Fibre Optic flagship project in Dillingen

5.3.1.1 Presentation and classification under urban development policy

The Fibre Optic flagship project in Dillingen, under the Infrastructure and the Environment business area, foresees the installation of a fibre optic infrastructure for the Rundwies and Dillingen-Nord in- dustrial zones (see Figure 19) to strengthen the competitiveness of these sites.

The funding from the CDF should serve as interim financing for the project, which will have to be granted until the industrial zones have enough subscribers to be profitable. The city of Dillingen is currently developing a community development concept (contract awarded at the end of 2009) into which the project will be integrated. The project falls under Article 5(3b) of Regulation (EC) No 1080/2006 of the European Parliament and of the Council dated 5 July 2006 on the ERDF “promoting

access to, take up, and efficient use of ICTs by SMEs by supporting access to networks, the establish- ment of public internet access points, [...]”, since the project entails enabling local businesses to ac-

cess information and communication technologies. According to the current Operational Programme ‘Saarland’, the project is classified under priority axis 2, business area 4 (“Stimulating structural

change through knowledge-based business, innovation and development of specific strengths – Cul- ture of innovation, qualification and access to ICT infrastructure”). This reaffirms the eligibility of the

project for funding by the CDF.

5.3.1.2 Financial analysis

The gradual connection of 50 current and about 15 new coming businesses creates potential income which can be used for revolving financing by a UDF. At present, their telecommunication mainly oc- curs via copper wiring. All carriers should be able to compete for the use of the new infrastructure. The recipients of the financing are the Stadtwerke Dillingen public utilities, a municipal holding com- pany held by the city of Dillingen (51% of shares) and Energis GmbH (49%).

Figure 20 – Business plan of Fibre Optic Lighthouse project in Dillingen

KomCon estimates that a one-time investment of EUR 540,000 is needed to make the telecommuni- cation infrastructure available. Implementation of the measure is judged to be timely, and the infra- structure should be complete in a period of nine months. Therefore, the following assumes that the investment will be made in 2010 and that revenues can already be expected by the end of 2011. In regard to revenues, KomCon projects that five new buildings can be connected and supplied by a car- rier each year. At the estimated number of 65 commercial businesses to be connected, this means the maximum amount of revenue can be generated after 13 years, or from 2023 on. With a basic fee

0

100.000

200.000

300.000

400.000

500.000

Income

Expenditures

of EUR 30 per month per subscription plus a premium of 10% of the carriers’ total sales, the average annual revenues are estimated at EUR 960 per subscription. This results in steadily growing revenues, reaching a maximum of EUR 62,400 from 2023 on. The projected duration of use for the telecommu- nication infrastructure is 30 years; after this duration, the investment is considered completely de- preciated, so no fictional residual value has been calculated (see Figure 20).

This project is shown to be viable under the given assumptions, since it results in a project rate of re- turn (as measured using the project IRR) of around 6.38%. Although this return would be (barely) commercially viable, it must be noted that the full amount of the revenues is not reached until 13 years have passed, meaning that if e.g. a commercial bank loan, which has a much shorter grace pe- riod (i.e. interest-free years at the start), were taken out, it would be necessary to find interim financ- ing.

Furthermore, there are two other factors which put the profitability into perspective. For one, the ef- fects of inflation have been abstracted from the calculation of revenues. If this is integrated into the calculation because of the very long duration of the project, it becomes clear that the price index for telecommunication has even been negative over the last 10 years. As the Federal Statistical Office’s price index for communications for 1999 to 2009 shows, by the end of this period it had fallen to 75% of its original price (cf. www.destatis.de, Consumer Price Index No 8, Communication). The reverse conclusion is that the revenues would not even remain at their nominal amount, assuming a similar price trend in future. For another, it must be considered that the total duration of the CDF was as- sumed to be 20 years, whereas this project was projected to last 30 years. With duration of only 20 years, the return on the project falls to 4.69%.

In principle, the periodic repayments from the project from the revenues for the basic fee and the additional, sales-related charges allow it to receive long-term equity capital from the UDF. The re- payment schedule to the fund should be adjusted to match the project cash flows, however, so that, except for the interest portion, no or only a minor amount of repayment is scheduled during the start-up years. The cash flows would appear as calculated in the following (see Figure 21).

Y e a r 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17 2 0 18 2 0 19 2 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4 ... 2 0 3 2 Cash flo w -540.000 4.800 9.600 14.400 19.200 24.000 28.800 33.600 38.400 43.200 48.000 52.800 57.600 62.400 62.400 62.400 62.400

Figure 21 – Cash flows from Fibre Optic Lighthouse project in Dillingen (in euro)

5.3.1.3 Legal analysis

In terms of volume, the investment is not considered a large project according to Article 39 of Regu- lation (EC) No 1083/2006. Moreover, no land acquisition is foreseen in this project, so that Arti- cle 7(1b) of Regulation (EC) No 1080/2006 does not apply.

In addition to the municipal investment company of the city of Dillingen, the private company Energis GmbH should own 49% of the project, so it is important in any case to ensure that the financing through the CDF is in compliance with state aid laws. It must also be noted that, depending on the division of shares in the business and the sphere of action, a municipal investment company can also be viewed as a market participant and thus as a recipient of aid.