Solving the broadband infrastructure gap

Torys Quarterly: Canadian sector report

Today, access to broadband internet is largely considered an essential service akin to utilities such as electricity or public highways, as it is critical to participation in the modern economy.

Despite this fact, many rural and remote communities have limited or no broadband connectivity due to lack of the consumer density required to support economically viable private sector broadband infrastructure projects. As of 2017, only 37% of rural households in Canada had access to speeds of at least 50 megabits per second (Mbps) download and 10 Mbps upload, compared with 97% of urban homes.1 Major urban areas are, in contrast, well supported with multiple internet service providers (ISPs) providing high-speed reliable service and economic pricing, and require no government financial or capacity support.

To eliminate this gap, governments at all levels are creating policy objectives, encouraging public-private hybrid delivery models. They are also allocating funding to broadband projects in support of expanding access. For example, in its Budget 2019, the Government of Canada established the $1.7 billion Universal Broadband Fund, which, together with the CRTC’s previously announced $750 million Broadband Fund, will be deployed on various broadband development projects in furtherance of the CRTC’s universal service objective that 100% of Canadian homes should have access to speeds of at least 50 Mbps download and 10 Mbps upload by 2030.2 However, those charged with implementing such policies need to navigate several challenges in structuring, funding and financing broadband projects in a way that will achieve the announced goals.

Leveraging government funds

Governments struggling to balance their budgets cannot solve the broadband infrastructure gap alone—simply put, there’s not enough money. In 2016, Innovation, Science and Economic Development Canada estimated the cost of connecting all Canadians with 50/10 Mbps service at between $6.5 billion and $50 billion, depending on the technologies used.3

To make taxpayer dollars go further, governments should encourage ISPs to invest in broadband infrastructure in rural and remote communities by sponsoring public-private hybrid/shared responsibility approaches or providing the minimum funding required to make otherwise uneconomic projects financially viable. However, determining the right type of project support and the right amount of funding requires deep industry knowledge and expertise which government entities may not have.

We see three models of broadband solutions evolving in the market: a pure private solution in major urban centres; a pure public model in remote communities with low demand but high political support; and a spectrum of mixed public-private models in situations where there is some reasonable level of demand, but not enough for a pure private solution to be viable.

Avoiding overbuild

Unlike traditional forms of infrastructure such as hospitals or highways where the government is not competing with private interests, with broadband network infrastructure, governments building new and standalone broadband systems may potentially compete with one or more incumbent ISPs. Building broadband network infrastructure in an area where a broadband network already exists is not an effective use of government funds, assuming the open access rules are honoured in practice. But in many cases the location of existing privately owned broadband network infrastructure is unknown to governments. 

Operating governance

While day-to-day operations and control of government-owned or government-funded broadband infrastructure naturally resides with ISPs, government entities will want to impose operational requirements upon the ISPs regarding open access, minimum performance standards and pricing in order to ensure the intended project benefits are achieved. Where government-owned or government-funded broadband infrastructure is operated by an ISP as part of its broader network, such operational requirements must be crafted to be compatible with the applicable ISP’s existing business processes and systems. These will vary across ISPs bidding on government funding for projects.

Recent broadband projects in Canada reflect various approaches being taken to address these challenges. We also see a similar mix of approaches taken to such projects in the U.S. and internationally.

Case study: Northwest Territories’ Mackenzie Valley Fibre Link

The Mackenzie Valley Fibre Link (MVFL) spans over 1,400 km along the Mackenzie Valley corridor in the Northwest Territories, connecting Northern communities, resource industries, Arctic research institutions and the Inuvik Satellite Station Facility to an existing fibre system at Checkpoint Junction, in southern Northwest Territories, and from there interconnecting to high-speed fibre optic networks in southern Canada. Following the completion of the all-weather Inuvik-Tuk highway, an additional 140 km of fibre cable will potentially be added to extend the MVFL to Tuktoyaktuk, located on the shores of the Arctic Ocean, at the uppermost edge of Canada.

The Government of the Northwest Territories (GNWT) procured the MVFL as a public-private partnership, selecting Northern Lights GP—a consortium comprised of Ledcor Developments and Northwestel (a wholly-owned subsidiary of BCE)—to design, build and finance the MVFL and, following construction completion, to operate and maintain the MVFL for 20 years. GNWT retained ownership of the MVFL and, accordingly, will repay in full the private financing arranged by Northern Lights GP to construct the MVFL over the 20-year operational term of the project. GNWT avoided overbuild by securing an indefeasible right of use on existing, Northwestel-owned fibre to connect the southern terminus of the newly constructed fibre in Checkpoint Junction to available long haul southern carriers in High Level, Alberta. Northwestel will operate the MVFL over the operational term on an open-access basis pursuant to a performance-based contract with financial incentives tied to key performance metrics. 

GNWT required that end users of the MVFL backbone would receive fair market pricing, set at no more than a 25% premium to southern Canada rates, and agreed to vary backbone access pricing such that the spur lines and last mile connections would be reasonably profitable to the ISPs while protecting overall customer pricing.

Torys acted as counsel to the Government of the Northwest Territories.

Case study: SWIFT

Southwestern Integrated Fibre Technology (SWIFT) is a not-for-profit regional broadband development program initiated by the Western Ontario Wardens’ Caucus and delivered in partnership with member municipalities and the governments of Ontario and Canada to subsidize the construction of an open-access, high-speed broadband network in Southwestern Ontario, Caledon and the Niagara region. The project is expected to provide broadband connectivity to approximately 300 underserved communities across 500,000 square km of mostly rural territory. The region currently features different service levels across urban, ex-urban and remote communities. Torys is acting as counsel to SWIFT.

The SWIFT program involves a multi-stage procurement process whereby ISPs must first be pre-qualified by SWIFT to participate in the program through a request for pre-qualification (RFPQ) process which requires respondents to share information about their business structure and financial capabilities, as well as the location of their existing broadband infrastructure and known service gaps. Through this RFPQ process, more than 40 ISPs have been pre-qualified to participate in a series of requests for proposals (RFPs) to be issued by SWIFT for multiple broadband infrastructure projects across Southwestern Ontario, Caledon and Niagara.

Through these RFPs, SWIFT will direct provincial and federal government funding to subsidize a portion of the construction costs for new or upgraded broadband infrastructure assets in low density rural and remote areas. Communities that already have access to 50/10 Mbps service are not eligible for funding, thus ensuring geographical expansion of existing broadband network infrastructure. The subsidy level for each project will be determined on a case-by-case basis through the competitive RFP processes, subject to a maximum specified proportion of the construction costs for each project that will be eligible for subsidy. The project will be constructed, owned and operated by ISPs, with SWIFT retaining a 51% ownership interest in all funded broadband infrastructure for the first seven years following construction completion.

SWIFT has mitigated against overbuild by compiling information provided by ISPs during the RFPQ process regarding the location of existing infrastructure and known service gaps to generate an internet service map setting out geographic areas that already have access to 50/10 Mbps service and are therefore ineligible for SWIFT funding. SWIFT also used information gathered from ISPs through the RFPQ process to establish critical network standards and performance criteria to align with ISPs’ existing business frameworks.

Conclusion

Those are just two examples of different approaches government entities have adopted to expand or to economically support expanded access to broadband infrastructure in rural and remote communities in Canada. We predict that the existing approaches to developing these types of projects, particularly the combined public-private projects, will continue to evolve and new models will emerge as the demand for more and better internet access approaches a near-universal social issue. It also seems probable that different regions will always require tailored approaches to address their unique needs, which means further attention, collaboration and creative thinking will be required from all parties involved to solve this important public policy challenge.

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1 Government of Canada, “High-Speed Access for All: Canada's Connectivity Strategy”

2 Federal Budget 2019: Building a Better Canada: Universal High Speed Internet

3 Office of the Auditor General, Connectivity in Rural and Remote Areas, Report 1 of the 2018 Fall Reports of the Auditor General of Canada

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