Presentation to CommunicAsia 2012, Singapore

1. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY
Next Generation
Broadband in
Asia
Strategies to promote
investment
Dr Martyn Taylor
Partner
martyn.taylor@nortonrose.com
June 2012
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2. Overview
1. Broadband deployment challenges in Asia
• Importance of broadband deployments
• Government policy objectives
• Risks associated with broadband deployments
Dr Martyn Taylor
• Characteristics of Asian economies Partner
+61 2 9330 8056
martyn.taylor@nortonrose.com
2. Government involvement as a solution
• Practical strategies to promote broadband investment
• Supply-side strategies: mitigating regulatory risk
• Demand-side strategies: mitigating market risk
• Financing strategies: reducing funding costs and risks
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3. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY
Broadband
deployment
challenges
in Asia
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4. Importance of broadband deployments
• ‘Digital divide’ once measured as differences in communications access
is now measured in terms of differences in the quality of access.
• Slow download speeds result in lost opportunities. A 10% increase in
broadband penetration in developing nations increases GDP by 1.4%.
• Broadband is an enabling ICT platform that can influence entire economy:
• Improves variety, utility, value of services/applications offered by
providers, to benefit users, society, multiple sectors of economy.
• Positive externalities of that can spillover into economic growth.
• Human Rights Council of the UN General Assembly has declared access
to the Internet a basic human right which enables individuals to exercise
their right to freedom of opinion and expression.
• The Internet is a cross-border resource for aggregate human knowledge
that far surpasses any individual library. Broadband Internet access is the
key that unlocks this knowledge in today’s information society.
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5. Government policy objectives
• A common policy objective is universal broadband Internet access
• Advanced nations: ‘superfast broadband’ speeds > 24 Mbit/s.
• Developing world: ‘basic broadband’ speeds up to 2 Mbit/s.
• Best illustrated by United Nations “Call to Action” for the Rio+20
sustainable development summit later this month:
• UN has called on all Governments to promote universal
broadband access, including policies to expand access to health
and education through broadband.
• UN has stated that its aim is to ensure that at least 50% of the
developing world’s population and 40% of households have
access to broadband Internet by 2015.
• UN has called for the private sector to contribute to this goal by
developing innovative business models that increase broadband
penetration, particularly in developing countries.
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6. Speeds required for different applications
BASIC BROADBAND HIGH SPEED BROADBAND SUPERFAST BROADBAND
500kbit/s to 1Mbit/s 1 to 5 Mbit/s 5 to 10 Mbit/s 10 to 100Mbit/s 100Mbit/s to 1 Gbit/s 1 to 10 Gbit/s
VoIP Complex web browsing Complex telecommuting Telemedicine Telemedicine HD Research applications
SMS Email with attachments Large file-sharing Educational services Multiple educational HD telepresence
Basic e-mail Remote surveillance IPTV SD (many channels) Broadcast video SD/HD Broadcast video full HD Digital cinema streaming
Simple web browsing IPTV SD (1-3 channels) Switched digital video IPTV HD Full IPTV channel support Complex telemedicine
Low-quality video Simple telecommuting Video on demand SD Complex gaming Video on demand HD Scientific remote control
Basic social networking Digital broadcast (1 ch) Broadcast video SD Complex telecommuting Gaming (immersion) Virtual reality
Small file sharing Streaming music Video streaming (2-3 ch) Complex telepresence Full telecommuting Terabyte file sharing
Music downloads Advanced social networking Video download HD Surveillance HD Video download (Blu-Ray) Remote supercomputing
Basic smartphone content Medium file-sharing Low-quality telepresence Intelligent buildings 3D HDTV channels
Video download SD Gaming
Low quality gaming Basic medical file sharing
Simultaneous devices Basic remote diagnosis
Remote education
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Building management

7. Characteristics of broadband deployments
• Magnitude of rollout costs can be significant (Australia USD 40 billion). Project Cashflows
• Economies of scope and scale make it efficient to roll out the
network rapidly and holistically. Investment is therefore “lumpy”
and bulk of network costs are up-front.
time
• Substantial labour costs and capital costs are involved as irreversible Revenues
sunk costs (up to 70% of fixed network costs can be in trenching). Costs
Ability to redeploy capital is limited, reducing flexibility.
• Investment is recovered over a substantial time period, creating a
mismatch between timing of outgoing (cost) cash flows and incoming
(revenue) cash flows.
• Financing must address this mismatch and comprises a substantial
proportion of overall costs.
Financing condition
NPV >0
• Private sector investment will not proceed until a firm has reasonable (implies IRR > WACC)
certainty that it will earn a return that exceeds its cost of its capital
(WACC), including a market risk-adjusted return.
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8. Key investment risks for broadband rollouts
Risk Description
Funding Interest rates may increase with a resulting impact on financing costs
(key risk) or lower cost financing may be difficult to obtain.
Market Network may not attract sufficient patronage from consumers,
(key risk) including if competition is intense (e.g., competing networks).
Design Network may not be optimally engineered or may contain material design
flaws that affect its ability to deliver a quality service on a timely basis.
