1.1 Need for a Comprehensive Communications Strategy
Broadband connectivity is seen by governments around the world as an important enabler for economic diversification, growth and service delivery. Many countries have developed national programs to upgrade broadband networks to ensure all citizens can take advantage of the enormous potential of e-commerce, tele-health and distance education. In the Canadian Arctic, accessible, reliable and affordable communication services are seen as a foundation for Northerners to meet many of the socio-economic challenges they face, enabled by networks capable of handling 21st century applications.
There is much documented evidence showing the telecommunications infrastructure serving Yukon, Northwest Territories and Nunavut has not kept pace with services available in many large Canadian cities.1
The Northern Communications Information Systems-Working Group (NCIS-WG) identified the need for a comprehensive strategy to improve communication services to the north, documented in the 2011 report “A Matter of Survival: Arctic Communications Infrastructure in the 21st Century”.2
Without a dedicated strategy to address the communications infrastructure deficit, the residents of the North are in danger of being left behind even as their territories lead Canada in GDP growth through increased development -- development that benefits Canada, but may not benefit northerners without strategic investments in the communications infrastructure.
With a robust communications infrastructure, northerners will be positioned to take full advantage of the economic, educational, governance and healthcare opportunities and bring their experience, expertise, and knowledge to help ensure responsible development of Canada’s Arctic for the benefit of northerners and all Canadians.
NCIS-WG commissioned Nordicity – a leading telecommunications and Information and Communications Technology (ICT) consulting firm to undertake this study, “Northern Connectivity: Ensuring Quality Communications”. The aim of this 2014 report is to identify measurable technical and financial solutions to ensure quality communication services. The study involves research and analysis in various areas, including user needs, network infrastructure and technology, financial sustainability and the economic impact of improving services.
The results of the analysis are incorporated into an optimization model developed for the project. The model allows for scenario analysis and evaluation of alternative options to ensure quality communications services for all residents of Yukon, Northwest Territories and Nunavut. The final chapter in the study provides recommendations and pathways for implementation of the connectivity strategy.
1.2 The Backbone Deficit
The Arctic’s huge distances, few roads, and relatively small populations living in communities spread over vast distances means southern telecommunications finance models (designed to serve larger populations living in close proximity to each other) have not been particularly successful in delivering affordable, robust communication services across the three territories.
The key challenge is the North’s insufficient communications ‘backbone’ – the infrastructure that connects northern communities to each other and the rest of the world. There must be a significant investment to upgrade the Arctic backbone to meet people’s current and future communication needs.
Policy makers, service providers and the public want to know - how much will it cost to upgrade or build new backbone infrastructure to deliver the necessary bandwidth to ensure northerners are not left behind? Where will the money come from, and who will lead this initiative?
1.3 Key Components of the Strategy
This report concentrates on capturing and analyzing the best available market, technical, financial and economic data for the development of a comprehensive connectivity strategy.
Detailed data, analysis and recommendations are provided in five key areas:
- Setting a Target Broadband Speed: Recommends a minimum broadband target speed and service standards for northern households, businesses and governments, based on analysis of northern needs, infrastructure, projected traffic and a review of international standards; (Chapter 2)
- Calculating the Cost of Backbone Upgrades: Documents the cost of four options to upgrade the existing communications backbone to support the reliable delivery of minimum target speeds, with redundancy options, using a custom-built dynamic optimization model; (Chapter 2)
- Developing a Sustainable Financial Model: Estimating the financial incentive required to attract telecommunications Service Providers to participate in backbone development and service delivery, by examining the capital and operational expenditures and projected revenue over an 8 year period for each of the four options. The model also identifies the necessary annual subsidy to ensure low-income households can connect at affordable prices; (Chapter 3)
- Measuring the Economic and Socio-Economic Impact of Investment: Quantifies the economic and socio-economic impact of delivering increased Megabits per second (Mbps) to underserved communities, by examining the impact of increased GDP and jobs resulting from better services, and additional income from an increased tax base and consumer surplus; (Chapter 4)
- Implementing an Action Plan for Change: Proposes a mandate, structure, and step by step process for government to initiate a strategy that includes governmental, community and service provider input to fund and oversee the next generation of critical Arctic communications infrastructure. (Chapter 5)
The results provide telecommunications service providers, policy makers, and investors with a starting point for solving the communications infrastructure deficit that currently plagues the Arctic.
