FTTH Business Guide - AWT.be

Chapter 7: Finance
Fibre projects are by their nature capital intensive infrastructure projects and so
payback periods are rarely less than five years – often much longer. This means
that financing is of central importance to any fibre project. Finance is a large
subject, however, there are some very clear aspects of finance that are vital to
creation of a business case for FTTH-based businesses.
The development of a business case for a new operator, business unit or
product/service has clear, if complex, inputs. To set the business up, you will need
to invest money in capital expenditure (CAPEX) to build the infrastructure, and
connect up the network, and use working capital to pay for operating
expenditures (OPEX) such as wages, office costs, and so on. In return, you expect
to generate revenues and ultimately, after covering operating costs, to generate
profits and a return on capital.
Other chapters in this book cover estimation of the different elements of CAPEX,
OPEX and revenues. However, in this chapter we will briefly discuss the types of
finance typically used in FTTH projects, and then in more detail explain how to use
your estimates and projections to provide the important answers that
shareholders, boards and bankers need. They want to know if the projected
business case will be profitable and whether it is worth investing in. That’s a
simple question – answering it can be a little more challenging.
Types of finance
To those unfamiliar with banking terms the array of financing solutions can at first
seem bewildering and details can vary greatly between countries. In this section
we discuss the basic concepts and solutions to provide a roadmap for general
managers or other non-financial executives considering an FTTH project.
At its simplest, capital invested (as opposed to being granted by government) in a
project will be equity or debt, or may be a hybrid of the two, called mezzanine.
Equity represents ownership in the company. Investors buying shares in the
company put their money at risk – if the business fails they generally get nothing
back. Start-up projects are generally funded in this way, and shareholders expect
a higher rate of return than lenders because of the extra risk they take. Financing
a project entirely with equity would therefore be extremely expensive.
Shares can have different classes so that some shareholders have more voting
rights (control) than their raw financial contribution would suggest.
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