Construction Revenue cannot be realised until infrastructure rollout has occurred, hence
construction delays impose costs.
Operating Realisation of project cash flows depends on the reliability of the technology,
control of operating costs, and managerial experience.
Force The network is continually exposed to unforeseen events in the nature of
majeure force majeure, including natural disasters.
Regulatory The project cash flows remain at risk of government regulatory
(key risk) intervention over the project life, including due to political pressures.
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9. Telecom networks are an inherently risky investment
• Investment in broadband infrastructure involves very substantial risks
greater than those faced with other large scale infrastructure projects.
• The two most significant for telecoms projects are:
• market risk, due to competitive overbuild, insufficient consumer
demand, rapid technological innovation, decreasing costs for
competitive rollout, and rapid technological obsolescence; and
• regulatory risk, due to the high political visibility of telecoms pricing,
significant legacy regulation, and a history of ad hoc intervention.
• The magnitude of these risks explains why the structured (project)
financing of telecoms networks still remains relatively uncommon around
the world today. Other infrastructure is a more attractive investment.
• Accordingly, some kind of Government intervention is often required in
telecoms projects to mitigate some of these risks and promote private
sector infrastructure rollout.
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10. Particular deployment challenges in Asia
• No single broadband rollout model will suit every economy:
• Asia has a diverse range of economies at varying levels of
geographic size, population density, economic size, state of
development and fixed network penetration.
• Less developed nations are heavily focussed on mobiles.
• Some of the particular deployment challenges have included:
• Market risks associated with competitive fixed and wireless
broadband networks.
• Consumers willingness to pay as a constraint on demand, including
the historic high cost of broadband rollouts.
• Significant differences in rollout costs for different geographies and
population densities.
• Regulatory models that have not been conducive to investment,
including high levels of regulatory risk.
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11. 0
200
400
600
800
1000
1200
1400
China
India
Indonesia
Pakistan
Bangladesh
Japan
Philippines
Vietnam
Population (millions)
0
200
400
Thailand
South Korea
China
Myanmar
India
Malaysia
Pakistan
North Korea
Taiwan Bangladesh
Australia Myanmar
Sri Lanka Vietnam
any telecoms
Cambodia Cambodia
Hong Kong Laos
Population without
Laos Sri Lanka
Singapore
New Zealand
$0
$10,000
$12,000
$2,000
$4,000
$6,000
$8,000
China
India
Japan
South Korea
Indonesia
Australia
Taiwan
Thailand
Pakistan
$0
$20,000
$40,000
$60,000
Malaysia
Philippines Singapore
Hong Kong
Asia covers a diverse range of jurisdictions
Hong Kong
Singapore Australia
Vietnam Taiwan
Weighted by income (USD billions)
Bangladesh Japan
Sri Lanka South Korea
New Zealand New Zealand
Malaysia
(GDP per capita)
Myanmar
Individual income
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North Korea Thailand
Cambodia China
Laos Indonesia

12. Many jurisdictions rely heavily on wireless networks
140% Jurisdictions that do not
yet have 100% fixed
network penetration by
120%
household…
100%
80%
Very heavy reliance on
wireless telecoms
60%
40%
20%
Mobile penetration
0% (by population)
Fixed penetration
(by household)
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13. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY
Government
involvement
as a solution
13

14. Strategies for Government intervention
Public policy and role of Government
Government broadband Economic and social Policy and regulatory
objectives importance of broadband initiatives
Market demand for
broadband services:
consumer and business Strategies to address rollout risks and facilitate broadband rollout:
Extent of commercial
rollout without public • Supply-side strategies
sector support • public-private partnership
• access holiday
Regulatory risk
• environmental and planning concessions
Private sector rollout risks
Market risk
• Demand-side strategies
Design risk • demand stimulation policies
• public-sector procurement of services
Operating risk
• impediments to competitive build
Construction risk
• Funding and institutional support
Force majeure • subsidies, including via tax concessions
• Government equity or debt funding
Funding risk
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15. Supply-side strategies: mitigating regulatory risk
• Supply-side interventions are intended to promote greater supply of
infrastructure by addressing factors that may inhibit supply.
• Of the various supply-side factors that can be addressed by Government,
regulatory risk is the matter most directly within Government control.
• Key objectives of regulation including promoting third party access to
infrastructure and preventing excessive pricing to consumers. However,
regulation can have a significant adverse impact on project returns.
• Regulatory and investment objectives may need balancing or recalibration.
• Two key solutions to mitigate regulatory risk:
• public-private partnerships, involving sharing of regulatory risk
between the public and private sector, potentially including binding
government commitments (enforced by compensation);
• access holidays, typically providing certainty that a network owner will
earn a positive NPV sufficient to justify the infrastructure rollout.
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16. Public private partnerships (PPPs)
• Set of contractual arrangements between public and private sector
entities to deliver cost effective and high quality services to the public.
• Overriding principle of risk redistribution: risks allocated to those parties
best placed to control or manage them. The party bearing the risk will
be the party that can best manage that risk at the least overall cost.
