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July 2012Brian PinnockResponse to Request for MarketSounding for Rolling out ofBroadband Infrastructure in South AfricaPresentation to the South African Treasuryby Brian Pinnock

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© Copyright Dimension Data 213 June 2013AGENDAOther CountriesApproachesFunding Sources & MechanismsKey ChallengesConclusionIntroduction

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Introduction

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© Copyright Dimension Data 413 June 2013Source: Booz & Company AnalysisA deeper look at broadband and digitizationPenetration AffordabilityReliability SpeedIntensitySkills- 150 countries studiedConstrained Emerging AdvancedTransitional

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© Copyright Dimension Data 513 June 2013Source: Booz & Company AnalysisStages of digitization – BRICS countriesPenetration AffordabilityReliability SpeedIntensitySkills- 150 countries studiedConstrained Emerging AdvancedTransitional

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© Copyright Dimension Data 613 June 2013GDP per capita overallGDP per capita: Constrained stageGDP per capita: Emerging stageGDP per capita: Transitional stageGDP per capita: Advanced stageGDP GrowthJob CreationAccess to BasicServicesInnovationQuality of lifeTransparencyE-GovernmentEducationUnemployment rateGlobal Innovation IndexOECD Better Life IndexUNDP HDI: Constrained and EmergingUNDP HDI: Transitional and AdvancedCorruption perception IndexE-Government Development IndexInequality adjusted Education Index: Constrained and EmergingInequality adjusted Education Index: Transitional and Advanced0.60 %*0.50 %*0.51 %*0.59 %*0.62 %*-0.84 %*6.27 points1.29 points0.13 points0.06 points1.17 points0.10 points0.17 points0.07 pointsPositive Impacts of DigitizationSource: Booz & Company Analysis

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© Copyright Dimension Data 713 June 2013Impact on SA GDP from wireless broadbandSource: Analysys Mason28,000new jobs1.8%of GDPby 2015

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© Copyright Dimension Data 813 June 2013Broadband Bill of MaterialsTechnologycomponentImpediments to deployment DeploymenttimeStatusInternational cablesconnecting yourcountryInvestment (~$100M upwards)Regulations allowing you toland12-18 monthsDomestic cables fromthe coast to yourmetro and inlandregionsInvestment (~$150M upwards)Complex rights of way process18-36 monthsLast-mile connectivity(fixed or wireless)Investment (~$400M upwards)Site acquisition andenvironmental impact18-∞ months

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© Copyright Dimension Data 913 June 2013Then NowInternational Connectivity

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© Copyright Dimension Data 1013 June 2013Fixed WirelessSatelliteFibreMobile broadband(current)Copper(fixed line /ADSL)The last mile

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

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© Copyright Dimension Data 1213 June 2013How have other countries been able to expandbroadband coverage?Approaches that rely on private sector investment, coupled with regulatoryreform that promote efficient and competitive marketsA mix of approachesand policiesEither private or public DBO models or JVs. The network is built and operatedby the either the public or private sector or both, with the public sectorretaining all or some ownership and some control of the networkVarious possiblemodels usedThe World Bank provides financing for strategic investments to support thedevelopment of key parts of ICT infrastructure. Vendor led financing is oftenused.Variety of fundingsourcesGovernment is able to leverage the commercial and technical acumen of theprivate sector on an on-going basis whilst retaining ownership of, and a largedegree of control over, the network infrastructure.Advantages

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© Copyright Dimension Data 1313 June 2013Elements of broadband strategies in selected countriesSource: Kelly, T., & Rossotto,C. 2011. Broadband Strategies Handbook. World BankEstablish open accesswholesale networksStrategy Brazil Columbia Finland France Japan Oman Singapore SA USAEncourage private sectorinvestmentInclude broadband inuniversal service definitionEncourage demand forbroadband servicesPromote improve andexpand PPPsSubsidize local, regional ornational venturesMandate LLU✔✔✔✔✔Promote facilities basedresale competitions✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔✔a✔✔✔✔✔✔

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© Copyright Dimension Data 1413 June 2013Broadband projects as counter cyclical investmentsAustralia (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$265mFrance (2008-2018)$13Bn$67bn$297m$371M$1.1Bn$650M$7.2Bn$118M$24.6Bn

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© Copyright Dimension Data 1513 June 2013Government contributions and financial mechanismsInitial investment 11% and 4% respectively. Balance from private companiesand issuance of government bonds.Australia and SouthKoreaOne third of costs is from public funding for rolling out high-speed networks toareas that are underserved or unserved by commercial internet serviceprovidersFinlandProviding a credit line to the operators on the rollout of fiber networks onfavourable terms but with clear repayment times.PortugalAdding resources to existing rural development or universal service fundsEU and USAContracting commercial providers to build the network with service obligationsthrough a competitive bidding processFrance, Ireland, Japanand SingaporeSource: World Bank (Qiang 2011)

