Financing Stimulus for FTTH.
Funding Europe’s €260 billion Access Fibre Upgrade:
A Radical Seven Point Action Plan
Financing a World Class Digital Infrastructure
Presentation to Scottish Government Event, Edinburgh 13 May 2013
Stefan Stanislawski, Partner, Ventura Team LLP
Builds on the November 2012 Ventura/Portland report for the FTTH Council Europe
Kick-off
My credentials:

We partly own a successful fibre
operator in Sweden;

Last year we helped Jersey
Telecom commit to a complete and
profitable fibre switchover;

We are helping start some new
fibre projects in real estate
telecom;

Our November report for the FTTH
Council
addressed
how
to
stimulate FTTH financing.
Financing Stimulus for FTTH.
Funding Europe’s €260 billion Access Fibre
Upgrade:
A Radical Seven Point Action Plan
Report by Ventura Team LLP and Portland Advisors
World class infrastructure = fibre
I make no apologies for focussing on fibre in the access network:

Fibre into - or very close to - the home is needed for 100M or
1000M;

100M is the fundamental, though not on its own sufficient, basis
for a digital future;

Fibre is cheaper: Ultimately lower costs should benefit both
shareholders and customers.
Source: www.rala.com
Some things you may not know about the fibre business
REALITY CHECK
BT stock has risen 50% in the last year easily beating the FTSE100
Virgin Media has more than doubled driven by the takeover
Compared to other utility stocks BT and Virgin Media are
financially healthy and have comparatively high returns on
capital employed
London market
listed utility
sectors with BT
and VMED
broken out
separately.
Data from
Stockopedia
11th May
2013.
EV is total.
Other indictors
are averages
weighted by
EV.
Yet our lack of modernisation is an embarrassment

Even
comparative
laggard
Germany has 10x the % fibre
coverage we do

Lets not even mention Kazakhstan
– they are installing more fibre
connections in one year than the
UK ever has
Customers of regulated utilities pay a
specific amount each month for asset refresh
Asset Class
Cost to pass
Capital Asset Life WACC Monthly
1038
25
7.4%
£7.44
Over 25 years fibre should
spread everywhere, already
paid for in the monthly bill.
This social contract underlies
all utility regulation – a fair and
stable price is paid for periodic
asset renewal.
This
ensures
modernity,
efficiency and fitness for
purpose.
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑓𝑎𝑖𝑟 𝑟𝑎𝑡𝑒 𝑜𝑓𝑟𝑒𝑡𝑢𝑟𝑛
𝑎𝑠𝑠𝑒𝑡 𝑙𝑖𝑓𝑒 𝑥 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑡𝑖𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛
If neither the regulator nor
competition prompts timely
asset refresh, then the
customer ends up paying for
something they do not get …..
…. and (unless it maintains a
sinking fund) the utility gets
“free” money distorting its
investment decisions - and
potentially the perception of
the more casual equity
investor.
WHAT IF I WERE MADE TELECOM MINISTER
OF A NEWLY INDEPENDENT SCOTLAND?
Let’s assume this is my brief…..
The whole country must be modernised
in no more than 12 years from today
We are out of the EU so you can move
on from 1980s style regulation
Your plan must be capital markets /
rating agency friendly
Money is tight so minimise calls on the
public purse
This would be my approach
My goal is to modernise the access network while keeping prices at or only
slightly above current levels in real terms – we are going to make the fibre
switchover.
I redefine universal service to be broadband at 100MBit/s symmetric. This
means that estimated USO payments within Scotland of £54m per annum
must now flow – through my Ministry - to fibre projects rather than to
propping up an obsolete copper voice business.
Next I change policy to be based on a contractual approach to infrastructure.
My first goal is to do a deal with BT to commit to the Fibre Switchover
voluntarily on transparent fair terms with contractual guarantees and tough
performance bonds.
If that is not possible then I have to start a new fibre utility.
In this case I assume I cannot find an “investor friendly” way of clawing back
renewal money from BT so the project has to be funded independently.
My “fag packet” estimate is that it will cost
£2.6 billion to pass every home and business
in Scotland with fibre
About 30% of the
population is urban
Glasgow
Edinburgh
Aberdeen
Dundee
Inverness
Stirling
Urban
592,820
486,120
217,120
144,290
56,660
89,850
1,586,860
Total
5,250,000
2.5 million premises
Average cost £1038
each
Assumes some re-use
of existing utility assets
including BT
Openreach
My plan is to run GPON from 50-100 aggregation points
Each fibre carries two networks: open access telecom & closed DOCSIS
 One or more NetCo(s) will build and
manage the passive fibre
 An asset manager will run the open
access active layer of the telecom
network
Having both major telecom brands and cable available from day one should
deliver a year one take rate of 50%
A Typical Swedish Style Money Tree Gives the
Different Parties About a Third of ARPU Each
Average monthly spend
Exc VAT
45.00
37.50
Retail Service Provider 13.13
Wholesale Concession Operator 24.38
Wholesaler Net Revenue
11.25
NetCo revenue
13.13
Project creates about 6000 jobs for a few years spread all over Scotland
These generate EXTRA tax revenues