• Government normally bears most of the regulatory risk as it is a risk
within its control. Moreover, the Government can spread the risk over
tax payers (appropriate if regulation is imposed for the public good).
• A further insight from PPPs is that it is possible to reduce regulatory risk
via a binding contract between the public and private sector:
• Private sector will agree to rollout infrastructure in public interest to a
certain quality and with certain socially desirable characteristics.
• Government will agree not to impose certain forms of regulation on
that network (e.g., price controls) and will back up this agreement via
compensation payable if the regulation is imposed.
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17. Access holidays
• Access holiday is a period of time within which new infrastructure
investment is exempted from some or all regulation.
• Networks have positive spillover externalities for wider society. It
is arguably appropriate that network owners receive an additional
reward in order to stimulate investment (analogy to a patent).
• If the infrastructure does not confer market power, prices will still
be constrained by market competition hence a full access
holiday may be appropriate (i.e., removal of all price regulation).
• If the infrastructure does confer market power, prices may not
be constrained by market competition hence some form of
upper price bound may still be appropriate to protect
consumers. Owner should be permitted to earn a regulated
return that generates a positive NPV sufficient to incentivise the
investment.
• Access holiday framework should require the Government to pay
compensation if the access holiday is removed.
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18. Demand-side strategies: mitigating market risk
Virtuous circle
• Supply-side strategies should also be supported by strategies to
promote demand. Supply and demand form a virtuous circle.
• Demand-side strategies are intended to promote greater demand for
services by addressing factors that affect demand.
Supply Demand
• Demand for services is generally manifested as market risk. strategies strategies
• Government demand-side strategies can assist in mitigating market
risk, as a key determinant of investment in telecoms infrastructure.
• Demand-side strategies can be categorised as:
• infrastructure based, promoting deployment of infrastructure to
sources of potential demand;
• services and application based, ensuring that services are
available to meet particular consumer needs; and
• end-user based, assisting end users to make use of services.
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19. Government measures to promote demand
Connection of infrastructure
• Connect schools and hospitals to broadband networks
• Make Government an anchor tenant
• Provide universal service funding to enable rollouts to remote communities
• Construct community access centres
• Expand universal service obligations to include supply of broadband
Services, applications and content
• Promote demand aggregation and online solutions in key sectors, such as agriculture
• Provide e-government applications and require greater online Government use (eg e-tax)
• Promote creation and widespread use of digital content, including policies aimed at R&D
• Promote education and health applications and services
• Deregulate media and broadcasting to enable online solutions
End-users
• Provide low cost devices in education, such as subsidised laptops
• Address content and security concerns
• Require basic service quality requirements and monitor service quality
• Support secure e-transactions and provide legal framework for online commerce
• Provide training and incentives for small and medium enterprises
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20. Reducing financing costs: mitigating funding risk
• Government has the ability to mitigate funding risks.
• Government involvement in financing of telecoms infrastructure can spread
risks over taxpayers as well as the private sector investors.
• Public sector financing costs are normally lower than private sector financing
costs, hence may reduce the WACC and result in a project becoming attractive.
• Equity: the Government may become a shareholder in the project company,
typically the 100% owner of a state-owned enterprise.
• Debt: the Government may provide low interest loans or provide
Government backing of debt securities, such as infrastructure bonds.
• The Government may provide tax concessions for the project, other direct or
indirect subsidies, or certain financing guarantees.
• The Government may also be able to assist in facilitating vendor financing,
limited recourse (project) financing, loans from development banks, support
from export credit agencies, or access to sovereign investment funds.
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21. Strategies for Government intervention
Public policy and role of Government
Government broadband Economic and social Policy and regulatory
objectives importance of broadband initiatives
Market demand for
broadband services:
consumer and business Strategies to address rollout risks and facilitate broadband rollout:
Extent of commercial
rollout without public • Supply-side strategies
sector support • public-private partnership
• access holiday
Regulatory risk
• environmental and planning concessions
Private sector rollout risks
Market risk
• Demand-side strategies
Design risk • demand stimulation policies
• public-sector procurement of services
Operating risk
• impediments to competitive build
Construction risk
• Funding and institutional support
Force majeure • subsidies, including via tax concessions
• Government equity or debt funding
Funding risk
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22. Conclusions
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23. Key conclusions and recommendations
1. Broadband Internet access is recognised as important for a range of
economic and social reasons.
2. Most Governments now have a policy of promoting ubiquitous broadband
access.
3. Broadband deployments have a variety of characteristics that make them
unattractive to private sector investors relative to other forms of
infrastructure, particularly very high market, regulatory and funding risks.
4. Government sector involvement can assist in mitigating these risks.
5. Specifically:
• Regulatory risks can be mitigated by demand-side strategies,
including via the use of PPPs and access holidays.
• Market risks can be mitigated by supply-side strategies, including a
combination of Government measures to stimulate demand.
• Funding risks can be mitigated by Government financing strategies.
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24. Disclaimer
The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose LLP or Norton
Rose OR LLP on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group
(whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director
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is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose OR LLP or Norton Rose
South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.