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© Copyright Dimension Data 1613 June 2013Government contributions & financial mechanisms in AfricaIntercity fibre PPP with the network operated by the incumbant UgandanTelecom. BOT model. Phase 1 - $30M (Total $96M) financed by a concessionloan from China.UgandaNational fiber backbone. The financing comprises two components: 1. theVendor led financing scheme:US$1.5 billion; 2. implementation fiinanced bythe Ethiopian Telecommunications Corporation with local capitalf $500M.EthiopiaFiber project primarily for CDMA rural telephony. $90M. State loan.Coˆte d’Ivoire“State-owned incumbents have maintained dominance overessential facilities, which has stifled competition”Source: Calandro (2012)PPP – Kenya National Optic Fibre Backbone Initiative (NOFBI) throughTelkom Kenya Ltd (TKL). Cost $28M. Main private investor is Altech Stream ofSouth Africa,Kenya

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© Copyright Dimension Data 1713 June 2013Other new initiatives in AfricaKenyan Open Access LTE network: Cost $500M. PPP approach. Modelsimilar to that of The East African Marine System (TEAMS) investors take astake in a holding company. Respective stakes are converted to capacity inthe LTE network.KenyaRural NetCo: Consortium funded by the World Bank and led by Ericsson ofSweden have started rolling out 3G. Plans are to do infrastructure/site sharingwith operators as well as deploying its own base stationTanzaniaSources: Telegeography, May 2012, Kenyan Communications Commission, March 2012

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Recommended ApproachesWhat approach enables rapid broadband expansion?

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© Copyright Dimension Data 1913 June 2013takenDefine project aims to tackle market failures and deliver socio-economic benefits. E.g. rapid rollout.EU Recommendations:6 stages of planning a broadband investmentSource: Analysys Mason (2011)Why should we invest inbroadband?Understand the costs and benefits of different kinds ofinfrastructureWhat type of network infrastructureshould we invest in?Understand the merits of each investment model and what mightwork best for you.How should we invest?Ensure successful delivery and operation and provide evidencefor audit.How do we manage/monitor theoutcome?Understand the commercial case and your potential role on thedemand side?What can be done to ensuredemand for services?Include measures to reduce costs and manage risks.What can be done to reduce thecost and manage risks?

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© Copyright Dimension Data 2013 June 2013• the link between price setting in termination markets andin the related retail markets that may be competitive..• Operator with SMP in one market that then transfers thismarket 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 tocompete.Types of market failures in telecoms marketsSource: Econex, 2011VerticalLeveragingRefusal to dealLeveraging by means ofnon-price variablesLeveraging by means ofpricingHorizontalLeveragingSingle market dominanceTermination (2-wayaccess)

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© Copyright Dimension Data 2113 June 2013Broadband subscriptions in SASource: Africa Analysis

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© Copyright Dimension Data 2213 June 2013Mobile subscribers and penetration rate at EU vs. SASource: IDATE, 2010; ITU 2011

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© Copyright Dimension Data 2313 June 2013SA Disappointing Broadband Market PerformanceSource: Africa AnalysisBroadband penetration rates in selected developing countries

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© Copyright Dimension Data 2413 June 2013Wireless Broadband Coverage (in Red)Source: Econex, 2011MTN 3G – 35% population coverageVodacom 3G – 27% population coverageVodacom Edge – 26% population coverage

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© Copyright Dimension Data 2513 June 2013Market share of the MNOs in mobile broadbandSource: Africa AnalysisThe level of competition may not be optimal when two large firmscontrol a market (duopoly) and have similar cost and pricing strategiesThe competition Act definesdominance if:(a) 45% market share(b) At least 35% market share(c) Less than 35% but hasmarket power

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© Copyright Dimension Data 2613 June 2013Dominance in the downstream marketSource: Africa AnalysisStable market share can indicatelow levels of competition

