Next Generation Broadband In Asia: Strategies to Promote Investment


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Next Generation Broadband In Asia: Strategies to Promote Investment

  1. 1. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY Next Generation Broadband in Asia Strategies to promote investment Dr Martyn Taylor Partner June 2012 1
  2. 2. Overview1. 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.com2. 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 2
  3. 3. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY Broadband deployment challenges in Asia 3
  4. 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. 4
  5. 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. 5
  6. 6. Speeds required for different applicationsBASIC BROADBAND HIGH SPEED BROADBAND SUPERFAST BROADBAND500kbit/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 6 Building management
  7. 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. 7
  8. 8. Key investment risks for broadband rolloutsRisk DescriptionFunding 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 ofmajeure 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. 8
  9. 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. 9
  10. 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. 10
  11. 11. 0 200 400 600 800 1000 1200 1400 China India Indonesia Pakistan Bangladesh Japan Philippines Vietnam Population (millions) 0 200 400 ThailandSouth 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 SingaporeNew Zealand $0 $10,000 $12,000 $2,000 $4,000 $6,000 $8,000 China India JapanSouth 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 KoreaNew Zealand New Zealand Malaysia (GDP per capita) Myanmar Individual income11 North Korea Thailand Cambodia China Laos Indonesia
  12. 12. Many jurisdictions rely heavily on wireless networks140% Jurisdictions that do not yet have 100% fixed network penetration by120% household…100% 80% Very heavy reliance on wireless telecoms 60% 40% 20% Mobile penetration 0% (by population) Fixed penetration (by household) 12
  13. 13. TELECOMMUNICATIONS, MEDIA & TECHNOLOGY Government involvement as a solution 13
  14. 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 concessionsPrivate 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 14
  15. 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. 15
  16. 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. 16
  17. 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. 17
  18. 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. 18
  19. 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 19
  20. 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. 20
  21. 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 concessionsPrivate 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 21
  22. 22. Conclusions 22
  23. 23. Key conclusions and recommendations1. 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. 23
  24. 24. DisclaimerThe 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 NortonRose 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 24is 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 RoseSouth Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.