1. Unlocking the Potential of the Telecommunications Sector to Support Networked Readiness Harvard University – March 14, 2002 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

2. 1 Impact of telecommunications sector reform Agenda Importance of reform going forward Priorities for reform

3. 2 Lower high income countries 47 33 20  10 - 20 15 Emerging countries 43 25 32  3 - 10 28 Developing countries 33 26 41 33 85 Spread of sector reform *Includes partial privatization and privatization in progress **Includes countries with liberalization only and full reform (privatization and liberalization) Source:ITU; McKinsey No reform Privatization only Liberalization Share of countries having undergone sector reform, % Real GDP per capita $000 No. of countries Upper high income countries 100 100%  20 21 Fixed voice telephony, status end of year 2000

4. 3 Value impact Incumbent market capitalization, $ billions *In cases where floatation dates less than 3 years, market capitalization of August 31, 2001 was used Note:Based on 42 countries where information on market capitalization was available Source: Bloomberg; Datastream; McKinsey January 18, 2002 993 -24% +105% 744 85 Flotation +3 years 829 CAGR 3% CAGR 18% 456 78 At flotation Emerging and developing countries High-income countries 534

5. 4 +21 +13 +3 Teledensity growth Change in teledensity between 1996 and 2000 Note: All upper high income countries have pursued reform. Teledensity in those countries has grown from 70% to 123% from 1996 to 2000 *Fixed plus mobile lines per 100 population **Includes countries that have privatised and liberalised Source:ITU; EMC; WEFA; McKinsey No reform Privatization only Liberalization +48 +20 +5 Lower high income Emerging countriesDeveloping countries +53 +26 +5 +54 Upper high income

6. 5 +11 +4 +1 +25 +1 +8 +31 Internet penetration % change in Internet users per 100 inhabitants from 1996-2000 Note: All upper high income countries have pursued reform. Internet penetration in these countries has grown from 7% to 38% of the population from 1996 to 2000 *Includes countries that have privatised and liberalised Source:ITU; EMC; WEFA; McKinsey +15 +6 +1 Lower high incomeEmerging countriesDeveloping countries Upper high income No reform Privatization only Liberalization

7. 6 Options to reach Internet penetration Status end of year 2000 *Fixed and mobile subscriptions **Based on unique users who access the Internet at least once a month Source:ITU; EMC; NielsenNetRatings; McKinsey 1 2 3 4 5 6 0102030405060708090100110120130140150160170 Teledensity (Lines per 100 inhabitants) 75 50 37.5 17.5 25 10 5 2.5 0.5 Internet penetration (%) 60 50 40 30 20 10 User Intensity (Internet users per 100 lines) ESP CHL

8. 7 Multiple tradeoffs Industry growth Source: McKinsey Society Government Employees, unions Government Employees, unions Equipment providers Domestic Foreign Domestic Foreign Customers Business Residential Business Residential Operators Incumbent(s) New entrant(s) Incumbent(s) New entrant(s) Investors

9. 8 Priorities among multiple objectives *Qualitative evaluation of objectives based on observed regulatory outcomes Source:Espicom; ITU; national policy statements and legislation; press clippings; McKinsey Promoted tele- density and additional investments Compromised between efficiency, privatization proceeds and teledensity Broadly favored market efficiency and competition Similar emphasis Networked readiness Efficient industry Attract investments New Zealand Developing countries Argentina (2) Czech Republic Developed countries Malaysia Emerging countries India Indonesia Philippines China Germany France U.K. (1) U.K. (2) Sweden U.S. Australia Japan South Korea Argentina (1) Mexico (1) Mexico (2) Russia Poland South Africa Brazil Chile (2) Chile (1) Hungary Country Proceeds for government Universal service Benefits to customers EXAMPLES

10. 9 Measurable dimensions *Footnote Source:Source TeledensityUniversal access Incumbent performanceProceeds to government Price levelsBenefits to consumers

11. 10 Universal Service Cumulative growth of fixed-line Teledensity 3 years post-reform Source:ITU; Espicom; McKinsey Developing countries China India Indonesia Philippines Senegal All with priority on Universal Service 3 1 1 1 1 150 2 1 1 1 1 Emerging countries Increase in lines per 100 Change Percent Priority on Universal Service No priority on Universal Service Czech Republic Hungary Poland Brazil Malaysia Chile (2) Chile (1) South Africa Mexico (2) Mexico (1) Argentina (1) Argentina (2) 9 8 8 8 3 4 3 3 2 2 1 1 Teledensity at time of reform 12 10 15 19 8 11 9 5 10 6 20

