FTTH as a PPP Project: How to Stimulate Growth

Lisbon, February 25th 2010

Jure Krajnc, M. Sc.Sales and Marketing Director, GVO Ltd.

Investments as a Growth StimulusIn the past investments in infrastructure strongly influenced

economic development:• electric power plants • telecommunication networks • railways• motorways• electric networks• gas pipes• oil pipes

Chicken and Egg Dilemma“We are producing more and more cars so they will have to

built more and more roads. When roads improve -without any doubt - we will produce more and more cars!”

Services as a Driving Force of FTTHDevelopment of services demands more efficient networks.

As we invest in network development and upgrades new services can evolve.

Case for FTTHFTTH can be a “stimulus” project because it:• boosts growth during construction period;• stimulates competition in services;• makes even remote areas competitive.

Do we Need PPP to Develop FTTH?Considering the current market situation in Slovenia it is

not feasible to develop FTTH which costs more than 600 € per port.

Case for PPPPPP is mostly applicable in areas with no broadband

services and with no perspective to be covered with commercial network any time soon.

In those areas costs normally exceed 3,000 € per port, so it is clear that involvement of public sector is needed if we want to develop such areas.

PPP offers the possibility to combine commercial interest with public funds with no competition distortion.

How does PPP Work?

Private investorEIBBanks Guaranty

Financing

EquityDebt

SPV

ConstructorPublic partner

UsersOperator

Upgrades

Contract

O&Mcontract Usage fee

Contract

Global Crisis and InvestmentsGovernments on global

scale currently use huge public funds to rescue financial system.

For a global recovery an increase in demand is needed which can be grossly stimulated through public investments (in infrastructure).

Economic Situation in Slovenia1. GDP plumbed for 9% last year.2. Budged deficit soared from 1% do 6% of GDP.3. Unemployment almost doubled from 60,000 to 100,000

people.4. Export fell by 15% in period from Q3 2008 to Q2 2009.

Was the crisis entirely brought to us from abroad?

What Happened?The main source of recession is the lack of investments:1. Motorways are down by 90%2. Railways are down by 20%3. Housing is down by 75%4. Private FTTH is down by 85%

Only above mentioned investments account for 7% of GDP on a yearly basis.

Cost Split in FTTH Analyzed

Construction47%

Installation - passive part

18%

Cables10%

Transport, organization,

insurance etc.10%

Design and permits

7%

Installation - active part6%

Measurements2%

FTTH is:Simple: because you can install cables without prior long

procedures as they are needed in case of roads or railways.

Acceptable for public: it is our experience that locals do not oppose the project and grant the right to dig without any compensation.

Quick: time that passed from tender to beginning of works is less that one year.

Multiple - effective: roughly 85% of the budget is spent locally which stimulates growth with multiplicative effect 1.6 (every euro spent brings 1.6 euro effect in economy).

Sustainable: FTTH reduces the need for transport and helps keeping rural areas populated.

Scope on a National LevelFirst phase: 42 million € of public funds (EU & national) will

be invested in the development of broadband networks mostly for FTTH under PPP scheme.

First tender is closed, public funds will be received by the local communities to invest them as public share in PPP.

GVO as a private partner is involved in two largest projectsin Slovenia:

1.) 7 municipalities: 14.6 million €2.) 3 municipalities: 10.4 million €

In 2010 second phase is announced with 40 million € of public funds.

Project No. 1

Project No. 1 Data950 km of ducts and 1,100 km of cables

4,000 households and 200 public points covered.

Network type: P2P FTTH

Budged: 14.6 million euro (public funds: 9.6 million euro & private funds: 5.0 million euro).

PPP model: DBOT (private part) & DBTO (public part).

Deadline: end of 2010.

Project No. 2

Project No. 2 Data350 km of ducts and 500 km of cables

3,000 households and 150 public points covered.

Network type: P2P FTTH

Budged: 10.4 million euro (public funds: 7.3 million euro & private funds: 3.1 million euro).

PPP model: DBOT (private part) & DBTO (public part).

Deadline: end of 2010.

Business ModelPPP model with local community as a public partner and GVO as

private partner.

Public partner invests public funds and grants right to use public roads to lay cables.

Private partner designs and builds the network in 18 months and invests private share of investment.

Private partner operates the network for 20 years and charges usage and operating fee.

Usage and operating fee is charged to service providers on non-profit basis.

After 20 years the network is completely transferred to local community.

Competition of Service ProvidersNetwork may be used by all service providers on non-

discriminatory basis.

Private partner as an operator rents dark fiber to service providers.

Service providers pay:1.) Usage fee (so that private partner can repay invested

funds).2.) Operation and maintenance costs.

Level of usage fee and O&M cost is set by the public partner on non-profit basis and it is revised once per year.