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© Copyright Dimension Data 2713 June 2013Recommended Approaches: PrinciplesRegulatory tools that might be able to increase entry and competition, andhence maximize what the market can deliver on its own. Technology neutrallicense regimes, frequency liberalization, preference to new operatorsMake the market workfirstPolicy makers goal should be a level playing field and avoid picking winners.Late entrance to an infrastructure market is unattractive especially ifgovernment funding assists incumbent operators furtherOpen AccessThe telecommunications sector has generally adopted a market-basedfinancing approach. The most effective means of channeling public support isthrough PPPs which are able to harness the investment resources andtechnical expertise of the private sector to meet policy objectives.‘‘Crowding in’’ privatecapitalPublic investment could be used to target spending on high-speed open-access networks providing connectivity to rural schools, hospitals and otherpublic institutions as anchor points for high-speed connections in thecommunity.Innovative strategiesfor underservedWhile addressing supply, public policies and investment for demandstimulation to facilitate broadband adoption are essential to the robustdevelopment of broadband infrastructure in the long run..Demand StimulationSource: World Bank (Qiang 2011)

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© Copyright Dimension Data 2813 June 2013United Kingdom OFCOMS 5 supporting elementsPricing FreedomRisk Reflective of returnEfficient NetworksWholesale Access for AllCompetitionSource: World Bank (Qiang 2011)

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© Copyright Dimension Data 2913 June 2013Recommended ApproachSource: Forzatti et al. (2010)Open Access Network Models

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© Copyright Dimension Data 3013 June 2013Recommended ApproachesA condition of granting State aid should be that the recipient provides openwholesale accessState led investmentGovernment ought design policies that ensure robust competition indownstream market segments which will result in the maximization ofconsumer welfare, as well as spur innovation and investmentCompetition indownstream marketsEnsuring efficient allocation and management of assets government controlsor influences, such as spectrum, poles, and rights-of-way, to encouragenetwork upgrades and competitive entryEfficient allocation &management of assetsEnable incentives and mechanisms to repurpose spectrum. Encourageinnovative spectrum access models, including unlicensed spectrum useInnovative spectrummodels

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

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© Copyright Dimension Data 3213 June 2013Funding MechanismsCompetitive subsidy or cost-sharing mechanisms are one type of PPP modelthat has traditionally been used to encourage the rollout of voice networks intounderserved areas and has been recently applied in the rollout of broadbandinfrastructure in France.PPP - Cost-sharingmodelsProvides an opportunity for Government to direct investement to achieve itsnational coverage obejectives at lower cost, as assistance from the privatesector reduces the high capital and operating expenditure requirements ofsuch a network.PPP -Public OutsourceModelsGovernment 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 impactFunding PassiveInfrastructureAs an anchor tenant on various networks, current Government expenditure oncommunications and connectivity could support the rollout of broadbandinfrastrure to underserviced commercially unviable areasAnchor TenantUSFs to subsidize the roll out of broadband to uderserved areas. Tools suchas competitive bids by private entities in relation to predetermined criteria (e.g.specified service levels, population coverage, technology neutrality etc.)USFs and competitivebids linked toobligations

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© Copyright Dimension Data 3313 June 2013EU Recommended Approaches – 5 modelsSource: Analysys Mason 2008BOM or local community, model involves a group of end users organisingthemselves into a jointly owned and democratically controlled group(frequently a co-operative) capable of overseeing the contract to build andoperate their own local network..Bottom-up modelInvolves 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 thenetwork, but may impose obligations in return for the funding.Private design, buildand operate (DBO)modelUnder a public outsourcing model a single contract is awarded for all aspectsof the construction and operation of the network. The major characteristic ofthis model is that the network is run by the private sector, but the public sectorretains ownership and some control of the network.Public outsourcingmodelA joint venture is an agreement under which ownership of the network is splitbetween the public and private sector. Construction and operational functionsare likely to be undertaken by the private sector.Joint venture modelA public DBO model involves the public sector owning and operating anetwork without any private sector assistance. All aspects are managed bythe public sector. A public sector operating company may operate the entirenetwork, or may operate the wholesale layer only.Public design, buildand operate model

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© Copyright Dimension Data 3413 June 2013ExamplesSource: Analysys Mason 2011The main basis for the recommendations presented in this guide is a series of interviews withstakeholders from example projects which have already been successfully implemented. Theseexample projects are summarised in Figure 1.1.CyprusGeorgiaAzerbaijanArmeniaTurkeyMaltaPiemonte, ItalyPublic DBOInspired privateinvestmentNuenen, NetherlandsBottom upCo-operative-based FTTHRural developmentprogramme, SwedenBottom upState-funded co-operativesMidtsoenderjylland, DenmarkPublic DBOPartnership withelectricity providerDORSAL, FrancePublic outsourcingInvestment in backbone,DSL and WiMAXSouth Yorkshire, UKPublic outsourcingPartnership arrangementfor network managementAuvergne, FrancePublic outsourcingCabinet-based ADSLfor very long linesRAIN, LithuaniaPublic DBONationwide backhauland core networkSTOKAB, SwedenPublic DBOCity-based FTTHmeshed networkLombardia, ItalyJoint venturePlanned FTTH to 50%of homesAlto Adige, ItalyPublic DBOWireless to homes andbusinesses; fibre to publicNorth Karelia, FinlandPrivate DBO and bottom upGrant to build to within2km of homesNote: DBO = design, build and operate; FTTH = fibre to the home

