1. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 Innovations for Digital Inclusion Session 7.2, Public policies, standards and digital inclusion Victoria Sukenik Secretary of Communications, Argentina New Model for Cost of Equity Evaluation in Emerging Markets: The Telecommunication Sector in Brazil/Tullio Bertini (National Telecommunications Agency, BRAZIL)

2. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Background 1 “New Model for Cost of Equity Evaluation in Emerging Markets” LRIC or FAC model implementation process for setting wholesale tariffs. Wacc (Weighted average cost of capital) i.e., the minimum rate of return.

3. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Background 2 “New Model for Cost of Equity Evaluation in Emerging Markets” Importance of the appropriate cost of equity capital model to be used in the Wacc estimation process. Using different CAPM models in the Wacc estimation process of North American fixed-line companies (Gentzoglanis, 2004). CAPM

4. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Background 3 “New Model for Cost of Equity Evaluation in Emerging Markets” Problems faced by the use of traditional CAPM model in the cost of equity capital assessment in emerging markets. Expected return Risk free rate Systematic risk Market risk premium

5. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Background 3 “New Model for Cost of Equity Evaluation in Emerging Markets” CAPM model requirements: global market integration normally distributed asset returns investors ability to diversify globally their portfolios If the local market is fully integrated to global market… Emerging markets not seem to be fully integrated to a Global market.

6. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Blueprint for the New Model “New Model for Cost of Equity Evaluation in Emerging Markets” Investors add risk factors in the Global CAPM models seeking recompense … There are several modified forms of Global CAPM models... Are created to add non-diversifiable local risks in the traditional CAPM model.

7. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Blueprint for the New Model “New Model for Cost of Equity Evaluation in Emerging Markets” New modified form of global CAPM model, I started from the following points: Modified Global CAPM model proposed by Mariscal and Lee (1993). Harvey (2005)’s criticism on the Global CAPM model proposed by Mariscal and Lee (1993). Some efficient portfolios theory’s assumptions.

8. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Blueprint for the New Model (1) “New Model for Cost of Equity Evaluation in Emerging Markets” Modified Global CAPM model proposed by Mariscal and Lee (1993). Global Risk Free Rate Global Systematic Risk (global beta) Global market risk premium Country risk premium New risk factor

9. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Blueprint for the New Model (2) “New Model for Cost of Equity Evaluation in Emerging Markets” Harvey (2005)’s criticism on the Global CAPM model proposed by Mariscal and Lee (1993). Same country risk premium for all assets Country risk premium weighted according to the characteristics of each asset.

10. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Blueprint for the New Model (3) “New Model for Cost of Equity Evaluation in Emerging Markets” Some efficient portfolio theory’s assumptions. Correlations Create an index CRP Weighted

11. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion The Model “New Model for Cost of Equity Evaluation in Emerging Markets” a new modified Global CAPM model. Index created to capture the diversification potential of each asset… Reduce global portfolio risk Diversification Potential Index

12. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Methodology: Main Aspects (1) “New Model for Cost of Equity Evaluation in Emerging Markets” Calculate Pod value. Attribute lower and upper limits Volatility ratio ranges from 0(zero) to 1(one) Correlation coefficient range already existent

13. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Methodology: Main Aspects (2) “New Model for Cost of Equity Evaluation in Emerging Markets” Proceed to Pod Value standardization. Considering " Pod better value” equal to 2 and “Pod worst value" equal to -1. Scalar value between zero and one. Pod observed value, zero Pod index value. Discount on the country risk premium v.v.

14. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Methodology: Main Aspects (3) “New Model for Cost of Equity Evaluation in Emerging Markets” Higher potential of risk diversification to the global portfolio ( PoD i ) Discount on the country risk premium v.v Estimated PoD i indexes for four Brazilian fixed incumbents Entire telecommunication sector in Brazil Country risk premium

15. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Results PoD_TLPP4 = 0,677 PoD_EBTP4 = 0,710 PoD_TNLP4 = 0,697 PoD_ITEL = 0,720 PoD_BRTO4 = 0,703. Level 2 text numbered/bulleted to appear in Verdana font, Point size 24

16. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Results “New Model for Cost of Equity Evaluation in Emerging Markets” The model applied for TNLP4 will suffer a greater discount over CRP..comparing. higher discount lower discount

17. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Conclusions / Recommendations New modified global CAPM model which has included an index that weights the country risk premium; Brazilian market is partially integrated to the global market; Pod index was calculated for the Brazilian telecommunication sector.. attempt to respond to criticisms about the inclusion of the same country risk premium

18. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion Conclusions / Recommendations The country-risk premium to be included in the cost of equity capital of fixed line companies should be, on average, 30.57% lower; The country-risk premium for the Brazilian telecommunication sector (represented by ITEL index) should be 28% lower; These results are consistent with the general principle of finance and with efficient portfolio theory.

19. Mar del Plata, Argentina, 31 Aug - 1 Sep 2009 ITU-T Kaleidoscope 2009 – Innovations for Digital Inclusion THANK YOU FOR YOUR ATTENTION