Industry Thought Leadership

Ubiquitous gigabit connectivity will be the backbone of our future economies and societies. The generation and consumption of data is increasing exponentially and will continue to do so, driven by consumer trends such as increased usage of mobile devices, rising video/ streaming demand, and advent of new data-intensive applications enabled by Virtual Reality/ Augmented Reality etc. as well as industrial/ governmental applications such as Industry 4.0, smart communities/ cities etc. enabled by technologies such as Internet of Things (IoT), Artificial Intelligence and Edge computing. These technologies will form basis for new/ innovative services and applications that require networks with enough capacity, quality and reliability to eventually support throughput requirements as high as potentially 1Gbps.

For realization of these Gigabit societies/ economies, both fixed and mobile networks will need to be upgraded. 5G will be a crucial connectivity enabler to facilitate transportation of such large volumes of data and reduce response time/ latency. According to Ericsson, 5G is expected to carry 35% of global mobile data traffic by 2024. The GSM Association (GSMA) forecasts that meeting such rapidly increasing mobile traffic demand in the world’s main cities by 2025 will require network operators to at least double, and in some cases triple, their capital and operating expenditures. At a cumulative level, estimates suggest 5G to require an investment to the tune of USD 1 trillion by 2025.

Historically, financing for information and communications technology (ICT) infrastructure has primarily come from private sector industry players such as telecom operators, Internet Service Providers (ISPs) and tower companies. However, under the current situation of declining telecom ARPUs and reducing margins given increased direct competition from internet players, telecom operators are becoming increasingly disincentivized to invest in new ICT infrastructure deployment. Public entities and other private players have also traditionally engaged in financing telecom infrastructure however in a limited manner.

Given the criticality of telecom/ ICT infrastructure for development of gigabit society/ economy and the benefits that such a society/ economy would unlock for various stakeholders, that is, the government, private sector enterprises as well as individuals, there is an increase in the number of entities keen to fund this telecom/ ICT infrastructure deployment. Governmental entities in some markets are already making regulatory changes to promote investment, and are even taking an active role as direct investors in some instances. Financial players and technology companies are also joining in. Given their ability to have longer-term investment horizons and their acceptance of relatively lower return expectations for a lower risk infrastructure business, vis-à-vis fully integrated telecom operators, they are expected to become formidable players in the game going forward.

In addition to “who funds it?”, there is also an increase in the types of assets, that is, “what is being funded?” and in the ways these investments are structured, that is, “how is it funded?”.

One example of the type of assets (“what”) is asset bundling, an asset class that has been widely used in transportation and civil infrastructure projects and is now entering the telecom/ ICT space. This product spreads the risk of small unattractive ICT infrastructure projects by bundling them with larger projects that expect strong potential financial returns. The portfolio of projects is offered under a single procurement contract and can cover projects across geographies and technologies. Beyond risk diversification, project bundling also allows the investor deploying the infrastructure to exploit economies of scale and to achieve contracting efficiencies, there reducing overall cost. As an example, the state of Kentucky in United States awarded in 2018, a bundled contract to develop several fiber optic infrastructure projects that totaled a network of approximately 3,000 miles. Another formula, that involves support of public entities or development banks, consists of backing a project with a credit guarantee. A guarantee diminishes risk not by reducing the probability of default, but by altering the exposure to losses ensuring either complete or partial compensation. Guarantees are generally granted to projects that observe high risks but present high potential socio-economic returns for a location. In 2017, the World Bank through its Multilateral Investment Guarantee Agency (MIGA) offered ~USD 115 million guarantee to the Second HyalRoute Fiber Optic Cable Network Project of 4,500 km in Myanmar to the Industrial and Commercial Bank of China that was funding the project.
To limit the risk and attract even more risk-averse investors, additional levers can be introduced around structuring of investments (“how”). Identifying different investors and aligning on their contributions towards telecom/ ICT infrastructure projects can be a challenging task. To overcome the complexity associated with this process, innovative approaches are becoming more mainstream to ensure that projects are paired with operators and adequate financing opportunities. For example, the establishment of infrastructure marketplaces is becoming more popular in developing countries, bringing together ICT infrastructure project owners with investors, public sector players and other stakeholders to understand the project in detail, discuss potential investments and arrive at combined funding arrangements. A simpler solution beyond marketplaces entails setting up organizations funded by governments, development banks or NGOs that support telecom operators to solicit funds from other players towards expansion or upgrade of infrastructure. A case in point is the ‘Mobile Solutions Technical Assistance and Research project’ funded by the U.S. Agency for International Development (USAID) that offers a service where it supports telecom operators to attract project-based co-investment from other private entities beyond the telecom industry.

The financing model to prevail in the future shall depend on multiple factors, including investment amount required, risk associated with the project and competitive landscape of telecom market in the country. Governments in Middle East have demonstrated a strong interest in development of telecom/ ICT infrastructure, considering that the sector shall be a key pillar in achievement of their ambitious national strategies. For example, In Bahrain, Telecommunications Regulatory Authority (TRA) is the primary driver behind many ongoing developments that shall improve both telecom infrastructure and services. Additionally, favorable regulatory environments are being promoted in an attempt to attract and localize investments in the sector, as is the case with Communication and Information Technology Commission (CITC) in Saudi Arabia. In addition to the public sector, private players have also shown interest in investing in the region. In October 2019, the German development finance institution DEG (Deutsche Investitions- und Entwicklungsgesellschaft) together with the EIB (European Investment Bank) announced a co-investment in modernization of infrastructure for the telecom industry in Lebanon. In summary, it is clear that co-investment shall be a key funding approach for these critical projects going forward, and that the telecom operators shall have access to an active ecosystem of players willing to partner with them in this journey.