COMMISSION STAFF WORKING PAPER GUIDELINES ON CRITERIA AND MODALITIES OF IMPLEMENTATION OF STRUCTURAL FUNDS IN SUPPORT OF ELECTRONIC COMMUNICATIONS

CONTENTS

1. Aims of the document

2. Background

- Policy developments

- Regulatory framework for electronic communications

- Rationale for structural funds intervention

3. Demand and content

- Modernising the public sector

- Stimulating demand in the private sector:

- Developing content:

- Raising digital skills

4. Financing of electronic communications infrastructure: criteria for ERDF intervention

- Need for a strategic framework

- Geographical targeting

- Technological neutrality

- Open access

5. Modalities of implementation

- Tendering process

- Financing

- Ownership

- Transparency

- Determination of co-financing rates

- Evaluation, monitoring and benchmarking

6. The case of Second generation mobile telephony

Annex 1

Annex 2

Annex 3

1. AIMS OF THE DOCUMENT

These guidelines are intended to help those regions who wish to co-finance investments through structural funds in the electronic communications sector. Under structural funds, the selection of projects within EU regional programmes is driven by decentralised management where the decisions on projects to be co-financed are taken by the programme partnership, i.e. a range of public and private bodies which contribute to the realisation of programme goals. The European Regional Development Fund (ERDF) is the main financial instrument in support of EU cohesion and regional policy.

The guidelines are similar to a range of guidance provided to programme managers and investors under the aegis of the Directorate General for Regional Policy. In particular, they update and complement the Commission's Staff Working paper [1] prepared in 1999 for the current programming period to reflect recent developments in the sector.

[1] European Commission, Information society and regional development- ERDF interventions 2000-2006- criteria for programme assessment, SEC/1999/1217,

Following a Commission proposal [2] endorsed by the Spring European Council, the guidelines set out the 'criteria and modalities of implementation of Structural funds in support of the electronic communications sector, especially for broadband, in particular in rural and remote areas of geographic isolation and low population density" [3].

[2] In 2003, the Commission Communication on Electronic Communications: the Road to the Knowledge Economy (COM(2003)65Final), ,states that:'. As the mid term review of structural Funds programmes will take place in 2003, this would provide an opportunity for Member States to give greater emphasis to this priority on the basis of an assessment of the regional needs .By Spring 2003, the Commission will provide Member States with guidelines on criteria and modalities of implementation of structural Funds in support of the electronic communications sector, notably broadband fixed and wireless infrastructure"(p7)

[3] Conclusions of Spring European Council, Corfu, 21 March 2003

The main focus of the present guidelines is on communications infrastructure, whilst maintaining the relevance of demand and content related measures. . They also address the issue of second generation mobile telephony, which may arise in particular contexts over the period 2004-2006.

The guidelines are meant to be indicative [4]. They are complementary to the broad guidelines for the Mid-term review of Structural Funds interventions, which is due to take place in 2003. They also take account of the specific situation of the new Member States.

[4] THESE GUIDELINES ARE WITHOUT PREJUDICE TO ANY GUIDELINES OR COMMUNICATION THAT THE COMMISSION COULD ADOPT CONCERNING THE APPLICABILITY OF THE STATE AID RULES TO SERVICES OF GENERAL ECONOMIC INTEREST.

2. BACKGROUND

Since 1999, the information society has undergone substantial changes as regards both the policy context (e-Europe) and the new regulatory framework on electronic communication networks and services (new set of directives). These changes may have a significant impact on structural fund support for the development of the information society in the less favoured regions.

Policy developments

The e-Europe 2002 Action Plan [5], agreed by Heads of State and Government in the Feira Council in June 2000 established that a priority for the Union is to ensure that less favoured regions can fully participate in the Information Society. It also recommends that new infrastructure and services across Europe may be supported with European funding, provided that public aid does not distort competition and respects technology neutrality.

[5] e-Europe 2002- An Information Society for all- Action Plan, p6

In 2002, the Seville European Council endorsed the e-Europe 2005 Action Plan that sets out a strategy to make broadband infrastructure widely available to businesses and citizens throughout the European territory at affordable prices. It also outlines the need to develop adequate content and services, with particular emphasis on public administrations (e-government), a dynamic business environment (e-business), health services (e-health) and education (e-learning). Subsequently, the Spring European Council of March 2003 called upon Member States to put their national broadband strategies in place by the end of 2003.

