Implementation of the Polar Connect submarine internet cable
Implementation of the Polar Connect submarine internet cable
European policymakers are increasingly convinced of Arctic digital connectivity's economic and social benefits linking Europe to its East Asian trade partners.
Consistent with this emerging policy support, the European Commission has granted funding to the Northern EU Gateways project. Within this framework, the Polar Connect initiative, led by NORDUnet, is being supported. This initiative investigates shorter route options for submarine internet cables through the Arctic Ocean.
Against this backdrop, NORDUnet asked Copenhagen Economics to assess public financing design options and regulatory implications that need to be considered to make Polar Connect a reality and the key aspects of the question: “how to”.
THE MAIN CONCLUSIONS OF OUR STUDY
Public intervention has the potential to unlock the underinvestment problem for Polar Connect.
Polar Connect is set to be implemented in a market characterised by growing demand for connectivity and a variety of stakeholders.
Several business models are available for submarine cable projects.
We find that there are three distinct financing and ownership models available in the submarine cable industry:
– The single (private) investor model, where a single owner is responsible for financing the cable and for any risks associated with it;
– The consortium model, where multiple industry players collaborate to build a cable, pooling resources and sharing the risks;
– The special purpose vehicle model, where multiple industry players come together and form an entity with a distinct legal status to finance and manage the cable.
We identified 13 business functions that submarine cable project developers must perform and execute along the life cycle of the cable. These business functions include but are not limited to, securing long-term anchor tenants, engaging with system suppliers and performing financial planning. We find that there exist three main options for selling capacity, namely through i) capacity leases; ii) fibre pair ownership sales; or iii) sales of a portion of spectrum of a fibre pair (spectrum sharing) solutions. We identified three possible (non-exclusive) archetypes of routes to implement a public funding model for Polar Connect:
The Anchor Tenant Model, where the public sector provides funding to a publicly-owned and accountable entity that acts as the anchor tenant. As such, public funding is used to back the purchase of pre-sold capacity by the anchor tenant, thus resulting in initial positive cash flows that will unlock manufacturing and de-risk the business case for equity and lending finance to commit to supporting the project.
The Tender Model, where a public entity funds the development of a project and allocates a pre-defined amount of funds through a competitive tender process. The objective of the tender is to provide a grant that would cover the costs of an investment that would serve a public objective (e.g., national security).
The Direct Procurement Model, where public entities fund a publicly-owned/accountable entity that takes responsibility for all business functions needed to be performed to build and operate a submarine cable. Under this model, the accountable entity is not only the buyer of the cable infrastructure but is also required to have capabilities across the business functions required for operating and maintaining the cable.
Different ownership options and design features will have implications for regulatory legitimacy. If Polar Connect receives public financing it is necessary for the aid to be reviewed within the two-step State aid process including (1) identifying the existence of the aid and (2) ensuring compatibility of the aid with the European State Aid Framework.
The study was commissioned by NORDUnet.
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related Links
Interested readers may also want to consult NORDUnet’s Vision 2030 White Paper, which NORDUnet prepared as part of the European Commission co-funded Northern EU Gateways project (CEF2 Digital – Call 1).