Techno Economic Methodology for the Evaluation of Telecommunication Investment Projects. Sensitivity and Risk Analysis Incorporation Dimitris Katsianis University of Athens Dept of Informatics & Telecommunications email:dkats@di.uoa.gr International Telecommunication Union- Telecommunication Development Bureau Market, Economics & Finance Unit Expert Dialogues: 28-29 October 2004 Geneva, Switzerland
University of Athens Dept of I nform atics & Telecom m unications The challenge Market Demand Willingness to pay User behaviour Technology Strategy Where? Technology variety When? Open provisioning How? Service integration Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s2
University of Athens Dept of I nform atics & Telecom m unications Consolidation of Results and Guidelines for deployment scenarios Guidelines Projects and field trials Other Sources Common conclusions Network Studies Common framework Information gathering / exchange Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s3
University of Athens Dept of I nform atics & Telecom m unications Operators Components Database Suppliers Cost Evolution Standardization body OA&M Class Year n Year n Other . . . . . . Volume Class Revenues Decision Year 2 Year 2 Revenues Decision Investments Index Index Year 1 Year 1 Revenues Investments calculation Cash Flows calculation Revenues User inputs Investments (NPV, IRR, Cash Flows (NPV, IRR, Profits Payback period) Payback period) Services Investments Services Cash Flows Profits Financial Model Architectures Cash Flows Profits Radio Model Profits Operators Real Options Market Tariffs Game Size Surveys Theory Policy Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s4
University of Athens Dept of I nform atics & Telecom m unications Steps in Network Evaluation – Definition of service basket – Network scenarios – First Simulations – Main Financial results – Sensitivity and Risk Analysis – Evaluation Recommendation and Guidelines Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s5
University of Athens Dept of I nform atics & Telecom m unications The TONIC Tool • Based on Office 2000 platform – Excel & Access • Automatic sensitivity analysis • Compatibility with Risk Analysis Tool(s) Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s6
University of Athens Dept of I nform atics & Telecom m unications The TONIC tool & its database Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s7
University of Athens Dept of I nform atics & Telecom m unications Cost model • P(0), the price in the reference year 0 • n r (0), the relative accumulated volume in year 0, • ∆ T , the time for the accumulated volume to grow from 10 % to 90 %, • K , the learning curve coefficient. ⋅ log K − 1 2 ⋅ − 2 ln 9 1 − − ⋅ ln n 0 1 t ∆ r − ( ) ( ) ( ) T 1 = ⋅ ⋅ + 0 0 1 P t P n e r Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s8
University of Athens Dept of I nform atics & Telecom m unications Relative cost evolution as a function of ∆ T with n r (0)=0.001 1,00 0,80 0,60 0,40 0,20 20 14 0 DT 8 0 2 4 2 6 8 year 10 Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s9
University of Athens Dept of I nform atics & Telecom m unications “Ecosys” project WP0 - Project Management and Coordination WP1 Market dynamics WP2 Techno-Economic WP3 Tool development for methodology development T-E modelling WP4 Broadband for all - WP5 Mobile and Economics of new wireless network networks and services economics beyond 3G WP6 Convergence WP7 Dissemination and Exploitation Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s10
University of Athens Dept of I nform atics & Telecom m unications The new Tool “Ecosys” • Based on Office 2002 platform – Multiplayer environments – Real Options implementatio – New demand models – ….. Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s11
University of Athens Dept of I nform atics & Telecom m unications Main Financial Results • Net Present Value, NPV • Internal Rate of Return, IRR • Payback Period • Financial indicators – Investments – Running Costs – Revenues – Cash Flows – Depreciation – Profits – Taxes – Retained Cash Flows – Cash Balance – Rest Value Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s12
University of Athens Dept of I nform atics & Telecom m unications Scalability of the tool • Sensitivity Analysis • Risk Analysis Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s13
University of Athens Dept of I nform atics & Telecom m unications Sensitivity Analysis • What if…? • Approach – select the most critical input parameters – establish boundaries for their variation with a « 95% confidence interval » • Results – impact on NPV • at boundary input parameter values: new NPV • sensitivity factor: how NPV varies (slope at base value) – impact on IRR • at boundary input parameter values: new IRR • sensitivity factor: slope at base value, although variation usually non linear Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s14
University of Athens Dept of I nform atics & Telecom m unications Risk Analysis • Input: – Uncertainty in market parameters • Market size • Market share • Broadband services characteristics – Uncertainty in Cost parameters • Cost units • Cost evolution • Area characteristics • Outputs: – Probability measures for a reduced set of parameters Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s15
University of Athens Dept of I nform atics & Telecom m unications Method Project setting for every decision vector perform simulation store result risk profile compare results* make decision Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s16
University of Athens Dept of I nform atics & Telecom m unications Risk Analysis Component Price NPV 10 000 Trials 52 Outliers Frequency Chart ,027 269 Probability Frequency ,020 201,7 0,68 0,74 0,80 0,86 0,92 ,013 134,5 Service Penetration ,007 67,25 ,000 0 -3000 -1000 1000 3000 5000 kE • Statistical Variation of the input 1,09 1,54 2,00 2,46 2,91 parameters Revenue per customer • Using Monte Carlo Simulation • Results: probability distribution, risk profile of the business case • Extended basis for investment 0,55 0,78 1,00 1,23 1,45 decisions Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s17
University of Athens Dept of I nform atics & Telecom m unications Risk Analysis - NPV Forecast: NPV 1.000 Trials Frequency Chart 988 Displayed ,038 38 ,029 28,5 ,019 19 ,010 9,5 ,000 0 -317.277.492 -86.334.971 144.607.551 375.550.072 606.492.594 Certainty is 82,10% from 0 to +Infinity Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s18
University of Athens Dept of I nform atics & Telecom m unications Requirements for a T-E study – Services Scenarios • Dimensioning – Commercial Network Architectures . • For these services • Database • Serving areas – T-E Model Constructions • Study period (years?) – Potential market – Market Shares (e.g operator) – Pricing – Runs Runs- - Results Results – – Sensitivity and Risk Analysis Sensitivity and Risk Analysis – – Evaluation of the results Evaluation of the results – – Recommendation and Recommendation and – Guidelines - - C Commercial ommercial viability viability Guidelines Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s19
Example case Location base Service LBS
University of Athens Dept of I nform atics & Telecom m unications Blend of …cases Tariff Positioning Model Business Profile Countries Terminals Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s21
University of Athens Dept of I nform atics & Telecom m unications Country Types: Country Type Large Small Description Size of surface area of the country (km 2 ) Area size 370,000 132,000 Size of dense urban area (km 2 ) . Area dense 185 7 Size of urban area (km 2 ) Area urban 2,960 4,000 Size of suburban area (km 2 . Area suburban 37,000 10,956 Size of rural area ( km 2 ). Area rural 303,400 109,956 Number of inhabitants in dense urban area per km 2 Population dense 50,000 10,000 Number of inhabitants in urban area per km 2 Population urban 4,000 1,216 Number of inhabitants in suburban area per km 2 Population suburban 1,000 174 Number of inhabitants in rural area per square km Population rural 40 35 (during busy hour) Total Population 65,000,000 11,000,000 Total population Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s22
University of Athens Dept of I nform atics & Telecom m unications Tariff and revenue forecasts – Services a) LBS services b) M-Guide Service – Study Period: 7 years Value Parameters Nr of Queries per day (2004) 0.2 Start Price per Query (€)(2004) 1.00 End Price per Query (€) (2009) 0.50 Nr of main Services 7 Expert Dialogues –ITU-D 28-29 Oct 2004 Geneva s23
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