For the governments of many countries, rollout of FTTx networks is not happening at a fast enough pace and there is a real risk that coverage targets for super-fast broadband, often defined as part of national broadband strategies, will not be met.

Project Finance for FTTx: Unlocking Investments

By Rodrigo Barreto and Michael Dargue

For the governments of many countries, rollout of FTTx networks is not happening at a fast enough pace and there is a real risk that coverage targets for super-fast broadband, often defined as part of national broadband strategies, will not be met. One of the major obstacles for incumbents and other communication providers to speeding up the deployment of FTTx networks is the magnitude of capital required. The project finance approach has the potential to unlock investments by facilitating cooperation among providers, allocating specific risks to stakeholders that are better positioned to manage/mitigate them and creating a structure that facilitates financing of the network build out at competitive rates and with limited impact in the financial accounts of individual providers.


In recent years, there have been a number of examples of projects where two or more service providers joined forces to build regional and, in some cases, national fibre access infrastructure which is shared between these service providers to offer high speed broadband services to a broader base of households.

It is worth mentioning that many of these projects were conceived and implemented during the worst period of financial crisis since the Great Depression. Even when demand was supposedly moderate due to the squeeze in consumers’ disposable income, some incumbents and other communication providers (CPs) found opportunities to make headway building FTTx infrastructure.

KPN and Reggefiber – KPN formed a Joint Venture with Reggefiber in 2008 with the objective of developing an open fibre optic network in the Netherlands. Since then, KPN has used the JV as the exclusive wholesale supplier for its FTTH retail services. The JV agreement was tailored to enable KPN to gradually increase its participation in the JV, which initially stood at 41%, by means of a call/put option structure. KPN exercised its first option in November 2012, increasing its participation to 51% but remaining as a non-controlling party due to the governance structure in place. In January 2014, KPN exercised its second option, increasing the ownership level to 60% and gaining full control of the JV. By taking this approach, KPN was able to advance with the build out of FTTH infrastructure from 2008 to the beginning of 2014 without the need to consolidate the full costs in its balance sheet. Reggefiber reported a total of 1.7 million homes passed and 547k FTTH homes activated by Q4 2013.

Sonaecom and Vodafone – In December 2009, Sonaecom and Vodafone Portugal announced a cooperation agreement to build and operate FTTH infrastructure in Portugal’s main towns, starting with the metropolitan areas of Lisbon and Porto. The implementation of this agreement involved the incorporation of a JV, owned by both companies on a 50-50 basis, through which the construction, management, maintenance and operation of the FTTH infrastructure was carried out in an integrated way and for the benefit of both companies. Sonaecom’s strategy regarding this cooperation agreement was part of its ‘Capital Light’ growth approach which focused on expansion based on operating the lease of properties rather than their ownership. As a result of the 2013 merger between Zon and Optimus, Sonaecom agreed to sell its participation in the fibre enterprise to Vodafone Portugal.

BskyB, TalkTalk & City Fibre – BskyB and TalkTalk announced in April 2014 that they had partnered with CityFibre in a joint venture with the aim of building competing infrastructure to BT’s Openreach. Starting with York and with plans to expand to two other cities, the companies will build city-wide FTTP networks to deliver broadband connections with speeds of 1Gbps to homes and businesses. Sky, TalkTalk and CityFibre will be equal shareholders in the new company, each having a 33.3% stake.


The Digital Agenda for Europe (DAE), a strategy adopted by the European Union, sets in its goals that, by 2020, all Europeans have access to internet speeds of above 30 Mbps and 50% or more of households subscribe to internet connections above 100 Mbps. In a recent report[1], the European Commission, makes evident the extent of the gap between the current situation and the goals established in the DAE:

“… the Digital Agenda calls for fast and ultrafast broadband, which is still rare in Europe. In July 2013, only one in five subscriptions were at least 30 Mbps and only 4.2% at least 100 Mbps. This also reveals that one in four NGA subscriptions have less than 30 Mbps headline download speed.”

According to the latest figures reported, 54% of households in the EU are in areas with Next Generation Access (NGA) coverage. As of July 2013, cable technology had the largest NGA customer base, representing 55% of NGA lines. VDSL is the second largest technology with 16% of NGA lines followed by FTTB (15%) and FTTH (9%).

Now, with economic recovery underway in many of the EU Member States, we expect that rejuvenated growth in demand, together with government policies, will drive new FTTx deployments. Many of these deployments will leverage a project finance approach to reduce the financial and operational risks that would, otherwise, be borne by single service providers developing these infrastructure projects.

