The passive layer of the planned glass fibre network (rights of way, ducts, fibres, etc.) would be owned by a public foundation (‘Stichting Glasvezelnet Appingedam’, hereafter: ‘the foundation’) set up and controlled by the municipality. The investment in the passive layer is estimated at € 4,9 million. The municipality of Appingedam will provide either a loan or a guarantee for a loan for that amount. Initially, it was not foreseen that the construction of the passive layer would be tendered out. However, the municipality decided, as stated in the letter of the Dutch authorities of 4 August 2005, that the construction of the passive layer would be subject to a public procurement procedure.

On the basis of the passive layer, an active network would be operated which provides wholesale services to service providers who would offer broadband services to end users (households and businesses). The costs of the active layer (telecommunications equipment, network management, etc.) are estimated at € 1 to 1,3 million. The active components have, according to the Dutch authorities, an estimated lifecycle of 5 to 8 years.

The authorities initially stated that the active layer would be owned and financed by an entity (‘Stichting Damsternet’) set up by private investors. Not all potential private investors were known at the initial stage of the project. According to the authorities, […], […] and […] had initially shown an interest.

However, in their letter of 4 August 2005, the authorities stated that the municipality would in fact tender out the concession for the active layer, including the operation of the network, to an operator (hereafter ‘the operator’). According to the information available to the Commission, it is not envisaged that other providers of electronic communications services than the operator would have direct access to the passive layer.

It is unclear under which financial terms the concession would be granted. The draft concession agreement submitted to the Commission lays down that the concession holder would pay a concession fee to the foundation on an annual basis. The foundation would claim ‘a payment which equals a maximum of 80 % of the generated annual cash flow’. In case of a negative cash flow, the foundation would not claim the payment of the fee. In that case it would only claim a minimal payment as laid down in an annex to the concession agreement. The annex to the concession agreement submitted to the Commission does however not set out the amount or conditions of the foreseen payments.

In case the FTTH network in Appingedam would be built, providers of electronic communications services would use the wholesale access provision to offer retail broadband services to end users. Therefore, both the wholesale as well as the retail markets in Appingedam are affected by the introduction of the planned FTTH network financed by the municipality.

In its opening decision, the Commission expressed reservations with regard to the compatibility of the measure with the Common market on the basis of Article 87(3)(c) of the EC Treaty. Relating to the necessity of the measure, the opening decision questioned whether the situation in Appingedam could actually be described as featuring elements of ‘market failure’.

It was stated in the opening decision that broadband access was in fact available in Appingedam, although the broadband services currently provided are not entirely comparable with the services which could be offered over the planned network. Consequently, it was considered that there is an important overlap of network coverage and services offered between existing networks and the envisaged measure.

The Commission also stated that it was difficult to envisage applications or services for citizens and businesses which could not be deployed using broadband services delivered over the existing networks. It was considered that the degree of substitutability between retail and wholesale services delivered over the envisaged FTTH network on the one hand and services delivered over the existing networks on the other hand were high. Hence, the potential distortion of competition by the measure was expected to remain very high for the foreseeable future.

The measure foreseen by the authorities would entail a serious risk that State intervention would crowd out existing and future investments by market players. Accordingly, it was expressed in the opening decision that it would under these circumstances also be questionable whether the foreseen measure and the use of the aid instrument as such were proportionate.

The Commission has received comments from three interested parties: Essent, Vecai and one industry association requesting anonymity.

Essent also states that Appingedam cannot be considered a peripheral area with socio-economic arrears. The services the municipality wants to offer for education, healthcare and elderly care can in fact be offered through the existing networks. Essent states that it supports the Commission's conclusion that it is not clear what applications or services could be offered on the FTTH network that cannot be offered through the existing networks. Moreover, the prices of broadband access in Appingedam are, according to Essent, not higher than elsewhere in the Netherlands.

VECAI, the trade association of cable companies in the Netherlands, considers the proposed state aid measure to be incompatible with Article 87(3)(c) of the EC Treaty. Government funding in this sector would, according to VECAI, directly distort competition in a highly competitive market.

There is, according to VECAI, no market failure present in the market for broadband services in the Netherlands. To substantiate its statement, VECAI also refers to the report of the CPB and the letter of the Minister of Economic Affairs also mentioned by Essent. The currently available infrastructures are capable of supporting highly advanced broadband services. The proposed investments would, according to VECAI, duplicate rather than complement existing infrastructures.

VECAI also states that Appingedam cannot be considered as a peripheral area. Moreover, according to VECAI, the fact that the municipality is active both as an infrastructure owner and a public authority (granting permits, rights of way, etc.), may, under some circumstances, lead to a conflict of interest.

The industry association requesting confidentiality submitted that the Commission should encourage the deployment of open passive access infrastructures. The de-coupling of services and infrastructure can, according to the association, lower barriers for entry and increase competition as well as stimulate innovation. The association is of the opinion that the aim of competition rules should be to enhance overall welfare and not to protect existing market players.

The association states that there is no need for state intervention if the owners of the existing infrastructures agree to make their infrastructure available to all other providers of electronic communications services and provide access on a fair and cost-oriented basis. However, if this is not the case, there is in fact a market failure present and public authorities should be allowed to intervene.