The remainder of this Executive Summary provides the key highlights of each of these five areas.
2 SETTING A TARGET BROADBAND SPEED (Chapter 2)
2.1 Arctic household target: 9Mbps down, 1.5 Mbps up
The consulting team gathered a range of inputs providing the basis to recommend a minimum average target of 9 Mbps down and 1.5 Mbps up.3 This target should be achieved by 2019 in order to meet projected consumer, business and government needs, while recognizing the constraints posed by the backbone infrastructure.
There are currently several telecommunications technologies used to connect Arctic communities. These technologies (whether fibre, microwave or satellite) dictate to a large degree what Internet speeds can be delivered to consumers and institutions, so setting realistic targets becomes particularly challenging in the Arctic with its mix of backbone technologies. Currently, Yukon and NWT have an average of 2.6 Mbps per household (for microwave and satellite served communities), while Nunavut has an average of 1.5 Mbps per household (satellite only).
Countries such as Finland and Alaska have set ambitious targets of 100 Mbps per household to be reached by 2015 and 2020 respectively. This number has no meaning in Canada’s Arctic if there is no realistic way to make it happen. So rather than setting a target that does not recognize the unique Arctic geography and population distribution, the team approached the design of specific target speeds for different user groups using the following inputs, detailed in the first half of Chapter 2:
- User needs as defined through secondary research and primary research with northern users through online surveys and focus groups;
- Existing and future network capacity as determined via interviews with operators and secondary research;
- Current and projected traffic calculated based (population and economic trends in the territories, user trends in benchmark jurisdictions, global markets, and);
- Experience of jurisdictions with similar geographic, population and economic profiles in setting and applying connectivity targets / standards to determine reasonable benchmarks.
The 9 Mbps average target for Arctic households is certainly modest within a global context, and the report acknowledges the target will likely rise over time.
It is important to note that the 9 Mbps is a minimum connectivity target reflecting current user needs (as estimated in 2013) and not a final target. The consulting team empahasized that user needs in the territorial and global jurisdictions will continue to grow and evolve on a year-over-year basis. In best practice global jurisdictions there has been an on-going adjustment of connectivity targets and standards and a process to ensure future connectivity enhancements will have to be considered in the three territories.
The target of 9 Mbps was used as a baseline for estimateing the resulting cost estimates, including the cost of various backbone upgrades, network access costs, the investment required, and finally, the economic impact of increased connectivity.
3 CALCULATING COST OF BACKBONE UPGRADES (Chapter 2)
3.1 Complex mix of target speed and backbone options
Once a minimum broadband target is set, engineers can estimate how much transport capacity is required in the backbone to deliver the necessary bandwidth to each community, and estimate how much it will cost to build based on similar projects with similar terrain and constraints.
But there is no single number. The answer depends on many inputs, from the population of the community to be connected and the distance to be covered, to the existence of roads and the backbone options available for the terrian in question. The inputs considered are detailed in Chapter 2 of the report.
When the distance is huge, the population is small, and there are no roads, the capital cost of installing fibre is very high when calculated on a per-user bases. However, once the fibre is installed, the additional operating cost to accommodate increased demand is relatively minimal as it has significantly greater reserve capacity and lower upgrade costs than satellite. Satellite ground infrastructure is cheaper to install than fibre in remove communitites, but is characterized by much higher operating costs as bandwidth needs inevitably increase as communications services evolve. The public, understandably, hopes their community gets fibre because everyone wants faster and better communications services at affordable prices into the future - no matter where they live.
3.2 Dynamic Optimization Model
Who getrs fibre, who gets microwave, and who gets satellite? And what happens when a fibre line is cut, or a satellite stops working? Which communities need redundancy, and how much redundancy? And who decides?
To help answer this thorny set of questions, the consulting team developed the "Dynamic Optimization Model" to help predict the estimated costs of four different backbone options. Depending on the inputs, the Dynamic Optimization Model can produce a set of numbers that define the costs for upgrading or building a new backbone to serve a community or region.
At the end of the Executive Summary, detailed data is provided on each option, divided by territory and community. This data was compiled from Chapter 2 of the report, with additional relevant data pulled from the Appendices as needed, for ease of review by readers.