12. 11 Note:Based on tariffs of incumbent operators Source:ITU; McKinsey Indonesia Countries that did not emphasize benefits to customers Mexico (2) U.K. (1) Argentina (2) Japan Poland Brazil Chile (2) Sweden New Zealand Australia (2) Australia (1) U.S. U.K. (2) Countries that emphasized benefits to customers South Korea France Germany Benefits to customers Long distance cumulative price change Incumbent tariffs 3 years post-reform, %

13. 12 Proceeds to Government Change in performance and relative value of incumbent % median values *Based on flotation dates of incumbents from 19 countries Source:ITU; Datastream; Bloomberg; McKinsey At flotation Flotation + 3 years Countries with priority on proceeds to Government Countries with no priority on proceeds to Government EBITDA EBIT P/E premium over main stock market index

14. 13 Overview of regulatory levers Pricing Interconnection Industry Structure Customer Access Universal Service Performance Levels Regulatory Levers

15. 14 Detail of fixed and mobile regulatory levers Regulatory Levers Industry Structure Pricing Inter- connection Customer Access Universal Service Example of fixed and mobile regulatory levers Number of competitors Ownership and control rules, including restrictions on foreign investment Networks and services open to competition Licensing procedures and conditions Price caps / tariff rebalancing Access deficit compensation Pricing constraints on local calls Constraints on roaming charges Rights and obligations to interconnect Structure and level of charges Collocation and infrastructure sharing Conditions for unbundling network elements Interconnection for ISPs Obligations and rights for virtual network mobile operators (MVNO’s) Numbering plan Number portability Length and ease of carrier pre-fixes Subscription mechanism for carrier pre-selection Universal access and service obligation definitions Universal service funding mechanism Penetration targets Network rollout and coverage targets Service quality targets Performance Levels Source: McKinsey

16. 15 Continued importance of reform Source: McKinsey Access Teledensity low in most developing world (>800 million households stilll without a phone line) Internet and usage intensity Increase usage of existing infrastructure already enabled for Internet 5.7 billion inhabitants are not using the Internet Increase usage of existing infrastructure already enabled for Internet 5.7 billion inhabitants are not using the Internet Quality Steps to ensure broadband reaches 187 million connections by 2005 $150-200 billion to support rollout of 3G mobile technology Steps to ensure broadband reaches 187 million connections by 2005 $150-200 billion to support rollout of 3G mobile technology $150–200 billion in value Value has been unlocked

17. 16 Developing countries Emerging countries Teledensity Million access lines/population Source: McKinsey High-income countries Access lines Population

18. 17 Lower income developed 31+ Developed Highest in group Median Lowest in group 41+ Potential to increase usage intensity Internet user intensity Emerging 38+ Developing 63+ Access availability Price Competition Enabled line Choice of service Interconnection

19. 18 2001 fixed lines Broadband penetration % of global access lines Infrastructure challenge 2001 2005 2001 2005 Broadband access lines, million

20. 19 Broadband quality upgrades by country, 2000 EXAMPLES U.S. Japan Netherlands Singapore South Korea Internet penetration Users per 100 inhabitants Broadband penetration Percent of all households

21. 20 3G challenges No deployment, available only in Japan US$130 bn paid in license auctions in Europe alone Unclear initial consumer value Additional US$150–200bn to deploy networks in Europe alone

22. 21 What can be done? Source: McKinsey Promote access Developing countries Encourage and attract investment Explore mobile options Recognize mobile options Slow gradual process Developing countries Encourage and attract investment Explore mobile options Recognize mobile options Slow gradual process Encourage Internet and usage intensity All countries Stimulate demand Encourage competition and choice Fine tune and revise Iterating process All countries Stimulate demand Encourage competition and choice Fine tune and revise Iterating process Fund quality improvements Mostly developed, but significant variation by country Require significant upgrades Explore funding options Experiment multiple approaches New approaches needed Mostly developed, but significant variation by country Require significant upgrades Explore funding options Experiment multiple approaches New approaches needed

23. Unlocking the Potential of the Telecommunications Sector to Support Networked Readiness Harvard University – March 14, 2002 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.