Financing Stimulus for FTTH. Funding Europe’s €260 billion Access Fibre Upgrade: A Radical Seven Point Action Plan

1. 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

2. 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

3. 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

4. Some things you may not know about the fibre business Reality Check

5. BT stock has risen 50% in the last year easily beating the FTSE100Virgin Media has more than doubled driven by the takeover

6. 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.

7. 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

8. Customers of regulated utilities pay a specific amount each month for asset refresh If neither the regulator nor competition prompts timely asset refresh, then the customer ends up paying for something they do not get ….. 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. …. 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.

9. What if I were made telecom minister of a newly independent Scotland?

10. Let’s assume this is my brief…..

11. 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.

12. Rough Estimate 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 2.5 million premises Average cost £1038 each Assumes some re-use of existing utility assets including BT Openreach

13. My plan is to run GPON from 50-100 aggregation pointsEach 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

14. 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

15. Project creates about 6000 jobs for a few years spread all over ScotlandThese 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

16. 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

17. 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

18. Stefan Stanislawski stefan@venturateam.com Thank you

19. 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.

20. 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.

21. EU average LLU charges over recent years (according to the DAE)