Regulatory framework for electronic communications

In response to the conclusions of the special European Council of Lisbon of 23-24 March 2000, and building on the Communication on the results of the public consultation on the 1999 Review of the Electronic Communications Sector and the principles and orientations for the new Regulatory Framework (COM (2000)239), a package of measures for a new regulatory framework for electronic communication services and networks was adopted during 2002.

Regulatory framework for electronic communications

Directive (2002/21/EC) on a Common Regulatory Framework for electronic communications networks and services

Directive (2002/19/EC) on Access and Interconnection

Directive (2002/20/EC) on Authorisation

Directive (2002/22/EC) on Universal Service and User's rights

Directive (2002/58/EC) on Data Protection and Privacy

Directive (2002/77/EC) on Competition in the markets for electronic communications networks and services.

Regulation (EC) 2887/2000 for unbundled access to local loop

These directives must be transposed by the Member States by 25 July 2003, with the exception of the directive on data protection (31 October 2003)

The new regulatory framework is intended to provide a coherent, reliable and flexible approach to the regulation of electronic communication networks and services in liberalising markets while ensuring that a minimum of services are available to all users at an affordable price and that the basic rights of consumers are protected.

Rationale for structural funds intervention

Community action through the structural funds has among its main objectives to promote the development and structural adjustment of regions which are lagging behind (Objective 1) or the economic and social restructuring of regions (Objective 2) [6]. The operations financed by the Funds must also be in conformity with other Community policies, including competition rules.

[6] General regulation on structural funds- Reg. 1260/99

In its guidelines for the 2000-2006 programmes [7], the Commission identified Information society as a key priority for structural funds interventions, with a strong emphasis on demand for services and applications.

[7] European Commission, The structural funds and their coordination with the Cohesion Fund-Guidelines for programmes in the period 2000-2006, COM 1999 (344)

Information Society has considerable potential for strengthening economic and social cohesion, i.e. bridging economic and social disparities in Europe. However, the success of regional development strategies will depend on the ability of regions to integrate the Information and Communication Technologies (ICT) made available.

Major changes in the electronic communications sector - e.g. the rapid pace of technological change, slow take up of broadband services, changes in the regulatory framework- make it necessary to rethink the role of public funding taking into account its strategic nature for economic development. After years of market liberalisation, there is also clear evidence of inadequate geographical coverage even for mature technologies such as the GSM network.

In the new Member States, the implementation of the 'acquis' in the area of Information Society may have significant financial implications, as the roll out of basic electronic communications infrastructure is far from being completed. This includes the financing of universal service obligations [8] .

[8] Under the new regulatory framework (Directive 2002/22/EC on Universal service and users rights), universal service is « provided to all end users throughout the territory, regardless of their geographical location, at a specified level of quality, and taking account of particular national circumstances, at an affordable price ». The scope of the universal service is defined as covering, inter alia, access to the fixed public telephone network based on voice and data communications as well as narrow band Internet access. It does not include mobile telephony or broadband access to the Internet.

The risk of a widening 'digital divide' and its economic consequences, e.g. the delocalisation of economic activities, has led many governments to explore new solutions to encourage the deployment of broadband infrastructure in less favoured areas. In such areas, geographical isolation and low density of population can make the cost of upgrading the existing infrastructure unsustainable. In rural areas, the unavailability of adequate infrastructure is an important obstacle for the development of certain economic activities such as tourism as well as a source of social disparities.

The investment costs to meet present and future requirements for the development of the Information Society are often difficult to justify on purely commercial grounds. There is a risk, that because the investment is potentially unprofitable, the underlying cohesion objective which underpins e-Europe 2000, i.e. "ensuring access for all to Information Society" is put into question.

Investments through structural funds need to go beyond commercial considerations and must take into account wider issues of public policy. Their role is to enable less favoured areas to come to the forefront of information society development by accelerating broadband deployment as well as ensuring greater territorial cohesion. It is also particularly important with regard to possible future funding of communication infrastructure and services for the new member States within their own development plans and programmes.

