More bits please

February 2018 – When it comes to the future of broadband service, the industrial and export nation of Germany is at risk of being left behind. Especially outside of metropolitan centres, the network is slow. But innovative companies want to change that. They concentrate on high-tech, streamlined structures, private capital, and expect just one thing from the state: clear framework conditions. As one of the earliest pioneers, HSH Nordbank has greater familiarity with the specific financial conditions than virtually any other financial institution.

A mere 2.4 percent. That’s how high, or perhaps we should say low, the percentage of fibre-optic connections is here, according to the Association of Telecommunications and Value-Added Services (VATM e.V.). The Organisation for Economic Cooperation and Development (OECD) quotes an even lower number of less than two percent (see graphic). A comparison: In Sweden, 55 percent of all private households surf with the fastest Internet speed. In Latvia, it is around 63 percent and in Japan nearly 75 percent.

Germany still lags behind when it comes to fast Internet surfing

Country ranking by percentage of households with fibre-optic network service

Germany still lags behind when it comes to fast Internet surfing. Country ranking by percentage of households with fibre-optic network service

Source: OECD, 2017

Germany is a far cry from having widespread coverage of the ultra fast fibre-optic network, which is capable of data transfer rates in the terabyte range. What's more, quick investments in this area are now more urgent than ever: According to forecasts by Germany’s Federal Ministry of Transport and Digital Infrastructure, the entire domestic IP data traffic will increase sixfold between 2015 and 2025, while mobile data traffic will increase by a factor of 18. You don’t have to be an engineer to know that this would be impossible if the existing capacity and data speeds remain unchanged.

Mobile future, sluggish present

Industry 4.0, 3D printing, telemedicine and electromobility are changing the face of the global economy. Mobile futur is more than using a smartphone.

The breakthroughs and market effects of Industry 4.0, 3D printing, telemedicine and electromobility are too radical. All of these megatrends are changing the face of the global economy and, while posing some risk, also present German’s globally situated middle class with far more opportunities. That is, if one basic requirement is met: Without fast networks, Germany’s companies, which often have to make due with data speeds of 50 MBit per second, won’t be able to benefit from the new technologies. Digital channels are the trade routes of the 21st century. High speed networks are as critical for today’s digital economy as electricity networks and railways were for industrial development.

“In Germany, there is a comparatively traditional understanding of how investments in infrastructure are to be carried out. Usually the projects remain in state hands or are guided through subsidies.”

Dr. Marcus Kleiner, Head of Origination Infrastructure & Logistics HSH Nordbank

The federal government is responsive and, given how crucial Germany’s digital infrastructure is to securing its future potential and ability to foster innovation, it wants to “continue to increase funding as necessary”. Currently, this means providing federal funds of nearly three billion euros per year starting in 2018. But improved coordination is at least as important as funding increases for regions with weak infrastructures. “The government often reacts in an uncoordinated manner to calls for help from mayors and county commissioners, who are concerned for the future of and employment opportunities in rural areas. The result is often subsidies granted in a scattergun fashion”, said Steffen Leiwesmeier, Head of Digital Infrastructure Financing at HSH Nordbank.

Energy

“The government often reacts in an uncoordinated manner to calls for help from mayors and county commissioners, who are concerned for the future of and employment opportunities in rural areas. The result is often subsidies granted in a scattergun fashion”, said Steffen Leiwesmeier, Head of Digital Infrastructure Financing at HSH Nordbank.

High speed networks are as critical for today’s digital economy as electricity networks and railways have been for industrial development.

What is more: “In Germany, there is a comparatively traditional understanding of how investments in infrastructure are to be carried out. Usually the projects remain in state hands or are guided through subsidies. Only rarely are private partners on board. However, it is especially through cooperations between public and private partners that additional — and also high-volume — projects could be realised, thereby increasing the overall amount of investment”, explains Dr. Marcus Kleiner, Head of Origination, Infrastructure, and Logistics for Corporate Clients at HSH Nordbank. Since the mid-90s, his company has been engaged in financing infrastructural projects, from locomotives to train cars to data traffic. According to Steffen Leiswesmeier, HSH Nordbank was the first German bank ever to be engaged in the area of digital infrastructure – and it continues to do so today, with steadily increasing intensity. We receive offers for projects throughout Europe nearly every other day. The ‘pipeline’ is absolutely full with around one billion euros.

Connecting the Earth to the moon

Civil engineers and craftsmen have already laid around 375,000 kilometres of fibre-optic networks for Deutsche Glasfaser.

Deutsche Glasfaser, a German fibre-optics company based in Borken in Westphalia, has demonstrated how to successfully invest and conduct business in the broadband sector when the legal and framework conditions are clear — and without using a penny of state funding. Just five years after its founding, the company invested 200 million euros, with an additional 450 million euros to follow ‘in the near future’. The company develops, builds, and operates fibre-optic networks and has grown its base of contract customers to 200,000 throughout Germany. Civil engineers and craftsmen have already laid around 375,000 kilometres of fibre-optic networks. That is roughly the distance between the Earth and the moon.

“Our goal is to be Germany’s market leader in fibre-optic expansion”, says CFO Jens Müller. Deutsche Glasfaser began by serving primarily private customers. “In the future, we’d like to place more emphasis on corporate customers”, says Müller.

“Using our direct fibre-optic connections, a rural village can easily outperform the Internet service available in any major Germany city.”

Jens Müller, CFO Deut­sche Glasfaser

These dreams of growth require solid financing: Just recently, the company (which has 400 employees) increased the third-party funding limit with its bank partners, which includes HSH Nordbank, from 225 to 650 million euros. Since mid-2015, Deutsche Glasfaser has been represented by the global investor KKR, which owns a majority share. According to the company’s own figures, nearly 1.5 billion euros of capital are available for current expansion plans, which are designed to service one million households and companies.

A critical factor in the company’s success was their focus on rural areas. “Using our direct fibre-optic connections, a rural village can easily outperform the Internet service available in any major Germany city”, said CFO Müller. In a survey of more than 1,400 companies conducted by the Association of Local Utilities (VKU: Verband kommunaler Unternehmen e.V.) in January of this year, local representatives expressed the hope that improvements to digital infrastructures could help stem Germany’s increasingly apparent rural exodus.

The faster the network in the rural regions, especially in the affluent suburbs of big cities, the more people that will move away from the high rents and property prices in the city centres. But no freelancers or digital workers will be tempted to move out of the city if the network in the village is sluggish. According to the VKU survey, the download speed in many communities is still significantly lower than 50 megabits per second. For nearly 65 percent of the companies surveyed, broadband expansion was clearly the biggest challenge facing their business.

Exciting new asset class

At 100 Mbit per second, the fibre-optic networks are far from their potential maximum performance. One of their chief benefits is scalability: there is virtually no technical limitation on their potential speed and number of connections. It is possible to increase capacity at any time. “This feature is one of the most important factors for the success of a long-term infrastructure for the country’s digitalisation. And it’s also what makes the asset class so interesting for institutional investors such as banks, insurance companies, and pension funds”, says HSH Nordbank expert Leiwesmeier. Jens Müller from Deutsche Glasfaser is certain: “The potential for fibre-optic networks is very high. There will definitely not be a lack of demand for the expansion”.

“For the success of a long-term infrastructure for the country’s digitalisation the increase of capacity is one of the most important factors. And it’s also what makes the asset class so interesting for institutional investors.”

Steffen Leiwesmeier, Head of Digital Infrastructure Financing at HSH Nordbank