1. About Oxera
Who we are
Oxera is one of Europe’s foremost independent economics consultancies. Established in 1982, we have built a
reputation for providing critical economic insight to an international list of clients including governments, regulators
and major companies. We apply the most rigorous economic thinking and quantitative methods combined with a
practical business approach to advise clients on matters in regulation, competition and corporate finance
One of our most important assets is our reputation for credibility and integrity with policy-makers, regulators and
legal authorities, which is of critical value to our clients and has been created through our long-standing emphasis
on quality and independence
Recent clients and projects in the telecommunications sector
- pricing principles of - retail bundles and
NGA networks margin squeeze tests
- co-investment model - spectrum trading
for NGA networks - mobile call termination
- estimating the cost of - damages estimation
capital
- IPR/FRAND analysis
- due diligence support
Oxera has conducted state aid analysis across sectors
1 Strictly confidential July 2012

2. The NGA underinvestment problem
- current and proposed fibre-access investment will not meet the
Digital Agenda objectives
- market characteristics make NGA investment particularly challenging
- demand uncertainty
- regulatory uncertainty
- cost characteristics
- external benefits
- recent policy developments offer funding for NGA:
- Broadband Delivery UK (BDUK) will allocate £530m for super fast
broadband in rural areas. An additional £150m is available for ten
‘super-connected’ cities
- participation in such schemes will trigger state aid considerations
- recent tenders have been won by BT; few (if any) other bidders remain in
framework
2 Strictly confidential July 2012

3. NetCo and the ‘anchor tenant’ model
‘NetCo’ model ‘Anchor tenant’ model
NetCo Participating investors
Ownership structure evolving
Trigger conditions Debt, equity
over time ROI
Vehicle holding fibre assets
Participating
OAOs
service providers
Participating service providers
End-customers
End-customers
- commercial network entity owned by
operators and other investors, - structurally separate, independent
supplying mainly passive access ownership model, open access
- addresses underinvestment by - anchor tenants obtain favourable
avoiding duplication and long-term conditions and limit demand risk
regulatory stability, achieving
commitment through ownership - similar characteristics to NetCo, but
stakes addresses underinvestment through
private investment and contracting
3 Strictly confidential July 2012

4. When is public funding for broadband not
state aid? (I)
- state aid is any use of state resources that cumulatively:
- confers an economic advantage to undertakings
- is selective
- distorts or threatens to distort competition
- affects trade between Member States
- the European Commission applies a two-stage assessment:
- stage 1 assesses the presence of state aid
- (if aid is found) stage 2 assesses if aid received is
compatible with the state aid rules
4 Strictly confidential July 2012

5. When is public funding for broadband not
state aid? (II)
- Altmark principles apply in deciding if compensation for services of
general economic interest (SGEI) constitute state aid.
Compensation is not state aid if:
- beneficiary is entrusted with a clearly defined SGEI
- compensation is calculated ex ante in a clear, transparent manner
- compensation does not exceed net costs, taking account of revenue
and a reasonable profit
- beneficiary is chosen in a public tender, or compensation is determined
on analysis of the costs of an efficient undertaking
- subsidy for broadband in rural areas could meet these criteria
- where private investment does not deliver adequate broadband
coverage, the Commission acknowledges an SGEI
- competitive tender process might satisfy the remaining criteria
5 Strictly confidential July 2012

6. Is state aid compatible with the rules?
- aid may be compatible if the market does not provide sufficient coverage.
To assess compatibility, three areas are defined in the
guidelines, depending on the extent of competition:
- white areas (presume compatible)—where there are no commercially
viable NGA networks (now and next three years), the Commission
acknowledges that state intervention is likely to be in the common interest
- grey areas (literally!)—where there is only one NGA network, the
Commission says a detailed assessment is required demonstrating market
failure
- black areas (presume incompatible)—where at least two providers are
engaged in NGA facilities-based competition, the Commission says no
market failure exists and will take a negative view on state measures to
fund further roll-out
- separate definitions of the above areas are made for ‘basic’ broadband and
NGA broadband. An area with one basic broadband infrastructure but no
NGA infrastructure can still be a ‘white’ NGA area. BT’s FTTC deployment
would not be considered as ‘NGA’
6 Strictly confidential July 2012

7. What are the consequences of the
Welsh auction?
- Fujitsu withdrew from the BDUK auction for broadband funding, leaving
Openreach as the sole bidder. Fujitsu may withdraw from other regions
(Cumbria), and already several regions (including the Scottish
Highlands and Islands) are down to one bidder
- likely to increase scrutiny on the adherence of the BDUK tendering
process
- ‘failure to meet any of these conditions would most likely require an
in-depth assessment’, including ‘a [competitive] tender must be
conducted’; the ‘most economically advantageous offer’ to be
accepted (para 67, BB draft guidelines)
- without a competitive tender, how can it be ensured that aid is no
more than the minimum required?
- competitive tender is highly desirable for compliance
- in absence of competitive tender, the Commission may require complex
scrutiny of whether beneficiary is over-compensated
7 Strictly confidential July 2012