In this paper we examine the motivation for use of the project finance approach and describe the main steps required to structure such deals.


One key motivation for development of FTTx network infrastructure is, unquestionably, projected demand for higher access speeds. Observing the evolution of average and average peak connection speeds as reported quarterly by Akamai[2], it is possible to realize that penetration of fibre will need to be extended so that incumbents and CPs are able to continue providing competitive services to end users.

Figure 1: Internet Connection Speeds in the UK, US and Japan

Internet Connection Speeds in the UK, US and Japan

Source: Akamai – State of the Internet

Analysis of historic data reveals a very good fit with exponential growth and makes it possible to forecast access speeds in future years. An extension of historic trends for the UK, using US and Japan projected growths as control parameters, reveals that by mid-2020 average speeds will  be in the range 30-40 Mbps and average peak speeds will be in the range 175-325 Mbps. Although the situation in the UK is not necessarily representative of all of the EU member states, these forecasts show that the DAE targets were set, among other things, with the specific goal of avoiding supply-side bottlenecks.

For some of the service providers, the motivation to build fibre infrastructure is tied to a commercial strategy centred on offering bundles of services with TV as a key component. To be able to provide good, multi-room HDTV (and, in the not too distant future, 4KTV and 3D TV) experiences, these service providers need to be able to offer broadband access speeds that are only possible using some variant of FTTx. Even cable operators are, in many cases, having to extend the reach of their fibre networks to the last amplifier (in areas with existing HFC infrastructure) and some prefer to deploy FTTH infrastructure when expanding to green field areas.

Cost reduction is another reason to extend the fibre network infrastructure. Although upfront capital costs are very high, the costs to run the network, compared with the alternative using only copper, are much lower. The higher operational costs on copper are mostly related to electricity consumption, maintenance of ageing cables and space in ducts and Local Exchanges. In a study led by the author for Anacom, the telecommunications regulator in Portugal, it was estimated that, over the course of a 10 year period, OPEX savings would correspond to 96% (or 48%) of the CAPEX requirements for the incumbent operator to develop FTTC (or FTTH) on a country-wide basis.

Although investing in fibre infrastructure makes sense from future demand, commercial strategy and OPEX saving perspectives, it is still not happening at the pace required to address the policy goals set for 2020 in the DAE. The reasons for this are many, including but not limited to regulatory uncertainty, high commercial risk and the economic issue of reaching low density areas. In Europe, the EU and individual governments are working to eliminate as many of these barriers as possible.

However, a major sticking point for incumbent operators and CPs is about committing to large scale investments which are unlikely to uplift revenues in the short term and for which pay-back – which is largely based on expenditure savings – is only possible over relatively long periods of time. As a generalisation, the financial markets tend to take a short term view on strategic investments which do not yield immediate growth and is inclined to ‘punish’ companies that have higher than average CAPEX to sales ratio. To add to the complexity, increasing debt levels to finance fibre infrastructure build-out could result in the downgrading of credit ratings of these companies.

Financial Performance, Leverage and Credit Rating of Largest European Operators

Financial Performance, Leverage and Credit Rating of Largest European Operators

An examination of the debt maturity profile (bonds and loans) of the five largest fixed line operators in Europe reveal that there is a very high concentration of debt maturity (in relation to total debt outstanding) in the period 2014 to 2018.

Figure 2: Debt Maturity (Group Level) of the Five Largest Fixed Line Operators in Europe (€ Million)

Debt Maturity (Group Level) of the Five Largest Fixed Line Operators in Europe (€ Million)

Source: Operators’ financial reports 

For these five operators alone, approximately €67 billion of debt matures between 2014 and 2018, representing approximately 54% of their total debt. Taking into consideration that this debt profile is typical of many other operators in the region, this means that many Telcos will be raising fresh debt between 2014 and 2016 to restructure their debt maturity schedule. During this period, these companies will be especially sensitive to making investments that may result in higher costs for the new debt. This is an unfortunate coincidence as the next couple of years is exactly the period when service providers should be investing in infrastructure to meet the DAE’s 2020 targets. To put the financial figures in perspective, the EC[3] quotes the following investment requirements to achieve the 2020 targets:

“To achieve the objective of access to Internet speeds of above 30 Mbps it is estimated that up to €60 billion of investment would be necessary and up to €270 billion for at least 50 % of households to take up Internet connections above 100 Mbps”

The project finance approach, so popular in sectors such as energy and highways, offers an important alternative. Service providers can limit their exposure by jointly setting up Special Purpose Vehicles (SPVs) which, in turn, are able to attract equity investment from infrastructure funds, raise syndicated loans and issue project bonds.

