DigiWorld by IDATE, TAS (Telecom Advisory Services) and the FTTH Council Europe presented the study "Financing #FTTH networks" during a webinar animated by Roland Montagne (Head of the Telecoms Business Unit at IDATE)

1. Financing FTTH networks
Study conducted on behalf of
FTTH Council Europe
Webinar, 19th June 2012
Roland MONTAGNE
Director Telecoms Business Unit, IDATE
r.montagne@idate.org
Dr. Raul KATZ
President, Telecom Advisory Services LLC
Raul.katz@teleadvs.com 1

2. Agenda
► FTTH Projects selection
► Theoretical framework for assessing financing models
- Three drivers of FTTH project success
- Project context drives financing model
- Investment model drives financing model
► FTTH Financing models structure
► Most suited FTTH Financing Models
- Municipal models
- Public Private Partnerships models
- Incumbent Financing Models
- Operator funded combined with public policy stimuli
► Most Appropriate Financing Models
► Consider Pooled Financing
► Practices Mitigating FTTH Financial Risk
► Recommendations
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Study conducted on behalf of FTTH Council Europe

3. FTTH Projects selection
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4. Taxonomy and sample of projects studied
 Formalization of taxonomy of financing approaches: two dimensions
 Geographic dimension: Urban, Suburban and Rural
 Financing strategies dimension: principal project sponsor and funding models
Sampling matrix
Geographic Mix
Urban Sub-urban Rural
Municipal
Government Funding
Financing
Strategies PPP
Operator-funded
Operator-funded and public
policy stimuli
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

5. Positioning of projects studied
 A dozen of project interviewed and positioned in the Matrix
 Projects selected in: Sweden, Finland, France, U.K, Germany, Spain, Switzerland,
Latvia, Andorra, Lithuania and Netherlands
Final Sampling matrix
Geographic Mix
Urban Sub-urban Rural
Municipal  Project A  Project B
 Project C
 Project D
Financing
Government Funding  French National Very High Speed Plan
Strategies  BB Delivery UK
PPP  Project E  Project F
Operator-funded  Project G  Project H  Project I
 Project J
Operator-funded and  Project K
public policy stimuli
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

6. Theoretical framework for assessing
financing models
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7. Framework for assessing Financing models
Three drivers of FTTH project success
Project Context Investment Model Financing Model
1. Competitive environment 1. Average revenue per 1. Sources of funds
(existing players offering user (equity, public funds,
broadband access) 2. Wholesale access debt)
2. Competitive substitutes rates 2. Financial investors
(VDSL, Docsis 3.0) 3. Wholesale/retail mix (institutional, banks,
3. Industry structure 4. Deployment costs venture capitalists,
(number of players, 5. Subscribers/homes angel investors,
existing service-based passed governments)
players) 3. Lending terms (limited
4. Project sponsor or non recourse, rate
(incumbent, municipality, and tenor, seniority,
alternative service collateral, covenants)
provider, etc.) Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

8. Project context drives financing model
Competitive Project
Environment Sponsor
Are there Are providers offering Industry structure (number
any existing competitive substitutes of players, existing service Municipality Telecom Alternative service
providers? (VDSL, Docsis 3.0) based players) incumbent provider
• Retail ARPU of FTTH project • Borrowing capacity
• Subscriber uptake • Credit rating
• Wholesale ARPU of FTTH • Infrastructure renewal and
project migration versus new
• Retail/wholesale mix customer acquisition
• Lending Rate
• Loan maturity FINANCING MODEL • Lending Rate
• Recourse or non-recourse
• Covenants VARIABLES
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

9. Projects positioning in two dimensional context matrix
FTTH Projects Contextual Matrix
No competition Existing ADSL, Cable Existing VDSL and/or
or 3G service Docsis 3.0
Municipality or local  Project D  Project F  Project B
government  Project A  Project C
 Project E
Alternative operator
 Project I  Project J
 Project K
Incumbent
 Project G
 Project H
Low contextual Risk
Medium Contextual Risk
High Contextual Risk
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

