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Sharing telecom infrastructure

Telcos have to share infrastructure to cope with the aftermath of the cellular revolution. By Varun Aggarwal

The immense growth of the telecom industry brings its own pitfalls with it. Growing call traffic, limited bandwidth and a limited number of cell towers have all combined to lead to a sorry state of affairs wherein poor network coverage by most operators is a matter of fact. One way to solve to this problem, the brute force method, would be to set up more towers. At present about 90,000 towers cater to 136 million wireless subscribers. The government of India has targeted 250 million subscribers by December 2007 and 500 million by 2010. In order to achieve this target, approximately 1,35,000 towers would be required by 2007 and 3,30,000 by 2010. This brings up the related problem of identifying such a large number of sites.

For a telco, infrastructure—towers and backhaul connectivity—account for about 60 percent of the cost of doing business. Thus, apart from the high costs that are incurred, it also results in delaying the roll out of services. The Department of telecommunication (DOT) has given a high priority to the issue of passive infrastructure sharing. It has also expressed its concern that while encouraging infrastructure sharing it should be ensured that the same should not come in the way of the growth of mobile services in the country.

Sharing Passive Infrastructure

The infrastructure at a cell site typically consists of active (electronic) components such as BTS, microwave radio equipment, switches, antennas, trans-receivers used for telecom signal processing and transmission as well as passive (non-electronic) components including the tower, shelter, air-conditioning equipment, diesel electric generator, battery, electrical supply, technical premises and easements and pylons. In India typically the passive component constitutes around 40 percent and the active component constitutes around 60 percent of the total capital cost. However, given the recent rise in property, steel and cement prices, the capital cost of passive infrastructure is going up while that of the active infrastructure is coming down thanks to declining prices of electronic components.

According to Pinakin Gandhi, Vice President - Strategic Planning and Investor Relations, GTL LTD, “Telecom infrastructure requires huge investment outlays. Often, such investments turn out to be risky propositions given the rapid introduction of successive generations of new technology. Operators are occasionally faced with a situation where even before recovering their investments in existing infrastructure they embark on further investments in new generation networks. This phenomenon is common in the mobile sector, particularly in the context of 3G services, where the high cost of licensing and equipment have left operators vulnerable at the early stage of network deployment.”

In response to this phenomenon, policy-makers, regulators and operators are increasingly placing greater emphasis on alternatives to the traditional high-cost infrastructure development model by considering such measures as infrastructure sharing, domestic roaming and Mobile Virtual Network Operator (MVNO) agreements. These measures can help reduce the financial burden on operators, accelerate the introduction of new services and facilitate the deployment of new networks while lowering barriers to market entry.

Benefits for all

With passive infrastructure sharing, operators are expected to save close to 30 percent on capex and opex when it comes to passive infrastructure management (mainly towers). Right now, sharing among operators is limited to two in most cases, whereby tower companies are aiming at an average of 2.5 to 2.7 carriers per tower. Furthermore, only 30 percent of sites are being shared–tower companies expect it to take this number higher with a focused approach.

Gandhi insists, “The sharing of passive infrastructure will allow service providers to focus on their own core sales/marketing areas. This will also free up management time at the carriers. Passive infrastructure sharing will allow operators to defer their tower-related capex investments into opex lease rental payments over an extended period of time. Existing towers can also be sold and leased back, thereby creating new sources of cash, which can be invested in radio network expansion and distribution.” He feels that operators outsourcing passive infrastructure will benefit from a quicker network rollout.

With multiple operators and dense coverage needs, acquisition of sites, with all necessary governmental approvals, is getting tougher. Furthermore, ascertaining legal ownership of sites in towns is a stumbling block to faster rollouts. In India, one of the additional incentives to owning passive telecom infrastructure is the subsidy being provided under the Universal Service Obligation (USO) fund for developing telecom infrastructure in rural areas. The USO fund has around Rs.7,500 crores and companies building network infrastructure in rural areas are subsidised through this fund.

As operators expand their networks into semi-urban and rural areas, there will be an increase in capex. This is due to higher costs of land development, security and insurance costs, power shortages and increased use of diesel generator backups, unclear land ownership and expensive backhaul connectivity costs. Hence passive infrastructure sharing will significantly lower the capex

Where it falls short

Some limitations of passive infrastructure sharing are:

• The concept is a nascent one. That said, many operators are experimenting with service providers like GTL Infrastructure Ltd and Quipo Telecom Infrastructure Ltd. Also there has been some amount of passive infrastructure sharing among operators in the form of barter. Business models are getting established gradually as regulatory issues are eased all of which should see the acceleration of passive infrastructure sharing.
• Another limitation seen here could be termed as the first mover advantage. Operators with a first mover advantage in rural/semi-urban areas might not want the third-party owner to offer the same towers to subsequent entrants like Idea, Aircel. However the timing gap between first and second-tier operators is closing, with easy funding available for smaller operators. The industry however doesn’t regard timing or conditional access to new lessees as a solution.
• EV/EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is a commonly used measure for operator valuation benchmarking in high-growth markets. Tower leasing basically transfers capex to opex leading to lower EBITDA, though capex, depreciation and interest expenses are also reduced. According to the operators, the industry is now working on business models which minimise EBITDA dilution.
• Two large operators may enter into sharing arrangements with one another to keep out a third-party vendor – thus keeping out new operators from quick access. However, the presence of at least four large operators and two or three small operators are likely to limit such instances.
• The larger operators currently have robust balance sheets with substantial debt capacity. Hence, in the immediate future, we do not expect them to get into sale-and-lease transactions for their existing tower portfolios.

TRAI regulations

Existing TRAI regulations allow only passive infrastructure sharing. Telecom companies are not allowed to share active infrastructure such as optic and feeder fibre cables, radio links, network elements, backhaul, antennae and transmission equipment. Service providers feel that infrastructure sharing can achieve its desired goals only once sharing of active infrastructure is permitted.

Currently, telecom infrastructure sharing takes place on an ad-hoc basis as it takes place only voluntarily. Thus TRAI released its consultation papers in November 2006 inviting comments from stakeholders on infrastructure sharing. Though most stakeholders encouraged infrastructure sharing, making the same mandatory was strongly opposed except for in sensitive areas like Lutyens Bungalow Zone (LBZ), Cantonment areas, Central Government and State Government office buildings, Designated Forest or Green Belt areas and Government Residential colonies, etc., where installation of cell sites by individual operators is either difficult or is not permissible due to lack of policy, security or aesthetic concerns.

Despite strong opposition TRAI has made passive infrastructure sharing mandatory. The move will be initiated in Delhi and Mumbai on a trial basis. Based on the success of these trials, it will be made mandatory across the country. This will have a deep impact on the growth of the Indian telecom industry. Following the roll out, consumers can expect better services in terms of network coverage and, possibly, falling tariffs.