World Bank Definition of Project Finance:

Project finance refers to a structure through which a project sponsor attracts financiers to a proposed discrete project on the basis of the project's revenues, rather than the general assets of the sponsor. An important corollary is that the project finance structure allows a sponsor to avoid providing financiers with "recourse" (that is, access) to its general assets in the case of poor project performance, which in turn allows the sponsor to finance the project off its balance sheet. This "off−balance sheet financing" characteristic is for many sponsors a significant part of the appeal of the project finance structure.

By emphasizing the link between the financial resources required to execute the project and the project's revenues, this structure provides a means of funding a variety of enterprises that might otherwise not be financed. In particular, the project finance structure permits the financing of a project whose sponsors either (a) are unwilling to expose their general assets to liabilities to be incurred in connection with the project (or are seeking to limit their exposure in this regard), or (b) do not enjoy sufficient financial standing to borrow funds on the basis of their general assets.


Estimating Costs

Once the expected market demand has been established, the first step in the development of a fibre infrastructure project is the identification, at a high level initially, of the costs involved in developing and operating such infrastructure. These costs are dependent on the rollout strategy which is usually guided by commercial strategy to address current and forecasted future demands. This is typically an iterative exercise as trade-offs need to be decided in respect to cost to deploy vs. demand (and/or revenue) maximisation.

Figure 3: Examples of Strategic Axes when Defining a Rollout Strategy

Examples of Strategic Axes when Defining a Rollout Strategy

Source: Cartesian 

Once an initial rollout strategy has been identified, network design can start with the identification of a set of geo-types (or model areas) that represent the different characteristics of the areas where FTTx coverage will be developed. The typical information conveyed in a geo-type includes: average distances, types and amounts of households, types of surface for excavation, average length and amount of existing infrastructure that can be re-used (e.g. ducts, fibre, cabinets, manholes and distribution boxes).

In parallel, it is necessary to identify and assess alternatives to buy, lease and/or build infrastructure. For instance, a small regional cable operator might be operating in an area of interest and it may be simpler to gain an initial foothold in the area through acquisition. In places where gas, water mains and sewage networks are being built or renewed, it makes economic sense to negotiate right-of-way and synchronise rollouts. In other places, it may be cheaper to lease space in existing ducts and poles from an infrastructure owner.

Although the costs of active transmission equipment are a relatively low proportion of the overall costs (e.g. typically 5 to 15% for FTTH networks), technology choices are important as they frequently influence network topology and space requirements in ducts. A careful analysis of total cost of ownership should be carried out to identify pros and cons of each alternative. This analysis should take into consideration not only the initial deployment costs but also the costs of upgrading the network after e.g. 5 and 10 years.

At this point, the project can be further detailed with an implementation roadmap and network architecture guidelines detailing the dimensioning rules for each alternative of deployment. Network related CAPEX and OPEX can finally be estimated.

Figure 4: Modelling FTTx Network Costs

Modelling FTTx Network Costs

Source: Cartesian

Identifying Financing Alternatives

Eventually, when deployment strategies have been examined and associated network deployment costs have been estimated, service providers start to turn their attention to the alternatives for financing the project. The three most commonly alternatives considered are:

  • Self-financing
  • Project Finance
  • Operating Lease

Operators may opt to use internal funds and pace the rollout to reduce the impact in the accounts. Incumbents such as BT and Deutsche Telekom have been using this route to upgrade street cabinets to enable FTTC. Both incumbents issue bonds as a regular practice to finance corporate activities. Part of these financial resources are redirected to FTTx projects but there is no direct link with the project. Senior debt is protected by cash flows from the group, not from the FTTx project.

Service providers that opt to go through the self-financing route can accelerate the expansion of reach of their fibre access networks by entering into arm-length agreements with other service providers for shared use of infrastructure in complementary geographic areas.

Jazztel and Telefonica – In October 2012, Jazztel and Telefonica signed an agreement to share the vertical segment of FTTH deployments (in-building cabling), expected to reach 3 million households by Q1 2015. Under agreement, the fibre deployment is shared equally between the two operators, and each will be able to serve any of the 3 million households. The agreement not only enables both operators to reduce the cost of deployment but also reduces the effort and time related to negotiating access to buildings. In January 2014, it was announced that both operators where studying the possibility to extend the reach of the agreement to 4.5 million households.

Orange and Vodafone (Spain) – According to an agreement announced by Orange and Vodafone in Spain in March 2013, each company will deploy its own FTTH network in complementary areas (both horizontally and vertical cabling required to access to the buildings). Additionally, Orange and Vodafone will facilitate mutual access and use of their infrastructures. The companies have agreed the timetable and geographical areas of the deployment plan with the aim of reaching 6 million households by 2017, covering more than 50 cities in Spain.