10. Investment model drives financing model
Average Revenue Wholesale Wholesale/Re Deployment Subscribers/Homes
per User Access Rates tail Mix Costs Passed
• Retail ARPU of FTTH project • Funding requirements
• Subscriber uptake • Debt to equity ratio
• Wholesale ARPU of FTTH
project
• Retail/wholesale mix
• Lending Rate FINANCING MODEL • Debt servicing
• Loan maturity • Drawing capacity
• Covenants VARIABLES
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

11. FTTH Financing Models Structure
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12. Typical financing model structure
EQUITY INVESTORS
LOAN TERMS • Financial sponsors
LENDER (S) Aligned with direct faciility • Construction and project managers
• Infrastructure suppliers and contractors
PUBLIC FUNDS
LOAN TERMS • Grants
• Limited or non recourse • Low interest loans
• Rate and tenor
• Seniority
• Collateral
• Covenants
FUNDING
STRUCTURE
DEBT RETURN ON EQUITY
REPAYMENT PROJECT INVESTED
ENTITY
PROJECT
CASH FLOWS
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Study conducted on behalf of FTTH Council Europe

13. Most suited FTTH Financing Models
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14. Pros and Cons of Municipal Models
Model Description Advantages Disadvantages
1. Direct Subsidy  Public funds pay for  Local government retains  Ongoing financing required
FTTH project for an ownership of infrastructure  Continued reliance on state aid
open access  Local government can  Public sector assumes market
business model ensure own needs are risk
covered  Competitive encroachment could
erode project viability
2. Local Investment  Local government  No state aid  Need to rely on public funds to
invests as would a  Local government bears the invest
private player in a failure risk alone  Risk of impacting local taxes
private venture  More lenient credit terms  Potential competitive retaliation
deploying the (rates, maturity) based on  Highly dependent on income
infrastructure municipal profile and density/distribution of
population
3. Private credit  Same as above, but  No impact on taxes  Potentially, but not necessarily,
financing funds borrowed from  Does not need to reach worse credit terms than from
private sources critical mass in order to qualify public sources
 Service revenues are for EIB support  Forces a period of full service
earmarked to service ran by local government
debt  Risk of bankruptcy unless
favorable covenants are
negotiated
4. Public /Private  Similar as above, but  Private lenders tend to follow  Borrowing from private sources
credit financing funds borrowed from the more lenient credit terms could be affected by restricted
public and private of public sources, sometimes access to capital
sources enabled by partial risk
guarantees
 No impact on local taxes
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Study conducted on behalf TAS LLC Council Europe
Source: IDATE and of FTTH

15. Pros and Cons of Public Private Partnerships Models
Model Description Advantages Disadvantages
1. Debt-facilitation  Public entity facilitates  No public funds are  Potential misalignment of
model access to tax-exempt placed at risk objectives between parties
financing  Limited leverage of public
 No commitment to use party capabilities (ROW,
public funds facilities)
2. Debt-  Government  Access to better  Public funds are placed at
guarantee model guarantees debt, financial terms of debt risk
secured by private
party
3. Public service  Private player deploys  Risk is assumed by  Subsidy is needed to attract
delegation FTTH network with or outside player the concession holder
without partial public  Lack of commitment of
subsidy project sponsor might result
 Player has a in service failure
concession to resell
the passive or active
layers to service
providers
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

16. Pros and Cons of Incumbent Financing Models
Model Description Advantages Disadvantages
1. Incumbent funded  FTTH financing follows  Flexibility to manage  Competitive retaliation could
model classical CAPEX rules of deployment according to potentially affect rate of return
carrier, subject to stand-alone internal by forcing price reductions
conventional stand-alone processes  Regulatory risk driven by
capital planning rules and wholesale access obligations
processes
2. Competitive  Partnering between  Complementarity of  Need for regulatory
partnering model I incumbent and construction, capabilities endorsement
(joint venture) or real estate company  Market risk mitigated by  Obligation to provide open
competitive co-optation access
 Ability to ring fence credit
facilities, which lowers
investment risk and
provides capital flexibility
3. Competitive  Incumbent assumes  Market risk mitigated by  Regulatory risk prompted by
partnering model II deployment responsibility competitive co-optation alternative carriers
(Multi-fibre model)  Costs are shared with  Potential limited positive
competitors purchasing response on the part of
access to fibre pairs envisioned partners
4. Competitive  Partnering between incumbent  Reduction in capital  Need to gain regulatory
partnering model III telco and alternative providers investment in low density endorsement
(Cost-sharing model)  Agreement to deploy areas  Technology choice can be
independently and grant bit- complicated by divergent partner
stream access to each other strategies
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

