Slide 1: Oi's Regulatory Challenges – Concession Agreement Revision & Terms of Adjustment of Conduct
OI’S REGULATORY CHALLENGES – CONCESSION AGREEMENT REVISION & TERMS OF ADJUSTMENT OF CONDUCT NEW YORK | JUNE 2016
Slide 2: Revision of the concession agreement and TAC will enhance Oi's position
Revision of the concession agreement and celebration of the TAC will enhance Oi’s position through a more robust and balanced regulatory model REVISION OF THE TAC: TERMS OF CONCESSION AGREEMENT ADJUSTMENT OF CONDUCT • Focus on the exoneration of obligations • Regulatory mechanism that enables the ex
Slide 3: Oi delivered one of the largest fixed-line universalization efforts
Over the past 15 years, Oi has delivered one of the largest and most aggressive fixed-line univer- salization efforts in the world; today, however, the concession model has lost it´s importance ... Country area Fixed lines – entire sector In Km2 In millions of lines Universal service effort Incumben
Slide 4: Attractiveness of the fixed line concession is decreasing
…, additionally, the attractiveness of the fixed line concession is decreasing due to the effects of competition between services and regulatory asymmetry between players Substitution of services: voice vs. data Regulatory asymmetry: ↑ Mkt share authorized players Participation of voice vs. data MM
Slide 5: Brazil continues to be an outlier in fixed telephony
Despite the loss of relevance in fixed telephony, Brazil continues to be an outlier in many aspects, including the regulatory model, asset reversion scheme, universal service obligations, etc. Regime1 • Only 3 of the 50 biggest countries today are concessions – Brazil is one of them Asset • Of the 8
Slide 6: Stakeholders express views on modernizing the fixed line regulatory model
Many relevant stakeholders have already publically expressed their views regarding the need to urgently modernize Brazil´s fixed line regulatory model “There´s a complete loss of attractiveness and essentiality “..it is essential for us to of fixed line…We can´t continue to make companies sustain re
Slide 7: Reduction of concession obligations would generate important benefits
A reduction of concession obligations would generate important benefits: 1st for greater financial balance of the fixed line unit, and 2nd to meet public policies (broadband expansion) 1st step: greater fixed line 2nd step: meet public financial sustainability policy agenda • Significantly reduce fi
Slide 8: Brazil has 2 broadband expansion challenges
In terms of broadband expansion (the government´s public policy priority), Brazil has 2 challenges: (1) activating new broadband users, and (2) increasing the average broadband speed Households by broadband usage Households: Fixed broadband by speed range2 % of households % of households Total = 65
Slide 9: Oi proposal for broadband expansion
The expansion of broadband has to distinguish between massification and universal services and consider not only supply (building network) but also demand (take up of clients) Oi proposal for broadband expansion Incentives for broadband take-up High cost Supply Demand Supply gap – universalization (
Slide 10: Oi's position and key requests on the regulatory model
Oi´s position and points of discussion with the government regarding the revision of the fixed line concession regulatory model has the following key requests: What needs to be done? Why it needs to be done? 1 • Convert the concession regime (public) to an • It allows greater competitiveness of Oi;
Slide 11: Oi has interacted with multiple external stakeholders
Oi has exhaustively approached and interacted with multiple external stakeholders to enable relevant changes in the regulatory framework Government Non exhaustive dimension Sector Operators dimension dimension "Radar" with Oi’s dimensions of activity 10
Slide 12: Different views under discussion for revision of concession contracts
There are different views under discussion for the revision of the concession contracts and regulatory model – we list 4 of the most relevant Recent key recommendations on the concession review (not exhaustive) Regulatory Regulatory Working Group Law Project – Commissioner – Commissioner - Minicom &
Slide 13: Uncertainties and risks to address
There are uncertainties and risks that we need to address to ensure a high degree of comfort and commitment from the operators, before making any decision regarding the regulatory framework Fixed line obligation Asset reversion Broadband Financing 1 reductions 2 scheme 3 expansion 4 universal servic
Slide 14: Status update: project reaching a decisive stage
