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4

THE ECONOMICS OF RURAL BROADBAND

WHITEPAPER

Authors: Myriam Ayada & Ivan Skenderoski

March 2018

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Table of Contents

MOTIVATION .................................................................................................................................. 2

OVERVIEW OF THE POSSIBLE MODELS OF INTERVENTION ......................................... 4

OPERATIONAL ELEMENTS TO CONSIDER ............................................................................ 7

Discussion on network costs .................................................................................................................... 7

Discussion on revenues ............................................................................................................................11

FINANCIAL PERSPECTIVE AND RISK MITIGATION .......................................................... 13

Flows between the public and the private sector ..........................................................................13

Availability of public funds ......................................................................................................................13

Two conditions that are required for private intervention .........................................................14

SALIENCE’S SOLUTION .............................................................................................................. 16

OUTCOMES & BENEFITS .......................................................................................................... 16

AUTHORS ....................................................................................................................................... 17

ANNEX: LIST OF ABBREVIATIONS ......................................................................................... 18

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Motivation

Independent of their overall economic

development, in most countries there is still

a well-known “digital divide” between rural

and urban areas when it comes to

broadband access. According to a World

Economic Forum report, more than half of

the globe’s population - about 4.1 billion

people - are not connected to the internet.

As shown in

Figure 1 below, there are multiple factors for

the digital divide, including lack of access,

lack of availability, lack of affordability, lack

of skills, and lack of awareness.

Most governments around the world are

now addressing the connectivity issue to

rural and underserved areas in their agendas.

Figure 1: Closing the digital divide

Source: ITU, Weforum

Successful policies find constructive ways to

join the public and private sectors (such as

Public-Private Partnership initiatives); rely on

regional initiatives for support (such as

European funds for broadband

developments); and/or exploit new

technologies (such as low-cost wireless

solutions).

Internet enables communities to connect

with the rest of the world, brings

government services, social programs,

educational opportunities, and remote

health services to people who otherwise may

have no access. However, due to high

prices and lack of service availability, poor

and rural communities are least likely to

subscribe to high speed Internet.

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Figure 2: Overall Next Generation Access (NGA) Coverage by Country, 2016

In order to reduce the “digital divide,” which

is defined as the non-availability of high-

speed connectivity in suburban and rural

areas versus urban areas, numerous

countries have initiated national

strategies to encourage the expansion of

fixed broadband to under-served and

non-served areas.

Initiatives range from country specific plans

to regional framework programmes (such as

EU or ASEAN) attempting to find global

solutions (such as the US satellite broadband

start-ups of OneWeb, O3B, and Google’s

Loon project). The European Commission

under the Digital Agenda framework for

20201 has stated the following broadband

targets:

broadband access for all by 2013,

access for all to higher internet speeds

(30 Mbps or above) by 2020,

and 50% or more of European

households subscribing to Internet

connections above 100 Mbps.

The merits of such initiative are

unquestionable, nevertheless most

broadband strategy policies do not

provide guidance on how to achieve the

stated targets which explains the

1 https://ec.europa.eu/digital-single-market/en/policies/improving-connectivity-and-access 2 https://ec.europa.eu/digital-single-market/en/news/european-commission-

joins-forces-help-bringing-more-broadband-rural-areas

significant gap between the targets and

the actual coverage at present.

As of 2016, see Figure 2, average NGA

coverage in EU countries is slightly above

70%; in France and Greece it is below 45%,

and overall there have been small

improvements in rural areas where NGA

coverage is below 35%.

Usually governments establish national

policies defining timelines when objectives

are to be met and requirements for

minimum speed, minimum coverage, and

type of technologies. Then it is up to the

national regulatory authority and/or relevant

entity responsible for telecommunication

development to ensure that the enforced

regulation is sufficient to reach those

objectives. Aware of this gap between

policies and implementation, the European

Commission has recently (in late 2017, only

two years before the deadline) published a

five-point toolkit 2 on how to bring faster

broadband in rural areas of the EU. This

toolkit notably includes the setting up the

Broadband Competence Offices (BCO) that

aim to help local regulatory authorities to

improve broadband connectivity in rural

areas.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MT CH BE NL IS PT LU DK UK LV AT CY DE IE SI LT NO ES HU SE EE EU

28

SK CZ FI BG IT RO PL HR FR EL

Source: Broadband Coverage in Europe 2016, a study by IHS Markit and point Topic for the European

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Within and outside Europe, over the last

decade, countries have chosen various

approaches such as establishing a National

Broadband Network (NBN), enforcing

Universal Services for broadband or

encouraging the development of Public

and Private Partnerships (PPP). There are

other models of intervention as well, but

generally they require different regulatory

enforcement and, most of all, unequal levels

of public versus private investment.

Within this paper, we discuss the key

factors that governments need to

consider when deciding on the

intervention model and how to

incentivize private investment in non-

economically viable areas.

Although it seems counterintuitive, it is

possible to make private sector investing

attractive in areas traditionally seen as

commercially non-viable because of high

costs and low demand. Studies of past

experiences show that cases of successful

PPPs have been implemented or private

intervention has been incentivized with

government subsidies. But first, it is

necessary to understand the key elements of

the business case such as demand, revenue,

and cost drivers. Establishing a

comprehensive business case will enable to

shortlist possible models of intervention:

indeed, in some case it is hardly feasible to

include private investment because of very

low returns and high costs.

After considering the operational aspects of

running the network, a model of intervention

can be chosen by the responsible body

considering the feasibility of the business

case but also strategic factors (such as, long

term ownership of the network, available

public funds, risk mitigation and other

factors).

Overview of the possible

models of intervention

Different investment models have been

applied around the globe to finance fixed

broadband deployment in non-economically

viable areas.

This paper does not discuss the benefits or

disadvantages of the different technologies

such as DSL upgrade, cable, FTTH with

GPON, FTTH with P2P or Fixed wireless,

although we mention in section 2 how the

capital and operational costs vary from one

solution to another. Nevertheless, being in

line with current best practices we consider

FTTH as the preferred and fully future-proof

technology.

Regarding the way to identify non-

economically viable areas, we first must

consider the generic definition used by the

EU to classify areas according to Next

Generation Access (NGA) services

availability. According to the EU process any

area falls in to one of these three categories:

Black – more than one NGA service

provider is available now or planned to

be made available in the next three years

and no (public) intervention can be

justified;

Grey – one NGA service provider is

available now or planned to be made

available in the next three years and

(public) intervention must be carefully

justified as creating a step-change;

White – no NGA service provider is

available now or planned to be made

available in the next three years and these

are suitable for public sector support.

Based on our experience, we have observed

that White and some Grey areas are in

general not economically viable for private

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Figure 3: Models of intervention attributes

Source: Salience analysis

operators (hence the low coverage there). In

this paper we will refer to non-

economically viable areas keeping in

mind that they are classified as Grey or

White and more often located in suburban

and rural to very rural areas.

Back to the intervention models, (Figure 3)

on one side of the spectrum we have cases

where the public sector finances the entire

project which in most cases ends with

telecom utility company being created to

operate either in specific geography or

nationwide. We will call such models the

Public Design Build and Operate model

(Public DBO). 3 On the other side we have

private investment and operations that are

subsidized by the government to make the

case viable: the private DBO with subsidy. In-

between there are various shared investment

schemes (PPP) that are tailored to the

specific circumstances and are therefore

3 A National Broadband Network is therefore a case of Public DBO (nationwide coverage)

difficult to be applied without very specific

context and investor involvement. PPPs can

vary from financial and operational

perspectives, but if we look at the build

versus operate aspects, we can distinguish

five models:

Third Party run Public Service –

Special Purpose Vehicle –

Lease case where the public sector builds

the network but outsources all the

operations to a private contractor. In

return, the private contractors pay a lease

to operate the built network.

Partnership Contract -

Concession -

We have summarized the attributes of all the

major models in Figure 3.

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Figure 4: Domain of existence of intervention model (% public intervention vs % public ownership of

the assets)

Source: Salience analysis

Figure 4, we have delimited the domain of

existence of PPP and Private DBO looking at

the following four cases:

The Private DBO with no subsidy case

where no public incentive is required to

make the case viable and is attractive for

the private sector. These are typically

black areas, therefore out of the scope of

this paper;

The Private DBO with full subsidy case

where the public sector subsidizes 100%

of the investment. In reality, the level of

subsidy varies from 20% to 80% of the

roll-out CAPEX;

The Lease PPP aforementioned;

The Public DBO

In Figure 4, the X-axis represents the CAPEX

and OPEX borne by the public sector, for

instance, in the lease case the CAPEX are fully

borne by the public sector whereas the OPEX

are on the private contractor side. In the

public DBO case, both CAPEX and OPEX are

incurred by public sector. The Y-axis

represents the percentage of assets owned

by the public sector: obviously, Y cannot be

superior to X. The assets are fully owned by

the public sector in the lease and in the

public DBO case, in opposition to the private

DBO case where the assets belong to the

private sector.

All the possible models of intervention are

located within the green areas: they are a mix

of public/private investment and assets

ownership:

Given one or multiple uncovered areas, how

to choose an intervention model that will on

one hand guarantee that the strategic

objectives are reached but will also maximize

the private intervention? In the next section,

we will review the key aspects of the business

case that will answer this question.

Expenses borne

by private sector

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Figure 5: Access and backhaul cost per premise comparison

Source: Salience analysis

Operational elements to

consider

Before choosing the best intervention

model, a business case is required to

estimate the long-term costs, revenues, and

cash flows for both the public and the private

sectors. We discuss in this section the key

elements that have a substantial impact on

the cash flows.

Discussion on network costs

The cost of providing broadband in rural

areas can be divided into two parts:

The cost of access network. The access

network establishes the link between the

end-user and the central office (in FTTH

GPON network, one central office

connects premises within about a 20 km

radius).

The cost of backhaul. The backhaul

establishes the link between the access

network, i.e. the central office and the

core network where service platforms

(Internet, voice, IP Television, and so

forth) reside.

The projects to cover rural areas with

broadband can either be only access

projects, covering groups of villages or

municipalities (relying on existing backhaul),

or only backhaul projects that usually cover

wider areas (separate projects are

implemented for access networks) or a mix

of access and backhaul projects. Backhaul or

“Middle Mile” projects have been popular

across Europe and supported by EU

structured funds – examples include the

Romanian RoNET project and the Estonian

EstNet project. For such projects, access and

backhaul, the cost per premise can vary

significantly depending on the technology

adopted or the density of population, as

depicted in Figure 5.

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Figure 6: A range of access network technologies are available, but only FTTH is future-proof

Source: Salience analysis

We will focus here on access network

projects, as they are usually the most

onerous and most risky from operational

perspective.

Over the last several years, new business

models have expanded Internet access, and

helped to ensure that technology

developments are deployed in areas typically

not served through traditional approaches of

broadband network buildout. Private actors,

governments, and international

organizations have sought solutions to the

challenges that communities, which are not

receiving the full benefits of broadband,

must face because deployments in these

areas are not financially viable for the private

sector to invest in alone.

Subject-matter case studies and research

show that multiple access network

technologies are available to provide

broadband services such as Fibre to the

Home; Cable technology; Fibre to the

Cabinet (upgrade of copper network);

Mobile broadband; Fixed wireless. We

compare their main attributes in Figure 6.

Most broadband access projects are

implemented with FTTH or Fixed wireless

solution. In an FTTH network, fibre is

deployed from the central office to the

customer premise either underground (in

duct or directly buried) or overhead

(suspended on poles). Fixed wireless solution

is different; usually the customer premise is

connected via wireless link to a tower. The

tower is then connected to the central

office/backhaul via a fibre link or microwave.

For illustrative purpose, Figure 7, on the

following page, represents the key elements

of the access network: the central office; the

street cabinet and the distribution boxes

(relevant for GPON); the towers (relevant for

fixed wireless); the trenches and the duct, the

poles, and the last drop.

Technology FTTH Cable FTTC Mobile

Broadband Fixed Wireless

Passive

Infrastructure Fibre: overhead or

trenched Coaxial cable

Mix of fibre and

copper

Cellular towers

and fibre backhaul

Towers or wireless

mesh

Active layer GPON (or Active

Ethernet) DOCSIS 3 VDSL / G Fast 3G / 4G / 5G Wi-Fi

Usual realistic

speed 100 – 1000 Mbps

10 Gbps in future 30-200 Mbps 30-50 Mbps

3G: <10 Mbps

4G: <20 Mbps

5G: <50 Mbps

5-20 Mbps

Geography Countrywide Countrywide Rural & suburban Rural coverage Rural coverage

Future proof?

Long term

Satisfies future

demand and asset

life is 30 years.

Short/medium

term

but it will not

satisfy long term

as needs to be

replaced due to

limitations.

Short/medium

term

but it will not

satisfy long term -

needs to be

replaced by full

fibre later due to

copper technology

limitations

Short term

but it will not

satisfy long term

demand. Stop gap

solution for

certain areas.

Short term

but it will not

satisfy long term

demand. Stop gap

solution for certain

areas. Unreliable

due to unlicensed

spectrum use

Page 9 of 18

Figure 7: Access network

Source: Salience analysis

There are various examples of co-existence

of multiple technologies for example NBNCo

Australia deployed FTTH in very dense areas

and fixed wireless in the surroundings.

Independently of the technologies, we have

identified key factors that have significant

impact of the cost of deploying an access

broadband network.

Density and distribution of population

In cities or in the countryside, the density of

premises is a structural influencer of cost. We

usually observe three to five types of areas:

Dense and urban areas: where population

is very high. Most of premises are in high

rise Multiple Dwelling Units (MDUs). Such

areas

are usually located in black NGA areas,

thus most of the considerations

discussed in this paper are not applicable

to them;

Suburban areas surrounding the dense

areas where population density is lower,

and premises are in smaller MDUs or

Single Dwelling Units (SDUs);

Rural areas where population density is

low, and premises are in grouped SDUs;

Very rural areas where the population

density is very low, and premises are in

dispersed SDUs.

For illustrative purposes, Figure 8 on the

following page, depicts how FTTH is

deployed in the different types of areas

(assuming GPON):

Central Office

Street Cabinet

Distribution Box

Street Cabinet

Street Cabinet

Houses

Tower

Poles

Aerial Fiber

Last Drop

ONTTrench

Duct

Cables

Feeder Cables

Medium Rise Building

High RiseResidential

Fixed wireless

Overhead FttH

Underground FttH

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Figure 8: Representation of GPON configuration in dense, suburban, and rural areas

Source: Salience analysis

Because of the difference in configuration,

costs can radically increase in rural areas. For

instance, if we consider the link between the

street cabinet and the central office (the

feeder), the same link serves multiple

premises in urban areas against a very small

number in rural areas. Moreover, deploying

an access network in an area where premises

are close to each other or distributed along

a road, is less onerous than in areas with

dispersed houses.

Existing and reusable infrastructure

Another key factor influencing costs is

existing infrastructure. In most countries the

incumbent has deployed a nationwide

copper network therefore some space can

be available in ducts or on poles for fibre.

Utility poles owned by electricity companies

can also be re-used. Re-using existing

infrastructure can massively reduce capital

expenditures although it is challenging to

get data on available space in duct or on

poles. Nevertheless, it must be noted that, if

the re-use of existing infrastructure reduces

the CAPEX, then additional OPEX must be

provisioned for leasing.

Mix between underground and overhead

fibre

We usually observe that underground fibre

is deployed in urban areas and overhead in

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rural areas. Indeed, municipalities and ISPs

prefer buried deployment in urban areas

because they can re-use existing

underground infrastructure (cable and

sewerage). Moreover, buried cables are

more reliable due to immunity to wind and

ice damage and they are more aesthetically

pleasing as the cables are invisible. Type of

soil is also a critical parameter; with labour

costs typically ranging between 50% and

80% of construction and maintenance costs.

The harder the soil or the deeper there is a

need to drill, the more expensive it will be to

deploy or repair the fibre.

On the other hand, overhead infrastructure

is more convenient in rural areas as it

eliminates the need to deploy expensive

infrastructure in sparsely populated areas.

Number of operators such as BT in the UK,

Telefonica in Brazil, and DST Telecom in

Portugal 4 have used aerial cables for

deployment.

Furthermore, in case of damage or

malfunction, it is easier to repair aerial than

underground cables because there is no

need to dig through ground or hard surfaces

to repair the cable. But, in some cases,

overhead operational cost can be very high

if owners of utility poles charge astronomical

leases.

The business case must therefore take

into consideration all those factors to find

the best mix. A study of the premises

between urban, suburban, and rural areas

can enable a segmentation of wide

broadband projects into smaller ones that

can be more attractive to private sectors.

4 Sources:

http://www.btplc.com/Innovation/News/Cornwallmilestone.htm

http://www.superfastcornwall.org/assets/file/Superfast%20Cornwall%20Evaluation%20-%20Executive%20Summary.pdf

https://books.google.mk/books?id=1tR2jc8hw6oC&printsec=frontcover#v=onepage&q=90%25%20aerial&f=false

https://www.nexans.co.uk/eservice/UK-en_GB/navigatepub_149247_-

32490/Nexans_to_supply_innovative_aerial_extractable_cab.html

Discussion on revenues

Depending on the market structure the

entity deploying the network could provide

wholesale or retail services or in some cases

both (usually this applies to the incumbent):

Wholesale services: in this case the

network is built to provide access to

retailers such as ISPs. The network can

support passive or active sharing so that

at least two or three retailers can get

access on a non-discriminatory basis. In

such cases, the revenues in the business

case will correspond to wholesale

revenues only, independent of the model

of intervention. Similarly, retail costs such

as marketing are excluded;

Retail services: in this case the network

is built to provide access directly to end-

users, both residential and business. Such

a programme is less common as it does

not promote competition. In general,

when the public sector intervenes, by

building a national network or by

subsidizing deployment, the objective is

to maximize competition (as it maximizes

economic welfare, improve quality of

services and encourage operators to

propose innovative services).

In the following section we review key

influencers of revenues for both approaches.

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Take-up

It is challenging to forecast degrees of

success of commercialization of broadband

in suburban and rural areas. There are

several points to consider:

The average income is lower in rural and

very rural areas so fast broadband

services may not be affordable;

Despite lower incomes in rural and very

rural areas, it is common that there is no

other alternative for customers to get

access to broadband, therefore take-up is

likely to be high within the first years

following deployment;

Take-up can be offset if the incumbent

upgrades the copper network with fibre

to the cabinet;

In its efforts to provide guidelines to support

local operators setting up FTTH wholesale

services in rural areas, the French regulator

ARCEP, has proposed pricing models with

three take-up assumptions (see Figure 9):

Rural operators’ estimates: this take-up

corresponds to operators’ forecasts

based on the outcomes observed in

previous rural projects;

DSL (2002-2013): this take-up is based on

DSL services penetration between 2002

and 2013;

Assuming copper upgrade: this is the

least optimistic take-up assuming the

incumbent will upgrade its network to

provide fibre to the cabinet in order to

lock its subscribers.

Offering passive and/or active access

There is a long-running debate in the

industry about the merits of passive sharing

versus active sharing. The two models are

fundamentally different:

Figure 9: Take-up of FTTH services in not

economically viable areas, based on French

regulator ARCEP

Source: Salience analysis, ARECEP

With passive sharing, an operator, a fibre

owner, builds only the fibre and rents out

individual fibre connections to service

providers. This is the model of OBC in

Oman, Stokab in Sweden and of

Singapore. There are clear disadvantages

for customers and service providers with

the “passive sharing” approach: each

change of provider requires a “truck roll”

and new gateway device installation

which is both expensive and

inconvenient; each service provider must

operate their own node in an area and

risk investment ahead of revenue. These

practical and financial barriers will favour

large operators at the expense of smaller

firms;

In the active sharing model, the fibre

owner uses a specialist active layer

operator to create “bit pipe” managed

connections from a central point of

interconnection down to a port on a

device on the customer’s premise. The

service provider does not need to put any

equipment in the customer's premise -

they simply interconnect in the

datacentre. The active operator has an

exclusive but time-limited concession.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Operators estimates Based on DSL (2002-2013) Assuming copper upgrade

Page 13 of 18

This model is used in most of Sweden, the

Netherlands, New Zealand and many

other countries, although technical and

commercial details vary considerably.

The wholesale revenues of active services are

higher than passive services. 5 The French

regulator, ARCEP, has estimated that in rural

areas the passive service is worth 12.2

EUR/month/premise, whereas the price of

actives services is 17.7 EUR/month/premise.6

The aforementioned points have critical

influence on the business case and the way

they are perceived by the private sector. The

following section goes further by discussing

financial aspects of the business as well as

risk mitigation between the public and the

private sectors.

Financial perspective and

risk mitigation

When considering one specific project area

(one or multiple villages, or a municipality)

an intervention model needs to be found

that will:

Encourage participation of the private

sector;

Optimize costs and revenues;

Mitigate operational, commercial and

financial risks between the public and the

private sector;

Ensure fair and balanced return on

investment between the public and the

private sectors;

In the following section, we will take the

considerations from above and provide

insights on the financial aspects of the

intervention models discussed in section 0.

5 There are two layers of wholesale services: Layer 1 is passive, and Layer 2 is active. Providing active services means

providing Layer 1+ Layer 2 hence a higher pricing 6 https://www.arcep.fr/uploads/tx_gspublication/lignes-dir-ARCEP-tarification-RIP-dec2015.pdf

Flows between the public

and the private sector

From a cash flow perspective, the public

DBO, PPP, and private DBO, are very

different. In the public DBO model, the

public-sector bears all the capital

deployment and operational expenditures.

Thus, all the risks, financial, operational, and

commercial are borne by the state.

The lease PPP model is like the public DBO

model except that the network is operated

by a private contractor. Therefore, the OPEX

are borne by the contractor, which also

collects the wholesale revenues. In return,

the contractor pays the leasing fees of the

network to the public sector, which remains

the owner of the assets. Hence the

operational risks are mostly borne by the

private side.

The cash flows of the private DBO case are

quite straightforward; it is the public DBO

case translated to private sector. A subsidy is

reserved to the private contractor, in order

to make the business case viable. The

subsidy can take two forms: an upfront aid

during the roll-out phase or a revenue grant

during the first years of commercialization.

Availability of public funds

From a public-sector perspective, financing

any type of intervention, public DBO or PPP,

with debt could be very costly.

1. In non-economical areas, the cost of

debt increases if the gearing increases.

Indeed, using the available data on

current weight of debt compared to

GDP, the credit rating of a sample of 68

countries and the credit spread of 10 to

30 years corporate bonds, we have

Page 14 of 18

represented in Figure 10 the cost of debt

versus the gearing:

Figure 10: Cost of debt (x) vs gearing (y)

Source: Salience Analysis

2. We can see that, in general, if a project is

financed with more than 60% debt, the

interest rate is likely to be very high.

Broadband access projects in rural areas

are risky from financial perspective, so

one can expect an even higher cost of

financing activities.

3. Cash flows are very negative for at least

5 years which would result in a

compounded debt if the grace period is

too short. It is very unlikely that the

revenues can cover the capital and

operational expenditures during the first

5 years, and even if they do, they will not

be sufficient to also cover the

instalments of the loans. As a result,

additional loans will be needed to

reimburse the initial loan, which will

increase the debt service and the

interest rate (more loans, more gearing,

higher cost).

Because of the risky nature of such projects

and the increasing relationship between cost

of debt and gearing, the availability of public

funds is critical. It does not seem realistic to

finance this type of projects with a bank loan.

Nevertheless, in the public DBO case, the

State can negotiate a loan with sovereign

guarantee which should lower the interest

rate and increase the tenure and the grace

period.

Two conditions that are

required for private intervention

Involving private intervention requires the

satisfaction of two conditions:

If the project is mainly financed by loans,

the bank will need guarantee that the

debt can be recovered

Private investors will request a minimum

return on equity after 10 to 15 years

The first condition can be satisfied by

introducing subsidies. In some countries

such as France, the amount of subsidy is

calculated on a top-down approach based

on the rate of rurality as shown in :

Figure 11: Subsidy of FTTH rural programmes

in France

Source: Salience analysis, Cahier des charges tres haut

debit France

The weakness of this approach is that

nothing guarantees that the level of subsidy

will be sufficient to attract private sector (i.e.

condition 1 is not necessarily satisfied). The

subsidy can also be calculated with a

bottom-up approach based on the cash flow

of a hypothetical private contractor. Indeed,

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

0% 20% 40% 60% 80% 100% 120%

CAPEX subsidy per premise (EUR)

0

100

200

300

400

500

600

700

800

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Subsidy per premise VS rural rate

%premise in rural areas

EUR

CAPEX subsidy per premise (EUR)

0

100

200

300

400

500

600

700

800

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Subsidy per premise VS rural rate

%premise in rural areas

EUR

Page 15 of 18

an initial business case can be modelled,

quantifying the elements discussed in

section 2. Then, assuming financing

leveraging loan debt, for each year the Debt

Service Coverage Ratio (DSCR) can be

assessed as the operating income/annual

debt service. Typically, commercial banks

require a DSCR of 1.15–1.35 times to ensure

sufficient cash flow is available on an

ongoing basis to cover loan payments. The

subsidy can therefore be calculated in a way

that the effective DSCR is superior to the

threshold, presumably required by the bank.

Such an approach has the merit to allocate

the minimum subsidy to make the case

viable for the private sector.

The second condition is verified by

assessing the cash flows and the Internal

Rate of Return (IRR) after a relevant

number of years (usually for this kind of

projects, the private sector looks for returns

after 10 to 15 years).

In general, the business case shows that the

forecasted IRR is relatively low, but the

private sector can be incentivized to invest

because of: 1) very long asset lifetime and 2)

stable revenues with low commercial risks

after 10 years. It is likely that once the

network is built, there is either no or very low

competition, as the government will not

allocate additional subsidy to another

contractor to build a network in an area

already covered and as the area is not

economically viable, no one will invest on

their own without public aid. Therefore, the

private contractor is certain to capture a

significant market share of the broadband

wholesale access services.

Another way to encourage private

investment with low IRR is to mitigate the

commercial risk. For this purpose, the

government can, instead of allocating an up-

front subsidy to support the capital

expenditure during the roll-out of the

network, guarantee the private contractor

minimum revenues during the first 5 to 10

years of commercialization. But this

approach increases the risks for the public

sector as the contractor may underperform

to secure the revenues guarantee only.

There are multiple ways of encouraging

the private sector to participate in rural

broadband programmes. A transparent

business that includes the key operational

elements discussed in section 2 combined

with a deep analysis of the financing

activities for both public and private sides

will first demystify the uncertainty of

private investors and second enable to

find the best intervention model based on

available funds, the negotiations with

banks and other specific features.

Page 16 of 18

Salience’s Solution

To support governments and public entities

to establish plans to implement broadband

programmes covering commercially non-

viable areas, Salience has developed a full

modelling solution that includes the

following:

Cost of network roll-out based on

geographical data:

Analysis of GIS layers, classification into

geotypes

Design of network with GPON, P2P or

Fixed Wireless

Inventory per geotype and geographical

areas

Operational business case:

Five built-in geotypes that can be

independently excluded or included with

specific attributes such as type of

technology deployed

Assessment of operational expenditures

over 30+ years

Revenues assessment with several

options such as active/passive services

and fixed wireless

Assessment of cash flows, IRR, and NPV

of both public and private contractors

Calculation of subsidy with bottom-up

approach based on debt recovery

Calculation of lease with bottom-up

approach based on debt recovery

Comparison of different models of

intervention:

Three intervention models within the

same tool: public DBO, PPP, and private

DBO

Possible customization of PPP model

Outcomes & Benefits

The key benefits are stated below:

Costs based on real geographical data

Possibility to identify and exclude specific

areas that have critical impact on funding

Various technologies such as GPON, P2P,

and Fixed Wireless

Option between active and passive

services with adjustable number of

operators

Adjustable financial parameters such as

funding, cost of equity and cost of debt;

Subsidy calculated on bottom-up

approach

Comparison of the funding and IRR

required for different intervention

models

Page 17 of 18

Authors

Myriam Ayada has a Master’s degree in telecommunications and applied

mathematics and specializes in cost and financial modelling. She has wide

experience in modelling and has built bottom-up and top-down costs models for

both fixed and mobile networks. Myriam has also been involved in projects

related to network sharing agreement, spectrum policy, and FTTH deployment

strategy. She has notably assisted the European Commission to assess the costs

of providing roaming services in the European Economic Area. Prior to Salience,

she worked as a mid-senior consultant at Tera Consultants in Paris and with

Ernst&Young in Paris.

Modelling Experience Highlights

Designed a bottom-up cost and business model to assist the government of Serbia to establish a

broadband programme in not economically viable areas. The cost model is based on GIS analysis as well

as a benchmark of local and international unitary costs. Designed a financial model to compare the cash

flows of three intervention models with adjustable levels of private and public involvement.

Co-lead of the assessment of cost impact of the implementation of mast regulation for the TRA of

Bahrain. Designed a cost model to assess the impact of the regulation for operators. Designed a sharing

model to assess the possibility of infrastructure sharing among operators. Created GIS database for the

zoning.

Built a bottom-up LRIC cost model to assess the cost of roaming services in 29 countries in Europe and

produced a study that has been used as one of the inputs for the proposal to set maximum wholesale

roaming charges and is part of the work the European Commission carried out to ensure the end of

roaming charges in June 2017.

Built a bottom-up LRIC cost model to assess the cost of roaming services in 6 countries in East Africa.

The model includes future proof technologies such as VOLTE and single RAN. Myriam has also designed

a tourism module embedded in the model, this tourism module assesses the incremental cost due to the

seasonality of tourism in some areas.

Ivan Skenderoski is founder and managing partner of Salience Consulting, a

telecom management consulting and professional services firm. The company is

exclusively focused on the telecom industry and provides services to telecom

regulators, operators and investors. Ivan has been with the company since its

launch in 2010 and is based in Dubai, UAE since 2008. He is also a Board Member

of Awasr Oman, the first regional fibre only operator.

He has over 17 years of dedicated telecom experience across Europe, Asia and

the Middle East.

Prior to Salience, Ivan was working for the UK incumbent operator, British

Telecom (BT) on numerous roles – Principal consultant in the Middle East,

Specialist technology and service advisor for BT’s bid to acquire telecom license

in Singapore, Head of the Asian Innovation Centre in Malaysia as well as the UK based technology roles at

the BT Labs in Martlesham.

Ivan is a recognized thought leader, speaking frequently at Telecom conferences covering Broadband

strategies and Next Generation Services. He holds MSc in Telecom Engineering from Macedonia.

Ivan Skenderoski Managing Partner

Salience Consulting

Myriam Ayada Senior Consultant

Salience Consulting

Page 18 of 18

ANNEX: List of Abbreviations

Abbreviation Definition

ARCEP Autorite de Regulation de Communication Electroniques et Postales

BCO Broadband Competence Office

CAPEX Capital expenditures

DBO Design Build Operate

FTTH Fiber to the Home

FW Fixed wireless

GIS Geographic Information System

GPON Gigabit Passive Optical Network

IRR Internal Rate of Return

MDU Multiple Dwelling Unit

NBN National Broadband Network

NGA Next Generation Access

NPV Net Present Value

OPEX Operational expenditures

P2P Point to Point

SDU Single Dwelling Unit

Page 19 of 19

Salience Consulting DMCC

2407 Mazaya Business Avenue AA1

Jumeirah Lakes Towers

Dubai

United Arab Emirates

Tel: +971 4 438 7041

www.salience.consulting