The costs produced from the Model provided in the following pages are only guidelines, and are not meant to represent detailed engineering costs, which are beyond the report’s scope. To produce detailed numbers, an exercise of detailed costing would have to be based on agreed-upon build parameters, site visits, etc., and would be a next step once funding has been determined.
The intention of presenting four options is to start the discussion. Additional options can be developed using the Dynamic Optimization Model as needed.
3.3 Four options presented ranging from $623 million – $2.178 billion
Four options were developed upon request by the NCIS-WG committee. The following assumptions are embedded in each of the four options below:
- Estimated microwave and fibre costs may vary +/- 50% (based on Alaskan estimates);
- The new Mackenzie Valley Fibre Link will connect six communities in NWT to fibre. The costs for upgrading this backbone are not included in cost calculations in any of the four options below, as costs are covered by a project independent of this study.
- Network access costs (often referred to as first mile or last mile connection) are the same for each of the four options, and are not included in the estimates on the next page.
Option 1: Base Network Upgrade (no new redundancy): $622,680,000
To upgrade the existing backbone (referred to as the base network in the report) to meet the target bandwidth requirements, the engineering team estimates the cost will be approximately $622,680,00 combining all three Territories.
This option sees no change to the existing type of backbone – a community currently served by satellite will continue with satellite, a community with microwave will continue with microwave, and fibre-served communities will continue with fibre.
No new redundancy is added in this option. (See sheets at the end of the Executive Summary for more details by community and territory.)
Option 2: Base Network Upgrade (critical traffic redundancy): $765,001,000
Option 2 was developed to ensure every community has a backup network (secondary network) ready for deployment in the event the primary network fails for a short period of time, such as a minor fibre cut or brief satellite service interruption.
The cost estimate of $765,001,000 includes the upgrade of the primary network as described in Option 1, plus the cost for ensuring the existence of a secondary redundant network that can support critical applications as needed. Where possible, the secondary network would be upgraded using existing backbone technologies already in place. For locations with no redundant infrastructure in place today, cost estimates include the building of additional satellite facilities where necessary.
In Option 2, an incremental amount of additional capacity is added via microwave, fibre or satellite capable of carrying the traffic load arising from critical applications required by first responders and key government services. (See detailed sheets at the end of the Executive Summary for details by community and territory.)
Option 3: Base Network Upgrade (full traffic redundancy): $2,178,014,000
A third option identifies the cost of providing full traffic redundancy on a secondary network in the event of a major longer-term primary network failure.
For an estimated cost of $2,178,014,000, all three territories could achieve redundancy to their primary network, by upgrading existing secondary networks and/or building additional infrastructure where required, capable of handling the entire traffic load on a secondary network if necessary.
Costs for this option are based on the traffic estimates created in the model. (For details on additional capacity available, please see 5BCMFT 4-6 at the end of the Executive Summary.)
Option 4: Enhanced Network Upgrade (Option 2 plus new fibre builds): $651,086,000
Consultants compiled the estimated costs for adding additional fibre links in all three territories.
The total of $651,086,000 for this option includes:
- upgrades to the existing primary network (as described in Option 1);
- upgrades to the secondary network for critical redundancy (as described in Option 2); and
- additional fibre builds – as described below.
The aim of this final option is to provide each region with options to meet their unique terrestrial circumstances as follows:
- Yukon to connect one additional community to fibre currently served by microwave, and build in additional redundancy to existing fibre networks;
- NWT to connect three more communities to fibre 4, and provide redundancy to an existing fibre network – in addition to the communities slated for the Mackenzie Valley Fibre Link;
- Nunavut to connect to the proposed Arctic Fibre undersea cable project, which proposes to connect seven Nunavut communities to fibre at no cost to government. An additional 10 Nunavut communities would be connected to the fibre link for a fee. 5 Calculations include the costs for adding these 10 communities, plus another 3 communities via microwave from a fibre-served community.
4 ESTIMATING INVESTMENT REQUIRED (Chapter 3)
Service providers cannot cover the full investment required to upgrade the Arctic backbone to meet the demand for services at prices people can afford. So how much additional investment is required?
The report tackles the question of needed infrastructure investment in Chapter 3 based on each of the four backbone investment options presented in the summary above. The Dynamic Optimization Model was used to estimate the cost for a third-party service provider to operate, maintain, and sell services using the four backbone options presented in Chapter 2. This data was then used to calculate how much of a financial incentive a service provider may require in order to invest in upgrading or building new backbone infrastructure.
