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UK Government Q and A on the New Broadband Investment Fund

Monday, August 1st, 2016 (1:10 am) - Score 1,122
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The Government’s Infrastructure and Projects Authority (IPA) has shared with us an interesting summary of queries received and their responses to them for the newly proposed Broadband Investment Fund (BIF), which aims to help alternative network ISPs to secure funds for building new “ultra-fast” (100Mbps+) broadband infrastructure.

The main policy objective of the BIF is simply to increase the amount of capital invested in the sector (currently there’s perceived to be a “lack of suitable finance” in this area), particularly (but not exclusively) more “debt-like” capital that would enable faster expansion of ultrafast broadband networks into either urban or possibly even rural areas.

As we’ve reported before, this fund is “intended to complement other government programmes rather than duplicating or competing with them” (e.g. the UK Guarantee Scheme and Broadband Delivery UK) and it would be supported by a mix of both public and private investors. The fund itself would then be managed by the private sector on a commercial basis.

Last month HM Treasury opened a request for proposals for the BIF (here), which they said would provide fund managers “with the necessary information to decide whether to submit a proposal to raise and manage the fund.” Naturally we were keen to know more and the IPA has now furnished us with a summary of the questions they’ve received about the BIF and how they responded, which contains some useful insights.

For example, when asked whether the BIF would target specific parts (e.g. rural or urban) of the UK or focus on specific technologies, the IPA said that it would “keep an open mind,” although they do “expect the technological focus to inevitably be fibre” (e.g. FTTP/H). But they also said there is “scope for the Fund to invest in other broadband technologies where appropriate,” such as wireless or hybrid fibre (FTTC) type services. We’ll paste the full summary below.

Broadband Investment Fund Q&A

1. What is HMT/IPA’s view of the target size of the BIF?

ANSWER:

We have not publicly stated a target fund size and invite prospective Managers to suggest what they think is an optimal size for a first fund close.

2. The Request for Proposals (RFP) states that the proposed timing of the Fund raising activities is to take into account the Q1 2017 target for Closing the Fund. We would be interested in having the ability to hold multiple closes (in an agreed timeframe) bringing in further private sector capital beyond Q1 2017. Please can HMT/IPA confirm whether they are comfortable with there being multiple closes?

ANSWER:

In principle we would be OK with multiple closes. It would be important to ensure that enough capital is being deployed into the sector expeditiously and that HMT was always below the 50% of total investment.

3. Is there a preferred approach to the fund structure?

ANSWER:

No. We will entertain a range of structural options. We will need to be satisfied that any proposed structure maximises the potential for private sector investment in the sector, including assurance that the manager was sufficiently focused and motivated, and not conflicted. This could include acting as a side car to an existing fund, with HMT’s money invested into individual deals along side it (but always such that the level of HMT investment is never greater than 50%).

4. Is HMT/IPA able to elaborate further on the “debt-like” investments that will facilitate the expansion of commercially viable ultrafast broadband networks? Is HMT only considering funds that are 100% focused on debt investments?

ANSWER:

It is up to prospective fund managers to propose investment types. We think there is the potential for quite a broad spectrum of investment, ranging from low coupon senior debt through to higher yielding sub investment grade debt, preference equity and ordinary equity. We want a majority of the fund to focus on investments that may be less dilutive to existing owners of broadband infrastructure, enabling them to expand quickly through access to more cost effective capital. We think there is definitely a role for ordinary equity too, which would likely be priced to reflect the additional risks taken, but see this as likely being a minority of the fund, particularly given the likely smaller ticket sizes. However, while this is an expectation and preference, it is not a hard requirement.

5. How will HMT/IPA govern the BIF to ensure that there is no conflict or duplication with other government policies and schemes?

ANSWER:

We see the BIF as being complementary to existing policies and schemes and this continuing to be the case. The government is proposing to become an investor in the fund, alongside the private sector, further indicating its support.

6. Has the HMT/IPA identified any key strategies? For example:
a. Geography
b. Urban / rural
c. Technologies

ANSWER:

Other than limiting HMT’s investment to the UK, we will keep an open mind with respect to Investment Strategy. Regarding technology, the purpose of the Fund is to attract more private sector capital into ultrafast (<100mbps) broadband and we expect the technological focus to inevitably be fibre. However, we believe there is scope for the Fund to invest in other broadband technologies where appropriate. This could include, for example, wireless technology or Fibre to the Cabinet (FTTC) type solutions under certain circumstances.

7. What role will HMT/IPA play in the origination of projects and investments?

ANSWER:

No formal role. We are in touch with most participants in the market and may be able to direct enquiries to the Manager, but investment decisions, as well as deal origination, will be their responsibility. Once the investment strategy is agreed the government will have no influence over the Manager, other than as is standard for a Limited Partner investor.

8. Are the developers who are seeking access to further capital already known to HMT/IPA?

ANSWER:

Some are. Prospective Managers are invited to get in touch with the Independent Network Cooperative Association (www.inca.coop) if they want more information about individual alternative network developers.

9. Is HMT/IPA providing capital or considering the provision of credits to local authorities to support the delivery of ultrafast broadband on a regional level?

ANSWER:

The superfast broadband program works in partnership with local authorities and provides some central funding to support network build in areas where it is uneconomic (see https://www.gov.uk/guidance/broadband-delivery-uk). That is a separate measure to this fund, though, and this Fund is intended to act entirely commercially.

10. Does HMT/IPA have any examples of projects which it has contemplated / would contemplate investing in?

ANSWER:

We don’t expect to be very restrictive with respect to projects that we would invest in and it is up to Managers to propose an investment strategy that it feels best meets our objectives.

11. Does HMT/IPA have any views as to asset classes that the fund should seek to invest in, or avoid, or is this to form part of the proposal by the fund manager?

ANSWER:

This should form part of the Manager’s proposed investment strategy.

12. How does HMT/IPA define ‘alternative broadband network developers’? What formal constraints (if any) are anticipated for the fund?

ANSWER:

Alternative broadband network developers are those who are designing, building and / or operating broadband networks that are independent from the incumbent network owner. The policy objective is to see more private capital invested into these companies, and we will consider any investment strategy that meets that objective, which could include ones that will look for opportunities to invest more broadly than just in actual broadband network developers.

13. How does HMT/IPA define support industries in the context of the broadband sector?

ANSWER:

Support industries could include, inter alia, those providing skills and training in broadband, those providing construction related services to the industry, etc.

14. Would the government be ok with taking a smaller proportion of the total fund (e.g. 30%).

ANSWER:

Yes. The 50% should be considered a maximum figure rather than a target. In general, the greater the amount of private capital alongside the government’s investment the better.

15. Can you please confirm in addition to capital, the resources that government intends to commit to the Broadband Investment Fund? Will the government act as a passive partner, or will they commit resources (including manpower) to assist with originating investment opportunities? Might this include any pipeline of government assets / government funded development projects to act as opportunities to the fund?

ANSWER:

The government expects to act as a passive partner investor and the origination, selection and execution of investment opportunities will remain solely with the appointed Manager. There will be no specific government pipeline although public sector related opportunities may well come along from time to time. For example, we would draw potential Manager’s attention to the current BDUK superfast broadband procurement program, which includes a pipeline of rural projects that could be of interest. (https://www.gov.uk/government/publications/bduk-new-procurement-pipeline). Those projects are largely gap funded by the public sector meaning bidders may still need to raise private finance as part of their bid structure.

16. Does the government have a desired investment period or minimum level of return?

ANSWER:

The government will be guided by the market with respect to investment period and minimum return level. However, we do expect the return period to relatively long (5 to 15 years, or longer). Regarding returns, Managers should aim to strike an appropriate balance between the return expectations of investors and the cost of finance expectations of potential investee companies/ projects.

17. Will HMT invest only in broadband infrastructure?ANSWER:

The policy objective is to see more private sector capital invested into ultrafast broadband networks. However, this doesn’t mean that HMT is only willing to invest in ultrafast broadband infrastructure. HMT will consider investment strategies that are broader than this (including, for example, service providers to broadband providers or other organisations that benefit from better broadband networks, e.g. datacentres), if it considers that this is the best option to maximise investment in the sector.

Similarly, as discussed in the RFP, HMT will also consider structures where HMT’s investment is a side car to a fund with a broader mandate, with HMT’s capital only used in qualifying investments (to be agreed with the Manager). HMT will need to be satisfied that its capital will be invested expeditiously and that this structure would deliver a sufficient focus on the sector and otherwise meet the governments policy objectives.

18. The fee structure listed suggests a more equity fund type. Should Managers make a proposal for each element referenced in the RFP?

ANSWER:

No, the RFP merely intended to capture the fact that HMT will want to consider all elements of Manager compensation and incentives. Managers may wish to propose a simple management fee based on invested capital with no additional costs to investors. HMT’s primary concern is that the fee is competitive and likely to be considered appropriate by all potential fund investors

It’s worth pointing out that the current deadline for receipt of proposals for the BIF has recently been extended slightly to 8th August 2016, but it shouldn’t be long before we get some more details.

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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