3. DEMAND AND CONTENT

The existence of high quality communications infrastructure is a key condition to enable citizens, businesses and administrations to exploit the opportunities offered by the Information society.

However, the availability of such infrastructure may be irrelevant if adequate services and applications are not provided to the end users or if these lack the knowledge or ability to use them properly. A relatively weak content base, a generally low level of awareness about the benefits and opportunities of the IS, relatively high prices as well as a scarcity of ICT skills are often common barriers in less favoured regions.

Though infrastructure is important, there is a need for businesses and regions to have a clear vision of the demand for the new services it will generate.

Structural funds should support regions in strengthening the demand side of the IS, especially the capacity of firms and institutions to effectively use ICT. Several approaches may be taken to boost demand:

Modernising the public sector

Demand aggregation for broadband services should be encouraged in order to ensure critical mass of users in public administrations whilst avoiding dependence on one single operator

Stimulating demand in the private sector:

Stimulation of demand for types or 'clusters' of SMEs allows to increase awareness and use of ICT

Developing content:

Financing content, including e-government, in particular local and regional services in order to boost demand for broadband on a sufficiently focused basis to develop supply.

Raising digital skills

Equipping the population with the necessary skills to use broadband connections

Public authorities, and particularly regional and local authorities, have a key role to play in the development of the information society by (1) using information society applications and services in the process of modernisation of services provided to citizens and companies, (2) promoting the information society in the region and (3) monitoring the evolution of the communications networks and services provision on the region in order to avoid exclusion and contribute to the balanced development of regional activities.

In this latter respect, accessibility [9] is especially important because it promotes demand by increasing interest and giving citizens, firms and institutions a chance to become aware of generic services and ICT applications and the practical benefits of their use. This, in turn, will bring about the critical mass or sufficient level of demand needed to strengthen the regional information society development.

[9] In particular, the ERDF could support local and regional governments in their effort to introduce on-line administration and telematic services and provide people with easy access to this system. For example, the ERDF should help to establish tailored access points in municipalities or local communities

Public funding for the above initiatives must comply with the Treaty rules on State aid. Depending on the particular case, such funding may be found compatible under the rules governing e.g. aid to small and medium-sized enterprises [10], regional aid [11] or "de minimis" aid. [12]

[10] COMMISSION REGULATION (EC) NO 70/2001 OF 12 JANUARY 2001 ON THE APPLICATION OF ARTICLES 87 AND 88 OF THE EC TREATY TO STATE AID TO SMALL AND MEDIUM-SIZED ENTERPRISES, OJ L 10 OF 13.1.2001, P.33.

[11] GUIDELINES ON NATIONAL REGIONAL AID, OJ C 74 OF 10.3.1998, P. 9.

[12] COMMISSION REGULATION (EC) NO 69/2001 OF 12 JANUARY 2001 ON THE APPLICATION OF ARTICLES 87 AND 88 OF THE EC TREATY TO DE MINIMIS AID, OJ L 10 OF 13.1.2001, P.30.

4. FINANCING OF ELECTRONIC COMMUNICATIONS INFRASTRUCTURE: CRITERIA FOR ERDF INTERVENTION

The e-Europe 2005 Action Plan indicates that new infrastructure and services may be supported through structural funds in eligible regions, especially in rural and remote areas. It is, however, conditional upon certain criteria, which must be taken into consideration for the appraisal of Information society investments. These are outlined below.

Need for a strategic framework

ERDF support should be linked and determined by the information society development strategy of the region. More specifically, infrastructure projects must be connected with the objectives of regional economic development, i.e. economic growth, regional competitiveness as well as balanced distribution of economic activities. Isolated projects should not receive support. They should be articulated with other actions aiming at developing new applications and services.

As part of the strategy, infrastructure projects should be based on an analysis of regional needs and opportunities identified in consultation with economic and social partners, taking into account specific economic and institutional conditions as well as the pre-existing infrastructure (i.e. an inventory of existing infrastructure endowment before planning any new investment)

Accordingly, public authorities, especially at sub-national level (regions, local authorities) will propose information society measures within national or regional programmes. They also have the responsibility to ensure that the investment measures are relevant to the regional objectives and needs and that these measures are coherent with the overall economic development strategy as well as guaranteeing their economic sustainability.