17. Operator funded combined with public policy stimuli
 Under this approach, national governments decide to intervene, through grants or
low interest loans, directly in the deployment and management of a national FTTH
network.
 In this case the Government is acting more as a lever by dedicating a special fund to
help financing neutral open access model, most of the time being at a regional or
municipality level.
 Under this model, the operator assumes primary funding responsibility but is
influenced by several initiatives aimed at improving a potentially unattractive business
case (e.g. demand aggregation, reduced property taxes, grants to cover capital
expenditures, etc.).
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Study conducted on behalf of FTTH Council Europe

18. Most Appropriate Financing Models
Geographic Mix
Urban Sub-urban Rural
Municipal/Regio • Municipality as an Public/private
nal investor credit
financing
Public Private Public service
Partnerships delegation
Financing
Strategies Operator-funded • Incumbent funded Cost sharing
• Joint venture model
• Multi-fibre
Operator-funded • Public funding program
and public
policy stimuli
Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

19. Consider Pooled Financing
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20. Consider Pooled Financing Approaches for small FTTH Projects
► Pooled facility to finance multiple small projects, with several
lenders taking their pro rata exposure to each of the projects
► Target size of each facility: US$ 20 million, sufficient to handle
5-6 small FTTH projects
► Projects would be majority-owned by public sector sponsors,
although the private sector could have an ownership stake
► Facility will have the support from a public lender, which would
provide credit enhancements, such as loan guarantees equal to
50% of the total amount
► The pooled facility will be ring fenced
► Projects could apply, through the pooled facility, to receive
output-based aid from public funds
► Each project will be structured using a project finance approach
► Project sponsors will develop the FTTH projects with technical
and operational assistance provided by government entities 20
Study conducted on behalf of FTTH Council Europe

21. Structure of Pooled Financing Facility
Pooled Facility
Long-Term Manager (e.g. EIB)
Loan
Public Funds Pooled Financing •Credit
Output-
based Aid if Facility Debt service Enhancement
needed payments Banks and
Debt service Funding for
Pension Funds
repayments FTTH projects
•FTTH project
•FTTH project
•FTTH project Technical Central
•FTTH project Assistance
FTTH project Government
User fees FTTH
services
•FTTH project
•FTTH project
•FTTH project
•FTTH project
FTTH subscribers Source: IDATE and TAS LLC
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Study conducted on behalf of FTTH Council Europe

22. Practices Mitigating FTTH Financial Risk
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23. Variables Explaining Success or Failure
Project Success Project Failure
 Demand aggregation across neighboring  Limited support obtained to negotiate
areas in order to achieve critical mass financial terms with lender syndicate
 Sharing of deployment costs by  Since project was treated as an
competitors or value-chain players infrastructure subsidy by central
government, little attention was paid to the
robustness of the business plan
 Focused FTTH deployment on the part of  Competitive retaliation eroded the viability
the incumbent of original business plan
 Financing of FTTH from capex  Over-optimism in assessment of customer
acquisition
 Careful development of business plan  Competitive retaliation of the incumbent
(demand assessment, technology could raise the issue that indiscriminate
decisions, commercial strategy, capital public intervention could pre-empt market
plan, etc.) forces
 Open access business model utilized to  Lack of initial commitment of project
rapidly gain critical mass of demand sponsor
 Due diligence of credit facility conducted
by an outside party on behalf of lenders
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Study conducted on behalf of FTTH Council Europe

24. Recommendations
► Careful development of business plan
► Careful assessment of project risks
► Demand aggregation to achieve critical mass
► Search for agreements to share deployment costs
► Secure a third party in search and negotiation of appropriate
funding
► Local governments should avoid the “Build it and they will come”
syndrome
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Study conducted on behalf of FTTH Council Europe

25. Thank you!
Roland MONTAGNE
IDATE
Director Telecoms Business Unit
r.montagne@idate.org
+33 6 80 85 04 80
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