New support measure of broadband internet might fail

Internet cable. Photo: Urmas Luik / Pärnu Postimees

• The builder of the last mile will have to shoulder 30 percent of the expenses.
• Network builders consider it too high and hesitate to take part in the tender.
• Municipalities may build the final and decisive part of the network.

Although more than a hundred million euros have been invested over the years in taking high-speed internet to the countryside, nearly 80,000 Estonian rural households are still without a modern internet connection. On Tuesday, the next 24 million euro measure was launched to ease the bottleneck, but according to network builders, it is likely to fail.

To understand the problem of Estonia’s broadband network, one must start from 2009, when the Estonian Broadband Development Foundation was founded under the aegis of the Ministry of Economy and Communications; the foundation was tasked with building a fiber-optic cable base network covering the whole of Estonia, which would carry ultra-fast internet throughout Estonia. The ministry expected that once the 7,000-kilometer cable network is ready, telecom companies will build connections from there to the people's homes.

An ambitious goal

The 81 million euro base network is complete over a decade later but 40 percent of households still do not have access to high-speed internet. According to the National Audit Office, the ministry did not take into account at the time that communication companies had no intention to start building access network in sparsely populated areas in order to be able to sell internet services to individual households.

Since the telecom firms did nothing and families dreaming of high-speed Internet in more isolated places received their offers of tens of thousands of euros to bring the cable to them, the state began to support the construction of the access network.

So far, two measures have been taken to move towards the goal: in 2018, the first public tender was announced aiming to take high-speed internet to as many addresses as possible without Internet access. The tender was won by Elektrilevi, which promised to build a network to 40,000 new locations within five years, in which all operators could offer the service. Ardi Ratassepp, a member of the management board of the company which has meanwhile been renamed Enefit Connect, confirmed yesterday that 28,071 addresses have been reached so far.

In 2020, at the height of the corona crisis, when pupils were forced to practice distance learning and parents stayed in their home offices, the state provided another 10.5 million euros from the supplementary budget to build an access network in the countryside; 7.3 million was eventually paid out for an additional 5,899 addresses. At that time the network was not built by a single enterprise as nine providers qualified for the measure. The average price of one address point was already 1,250 euros instead of 500 euros.

Although more than 45,000 addresses have access to high-speed internet or will have it soon, the amount of work still to do is enormous. According to Statistics Estonia, there are currently 84,463 permanent residences in Estonia where fast internet (over 30 megabits per second) is still only a dream. 74,000 of them are outside the cities.

The European Commission has tasked the member states with ensuring one gigabit internet connection in every home and business by 2030, regardless of whether it is located in the center of Tallinn or in a forest of Võru county. To perform this task, the European Union grants money to the member states. Forty-five million euros from the European Regional Development Fund will be added to the 24.29 million euros given to network builders in the Recovery and Resilience Facility that opened on Tuesday.

The entrepreneurs are critical

Until now, the state has paid subsidies for high-speed internet directly to the network builders, who have decided at their own discretion where the new connections will be established. However, this approach has received some criticism. The critics have mainly complained that the network is being built in places where it will not be used. The State Audit Office also pointed out that only 21 percent of the households, which had received Enefit connection, started using high-speed internet.

It has also been complained that this approach favors building connections where it is the most profitable for the network developer instead of where the people need it most.

Although the support measure launched this week is also intended for network builders, the criticism has been partially accepted by now and the approach is somewhat different. Namely, this time a certain amount has been allocated for each municipality, which cannot be used elsewhere. Municipalities were also asked to map socio-economically important institutions, whose fast internet connection gives extra points in the competition.

However, telecom enterprises claim that the new support scheme will never work. Namely, in addition to the municipality-based budget, the state has amended the logic of the distribution of support. Network developers are now required to bear 30 percent of the cost of the project themselves. The state is also ready to compensate a maximum cost of 3,000 euros per address.

According to the Association of Information Technology and Telecommunications, it is not possible for the entrepreneurs to build the network in the countryside in such conditions, which is why the measure might remain unused. The association sent an appeal to the ministry in March, requesting that the subsidy rate for one address to be increased to 4,500 euros and the companies' own share of financing to be reduced to five percent. The state rejected the proposal.

The entrepreneurs who took part in the corona period support round are now saying that they will probably not join the tender this time.

“When developing the new support scheme, the state involved indeed many parties, but unfortunately ignored the feedback. When it was presented, we immediately said that we were not interested in participating under such conditions. This is precisely because of the 3,000 euro and 70 percent requirement,” says Ivo Suur, head of Elisa cable networks. “I cannot say that we will definitely not participate, but the likelihood that we will do something is very low. This is significantly different from the last time, when we said we would do it and we did.”

According to Enefit Connect, the state's largest partner in recent years, they are also bothered by the large percentage of self-financing.

“30 percent self-financing means that the network developer has to bear a higher cost, which is no longer so attractive in terms of profitability. Therefore, network developers have no significant commercial opportunities”, assessed Ardi Ratassepp, a member of the management board of Enefit Connect, adding that the company has not yet decided whether it will submit an application for the measure, which closes at the end of September.

The head of Elisa cable networks used numbers to illustrate the problem of self-financing.

“If we consider the cost of connecting one address point to be the maximum subsidy rate or 3,000 euros, we would have to contribute 900 euros to the connection of one customer. If this customer were to start using our services immediately, this cost would even be conceivable. However, since the network must be operator-neutral, another operator may offer service there. In this case, we shall only receive the rental fee, which is, for example, four euros per month in our operator-neutral network built in Lagedi. Everyone can calculate how much time it will take to earn back 900 euros,” said Suur.

However, the state wants to distribute the EU support measure on a uniform basis. Since the next subsidy paid from the Regional Development Fund has a requirement of 30 percent anyway, the state does not want to be more generous when paying support from the recovery facility. There is also the hope that the higher self-financing share will force the communication operators take the Internet to those customers who really need the service and will use it.

On the other hand, this means the risk that some municipalities may not receive any bids to build a network. According to the manager of Elisa networks, for example, the cost of building a network in Rõuge municipality cannot be compared with the cost of some more densely populated municipalities in Harju County.

The ministry also admits that there may be problems with receiving bids. According to Raigo Ilingu, the adviser of the communications department, they will be able to redistribute the amount of support planned for each municipality later, if it should turn out that the interest of developers will be more modest than expected in some localities. The ministry has also prepared for the lack of interest from telecom operators with a clause which allows the local governments to take the initiative and let their companies build the network instead. The rest of the applicants are expected to have three years’ experience in the construction of networks.