The report also identifies the recurring annual subsidies required to assist low-income households to connect to the infrastructure.
4.1 Calculating the Net Present Value
Using a standard business model (see chart below), the Model’s assumptions include:
- Estimated Capital Expenditures (CapEx): Includes backbone capital expenditures (based on four options), and network access capital expenditures (connecting local networks to the backbone) based on $500 on average for each new subscriber;
- Estimated Operating Expenditures (OpEx): Includes both network operations costs (a percentage of the CapEx for terrestrial and $50,000 annual maintenance cost per community for satellite site) and standard administrative expenditures in the operations of telecommunications network such as cost of acquisition, sales, and general administration; Operating Revenue: Assumes no new government purchases, no new revenue from mines operating outside of communities, no new revenue from large businesses located in large centres. The incremental revenue from small and medium sized businesses is assumed to be 20% of the incremental revenue in the fixed residential market.
From the expenditure and revenue estimates, the potential earnings are calculated before interest, taxes, depreciation and amortization (EBITDA).
The Free Cash Flow value was calculated by subtracting the Capital Expenditures from the EBTIDA. The resulting Net Present Value then determines if the targeted rate of return can be achieved over time. The FCF and NPV are then used to calculate if and how much of a financial incentive payment a Service Provider may require to get involved.
4.2 Capital Expenditure Financial Incentive Payment Required
In almost all options presented, a financial incentive payment would be required for a third party service provider to take on the risk of investing to build, upgrade backbone networks, and deploy services to Arctic consumers. This incentive would be required to assure a reasonable financial return, with details provided in the tables at the end of the Executive Summary, divided by territory and option, and summarized here for ease of access.
Note: all numbers presented are based on costs assuming the fast roll-out scenario of 3 years.6
In Yukon, projected financial investment required is always lower than the upgrade costs, because over time, the incremental revenue generated from the upgraded network will offset part of the operating costs in future years.
In NWT, in two options, the projected financial investment incentive payment required is lower than the upgrade costs, and in two options, they are higher, as the revenue generated from the upgraded network is not sufficient to offset all operating costs in future years.
In three of Nunavut’s options, the financial incentive required is lower than the upgrade costs and in one option, the financial incentive is higher. In all of the scenarios, however, the Net Present Value is negative but the financial investment will not completely offset the CAPEX costs.
Note: The final rolled up figures do not account for cost efficiencies if one company were to do all three territories. If one company were to do the upgrading work for all three territories, the final Capital Expenditure costs might be lower.
4.3 Annual Recurring Subsidy Required
The consulting team also calculated the necessary recurring annual subsidy required for every household designated as a ‘low income’ household. These subsidies are included in the model regardless of which option is selected. Annual recurring subsidies were considered for low income households so that the monthly cost of service is kept at an affordable level.
4.4 Potential Sources of Financing
Chapter 3 concludes it will be necessary to obtain funds from outside of the territories, as these infrastructure funds and recurring subsidy investments are not available locally.
In other countries such as Australia, the US, and the UK, infrastructure projects of this nature rely on federal government investment as the principal source of funding.
Other possible complementary sources of funds could come from service providers, operators, end users, territorial governments, and P3 (Public-Private-Partnership) project financing models.
5 ECONOMIC & SOCIO-ECONOMIC IMPACT OF INVESTMENT (Chapter 4)
5.1 Measurable Economic Impact
Calculating the dollar value of benefits in increased broadband speeds and penetration is not an exact science, as it is difficult to isolate the effect of broadband in the larger economy. However, research has shown that there is a positive relationship between broadband adoption and penetration, and GDP growth that is not explained by other economic factors.
In Chapter 4, the report’s authors calculate the rise in Gross Domestic Product using accepted economic models for assessing the impact of an increase in broadband penetration and speeds. The rise in GDP was in turn used as a base for calculating the measurable impact on the economy between 2016 and 2023 from additional jobs created and consumer surplus impact.
Measurements were calculated based on the forecast broadband penetration and adoption using the target speed of 9 Mbps down (delivered in 2019 in Yukon and NWT and by 2020 in Nunavut):
- Increased penetration and speed of broadband leading to measurable rise in GDP;
- Increased GDP leading to measurable increase in number of jobs;
- Calculation of tax income to government from GDP and wages and territorial tax rates;
- Increased benefits to consumers through use of broadband leading to measurable rise in the Consumer Surplus.
5.2 Non-quantifiable socio-economic impacts
The impact on resource development, while not specifically measured in the report, was highlighted as a positive economic impact as improved communications networks would surely lessen logistical challenges facing developers, as well as increase the attractiveness of doing business in Canada’s Arctic.
In addition, better communication networks would likely lead to measurable benefits for northerners over time - accelerating job creation, increasing procurement opportunities for northern companies, and an increase in opportunities for Public-Private-Partnerships.
The report summarizes many of the other socio-economic positive impacts in the other areas such as increasing educational opportunities, enabling small and medium sized business creation and growth, realizing healthcare cost savings, supporting the Government of Canada’s Arctic initiatives, and improvements to public safety. These correspond with findings documented in other reports.
5.3 Socio-economic impact of doing nothing
Without significant improvements to broadband connectivity levels in the North, the three Territories would likely see reduced economic growth, lower territorial tax base and correspondingly, stagnant or lower household income and fewer jobs. The competitiveness and business development of the Territories relative to other northern jurisdictions with resource-based economies such as Alaska and the rest of Canada would be impeded. As development of the North is a key to overall Canadian economy, on a global basis, Canada’s ability to attract new capital into critical resource and transportation projects would be lessened.
There would also be significant negative socio-economic impacts in particular, in the delivery of health, education and other government services. The overall quality of life would be affected and while improvements are made in the rest of Canada as a result of improving technologies and better tools in these sectors, the North will be at a disadvantage since the technological requirements would impede proper functioning of these newer technologies. The ability of the Territories to attract and retain talented workers and their families would be also be hobbled. The northern workforce - already characterized by retention difficulties in recruitment and retention – could become ever more unstable.
6 IMPLEMENTATION ACTION PLAN (Chapter 5)
One of the challenges of moving the Arctic infrastructure agenda forward is in identifying who is responsible for finding and implementing solutions.
The NCIS-WG’s mandate is to provide a forum for stakeholders to engage in discussions regarding communications in the Arctic and, ultimately, to identify strategic recommendations leading to more robust communication capabilities in the North. But the NCIS-WG has no ongoing funds for developing or leading change to the status quo.
The report outlines an action plan in Chapter 5, to move from the discussion stage to the implementation stage to make long-term robust connectivity in the north a reality.
The report recommends the creation of a Broadband Implementation Task Force responsible for implementing the needed changes – along with the ability to gather and expend the necessary resources to make effective change.
The Broadband Implementation Task Force would be made up of federal and territorial government stakeholders with strategic knowledge of Arctic needs. The Task Force’s mandate would be to oversee the development of the next generation of critical Arctic communications infrastructure.
The Task Force would operate over a multi-year period, and requires federal and territorial government funding to complete the following tasks in its quest to develop the Arctic communications infrastructure. Through its own work and via a series of subcommittees, the Task Force would:
- Clarify joint federal and pan-territorial funding commitments;
- Provide guidance in the application and adaptation of the strategy;
- Direct implementation and stakeholder engagement around regional projects and pan-territorial concerns;
- Provide continuity and corporate memory;
- Obtain guidance from CRTC and relevant departments on regulatory changes that affect the Arctic;
- Have the authority to issue Requests for Information, and Requests for Proposals;
- Have the ability and mandate to evaluate and act upon the information collected.
There is a critical role for the federal government and its agencies to develop connectivity in the territories. Supporting the creation of an implementation plan via the Broadband Implementation Task Force would be the first step on the road to improving the communications infrastructure in the north for years to come.
1. Imaituk Inc., (2011). “A Matter of Survival: Arctic Communications in the 21st Century”, NCIS-WG Arctic Communications Infrastructure Assessment online at www.aciareport.ca.
3. The target speed is expressed as an average - some institutional users will access much faster speeds, and some households will have access to lower speeds, depending on many factors. The 9 Mbps down and 1.5 Mbps up is an average over all users, amd does not guarantee that every consumer will have access to these speeds.
6. Two roll out scenarios: fast and slow - correspondingly to 3 and 5 year infrastructure build periods respectively - were considered to reflect potential preferences of territorial governments. In both scenarios, September 2016 is designated as the start up date for both fast and slow scenarios. This date was estimated based on timing required for funding approval, design and roll-out of the initial portion of the infrastructure.