. Similar PPP laws are awaiting adoption by the Tunisian and Moroccan governments.
Turning to MENA
Despite the promise of PPPs for MENA, the number of PPPs reaching financial close is substantially lower than in other developing regions. This is due to two key challenges in the implementation of PPP programs in the region: the identification of projects that are suitable for PPP procurement, and the high costs and complexity of preparing them.
To address this, international financial institutions have deployed several initiatives and advisory facilities that use the European experience as a guide. For example, the EU PPP Project Preparation Facility for the Southern Neigbourhood (MED 5P), funded by the European Commission and led by the EIB, supports projects at different stages of maturity.
The transition to broadband in MENA will transform its people and its economic potential, as in every other region that has leaped the digital divide. But although the promises are similar, the challenges don’t have to be. By learning from the European experience, MENA can prepare itself for success that will benefit people both inside and outside its borders.