Business models and return on investment

ENGAGE, Letterkenny, 12 February 2013

Filippo Munisteri, Economic analyst, DG CONNECT, European Commission

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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)

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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

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The role of a public non for profit organisation in Donegal1. Less pressure on RoI and long-term investment

perspective (ERR>FRR)2. Local drive foster demand aggregation3. Possibility to team with private partners and

companies operating in the area4. Possibility to use SF5. Retains the control of infrastructure after

deploying6. Easier to re-use existing infrastructure• Access to debt funding?

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Role of local communities

1. Foster demand aggregation through awareness raising in: chambers of commerce, churches, sport centers, youth centers, pubs…

2. Improving digital skills (ERDF, ESF can help)3. Mapping of infrastructure at the local level to

identify cost-reduction and infrastructure sharing possibilities

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Are there models which can measure the social or community RoI of deploying HSB networks in rural areas?1. It is assumed that in a HSB CBA ERR>IRR2. However, this has not yet being modelled at the

EU level (Acreo will try)3. A number of study exist for basic broadband but

limited no. of papers for HSB4. The first comprehensive study at EU level is by

Analysis Mason

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Which financial models do you think better fit into the current scenario?

1. After direct support is scrapped, SF grants remain the most likely solution for areas like Donegal where the business case is not clear

2. Infrastructure sharing (electric networks with areal poles in Donegal) may become crucial for the business case, but public involvement will be needed

3. Another option could be to wait for 4G roll-out and then rely on the fibre at the BTS

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Which are the assumptions to bear in mind under this approach?

1. State aids might be an issue in the re-use of existing infrastructure if financed with public money

2. Impact of Basel III on long-term lending will make public intervention more likely

3. Impact of no-CEF on project bonds still unclear• Technical assistance needed?

• Project design?• Project appraisal?• Experts or twinning?

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Content

1. Essential of EU financial instruments

2. Crowding in – crowding out3. Corporate vs. ProjectTEN-T

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Scope of Financial Instruments

Socio-economic benefit(Economic Rate of Return / ERR)

Result of a Cost-Benefit Analysis

Financial benefit(Internal Rate of Return / IRR)

Result of financial modelling

grants

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EIB or other IFI/promotional bank lending

Scope of financial instrumentsSuboptimal investment situation

Market failure

Private bank lending

Equity

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EIB Financing Instruments

European Investment Bank

Direct Loans

ProjectSPV

(PPP) Project finance with direct project risk

MezzaninePBI / RSFF

Equity through Funds (e.g. Marguerite)

Standard Loans“Traditional” EIB lending instrumentGuaranteed basisRepresents the bulk of EIB’s lending volumes

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

Public Sector

Equity & Quasi-equity

Equity & Quasi-equity

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Funded subdebt - Unfunded subdebt

Project BondsTarget rating minimum A-

Bond Issue and underwriting

SPVProjectCosts EIB/EU

Funded Sub-debt

EIB/EU Funded Sub-debt comes as a mezzanine, sub-ordinated loan – replacing part of the bond to increase its target ratingEIB/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

Project BondsTarget rating minimum A-

up to 20% of total Bond issue

Project Bond Investor

SPVProjectCosts

Project Bond Investor

Bond Issue and underwriting

EIB/EU Un-funded Sub-debt

up to 20% of total Bond issue

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Risk sharing with the EIBEIB separates its loans into:• Investment grade with low provisioning rates –

capital in balance sheet set aside for a loan• Sub-investment grade loans with expected

loss higher than 2% are classified as "Special Activities" with high provisioning rates"Special Activities lay heavy on EIB balance sheet and limited to ca. 9% of total lending"

• EIB-EC risk-sharing aims at reducing the risk provisioning for Special Activities:

a) splitting risk-provisioning 50/50 (old RSFF, old LGTT) b) portfolio tranching (First Loss Piece and Residual Risk

Tranche)

Moody's S&P and Fitch… …A1 A+A2 AA3 A-

Baa1 BBB+Baa2 BBBBaa3 BBB-Ba1 BB+Ba2 BBBa3 BB-… …

Sub-investment grade