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

2. 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

3. 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

4. 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

5. 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

6. www.oxera.com Follow us on Twitter @OxeraConsulting Contact: Felipe Florez Duncan +44 (0) 20 7776 6654 felipe.florezd.duncan@oxera.com Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor’s own risk. © Oxera, 2013. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission.