Presentation to SA National Treasury on National Broadband Funding

July 2012
Brian Pinnock
Response to Request for Market
Sounding for Rolling out of
Broadband Infrastructure in South Africa
Presentation to the South African Treasury
by Brian Pinnock

© Copyright Dimension Data 213 June 2013
AGENDA
Other Countries
Approaches
Funding Sources & Mechanisms
Key Challenges
Conclusion
Introduction

© Copyright Dimension Data 413 June 2013Source: Booz & Company Analysis
A deeper look at broadband and digitization
Penetration Affordability
Reliability Speed
Intensity
Skills
- 150 countries studied
Constrained Emerging AdvancedTransitional

© Copyright Dimension Data 513 June 2013Source: Booz & Company Analysis
Stages of digitization – BRICS countries
Penetration Affordability
Reliability Speed
Intensity
Skills
- 150 countries studied
Constrained Emerging AdvancedTransitional

GDP per capita overall
GDP per capita: Constrained stage
GDP per capita: Emerging stage
GDP per capita: Transitional stage
GDP per capita: Advanced stage
GDP Growth
Job Creation
Access to Basic
Services
Innovation
Quality of life
Transparency
E-Government
Education
Unemployment rate
Global Innovation Index
OECD Better Life Index
UNDP HDI: Constrained and Emerging
UNDP HDI: Transitional and Advanced
Corruption perception Index
E-Government Development Index
Inequality adjusted Education Index: Constrained and Emerging
Inequality adjusted Education Index: Transitional and Advanced
0.60 %*
0.50 %*
0.51 %*
0.59 %*
0.62 %*
-0.84 %*
6.27 points
1.29 points
0.13 points
0.06 points
1.17 points
0.10 points
0.17 points
0.07 points
Positive Impacts of Digitization
Source: Booz & Company Analysis

Impact on SA GDP from wireless broadband
Source: Analysys Mason
28,000
new jobs
1.8%
of GDP
by 2015

Broadband Bill of Materials
Technology
component
Impediments to deployment Deployment
time
Status
International cables
connecting your
country
Investment (~$100M upwards)
Regulations allowing you to
land
12-18 months
Domestic cables from
the coast to your
metro and inland
regions
Complex rights of way process
18-36 months
Last-mile connectivity
(fixed or wireless)
Site acquisition and
environmental impact
18-∞ months

Then Now
International Connectivity

Fixed Wireless
Satellite
Fibre
Mobile broadband
(current)
Copper
(fixed line /
ADSL)
The last mile

Broadband in other Countries
How have other countries expanded coverage?
Government contributions to financing rollout?
What financial mechanisms were used?

How have other countries been able to expand
broadband coverage?
Approaches that rely on private sector investment, coupled with regulatory
reform that promote efficient and competitive markets
A mix of approaches
and policies
Either private or public DBO models or JVs. The network is built and operated
by the either the public or private sector or both, with the public sector
retaining all or some ownership and some control of the network
Various possible
models used
The World Bank provides financing for strategic investments to support the
development of key parts of ICT infrastructure. Vendor led financing is often
used.
Variety of funding
sources
Government is able to leverage the commercial and technical acumen of the
private sector on an on-going basis whilst retaining ownership of, and a large
degree of control over, the network infrastructure.
Advantages

Elements of broadband strategies in selected countries
Source: Kelly, T., & Rossotto,C. 2011. Broadband Strategies Handbook. World Bank
Establish open access
wholesale networks
Strategy Brazil Columbia Finland France Japan Oman Singapore SA USA
Encourage private sector
investment
Include broadband in
universal service definition
Encourage demand for
broadband services
Promote improve and
expand PPPs
Subsidize local, regional or
national ventures
Mandate LLU
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Promote facilities based
resale competition
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Broadband projects as counter cyclical investments
Australia (2010-2018)
Canada (2009-2012)
Finland (2009-2015)
Germany (2009-2018)
Ireland (2009-2010)
Japan (2009-2010)
Portugal (2009-2010)
Singapore (2009-2013)
South Korea (2009-2013)
Spain (2009-2012)
USA (2009-2010)
Source: World Bank (Qiang 2011)
$30Bn
$181M
$265m
France (2008-2018)
$13Bn
$67bn
$297m
$371M
$1.1Bn
$650M
$7.2Bn
$118M
$24.6Bn

Government contributions and financial mechanisms
Initial investment 11% and 4% respectively. Balance from private companies
and issuance of government bonds.
Australia and South
Korea
One third of costs is from public funding for rolling out high-speed networks to
areas that are underserved or unserved by commercial internet service
providers
Finland
Providing a credit line to the operators on the rollout of fiber networks on
favourable terms but with clear repayment times.
Portugal
Adding resources to existing rural development or universal service fundsEU and USA
Contracting commercial providers to build the network with service obligations
through a competitive bidding process
France, Ireland, Japan
and Singapore

Government contributions & financial mechanisms in Africa
Intercity fibre PPP with the network operated by the incumbant Ugandan
Telecom. BOT model. Phase 1 - $30M (Total $96M) financed by a concession
loan from China.
Uganda
National fiber backbone. The financing comprises two components: 1. the
Vendor led financing scheme:US$1.5 billion; 2. implementation fiinanced by
the Ethiopian Telecommunications Corporation with local capitalf $500M.
Ethiopia
Fiber project primarily for CDMA rural telephony. $90M. State loan.Coˆte d’Ivoire
“State-owned incumbents have maintained dominance over
essential facilities, which has stifled competition”
Source: Calandro (2012)
PPP – Kenya National Optic Fibre Backbone Initiative (NOFBI) through
Telkom Kenya Ltd (TKL). Cost $28M. Main private investor is Altech Stream of
South Africa,
Kenya

Other new initiatives in Africa
Kenyan Open Access LTE network: Cost $500M. PPP approach. Model
similar to that of The East African Marine System (TEAMS) investors take a
stake in a holding company. Respective stakes are converted to capacity in
the LTE network.
Kenya
Rural NetCo: Consortium funded by the World Bank and led by Ericsson of
Sweden have started rolling out 3G. Plans are to do infrastructure/site sharing
with operators as well as deploying its own base station
Tanzania
Sources: Telegeography, May 2012, Kenyan Communications Commission, March 2012

Recommended Approaches
What approach enables rapid broadband expansion?

taken
Define project aims to tackle market failures and deliver socio-
economic benefits. E.g. rapid rollout.
EU Recommendations:
6 stages of planning a broadband investment
Source: Analysys Mason (2011)
Why should we invest in
broadband?
Understand the costs and benefits of different kinds of
infrastructure
What type of network infrastructure
should we invest in?
Understand the merits of each investment model and what might
work best for you.
How should we invest?
Ensure successful delivery and operation and provide evidence
for audit.
How do we manage/monitor the
outcome?
Understand the commercial case and your potential role on the
demand side?
What can be done to ensure
demand for services?
Include measures to reduce costs and manage risks.
What can be done to reduce the
cost and manage risks?

• the link between price setting in termination markets and
in the related retail markets that may be competitive..
• Operator with SMP in one market that then transfers this
market power to another, potentially competitive market.
• Price discrimination
• Cross subsidisation
• Predatory pricing
• Discriminatory use of information
• Withholding information
• Delaying tactics
• Bundling/Tying
• Undue requirements
• Quality discrimination
• Strategic design of product characteristics
• SMP firm controls inputs essential for other players to
compete.
Types of market failures in telecoms markets
Source: Econex, 2011
Vertical
Leveraging
Refusal to deal
Leveraging by means of
non-price variables
Leveraging by means of
pricing
Horizontal
Leveraging
Single market dominance
Termination (2-way
access)

Broadband subscriptions in SA
Source: Africa Analysis

Mobile subscribers and penetration rate at EU vs. SA
Source: IDATE, 2010; ITU 2011

SA Disappointing Broadband Market Performance
Broadband penetration rates in selected developing countries

Wireless Broadband Coverage (in Red)
Source: Econex, 2011
MTN 3G – 35% population coverage
Vodacom 3G – 27% population coverage
Vodacom Edge – 26% population coverage

Market share of the MNOs in mobile broadband
The level of competition may not be optimal when two large firms
control a market (duopoly) and have similar cost and pricing strategies
The competition Act defines
dominance if:
(a) 45% market share
(b) At least 35% market share
(c) Less than 35% but has
market power

Dominance in the downstream market
Stable market share can indicate
low levels of competition