In view of future adjustments to be made to Objective 1 and 2 programmes. the Commission should be informed of the content of the strategies, in the form of a simplified framework (Annex I)

Geographical targeting

ERDF support take into account regional specificities, such as geographic factors that may vary greatly across eligible regions. In principle, investments must be targeted towards areas that would otherwise be neglected under free market conditions. The main focus should be on rural and remote areas, which are not covered by adequate infrastructure. ERDF support is also justified in areas where there are insufficient commercial incentives to provide adequate infrastructure allowing for advanced applications and services of general interest.

Although regional aid is, in principle, strictly concerned with eligible areas under Objective 1 or 2, investments can be financed outside these areas to the extent that they are realised in contiguous areas (NUTS III) and comply with eligibility rules laid down in Reg. (EC) n°1685/2000 [13].

[13] « The maximum eligible expenditure of the operation is determined pro rata to the proportion of the benefits from the operation which it is foreseen will accrue to the region and shall be based on an evaluation by a body independent of the managing authority. The benefits shall be assessed taking account of the specific targets of the assistance and its expected impact. The operation cannot be accepted for co-financing where the proportion of benefits is less than 50 %. For each measure of the assistance, the eligible expenditure of the operations accepted under point 2.1 should not exceed 10 % of the total eligible expenditure of the measure. In addition, the eligible expenditure of all operations in the assistance accepted under point 2.1 should not exceed 5 % of the total eligible expenditure of the assistance ».

Technological neutrality

Selection criteria for investments in electronic communications infrastructure must adhere to the principle of 'technology neutrality'. ERDF support should not a priori favour any particular technology, nor limit the technology choice of the regions.

When a project involves the financing of a specific technology - in the case of broadband, e.g. DSL, cable, satellite, wireless, etc. - or a specialised infrastructure, the choice must be clearly justified on the basis of a cost-benefit analysis, taking into account possible alternatives for the provision of the service.

Open access

Financial support will be granted to projects which are consistent and in accordance with the new regulatory framework on communications networks and services as well as competition rules (state aids and antitrust). Compliance with these rules is a key condition of eligibility for ERDF support, which needs to be accompanied by clear open access obligations.

ERDF support should be limited, in principle, to infrastructure, i.e. installations (dark fibre, ducts, masts,...) and equipment which is open to all operators and service providers.

The local area concerned may be subject to unbundling of access to the local loop. Location and technical requirements of the points of access to the new infrastructure should not favour dominant operators on the local access nor give rise to distortions on other markets.

The case of non-open infrastructure projects

Direct financing of installations and equipment which are not open to all, but are dedicated to one or more operators, does not qualify as funding of an 'open infrastructure' project, e.g. the case of installations reserved to a specific operator as a result of an agreement with the regulatory authority.

Funding of installations and equipment dedicated to a specific final user may constitute State aid whenever such user is an undertaking. Depending on particular cases, such funding may not constitute State aid when it is necessary for the provision of a 'service of general economic interest' (SGEI). When it constitutes a State aid, it may be compatible under rules governing aid to small and medium size enterprises, regional aid or 'de minimis'.

The provision of the service should respect the principles of transparency, non- discrimination, proportionality and least market distortion. If the service is not awarded as a result of an open, transparent and non-discriminatory procedure, the operator is required to hold a separate accounting system for the service in question, which would allow to establish the amount of public compensation or tariffs applicable for the use of the service and subject to annual revision.

5. MODALITIES OF IMPLEMENTATION

Once infrastructure projects are considered as being consistent with the above criteria, they should follow a number of key implementation rules. With respect to competition rules, it should be noted that EDRF support does not represent a state aid in the meaning of Article 87(1), but must follow the same rules and, where is the case, concurs with Member States' funding to determine the compatible amount of aid.

Tendering process

Contracts should be awarded through open calls for tender. As a general rule, this should be organised at the appropriate level (national, regional, local) under the supervision of the competent authority, which should ensure compliance with relevant legislation and coherence with national IS policies.