In response to the request for comments in the decision to initiate the procedure, the authorities did not refute any of the arguments brought forward by the Commission in the opening of the procedure. The Dutch authorities submitted a number of documents (e.g. research reports) that would explain the reasoning behind the measure and the possible usage of the network.

The services and applications which can be offered over the envisaged FTTH network are considered to be important for the exercise of the tasks of the municipality itself (e.g. offering e-Government services), for the healthcare sector (e.g. telemedicine and co-operation between different institutions involved in healthcare), as well as education (e.g. telelearning applications). In this context, the Dutch authorities mention that Appingedam has a high rate of unemployed and elderly people which need access to advanced broadband services.

According to the Dutch authorities, the measure at hand does not fall within the scope of Article 87(1) EC, but should rather be seen as a typical task of a public authority, providing general ‘public’ infrastructure open to all parties at similar conditions.

The Commission considers that this would be the case if an infrastructure is needed to provide a service that is falling within the responsibility of the State towards the general public and is limited to meeting the requirements of that service. Moreover, it should be a facility that it is unlikely to be provided by the market because it is not economically viable and the way in which it is operated should not selectively favour any specific undertaking.

Accordingly, the Commission is of the opinion that the project cannot be qualified as a general infrastructure which is outside the scope of State aid control. Contrary to, for example, certain infrastructures in the transport sector, which are open to all potential users on equal and non-discriminatory terms and which are not provided (constructed and/or managed) by the market on purely commercial terms, this type of infrastructure is actually deployed by private parties which are also delivering electronic communications services, although not necessarily on the conditions foreseen by the municipality of Appingedam for the measure at hand.

As the presence of KPN and Essent in Appingedam shows, the provision of a local access network for electronic communications is not a typical task of a public authority, but such networks are normally deployed by providers of electronic communications services who deliver broadband services to households and businesses. The project thus duplicates to a certain extent market initiatives or makes possible the provision of services which are already available.

Indeed, the absence of distortion of competition is not an inherent feature of this type of facilities, but rather has to be verified on a case by case basis. The market situation in Appingedam is such that the measure distorts or threatens to distort competition by competing with existing private networks and by discouraging future private investment in similar facilities.

The Commission thus considers that the project in Appingedam falls within the scope of State aid control rather than considering it a general infrastructure which falls within the normal responsibilities of the State towards the public.

Although the Dutch authorities have not explicitly invoked the existence of a Service of General Economic Interest, the argument that the provision of the FTTH network in Appingedam might represent a SGEI will be assessed.

In the case of Pyrénées-Atlantiques, the direct objective of the measure was to enable access to broadband services through a wholesale network to the general public in a region with limited broadband coverage. These conditions do not apply in Appingedam where broadband services are already provided over two networks.

The Dutch authorities claim that the investments by the municipality and the foundation are necessary precisely because market players are not willing to invest in the passive FTTH network in Appingedam as the expected return on investment is not sufficient to justify the investment on market terms.

According to the Dutch authorities, the municipality had requested several banks to finance the investment in the passive network, but all banks except for the Bank Nederlandse Gemeenten (BNG) have refused to finance the project. BNG is willing to grant a loan to the municipality because, according to the municipality, BNG only assessed the creditworthiness of the beneficiary of the loan, i.e. the municipality, but not the setup of the FTTH network by the foundation or the overall project as such.

Hence, the investment by the municipality in the foundation and the investment by the foundation in the passive network do not pass the ‘market investor test’ as a market operator would not have invested in the passive network, as experienced by the municipality when it contacted private investors.

In their initial submissions before the Commission's decision to initiate the procedure, the Dutch authorities claim that there is no aid involved in this project, on any of the four levels which can be distinguished. There would be no advantage to the foundation and even if there were an advantage, it would have no effect on trade between Member States. The authorities are further of the opinion that there is neither aid granted to the operator of the active layer nor to the retail service providers. The operator will (have to) charge a wholesale price in line with market rates to service providers that deliver retail services which they already offered over existing infrastructures. If the Commission were to request the municipality to guarantee that the operator charges these market prices, the municipality would lay this down in the agreement between the foundation and the operator.

• there is an intervention by the State or through State resources;

• it confers an economic advantage on the recipient;

• it distorts or threatens to distort competition and

• the intervention is liable to affect trade between Member States.

Concerning more specifically Appingedam, as regards the retail market, as stated before, KPN and Essent both offer retail broadband services. Essent currently offers up to 5Mbit/s and KPN up to 6 Mbit/s. Both Essent and KPN offer ‘triple play’ services (telephony, internet, digital/analogue TV). Both KPN and Essent have the technical possibilities and will further increase, on the basis of their existing networks, the bandwidth capacity of their service offerings, should there be sufficient demand for such services. Other Internet Service Providers also have the possibility to offer broadband services, based on the wholesale offers of KPN.

In summary, it can be concluded that there is no market failure present in the broadband markets in Appingedam which would require financial state support.

Although Appingedam is located in a peripheral region of the Netherlands, the intervention is taking place in a town where retail and wholesale broadband services are already available via various providers of electronic communications services and networks at service conditions and prices comparable to other regions.

Consequently, the measure concerned does neither address a market failure nor a cohesion objective. The aid is not necessary to promote the supply of broadband services in Appingedam and distorts competition in a disproportionate way. Therefore, in view of the absence of an objective of Common interest, the measure does not fulfil the criteria for compatibility under Article 87(3)(c).