On 1 October 2009 the european Commission’s new guidelines for the application of the state aid rules to the rapid deployment of broadband networks (the guidelines) entered into force, following their publication in the Official Journal of the EU.
The guidelines set out the Commission’s policy approach to the assessment of state aid measures in support of both traditional broadband networks and next generation access (NGA) networks (ie super-fast broadband networks). Given the integral nature of broadband networks to the digital economy of Europe, it is unsurprising that the Commission describes broadband as being of ‘strategic importance’. The guidelines will be required reading for EU member states seeking an incentive for the rolling out of broadband to rural areas or to speed up the implementation of high-speed NGA networks.
State aid rules
Article 87(1) of the EC Treaty (the Treaty) prohibits the grant of aid by a member state or through state resources that distorts, or threatens to distort, competition by favouring certain undertakings or the production of certain goods. Although the state aid rules have been in operation for decades, they have been catapulted into the public consciousness in recent times as a result of the numerous and highly publicised bank bailouts that have involved the application of the rules.
Aid measures consist of a spectrum of state interventions, ranging from straightforward grants and interest free loans to guarantees and favourable taxation policies. The Treaty rules require member states to notify aid measures in advance and to seek clearance from the Commission. Measures falling within article 87(1) may be cleared where they meet the criteria in articles 87(2) or 87(3) EC. In the case of state aid for broadband, this is likely to be under article 87(3)(c), that permits aid:
‘… to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.’
For its part, the Commission has pursued an interventionist policy in relation to unlawful aid and can order the recipient to repay the aid where it has not been notified and cleared by the Commission in advance.
State aid for broadband projects
The guidelines note the Commission’s view that investment in broadband is an important part of the plans for recovery from the financial and economic crisis. Moreover, it is recognised that state intervention in the broadband field can help reduce the digital divide:
‘… that sets apart areas or regions within a country where affordable and competitive broadband services are on offer and areas where such services are not.’
However, allied with those aims, the Commission considers that aid measures must not crowd out market initiatives. The primary objective of the Commission’s policy in this area is to ensure that aid measures result in a higher level of broadband coverage and penetration than would occur without aid, and to ensure that any negative effects are outweighed by the positive effects of state intervention. As a result of this policy aim, the Commission considers that it has taken an ‘overwhelmingly favourable’ view towards state measures for broadband deployment in rural and underserved areas, whereas it has been critical of any state intervention in areas where broadband infrastructure and competition already exist.
Absence of State aid
The Commission highlights two situations in which there will be no state aid in the meaning of article 87(1) EC:
- Where the market economy investor principle is satisfied. This will be the case where the state participates by way of an equity participation or capital injection into a company in circumstances that correspond to normal market conditions. This is likely to be when private undertakings participate with the state on the same terms.
- Where the aid is provided by way of compensation for undertaking a service of general economic interest (in accordance with article 86(2) EC). The guidelines set out extensive criteria that must be met for this situation to arise.
Assessment of aid measures under Article 87(3)
If the state measure in question does constitute aid, the Commission will undertake an assessment to determine whether the measure can be deemed compatible with the common market. To do this, the Commission carries out a balancing exercise, weighing up the positive impact of the aid measure against its potential side effects (such as distortions of trade and competition). The guidelines note that the Commission will consider the objective of the measure and the design of the measure.
In terms of the objective of the measure, the Commission distinguishes between the following:
- ‘White areas’: these are areas where broadband is not currently available and where there are no plans by private investors to roll out such infrastructure in the next three years (eg rural and underserved areas). The Commission notes that it is likely to take a favourable view of such aid measures.
- ‘Grey areas’: these are areas where a single broadband operator is present. The Commission notes that these areas will require a more detailed assessment to determine whether there is justification for state intervention. This may be the case, for instance, if certain categories of users are excluded or if retail prices are unaffordable.
- ‘Black areas’: these are areas where at least two broadband network providers are present and broadband services are provided under competitive conditions. The Commission considers that such areas do not require state intervention.
In terms of the design of the measure, the Commission notes that, in its assessment of interventions in ‘white’ and ‘grey’ areas, the lack of the following conditions would necessitate an in-depth examination that would be likely to lead to a negative conclusion on the compatibility of the aid:
- a detailed mapping and coverage analysis;
- an open tender process;
- the acceptance of the most economically advantageous offer;
- technological neutrality;
- encouraging the use of existing infrastructure;
- mandating effective third-party access to any subsidised infrastructure;
- benchmarking of wholesale prices to other competitive areas; and
- use of a claw-back mechanism to avoid overcompensation.
State aid for NGA broadband networks
The guidelines adopt a similar framework for the assessment of the compatibility of state aid measures for the roll out of NGA networks for broadband provision. Unlike the roll out of conventional broadband infrastructure, where state intervention has focussed on rural areas, state intervention for NGA networks may legitimately be focussed on urban areas where the market will not provide a solution.
The guidelines adopt the same ‘white’, ‘grey’, ‘black’ list approach for NGA networks, focussing on the existing operators in the market and the extent to which development plans are in the pipeline for private operators.
Comment
Competition Commissioner, Neelie Kroes, has gone on record noting that the Commission expects to see up to €300m of investment in high and very high-speed broadband across Europe in the coming decade. In the UK the government’s recent Digital Britain Report proposed a universal service commitment for conventional broadband by 2012 to ensure that underserved areas gain access to the technology. This is to be funded by a mixture of direct public funding and private sector involvement. In terms of NGA broadband networks, the government has proposed establishing a next generation fund based on a levy of 50p per month to consumers on all fixed copper lines. The fund will be available to private enterprises on a tender basis to ensure NGA broadband networks are rolled out where the market would not do so.
In light of these developments, the guidelines represent a timely and helpful statement of the Commission’s policy towards state intervention in the broadband field.
By Niamh Grogan, partner, and Neil Davies, associate, SJ Berwin LLP.
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