Competitors should be invited to submit their technical and financial offers. The contract should be awarded to the operator who will provide the service with the specific characteristics of the required solution at the lowest cost.

Financing

ERDF support should be limited to the necessary amounts of resources for the provision of the service. In principle, it covers both the financing of installations and equipment that are open to all operators and service providers.

Projects should contain sufficient and detailed information in order to ensure a proper assessment -on the part of the managing authorities- of whether or not they are coherent with economic development objectives as well as compatible with competition rules.

Ownership

The subsidised infrastructure can remain owned by a public authority, a private entity which provides co-funding, or by a public-private entity. In all cases, access for all operators to the infrastructure at non-discriminatory conditions must be granted. In principle, Community support should not strengthen a dominant position by any operator, or distort competition rules.

The modalities of renting of the infrastructure to private undertakings will have to be accurately defined on a case by case basis. In some countries, national regulatory frameworks are being modified, e.g. local authorities having the right under certain conditions to become operators.

With a view to determining compliance with the regulatory frameworks, it is useful to distinguish the funding of an infrastructure which is owned by a public authority from the funding of an infrastructure which is owned by an undertaking.

Infrastructure owned by the public authority

The funding of an infrastructure owned by the public authority does not constitute granting of State aid in the meaning of Article 87(1). The procurement of the works for the creation of such infrastructure must follow the appropriate community legislation in the matter.

However, when the infrastructure is made available to undertakings, this should be done on non-discriminatory terms and upon payment of appropriate fees. Such fees are not expected to cover the entire cost of investment -in cases when the market is not capable of providing equivalent services - and should also not allow the users of the infrastructure to make extra profits in excess of a fair return .

When a service equivalent to that provided by the infrastructure is already supplied by the market, then the infrastructure should be rented out at fees allowing coverage of costs and a fair return on investment.

If the management of the facility is entrusted to a third party, it should be awarded for a limited amount of time as a result of an open, transparent and non-discriminatory procedure, preferably determined through a competitive process and leading to a market compensation paid by the concession holder. As a general rule, this should be organised at the appropriate level (national, regional, local) under the supervision of the competent authority, which should ensure compliance with relevant legislation and coherence with national and regional IS policies.

The manager of the infrastructure is submitted to operating requirements that preserve the nature of the infrastructure as a facility open to all operators providing electronic communication networks and services at non-discriminatory conditions.

Infrastructure owned by undertaking(s)

In the case of (co-)funding of a facility which is owned by an undertaking, the State financial contribution would have to be made conditional on the acceptance of operating requirements which would preserve the nature of the infrastructure as a facility open to all operators providing electronic communication networks and services at non discriminatory conditions.

There should be evidence that the amount of state funding was the minimum necessary to allow the project to proceed, so to ensure that the operator using the facility does not receive more than a normal market return for its activity. To this end, State funding should be awarded through open call for tender. As a general rule, this should be organised at the appropriate level (national, regional, local) under the supervision of the competent authority, which should ensure compliance with relevant legislation and coherence with national and regional IS policies. Competitors would be invited to submit their technical and financial offer. The contract will need to be awarded to the operator/s providing electronic communication networks which fulfil the minimum specified requirements for the service (in terms of quality of service, future improvements, etc) at the lowest cost

Transparency

Infrastructure operators will have to develop a cost accounting system, which allows the calculation and justification of any compensation or subsidy in accordance with competition legislation. Only on the basis of such a system, will it be possible to establish tariffs in a transparent and efficient way and to charge cost elements to the relevant parts of the network.

The regulatory framework for electronic communications requires inter alia that regulatory authorities are legally distinct and functionally independent from the organisations - which are in charge of the provision of networks, equipment or communication services. In cases where local authorities have regulatory functions, notably with regard to passage and building permits, the Member States will respect the principles of transparency and non-discrimination and ensure that such rights are obtained under similar conditions by applicants which do not benefit from the assistance.

Determination of co-financing rates

The responsibility for the appraisal and selection of the projects lies in the regions. ERDF aid rates apply to the projects co-financed, according to economic and financial profitability of projects, in accordance with the provisions laid down in article 29 (4) of Reg. 1260/99 [14] .