Recommended Approaches: Principles
Regulatory tools that might be able to increase entry and competition, and
hence maximize what the market can deliver on its own. Technology neutral
license regimes, frequency liberalization, preference to new operators
Make the market work
first
Policy makers goal should be a level playing field and avoid picking winners.
Late entrance to an infrastructure market is unattractive especially if
government funding assists incumbent operators further
Open Access
The telecommunications sector has generally adopted a market-based
financing approach. The most effective means of channeling public support is
through PPPs which are able to harness the investment resources and
technical expertise of the private sector to meet policy objectives.
‘‘Crowding in’’ private
capital
Public investment could be used to target spending on high-speed open-
access networks providing connectivity to rural schools, hospitals and other
public institutions as anchor points for high-speed connections in the
community.
Innovative strategies
for underserved
While addressing supply, public policies and investment for demand
stimulation to facilitate broadband adoption are essential to the robust
development of broadband infrastructure in the long run..
Demand Stimulation

United Kingdom OFCOMS 5 supporting elements
Pricing Freedom
Risk Reflective of return
Efficient Networks
Wholesale Access for All
Competition

Recommended Approach
Source: Forzatti et al. (2010)
Open Access Network Models

Recommended Approaches
A condition of granting State aid should be that the recipient provides open
wholesale access
State led investment
Government ought design policies that ensure robust competition in
downstream market segments which will result in the maximization of
consumer welfare, as well as spur innovation and investment
Competition in
downstream markets
Ensuring efficient allocation and management of assets government controls
or influences, such as spectrum, poles, and rights-of-way, to encourage
network upgrades and competitive entry
Efficient allocation &
management of assets
Enable incentives and mechanisms to repurpose spectrum. Encourage
innovative spectrum access models, including unlicensed spectrum use
Innovative spectrum
models

Funding Sources &
Mechanisms
How much funding would be required from government?
What mechanisms ensure targeted aims?
What are the potential sources of financing ?

Funding Mechanisms
Competitive subsidy or cost-sharing mechanisms are one type of PPP model
that has traditionally been used to encourage the rollout of voice networks into
underserved areas and has been recently applied in the rollout of broadband
infrastructure in France.
PPP - Cost-sharing
models
Provides an opportunity for Government to direct investement to achieve its
national coverage obejectives at lower cost, as assistance from the private
sector reduces the high capital and operating expenditure requirements of
such a network.
PPP -Public Outsource
Models
Government funding could be used to install passive infrastructure (poles,
conduit, etc.) – representing a high-cost portion of new network investment,
which can then be used by various operators. Installation is highly labor-
intensive and can start quickly, thus having a fast and large stimulus impact
Funding Passive
Infrastructure
As an anchor tenant on various networks, current Government expenditure on
communications and connectivity could support the rollout of broadband
infrastrure to underserviced commercially unviable areas
Anchor Tenant
USFs to subsidize the roll out of broadband to uderserved areas. Tools such
as competitive bids by private entities in relation to predetermined criteria (e.g.
specified service levels, population coverage, technology neutrality etc.)
USFs and competitive
bids linked to
obligations

EU Recommended Approaches – 5 models
Source: Analysys Mason 2008
BOM or local community, model involves a group of end users organising
themselves into a jointly owned and democratically controlled group
(frequently a co-operative) capable of overseeing the contract to build and
operate their own local network..
Bottom-up model
Involves the Managing Authority issuing funding (often in the form of a grant)
to a private sector organisation to assist in its deployment of a new network.
The public sector has no specific role in the ownership or running of the
network, but may impose obligations in return for the funding.
Private design, build
and operate (DBO)
model
Under a public outsourcing model a single contract is awarded for all aspects
of the construction and operation of the network. The major characteristic of
this model is that the network is run by the private sector, but the public sector
retains ownership and some control of the network.
Public outsourcing
model
A joint venture is an agreement under which ownership of the network is split
between the public and private sector. Construction and operational functions
are likely to be undertaken by the private sector.
Joint venture model
A public DBO model involves the public sector owning and operating a
network without any private sector assistance. All aspects are managed by
the public sector. A public sector operating company may operate the entire
network, or may operate the wholesale layer only.
Public design, build
and operate model

Examples
The main basis for the recommendations presented in this guide is a series of interviews with
stakeholders from example projects which have already been successfully implemented. These
example projects are summarised in Figure 1.1.
Cyprus
Georgia
Azerbaijan
Armenia
Turkey
Malta
Piemonte, Italy
Public DBO
Inspired private
investment
Nuenen, Netherlands
Bottom up
Co-operative-based FTTH
Rural development
programme, Sweden
Bottom up
State-funded co-operatives
Midtsoenderjylland, Denmark
Public DBO
Partnership with
electricity provider
DORSAL, France
Public outsourcing
Investment in backbone,
DSL and WiMAX
South Yorkshire, UK
Public outsourcing
Partnership arrangement
for network management
Auvergne, France
Public outsourcing
Cabinet-based ADSL
for very long lines
RAIN, Lithuania
Public DBO
Nationwide backhaul
and core network
STOKAB, Sweden
Public DBO
City-based FTTH
meshed network
Lombardia, Italy
Joint venture
Planned FTTH to 50%
of homes
Alto Adige, Italy
Public DBO
Wireless to homes and
businesses; fibre to public
North Karelia, Finland
Private DBO and bottom up
Grant to build to within
2km of homes
Note: DBO = design, build and operate; FTTH = fibre to the home