In terms of status update, the project is reaching a decisive stage where the entire Telecom sector can benefit from structural changes in the regulatory model Concession project milestones Status update • Deadline for concession contract extended to Dec/2016 • Commissioner Zerbone vote (previously
Slide 15: New Minister promises to reevaluate all options
The new Science, Technology, and Communications Minister has recently taken office and promises to reevaluate all options, establish a point of view, and redefine efforts, if required Assess efforts up to date Re-discuss w/ stakeholders Redefine outputs / efforts (among others) • Assess all efforts
Slide 16: Key next steps
Key next steps Continue to approach, discuss, and solve key uncertainties and risks (asset 1 reversion, zero sum game, broadband expansion,...) with relevant stakeholders Evaluate and quickly address (if required) Commissioner Otávio Rodrigues´s 2 concession review vote – to be made in the next coup
Slide 17: Revision of the concession agreement and TAC will enhance Oi's position
Revision of the concession agreement and celebration of the TAC will enhance Oi’s position through a more robust and balanced regulatory model REVISION OF THE TAC: TERMS OF CONCESSION AGREEMENT ADJUSTMENT OF CONDUCT • Focus on the exoneration of obligations • Regulatory mechanism that enables the ex
Slide 18: Oi is negotiating at least 3 TACs for regulatory liabilities
Oi is currently negotiating at least 3 Terms of Conduct Adjustment (TAC) for the regulatory liabilities under Anatel’s domain Oi’s regulatory liabilities by process stage X More details in the next slides Liabilities under negotiation are related to: Quality of service, Universal Service, Consumer,
Slide 19: A TAC aims to clean up ~R$5Bn in liabilities
A TAC aims to clean up ~R$5Bn in liabilities within Anatel’s domain, avoiding new fines and enabling 4 years to achieve regulatory compliance Key TAC objectives 1 Fully deducts liabilities under Anatel’s domain, with discount1 2 Avoids new fines through conduct adjustment 3 Allows 4 years to achieve
Slide 20: Quality and Universal Service TAC approved by Anatel Board
A Quality and Universal Service TAC has been approved by Anatel Board after +2 years of intensive work by Oi to build and negotiate the proposal TAC core stages all TAC themes together only Quality and Universal Service TAC 2013 2014 2015 2016 December January April Up to February Anatel determined
Slide 21: Quality and Universal Service TAC work streams
Quality and Universal Service TAC A TAC proposal implies 2 work streams: Conduct Adjustment (expenditure not related to fines amount) and deployment of a Additional Commitment (expenditure proportional to contingencies) TAC Q&U contingencies adjusted R$ Bn ~0,4 Quality A Conduct Adjustment 6 Project
Slide 22: Next steps and implications after approval of the TAC
A Next steps and key implications to Oi after the approval of the Quality and Universal Service TAC by Anatel Board What steps are required to bring the TAC Does the TAC approval allow Oi to What are the expected TAC impacts on into practice? reverse escrows and/or judicial deposits? cash flow and o
Slide 23: Oi pushing to start TAC negotiations for AGU liabilities
B Considering the recent Congress approval of the “Mediation Law1”, Oi is also pushing to start TAC negotiations for liabilities under AGU’s domain, requiring low incremental costs for the adjustment of conducts Required solution Which alternatives to implement? 1 Anatel autonomously decides to exec
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Slide 25: Back-up Slides TAC
BACK-UP SLIDES TAC 24
Slide 26: Projects approved by Anatel Board as conduct adjustment obligations
Quality and Universal Service TAC A Projects approved by Anatel Board as obligations for the conduct adjustment Project Description Relevant KPIs New FTTH network deployment: 950k home-passed in 4 years ARI, RAI, END, 1 Structuring RJ (FTTH) in the Rio de Janeiro State area ART e TEP Increasing 3G m
Slide 27: Back-up Slides Concession
BACK-UP SLIDES CONCESSION 26
Slide 28: Fixed-line service – Oi's proposal (1/2)
Fixed-line service – Oi´s proposal (1/2) Proposal assumptions Rationale • Universalization of voice service was successful and fulfilled, loss of essentiality of In areas with mobile-phone fixed-line service (fixed-mobile substitution and voice-data), and unsustainability of 1 coverage, immediate wi
Slide 29: Fixed-line service – Oi's proposal (2/2)
