Driven by the need to achieve greater operational efficiencies, most telecom operators have hived off their tower-related operations into separate entities. Along with the significant increase in telecom penetration in India, there has also been a rapid addition in towers during the past seven years. The number of telecom towers in the country has gone up from about 100,000 in 2007 to 420,000 in 2014. Given that the sector is expected to continue on its upward trajectory, the tower industry is seen as an attractive investment option by investors.

Key trends

The telecom tower segment provides for a wide range of tenancies. While residual operator-captive assets account for many single-tenant towers, most of the larger tower companies boast of a tenancy ratio of over two. The industry has been marked by an oversupply of towers and consolidation of tenants in the past few years. In the face of low tariffs and the need for ubiquitous and robust coverage, the telecom infrastructure sharing model provides for the best utilisation of tower assets. Tower sharing has allowed operators to focus on their core marketing activities, thus enabling new operators to roll out networks in a shorter time period.

That said, several challenges remain. The foremost among them is the uncertainty regarding tower installation norms. Further, the optic fibre cable (OFC) requirement for connecting tower sites is far from being met, with less than 15 per cent of these sites being connected through OFC at present. Operators have also been struggling to find a solution to right-of-way issues. The matter has been compounded as a result of growing public apprehension regarding electromagnetic field radiation from towers. Adhering to the renewable energy mandate of powering 50 per cent of rural towers and 20 per cent of urban towers through hybrid energy solutions has put additional pressure on tower operators.

IFC’s investment in the tower segment

The International Finance Corporation (IFC), part of the World Bank group, is an active investor in the tower industry and is among the few that have a global tower footprint. IFC currently has an exposure of $326 million in towers, about 80 per cent of it in Africa.

IFC recognises that the segment needs significant and patient capital, and flexible structures. Investment in a tower company require large-scale mobilisation of debt and equity. In addition to providing debt financing, IFC has mobilised nearly $1 billion in equity, B loans and agented loans for tower companies. IFC plans to increase its exposure in the tower industry to approximately $1 billion by 2017-18. Going forward, the company’s strategic focus areas will include:

• Equity and debt financing for tower companies entering new markets, typically through the first/second divestiture of mobile network operators’ tower assets.
• Equity and mezzanine investments in smaller firms in maturing tower markets that will be attractive targets for strategic regional and global tower companies.
• Large tower market consolidations that promote telecom sector growth; for instance, making investments alongside other strategic investors that earn moderate returns with instruments that are weighted towards debt and mezzanine.

Future positive

IFC expects the demand for tower infrastructure to increase as operators aggressively expand their 3G and 4G footprint. The government’s Digital India and 100 Smart Cities initiatives are expected to drive data growth further. In addition, the penetration of budget smartphones is likely to fuel the demand for data.

Besides, voice usage in rural communities is expected to pick up as rural penetration is still under 42 per cent. At the same time, urban areas are facing capacity constraints leading to poor quality of service. To address these issues, greater investments will be required in tower infrastructure.

Lastly, migration of 2G GSM from 900 MHz to 1800 MHz and freeing up of 900 MHz for 3G will require twice the number of tower sites to support the same number of users in the 900 MHz band.

Investments in broadband

Other than investing in tower infrastructure, IFC also views the broadband market as a viable investment opportunity. While a number of technologies are available to deliver broadband connectivity, no single broadband technology is expected to dominate in the short to medium term. The choice of technology generally involves a trade-off between the cost of rolling out the service and the data speeds available on the network. Also, different technologies serve different market segments. Therefore, mobile broadband will coexist with fixed line broadband because they serve two different types of consumer needs. However, as demand for bandwidth continues to increase, fixed broadband will continue to grow until penetration rates similar to those in developed countries are reached. IFC’s investment focus in the segment is currently technology agnostic. However, its decision is driven by the time horizon of the investment and the viability of the particular technology at the time of its exit.

In sum, the industry presents an attractive proposition for investors and is likely to invite greater investments to fund its expansion.

Based on a presentation by Ruchira Shukla, South Asia Lead for Technology, Media and Telecom, IFC