[14] EC Regulation on structural funds 1260/99, art. 29.4

When communications infrastructure projects are considered as investments generating substantial net revenues, co-financed rates should be justified and modulated on the basis of a full cost-benefit analysis. As a general indication, these projects are those which generate at least 25% of net revenues in relation to the actual cost of investment using an appropriate discount rate (i.e.6%).

Evaluation, monitoring and benchmarking

Judging the effectiveness of structural funds assistance to the regions is an essential part of accountability, achieving value for money and appraising future investment decisions.

In terms of the prior appraisal of information society related projects, and especially communications infrastructure projects, criteria could include:

* Electronic communication networks penetration (per 100 residence households and, if this is not available, lines per 100 inhabitants)

* Electronic communication networks revenue per inhabitant;

* Active operators (services and networks) in the region/area;

* Market evolution (share and market growth);

* Penetration, revenue and diffusion of any other communication means (satellite, wireless, mobile communications, etc).

* Improvement in affordability of services

Furthermore, detailed information on the project and on the promoter should be provided. This should include: total cost, expected return on capital investment, estimated (direct) employment creation, diversification of the local economy into knowledge related activities

A checklist of indicators should be used to monitor over time outputs and impacts generated by ERDF-supported IS projects. Regional indicators should be developed, where appropriate, with due regard to e-Europe 2005 indicators. Targets would have to reflect particular local conditions.

6. THE CASE OF SECOND GENERATION MOBILE TELEPHONY

As a general rule, investment in 2nd generation mobile telephony is profitable and therefore ERDF support is not justifiable on economic grounds. Although coverage of certain areas might not be entirely profitable, wide coverage of a significant proportion of the territory is normally required and this includes the use of cross-subsidisation. However, there might be a case of a member State that wishes to extend coverage to the remaining part of the population living in uncovered areas in order to ensure economic viability of these investments. Under these circumstances, ERDF support could be granted to 'uncovered areas' where investments are not financially viable.

Competition issues

Investments limited to open infrastructure i.e. installations and equipment ensuring non-discriminatory access to all operators do not raise particular problems in terms of competition policy. Local roaming must be provided at fair tariffs to other operators when this is necessary to avoid discrimination between operators. This involves the set up of a local itinerant service to ensure the sharing of active infrastructures, to be carried out in accordance with competition rules.

Direct aid for a service or equipment which is dedicated to one or more operators does not qualify as an 'infrastructure' project, e.g. the case of installations reserved to a specific operator as a result of an agreement with the regulatory authority. In such cases, State intervention might be justified by the need to provide a 'service of general economic interest' (in accordance with art.86.2 of the Treaty) insofar as operators are not granted a financial advantage which exceeds the funding of the net additional cost of the service.

The provision of the service should respect the principles of transparency, non-discrimination, proportionality and least market distortion. If the service is not awarded as a result of an open, transparent and non-discriminatory procedure, the operator is required to hold a separate accounting system for the service in question, which would allow the amount of public compensation or tariffs applicable for the use of the service to be established and which would be subject to annual revision.

Annex 1

Regional Information Society Strategy

Indicative schema

I. State of play

* Existing strategic documents (to be sent to DG REGIO)

* Existing projects: census of network infrastructure (mobile / broadband), applications / services and content

* Economic development needs

II. Challenges and medium-long term objectives

* Coherence of IS regional strategy with the overall development strategy of the region

* Relevance of IS objectives and their contribution to the programme's objectives

* Main challenges for economic development

III. Main projects to be funded

In relation to point I, it would be necessary to provide relevant information with regard to:

- Nature of actions

- Content of projects

- Location of investments

- Financial incidence

- Economic viability

IV. Estimated costs

* The region will have to provide an estimation of the overall investment costs, for both co-financed and non co-financed projects.

Annexes: Maps on broadband / mobile telephony coverage

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Annex 2

SCHEMA I : CRITERIA FOR FINANCING INFRASTRUCTURE UNDER STRUCTURAL FUNDS

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Annex 3

SCHEMA II : MODALITIES OF IMPLEMENTATION

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