Funding Models
Bottom Up
Model
Advantages Disadvantages Recommended Use
• Long term, non profit
view suitable for
high-cost
infrastructure e.g.
FTTH
• Localised with risk of
technology
differences
• Localised areas
Private DBO
• Larger scale than
BU
• Low public burden
• Minimum threshold
to attract private
investment
• Limited control over
operations
• Larger scale
investments with
sufficient funding to
attract private
investments.
Operations and risk
transferred to
operator
Public Outsourcing
• Public financial
stability with private
expertise
• Greater control than
private DBO
• Reduced financial
benefit to private
sector
• Additional
bureacracy
• Govt requires high
conttol
• Operator is risk
averse

Funding Models Continued
Joint Venture
Model
Advantages Disadvantages Recommended Use
• Potential benefits for
both parties based
on risk sharing
• SPVs can make
model scalable and
allow external
investment
• Potential for
conflicts of interest
• Few examples of
implemented JVs to
indicate best
practice
• Where interests of
public and private
sector can be
closely aligned
Public DBO
• Have full control to
promote competition
and enforce
standards.
• Ensure socio-
economic benefits
are prioritised
• Size and scope
limited by public
expertise.
• Potentially excludes
private sector
expertise
• Where managing
authority requires
absolute control
• Where small
targetted investment
will inspire
investment from
private sources

Key Challenges
Best ways to address challenges?

Key Challenges and Ways to Address Them
Prohibitive cost of deploying broadband infrastructure given South Africa’s
size and population spread. Use PPPs to leverage off the private sector while
maintaining control of outcomes.
Cost
Policy and regulatory inefficiencies. Significant strengthening of the regulator.
Clearer policies that encourage Investment and clarify the role of
Government.
Policy & Regulation
Unintended consequences of technology choices, in the context of a world
characterized by rapid technology change. Be as technology neutral as
possible in policy, regulation and investment mechanisms.
Unintended
Consequences
Ensuring that state owned enterprises do not crowd-out private investment in
commercially viable markets. Support rural access and connectivity initiatives
aligned to commercially viable markets. Avoid favouritism towards an
incumbent that discourages other players.
Crowding Out
The dominance of incumbent operators is a key obstacle to competition. Open
access wholesale models to encourage new entrants and widen the market.
Make MVNOs a condition of access to further spectrum. Procedures to avoid
years of litigation.
Dominance of
incumbents

Key Challenges and Ways to Address Them
Inefficient allocation of radio spectrum. Spectrum is a scarce resource and we
need a use it or lose it approach. Faster decisions on spectrum.
Spectrum
Limited capital markets for both public and private sector. Universal service
funds, vendor finance and World Bank funds available. A condition of granting
State aid should be that the recipient provides open wholesale access.
Limited Capital
Markets
Demand does not automatically follow supply. Singapore 40% refusal. Japan
has FTTH coverage but only 30% uptake. Cross subsidies. Link investment to
wider programmes driving broadband ecosystem.
Driving demand
Lack of skills in DoC, regulator, SoEs and private sector to a lesser extent.
Public outsource model for SoEs. Strengthen regulator with better funding for
skills acquisition. Link broadband inititaives to national skills programmes in
telecommunications. Private sector initiatives. Broaden market.
Skills deficit
Obtaining access to rights-of-way, building permits. Navigating multiple
different local regulations. . Ensuring that there is a clear and commonly
applied set of procedures and processes for obtaining access to rights-of-
way, building permits
Delay due to local
regulations

Conclusion
Make the market work first
Open Access Models
‘‘Crowding in’’ Private Capital
Innovative Strategies for Underserved
Demand Stimulation
Public outsource for InfraCo and Sentech

July 2012
Response to Request for Market Sounding for
Rolling out Broadband Infrastructure in South Africa
Presentation to the South African
Treasury
Brian Pinnock
Thank you

Presentation to SA National Treasury on National Broadband Funding

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