Business models and return on investment

1. Business models and return on investment ENGAGE, Letterkenny, 12 February 2013 Filippo Munisteri, Economicanalyst, DG CONNECT, European Commission

2. Post- CEF environment (1/2) • CEF digital obtained only 1 billion EUR out of the 9.2 bn. EUR requested in the MFF negotiations concluded on 08/02/2013 • This means no broadband financing under CEF for 2014-2020 • Funds obtained will be allocated to Digital Services Infrastructure (pan-European eGov, eHealth, eInclusion platforms)

3. Post- CEF environment (2/2) – Way forward • Try to obtain from EP the inclusion of ICT in the main thematic areas for SF concentration • Work on the provision of technical assistance • Pressure on the MS to finance broadband infrastructure • Regulatory action if needed (10-points action plan announced by NK on 18/12/2012) • Continued collaboration with EIB on loans, guarantees and project bonds

4. The role of a public non for profit organisation in Donegal • Less pressure on RoI and long-term investment perspective (ERR>FRR) • Local drive foster demand aggregation • Possibility to team with private partners and companies operating in the area • Possibility to use SF • Retains the control of infrastructure after deploying • Easier to re-use existing infrastructure • Access to debt funding?

5. Role of local communities • Foster demand aggregation through awareness raising in: chambers of commerce, churches, sport centers, youth centers, pubs… • Improving digital skills (ERDF, ESF can help) • Mapping of infrastructure at the local level to identify cost-reduction and infrastructure sharing possibilities

6. Are there models which can measure the social or community RoI of deploying HSB networks in rural areas? • It is assumed that in a HSB CBA ERR>IRR • However, this has not yet being modelled at the EU level (Acreo will try) • A number of study exist for basic broadband but limited no. of papers for HSB • The first comprehensive study at EU level is by Analysis Mason

7. Which financial models do you think better fit into the current scenario? • After direct support is scrapped, SF grants remain the most likely solution for areas like Donegal where the business case is not clear • Infrastructure sharing (electric networks with areal poles in Donegal) may become crucial for the business case, but public involvement will be needed • Another option could be to wait for 4G roll-out and then rely on the fibre at the BTS

8. Which are the assumptions to bear in mind under this approach? • State aids might be an issue in the re-use of existing infrastructure if financed with public money • Impact of Basel III on long-term lending will make public intervention more likely • Impact of no-CEF on project bonds still unclear • Technical assistance needed? • Project design? • Project appraisal? • Experts or twinning?

9. Content • Essential of EU financialinstruments • Crowding in – crowding out • Corporate vs. ProjectTEN-T

10. Scope of Financial Instruments Financial benefit (Internal Rate of Return / IRR) Resultoffinancialmodelling Equity Private bank lending EIB orother IFI/promotionalbanklending Scopeoffinancialinstruments Market failure 0 Suboptimal investmentsituation grants 0 Socio-economicbenefit (Economic Rate of Return / ERR) Resultof a Cost-Benefit Analysis

11. EIB Financing Instruments Standard Loans “Traditional” EIB lending instrument Guaranteed basis Represents the bulk of EIB’s lending volumes Direct Loans Public Sector Intermediated Loans Banks Structured Finance Established in 2001 Expands the ability of EIB to provide financing Allows lending to projects with higher risk (PPP’s) Allows for more flexible financing solutions (PPP) Project finance with direct project risk Project SPV Mezzanine PBI / RSFF Equity through Funds (e.g. Marguerite) European Investment Bank

12. Fundedsubdebt - Unfundedsubdebt SPV Project Costs Project Bonds Target rating minimum A- SPV Project Costs Project Bonds Target rating minimum A- Bond Issue and underwriting Bond Issue and underwriting Project Bond Investor Project Bond Investor EIB/EU Funded Sub-debt EIB/EU Un-funded Sub-debt Equity & Quasi-equity up to 20% of total Bond issue Equity & Quasi-equity up to 20% of total Bond issue EIB/EU Funded Sub-debt comes as a mezzanine, sub-ordinated loan – replacing part of the bond to increase its target rating • EIB/EU Unfunded Sub-debt guarantees part of the bond issued to improve the target rating • Increases the amount of bonds to be issued • Available during the whole lifetime of the project • Can address the problem of cash shortfalls during the construction period (additional liquidity) • Functioning similar to a line of credit

13. Risksharingwiththe EIB EIB separates itsloansinto: • Investment gradewithlowprovisioningrates –capital in balancesheetsetasidefor a loan • Sub-investment gradeloanswithexpectedlosshigherthan 2% areclassifiedas "Special Activities" with high provisioningrates "Special Activitieslay heavy on EIB balancesheetand limited to ca. 9% of total lending" • EIB-EC risk-sharingaimsatreducingtheriskprovisioningfor Special Activities: • splittingrisk-provisioning 50/50 (old RSFF, old LGTT) • portfoliotranching (First Loss Piece and Residual Risk Tranche) Sub-investment grade