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© Copyright Dimension Data 3513 June 2013Funding ModelsBottom UpModelSource: Analysys Mason 2011Advantages Disadvantages Recommended Use• Long term, non profitview suitable forhigh-costinfrastructure e.g.FTTH• Localised with risk oftechnologydifferences• Localised areasPrivate DBO• Larger scale thanBU• Low public burden• Minimum thresholdto attract privateinvestment• Limited control overoperations• Larger scaleinvestments withsufficient funding toattract privateinvestments.Operations and risktransferred tooperatorPublic Outsourcing• Public financialstability with privateexpertise• Greater control thanprivate DBO• Reduced financialbenefit to privatesector• Additionalbureacracy• Govt requires highconttol• Operator is riskaverse

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© Copyright Dimension Data 3613 June 2013Funding Models ContinuedJoint VentureModelSource: Analysys Mason 2011Advantages Disadvantages Recommended Use• Potential benefits forboth parties basedon risk sharing• SPVs can makemodel scalable andallow externalinvestment• Potential forconflicts of interest• Few examples ofimplemented JVs toindicate bestpractice• Where interests ofpublic and privatesector can beclosely alignedPublic DBO• Have full control topromote competitionand enforcestandards.• Ensure socio-economic benefitsare prioritised• Size and scopelimited by publicexpertise.• Potentially excludesprivate sectorexpertise• Where managingauthority requiresabsolute control• Where smalltargetted investmentwill inspireinvestment fromprivate sources

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Key ChallengesBest ways to address challenges?

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© Copyright Dimension Data 3813 June 2013Key Challenges and Ways to Address ThemProhibitive cost of deploying broadband infrastructure given South Africa’ssize and population spread. Use PPPs to leverage off the private sector whilemaintaining control of outcomes.CostPolicy and regulatory inefficiencies. Significant strengthening of the regulator.Clearer policies that encourage Investment and clarify the role ofGovernment.Policy & RegulationUnintended consequences of technology choices, in the context of a worldcharacterized by rapid technology change. Be as technology neutral aspossible in policy, regulation and investment mechanisms.UnintendedConsequencesEnsuring that state owned enterprises do not crowd-out private investment incommercially viable markets. Support rural access and connectivity initiativesaligned to commercially viable markets. Avoid favouritism towards anincumbent that discourages other players.Crowding OutThe dominance of incumbent operators is a key obstacle to competition. Openaccess wholesale models to encourage new entrants and widen the market.Make MVNOs a condition of access to further spectrum. Procedures to avoidyears of litigation.Dominance ofincumbents

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© Copyright Dimension Data 3913 June 2013Key Challenges and Ways to Address ThemInefficient allocation of radio spectrum. Spectrum is a scarce resource and weneed a use it or lose it approach. Faster decisions on spectrum.SpectrumLimited capital markets for both public and private sector. Universal servicefunds, vendor finance and World Bank funds available. A condition of grantingState aid should be that the recipient provides open wholesale access.Limited CapitalMarketsDemand does not automatically follow supply. Singapore 40% refusal. Japanhas FTTH coverage but only 30% uptake. Cross subsidies. Link investment towider programmes driving broadband ecosystem.Driving demandLack of skills in DoC, regulator, SoEs and private sector to a lesser extent.Public outsource model for SoEs. Strengthen regulator with better funding forskills acquisition. Link broadband inititaives to national skills programmes intelecommunications. Private sector initiatives. Broaden market.Skills deficitObtaining access to rights-of-way, building permits. Navigating multipledifferent local regulations. . Ensuring that there is a clear and commonlyapplied set of procedures and processes for obtaining access to rights-of-way, building permitsDelay due to localregulations

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Conclusion

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© Copyright Dimension Data 4113 June 2013ConclusionMake the market work firstOpen Access Models‘‘Crowding in’’ Private CapitalInnovative Strategies for UnderservedDemand StimulationPublic outsource for InfraCo and Sentech

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July 2012Response to Request for Market Sounding forRolling out Broadband Infrastructure in South AfricaPresentation to the South AfricanTreasuryBrian PinnockThank you