Financing world class digital infrastructure May 13th 2013 Scotland’s Digital Dialogue Felipe Florez Duncan, Managing Consultant

What is world class digital infrastructure? it depends how world class is defined… future-proof, open access, ubiquitous network? – fibre-to-the-home or premises (FTTH/P) a network that provides what customers demand today, but has the capability of evolving over time? – fibre-to the-cabinet (FTTC/VDSL) – 4G/LTE – DOCSIS 3.0 – FTTH/P rollout only where willingness to pay is high

What is the economic problem we are trying to solve? regardless of how we define world class infrastructure, there is an underinvestment problem private investment will fall short of the social optimum economics has a name for this: externalites; and a solution: subsidies but private investors face additional risks which exacerbate the problem (demand, competition/duplication, cost, regulation) many countries are taking action Australia Publicly funded Private and public with tax breaks/subsidies Private with white-space aid USA UK and others EU Member States Private with stimulus funding Japan South Korea New Zealand

Is the current regulatory framework fit for purpose? -three broad models for regulating infrastructure: 1.Regulation of outcomes (telecoms currently) 2.Regulation of investments (eg, energy, water) 3.Stakeholder commitment to agreed objectives (aviation, rail) -in other sectors, RAB is a ‘funding mechanism’—this is not the case in telecoms -furthermore, current three-year regulatory cycle is not conducive to an environment of investment stability (relative to other utilities) Depreciation RAB Cost of capital Asset lives Return (WACC) Initial assets CAPEX OPEX Telecoms regulators or the government do not influence investments directly Revenue No duty to ensure financeability

Alternative business models: what role can they play and how can government help? CityFibre’s ‘anchor tenant’ model Oxera’s co-investment ‘NetCo’ model Participating service providers OAOs End-customers NetCo Ownership structure evolving over time P A P End-customers Anchor tenants/Service providers Vehicle holding fibre assets Participating investors P -structurally separate, independent ownership model, open access -anchor tenants obtain favourable conditions and limit demand risk -similar characteristics to NetCo, but addresses underinvestment through private investment and contracting -commercial network entity owned by operators and other investors, supplying mainly passive access -addresses underinvestment by avoiding duplication and long-term regulatory stability, achieving commitment through ownership stakes Investment supported by long-term contracts with anchor tenants sales of passive or active access sales of retail services wholesale/retail payment investment dividend After five years

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