Fixed-line service – Oi´s proposal (2/2) Proposal assumptions Rationale • Regulatory symmetry with private operators and more flexibility of the model 6 Migration to private regime • In line with the rest of the world (> 85% of the analyzed countries) Evolution Maintenance of the basic plan, • Commi
Slide 30: Asset reversion – Oi proposal
Asset reversion – Oi proposal Proposal assumptions Rationale • Fixed-line lost its essentiality in the voice market – mobile-line is the replacement 1 End of the asset reversion scheme • Additionally, there are other mechanisms to ensure continuity (e. g. warantees) Valuation should consider the use
Slide 31: Broadband – Oi's proposal (1/2)
Broadband – Oi´s proposal (1/2) Proposal assumptions Rationale • The financial and operational efforts to be made by concessionaries should be Commitments limited to the balance of 1 reversible assets limited to the balance / amount of money associated with reversible assets (to be determined) 2 Cho
Slide 32: Broadband – Oi's proposal (2/2)
Broadband – Oi´s proposal (2/2) Proposal assumptions Rationale 7 Use of the reversible asset financial balance as CAPEX, and not VPL • Direct balance for investment (CAPEX), leaving the responsibility to operators the use and return of this investment • The use of the already installed copper infras
Slide 33: Concession agreement timeline for fixed-line telephony
The concessions agreement for fixed-line telephony was established in 1998, with expiration in 2025; we are currently in the 2nd revision Timeline of the key components of fixed-line telephony (STFC) Apr/08 Jun/98 Change in universal Dec/151 Concession Agreement service targets 2nd Revision of Agree
Slide 34: Concession model developed in 1997 to fulfill unmet demand
Concession model was developed in 1997 to fulfill unmet customer demand and lack of telecom infrastructure Waiting list to acquire fixed landline Price of a fixed landline installation1 # pending requests - 1997 R$ in 1997 (Telebrasil) 2 2,4 million R$ 5.300 Note: (1) Real value adjusted by IGP-M in
Slide 35: Fixed telephony universal service delivered throughout Brazil
The fixed line concession met its initial objective - fixed telephony universal service was successfully delivered throughout Brazil # lines per 100 households 1994 1999 2014 Up to 30 From 30 to 50 From 50 to 70 From 70 to 90 More than 90 # lines per 100 households 35 65 70 Note: 1994 and 1999 repre
Slide 36: Success of broadband expansion depends on use of Telecom funds
In Brazil, the key success factor of a massive broadband expansion and maintenance of fixed line universal services (where required) depends heavily on active use of Telecom funds Use of sector funds (since inception) FISTEL Values reported by regulator (Inspection fund) R$ 67,7 Bn FUST FUNTTEL (Uni
Slide 37: Working group of local private fixed line concessionaires
A working group composed of local private fixed line concessionaires is underway to strengthen their position regarding the regulatory framework evolution and mitigate key risks / uncertainties Description of work fronts 1 • Detailing, methodology alignment, and definition of the fixed line Fixed li
Slide 38: Fixed line telephony benchmark: key findings (1/2)
Fixed line telephony benchmark: key findings by regulatory layer (1/2) Layer Lessons learned Regime • Concessions are rare, outdated (only 3 in the world) and transitory (average of four years after market liberalization) • Most countries (~85%) have migrated to private-regime model Reversibility •
Slide 39: Fixed line telephony benchmark: key findings (2/2)
Fixed line telephony benchmark: key findings by regulatory layer (2/2) Layer Lessons learned Obligations Obligations: and fines • Brazil is an "outlier" in the public telephony provision - high density of public phones vs. mobile penetration • Even with new public consultation (PGMU 4) • Benchmarks
Slide 40: Fixed telephony concessions are very specific and rare
Currently, fixed telephony concessions are models very specific and rare Non - exhaustive Evaluation of responsibility vs Control Private regime (84% of the 50 biggest countries2) Netherlands France USA UK South Korea Private Ex-concessions Germany Japan Spain Portugal Responsibility for service Con
Slide 41: Concessions were transitory in other countries
While in other countries concessions were transitory, Brazil remains 16 + years with the same model Time between market liberalization and end of the concession In years Concession model planed ending Concession model real ending 26 25 Non-exhaustive 24 16 16 9 16+ 13 5 1 0 0 3,8 years1 Brazil Portu
Slide 42: Concession model needs to evolve