At the peak of construction the
project creates 6400 new jobs

Over the 10 year period, direct
labour taxes plus VAT on half of
net
wages would generate
almost £400m of extra tax
revenue

Of this I assume £200m is
invested back as equity in the
project, phased over 7 years
Government Cashflows
Equity (if all Govt)
Tax revenues
Cumulative
1
-20
2
-18
-18
2
-30
19
-11
-29
3
-30
43
13
-16
4
-30
58
28
12
5
-30
58
28
41
6
-30
58
28
69
7
-30
58
28
97
8
0
51
51
148
9
0
31
31
179
10
0
10
10
189
One way of financing the NetCo(s) is to copy Germany




I heard that Germany is funding 30% of
some FTTH project costs using an EIB loan
at 1.3% backed by a sovereign guarantee
Let’s assume Scotland funds 25% of
financing needed each year in the same
way, either from the EIB or some pension
funds
This sovereign guaranteed loan is really a
form of pseudo-equity, so if all goes
according to plan, then its fairly easy to
fund the rest with normal bank debt
By year 9 the NetCo(s) will have 1.3
million paying customer premises and
revenue of £230m pa
Year 9 Capital
Equity
Pseudo Equity
Bank Debt
200
417
949
1,566
Bank debt/EBITDA
Debt service/EBITDA
13%
27%
61%
4.5
0.6
Year 9 Tax Payer Cost-Benefit
Exposure
-417
Cumulative cash
179
Net Risk in year
-238
Equity Value
1,912
8x
A new modern national infrastructure
Indirect economic benefits
Another way would be for regional PPPs to buy the legacy network from the
incumbent with a call option so that they can buy it back later
Incumbent
cashflows
resulting
from
moving
access
network
off balance
sheet
Compensation
Rental payments
Stefan Stanislawski
stefan@venturateam.com
THANK YOU
Received wisdom is that investors will flee telecom stocks if faced with fibre
capex but hard evidence suggests the opposite. Telecom New Zealand
shareholders made 37% TSR in one year because of mass fibre!
Comparison of Telecom New Zealand (faint orange line - TEL:NZC) and Chorus (red - CNU:NZC)
share prices before and after end Nov 2011 divestment of the local loop into Chorus.
Source: Financial
Times, FT.com
Shareholders received 1 Chorus share for every 5 TCNZ and this split seems to have released hidden
value – the TCNZ price remains stable or grows instead of of falling 20% as one might expect. In fact
total TCNZ shareholder returns were 37% over the 12 months up to 23rd Feb 2012.
In Australia the Government will renew the local loop by buying Telstra’s
assets and providing wholesale access in a rolling programme – compared to
the AUS 250 index Telstra shares seem fine (16% up)
Comparison of Telstra (red line - TLS:ASX) with the Australian 250 Index (faint orange - XJO:ASX).
Source: Financial
Times, FT.com
2007: On 24th November the election returned a Labour Party Govt committed to the NBN.
2008: Legislation passed 1H 2008 and an RFP process officially excluded Telstra from NBN in December.
2009-2011: NBN starts-up and begins deployment
2012: Q1 Telstra structurally separated and agrees “pit and pipe” compensation deal with Govt.
EU average LLU charges over recent years (according to the DAE)