However, as discussed previously in this paper, self-financing has the unwanted effects of either limiting the speed of development and/or increasing the leverage ratio and the CAPEX to sale ratio. These are some of the key reasons why large incumbents in Europe are taking many years to enable FTTC throughout their networks and are very slow in developing FTTH/FTTP.

In the project finance approach, the project sponsors (i.e. the Service Providers willing to develop the FTTx project) incorporate a Special Purpose Vehicle (SPV) as an independent company, sometimes also referred to as Project Company, that is able to raise finance using as guarantees its secured cash-flows (the sponsors usually enter into long-term off-take agreements with the Project Company) and its assets. The off-take agreements are commitments from the Service Providers to rent, from the project company, a certain minimum volume of infrastructure at a price that is not below a fixed floor level.

With such structure in place, the project company is able to raise finance through issuing debt and also through equity investment. Debt can be raised with infrastructure funds (when the project qualifies for such), syndicates of banks organizing loans, and by means of project bonds. Equity investment can come from a variety of sources: local authorities may invest in such projects to stimulate the local economy (as long as such investment doesn’t conflict with State Aid rules); pension funds and large infrastructure funds (usually linked to sovereign wealth funds) seek to invest in such projects due to the prospects of long-term stable dividend payments and increase in value of assets; and technology vendors and other suppliers may be induced to have some equity participation in the Project Company so that they have their ‘skin in the game’ and seek to perform in an optimal way to guarantee returns from the investment.

The Europe 2020 Project Bond Initiative – Innovative infrastructure financing

The Project Bond initiative is a joint initiative by the European Commission and the EIB.

Its objective is to stimulate capital market financing for large-scale infrastructure projects in the sectors of transport (TEN-T), energy (TEN-E) and information and communication technology (ICT). According to the Commission, the European Union’s infrastructure investment needs to meet the Europe 2020 objectives in these sectors could reach as much as EUR 2 trillion.

The Project Bond initiative is designed to enable eligible infrastructure projects promoters, usually public private partnerships (PPP), to attract additional private finance from institutional investors such as insurance companies and pension funds.


An alternative to Project Finance is to rely on an Operating Lease. In this case, the SPV leases its assets, for instance ducts and fibre, to service providers that use these inputs to provide FTTx. In the operating lease approach, the Service Providers are barred from having equity participation in the project company and the full investment is made by Leasing Companies. Because ownership and maintenance risks are offloaded to a leasing company, service providers only need to report lease payment commitments (i.e. the investment in FTTx network is completely off balance sheet). However, the IFRS accounting rules related to leasing are changing and there is less clarity as to whether this off balance sheet approach will continue to be viable in the future.

Structuring the Deal

When a decision has been reached to proceed with a project finance approach, it is time to contact other potential stakeholders in the project company. Selecting other service providers to partner with is always subject to careful strategic considerations. A joint venture requires commitment from all parties and is frequently compared to a wedding. As with modern engagements, the parties also tend to think carefully about the equivalent of “pre-nuptial agreements”, i.e. break up clauses that apply when one of the parties decides to leave the project company.

Once the initial approach to other service providers is made and the project plan and associated cost estimates are shared, it is common that another round of network design and cost estimation follows to address requirements from these other service providers. Eventually, all parties align their views on the different aspects of network deployment and a Memorandum of Understanding is signed to register the commitment of the parties to go ahead.

At this point, it is time to form a dedicated project team, sponsored by the service providers, which will liaise with other stakeholders to structure the deal. An initial engagement with accounting and legal advisory firms is common as the project team needs to gain a more detailed understanding of the scope of future advisory work in these two areas once the deal takes its final shape and contractual drafting starts.

In parallel, the project team needs to identify the Engineering Procurement and Construction (EPC) company which will build out the network as a turn-key project, as well as the Operation and Maintenance company that will look after the infrastructure during the operation phase. Frequently, these two parties are working in tandem with technology vendors. Normally, the project team issues a tender invitation to a limited number of pre-selected vendors and engineering companies. The bids submitted give the project team access to detailed project plans and pricing for the rollout of the infrastructure and equipment.

Figure 5: Stakeholders and Linkages in a Typical Project Finance Arrangement

Stakeholders and Linkages in a Typical Project Finance Arrangement

Source: Cartesian

Eventually, the essential elements required to advance the deal are in place and banks, which may have been previously engaged to provide preliminary input on financing alternatives, can start to work on structuring the term-sheets for the initial loans.  It is relatively common that the engagement with banks is made by means of invitation to tender. At this phase, the project team will also engage insurance companies to obtain quotations for the different types of insurance required by the project company.