The concession model met its role and now needs to evolve; most used system in the world is and authorization regime (~85% of countries) Concessions countries benchmark Lessons learned Concessions Authorizations/ state-owned Ex-concessions Out of analyses International and national references Regula
Slide 43: Model evolution implies solving the asset reversion scheme
Model evolution implies in solving the asset reversion scheme, creating a long-term outlook for the sector (more productive and efficient investments / allocation, monetization of asses,…) Countries breakdown # of countries 50 42 8 2 2 4 50 biggest Never concession Current and ex- Concession Partial
Slide 44: Regulatory obligations still a heavy financial burden
Additionally, contractual regulatory obligations today still represent heavy financial burden for the fixed line business of concessionaires Topics Examples of issues faced Non exhaustive • Obligations are distant from real market needs Public payphones • Aggressive targets and heavy financial burde
Slide 45: Brazil is an outlier in obligations and overheads
Brazil is "outlier" when compared with other countries in terms of obligations and fixed-line overheads Agressiviness in fixed-line obligations and overheads Fixed-line collective Density of public phones1 0 5 90% Fixed-line individual Installation deadline2 100 100% 100% 100% 95% 100% 0 Quality # i
Slide 46: Brazil has high payphone density versus other countries
Benchmark example: Brazil presents high density of payphones in comparison with other countries, driven by heavy regulatory obligations Payphone density vs. mobile phone penetration – 2014 Non exhaustive 17 (payphones per 1000 inhabitants) China 6 Mexico Payphone density 5 Venezuela 4 Brazil 3 South
Slide 47: Other countries have eliminated payphone obligations
Benchmark example: Other countries, with lower mobile penetration than Brazil, have already eliminated their payphone obligations Non exhaustive Mobile phone density # lines per 100 inhabitants, in year of elimination Average of 119% penetration, vs. 139% in Brazil 139 142 127 126 125 117 111 119 10
Slide 48: Brazil has 5.8x more public phones than Russia
Despite having characteristics similar to Russia, Brazil has a number of public phones 5.8x higher Russia Brazil Area: 17,1K km2 Area: 8,5K km2 148k PPs 865k PPs Population 142M inhab. Population 204M inhab Density 8 inhab/km2 Density 24 inhab/km2 Rural population 26% Rural population 15% GDP U$2,1T
Slide 49: Brazil has more rigorous landline installation targets
Benchmark example: In terms of lead time landline installation requirements, Brazil has much more rigorous targets compared to benchmarks Non exhaustive Installation obligations of individual access1 Days2 to serve % of requests 180 90 Argentina Single targets Installation lead time (days1) 80 Progr
Slide 50: Broadband benchmark: key findings by layer
Broadband benchmark: key findings by layer Layer Lessons learned • Benchmark countries show a focus on expanding coverage, gradually increasing speed targets Technical • Average speed of 25 Mbps is far from the current reality of Brazil (3.6Mbps) and even most of the leading countries aspects of goa
Slide 51: Benchmark countries focus on coverage, then speed targets
Benchmark countries show an initial focus on expanding coverage, gradually increasing speed targets xyz Measured coverage xyz Coverage goals 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3 Mbps 95% 96% EUA 10 Mbps 93% +1,4 M +2,2 M +3,6 M 1.5 Mbps 94% 95% 97% +3.6 M of rural households cove
Slide 52: Only a few applications require more than 10Mbps
Only a few applications without relevant social value require> 10Mbps Videoconferencing Bandwidth speed required for application and ultra- Mbps resolution streaming 30,0 25,0 10 Mbps 4,0 4,0 5,0 1,0 0,5 1,5 0,5 0,5 1,5 1,0 0,1 0,2 VoIP Social media e-government, e-education, Communication Entertain
Slide 53: 10 Mbps is sufficient for most Brazilian home internet demand
Brazilian family consumption analysis indicates that 10 Mbps is sufficient to meet most of home internet demand Typical Brazilian household Simulation of use in peak hour PNAD 20141 Assuming 100% of family connected Dad watching HD movie on TV 5,0 Mbps Mom watching videos on tablet 1,0 Mbps Couple w
Slide 54: US universal service fund finances fixed-line and broadband programs
US universal service fund finances a number of programs in fixed-line and broadband - with annual spending of ~ USD 8.0 B Distribution of the Universal Service Fund (USF) Total: USD 7.8B Programs Beneficiaries of support Amount spent in 2014 2% Rural Health • Health care providers in rural areas pro
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