Summary: Broadband connection is arguably becoming one of the UK’s most important ‘utilities’. Most of our daily activities occur on-line, be it updating our social media, steaming live television or running a business. We expect our internet connection to be instant. The question remains whether ultra-fast fibre has the ability to become a solid investment option in the way that traditional infrastructure has. What are the risks? What are the rewards?

BLP recently hosted an IPFA panel discussion that brought together representatives of the telecoms market including funders, infrastructure providers and advisors to explore:

  • where the UK sits globally in terms of broadband connectivity;
  • whether digital broadband infrastructure is, or will be, viewed as an attractive investment opportunity for large UK and overseas institutional investors; and
  • the key risks in investing in broadband infrastructure.

Where does the UK sit in terms of broadband connectivity?

During the panel discussion we heard from Matt Yardley, a Partner at the TMT specialist consultancy firm, Analysys Mason. He believes that despite the UK ranking as one of the lowest OCED nations in terms of ultra-fast fibre connection, the future for investment is positive. The reasons the UK has fallen behind are mainly structural - Ofcom’s policy has historically focussed on allowing service provider’s rights of access to incumbent operator’s networks, which allows other internet service providers to use other operators’ infrastructure. As a result, there has been little incentive for innovation and for large service providers to invest in new fibre networks.

However, both the Government and Ofcom have now recognised this and have attempted to address these issues. Ofcom has adopted a new policy to reduce the UK’s dependency on Openreach and to achieve full competition between three or more networks. Similarly the Government has pledged to cut business rates on businesses implementing fibre infrastructure, as well as safe guarding £400m for a Digital Infrastructure Investment Fund.

Can broadband infrastructure be viewed as an attractive investment opportunity for large UK and overseas investors? What are the risks?

Notwithstanding both the Government’s and Ofcom’s efforts, as mentioned above, the point remains that fundamental project finance risks are the same. Whether looking to finance a road or a fibre network, investors want a reliable revenue stream, high-demand/low-supply, high yield and a long-term future proofed asset.

During the panel discussion we heard from Mark Collins, co-founder of ‘CityFibre’,an alternative digital infrastructure provider which operates as a pure open access wholesale platform, i.e. a competitor to Openreach. CityFibre’s business model operates on a long-term basis, the cables are expected to last for over 50 years and it is unlikely that new technology will render these fibres redundant. The service providers pay a rent to use the network; in some cases, CityFibre has been able to gain committed revenue streams prior to works commencing on networks through local authority contracts. Being a ‘first-mover’ creates competitive advantage given there are limited returns in overbuilding (i.e. building an alternative fibre network in an area already served by a fibre network).

Key Risks:

  • An over active and unpredictable regulator, such as Ofcom.
  • Guaranteed revenue streams, particularly in relation to consumer contracts.

Key Rewards:

  • First-mover opportunities – there is considerable space in the market and a clear advantage to those who make the first move.
  • Broadband is considered a necessity – the new utility.
  • Fibre cables are ‘future-proof’ – their expected lifespan ranges from 50-100 years.

Final thoughts

The fact that the UK’s broadband network is made up from less than 3% fibre demonstrates that there is significant capacity for further infrastructure providers such as CityFibre to join the market. A further positive sign for the future is that as usage and expectations increase, consumers are realising the value and are willing to pay more for a better broadband service. It seems that broadband can offer the kind of return that investors expect from a traditional infrastructure asset. That said, investors should always be wary of an active and often unpredictable regulator such as Ofcom.