Finally, the project team engages the legal advisors to incorporate the SPV, formalize the supply contracts with selected contractors, formalize the rental contracts with the project sponsors and agree contract terms with banks and insurers.

Managing Risks

The key tenet of project finance is the allocation of risks to the parties that are best suited to manage / mitigate them. As such, mapping construction, operational, business and financial risks are essential steps in the implementation of such deals.

On the operational side, it is necessary to map end-to-end business processes that traverse multiple organisations providing services to the project company. For instance, the OSS and BSS development may be responsibility of the project sponsors but support and information is provided by the project company. The allocation of responsibilities is summarized in a Responsibility Matrix which include headline topics such as:

  • Network rollout
  • Capacity Extensions
  • Subscriber connection / provisioning
  • Service development
  • End to end services operation
  • Network Operation and Maintenance

Subsidiary to the Responsibility Matrix, key operational risks, mitigation measures and minimum SLA commitments should be detailed. These are later incorporated in the contracts between the various stakeholders.

Financial flows must also be analysed for risk. Project sponsors will only start to pay rental for the infrastructure in a given area when a formal handover is completed. This entails certifying that the infrastructure is operational and that a pre-agreed minimum number of households have been passed. Cash-flows which are essential for the viability of the project can be delayed if the EPC contractor is not able to deliver as planned. On the other hand, project sponsors may also end up delaying rental payments for reasons not related to the performance of the project company, again, causing cash-flow problems. A common way to address such risks is by defining financial penalties. However, lenders might also require that bank guarantees are in place. In this case, the EPC contractor would be required to provide a performance bond and the project sponsors would be required to present payment guarantees.

Insurance has an instrumental role during both the construction and operational phases of the project. During construction, risks associated with property damage, delay in start-up, force majeure and design/performance problems can be covered by specific insurance policies. During the operational phase, insurance can be used to protect property (including equipment failure, third party liability and accidental damage to infrastructure) as well as business, through reimbursement for loss of profits arising from physical damage due to insured risk. Insurance can also be used to cover other risks such as country risk and credit risks.

However, insurance can be onerous and, during the planning phase of the project finance deal, the trade-offs between allocation of risks to different stakeholders and insurance costs should be carefully examined. It is worth noting that stakeholders that internalise risks tend to transfer the associated costs to the project company. It only makes sense to transfer risks to stakeholders when they can efficiently mitigate the risks transferred to them, resulting in lower costs transferred to the project company than the respective insurance policies. This assessment is not straightforward and, not infrequently, project companies find themselves without the adequate cover as risks that were supposedly transferred to stakeholders are not adequately covered by the contracts in place. Furthermore, lenders may not release loans until they are satisfied that risks are satisfactorily addressed and project bonds may not receive an ‘AAA’ rating unless credit risks are insured.


As identified in this paper, there are commercial and policy drivers for a faster deployment of FTTx. However, service providers in Europe are not making the required investments and part of the reason for such is the capital intensity and risks associated with FTTx deployments. It is estimated that in the next 4 to 5 years, investments in the order of €200 to 300 billion will be needed to achieve the targets set in the Digital Agenda for Europe. Cartesian believes that a considerable portion of these investments will be made using the project finance approach.

The project finance approach offers the benefits of facilitating access to financial resources, limiting the impact of investment in the financial accounts of individual service providers and spreading the risks to multiple stakeholders.

Cartesian has the capabilities and competencies to provide strategic advisory services throughout the lifecycle of a project finance project. These include: financial and network modelling and cost estimation; strategic assessment of potential partnerships; technology assessments; strategic assessment of options for the structure of the deals and development of the respective business plans; and selection of technology vendor, EPC and O&M contractors. Cartesian also has well established PMO capabilities and can help structuring and running the project team. Very importantly, Cartesian is free of conflicts of interest and can provide independent advice to any of the stakeholders involved in an FTTx project finance deal.<>


Cartesian has deep experience in assisting network operators and service providers achieve their objectives. We have worked on numerous FTTx related projects and can support across a number of areas, including:

  • Strategic planning of FTTx Project Finance deals
  • Planning, modelling and estimating costs of FTTx deployments
  • Developing detailed business plans for communication providers
  • Project managing large broadband transformation projects on behalf of Service Providers


[1] Broadband access in the EU: situation at 1 July 2013 (released – 25 March 2014)

[2] See:

[3] EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks (Jan 2013)