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Changing Needs: Consolidation and policy clarity key factors in telecom infrastructure growth

February 11, 2016
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During 2015, there were several ups and downs in the telecom infrastructure segment, which essentially forms the backbone of the telecom sector. While the policy and regulatory environment eased with some significant judgments being passed, policy inconsistency continued to pose a problem. The infrastructure industry also came into sharp focus due to the prominence of the call drop issue in all telecom-related debates. Meanwhile, a big consolidation move took place, with the American Tower Corporation (ATC) acquiring a majority stake in Viom Networks. In addition, a few players announced plans to hive off their tower assets for paring debt.

A look at the developments in the infrastructure industry over the past year, the challenges in the segment, and the way forward…

Industry consolidation

A major development in the telecom tower industry during 2015 was the acquisition of Viom Networks by ATC in October 2015. The latter signed a definitive agreement with Tata Teleservices Limited, SREI Infrastructure Finance and several other minority holders to acquire 51 per cent stake in Viom Networks in a deal valued at Rs 76 billion. Considered to be the telecom infrastructure industry’s largest merger and ATC’s biggest acquisition, it will result in the combined entity having a total of about 56,000 telecom towers across India. The merger has catapulted ATC to the forefront of the segment, alongside the likes of Indus Towers and Bharti Infratel.

In May 2015, ATC had acquired KEC International Limited’s assets in Chhattisgarh, Meghalaya and Mizoram. The Viom merger will allow the company to nearly triple its footprint and tap the opportunities presented by future 3G and 4G technology deployment moves by various operators. For Viom, the deal shows a way of surviving the competitive Indian landscape amid heavy operational expenditure.

Consolidation is much needed in a sector where high energy expenses, along with increased instances of tower sealing, have left small independent players in debt. Reliance Communications (RCOM), for one, is looking to completely exit the telecom tower business to focus on its core wireless offerings and reduce its debt burden. It has already signed an agreement with private equity firms TPG and Tillman Global for selling its telecom tower arm, Reliance Infratel. The deal, which is subject to regulatory and other approvals, is reportedly valued at Rs 300 billion. Reliance Infratel currently has around 44,000 towers and 100,000 km of optical fibre, which are expected to be sold for Rs 220 billion and Rs 80 billion respectively. RCOM will continue to be the anchor tenant for its telecom towers.

Similarly, heavy debt has forced infrastructure service provider GTL Group to plan an asset sale. As per industry reports, it is looking to sell the operations and maintenance parts of its 28,000 towers, and is also open to diluting promoter stake and forming joint ventures. In addition, Idea Cellular is planning to sell its independent towers for Rs 75.8 billion. It has attracted the interest of telecom tower companies like Bharti Infratel, ATC and Malaysia-based Axiata, which owns equity interest in Idea Cellular.

Meanwhile, the cabinet has approved the government’s proposal to hive off Bharat Sanchar Nigam Limited’s (BSNL) towers into a separate company in a move aimed at realising the value of the operator’s assets. This decision was made in view of BSNL’s failure to generate any profit from sharing assets with other telecom service providers. With these possible stake sales, the segment is set to reorganise itself and improve cost efficiencies.

Policy environment eases but challenges remain

It was a mixed year for the segment on the policy and regulatory front. The issue of call drops was fiercely debated, and it brought the tower industry’s role into sharp focus. While the government pulled up telecom service providers for the deteriorating quality of service (QoS), operators blamed the increasing call drops on the lack of mobile towers. A significant reason for the shortfall is the increasing public concern over electromagnetic field radiation (EMF) from base transceiver stations. Even though India has one of the most stringent EMF standards in the world, the general public continues to be wary about new tower installations. The struggle to put up additional towers is leading to an excessive burden on existing infrastructure and worsening QoS.

However, a number of positive developments are expected to ease this situation. In a discussion paper released by the Telecom Regulatory Authority of India (TRAI) in November 2015 to analyse call drops, the regulator noted that mobile towers did not have unlimited capacity for handling network load. Hence, there was an urgent need to increase the number of towers for catering to the growing subscriber base.

An encouraging step in this regard was the Kerala government’s decision to permit service providers to lay optical fibre and set up ground-based masts and rooftop towers on government land and public buildings across the state. As per the order, any licensed telecom service provider or infrastructure provider will be allowed to use government land and buildings for the above-mentioned purposes by paying a certain amount of lease rent. The central government is also planning to allow telecom companies to install mobile towers at 155,000 post offices across India. The telecom ministry has discussed this issue with the Department of Posts (DoP) and asked it to prepare a roadmap in this regard. Thereafter, the telecom companies and DoP will work on rent charges and other aspects. This comes after the Department of Telecommunications (DoT) and the Ministry of Urban Development gave in-principle approval to the installation of telecom towers on government buildings. In addition, the South Delhi Municipal Corporation allotted rooftops and open areas of 102 buildings to telecom companies for tower installation through an e-auction. The minimum rent for the towers is Rs 60,000 per month, along with a one-time fee of Rs 500,000. Earlier, Delhi’s telecom companies and three municipal corporations had been involved in a dispute over the latter’s decision to increase the one-time licence fee for tower installation from Rs 100,000 to Rs 500,000.

Meanwhile, in October 2015, the Delhi High Court asked the city’s municipal corporations to immediately deseal those mobile towers for which cellular operators have valid licences. The directive was issued in response to an application by a telecom company and the Cellular Operators Association of India, which claimed that around 130 mobile towers had been wrongly sealed.

In a similar move, in December 2015, the Himachal Pradesh High Court dismissed all petitions filed against the installation of mobile towers in the state after several residents expressed concern about the health hazards caused by tower radiation. The court, however, observed that people had been living amid several types of rays, including ultraviolet rays, and added that X-rays were more harmful than those emitted from mobile towers. However, in the same month, the Municipal Corporation of Gurgaon banned the installation of new telecom towers after mobile operators failed to provide details of their location, radiation levels and fees.

Such inconsistencies in the policy regime have added to the woes of the tower industry. According to the Tower and Infrastructure Providers Association (TAIPA), the regulations of many state governments are not aligned with DoT’s mobile tower installation rules, a fact that is adversely affecting telecom networks.  TAIPA has asked DoT to make it mandatory for state governments to include the latter’s rules in their tower regulations.

Energy management challenge

Apart from the difficulties involved in setting up new towers, the industry has to deal with energy management at existing sites. The absence of grid power at the majority of tower sites has forced companies to rely on diesel to such an extent that diesel costs are a significant part of the overall operational expenditure. Diesel consumption will only increase as more operators expand networks and launch 4G/long-term evolution services. However, there is public and regulatory pressure to reduce energy consumption and pollution at telecom towers, especially from diesel generators. This has led tower companies in India to adopt alternative and renewable sources of energy, with many testing towers run on technologies like solar photovoltaic cells, fuel cells, biomass and biofuels. For instance, Indus Towers has a total of 115,000 towers, of which around 40,000 are diesel-free sites and close to 50,000 operate without ACs. The company claims that green initiatives have helped it reduce energy costs by more than 40 per cent and diesel consumption by 37 per cent in the past four years. Its investments in green initiatives are estimated to touch Rs 5 billion during 2015-16. Similarly, in September 2015, GTL Limited awarded a contract to UK firm Intelligent Energy for supplying energy management services across more than 27,400 telecom towers in India. Intelligent Energy uses fuel cells to power telecom tower sites.

Though tower companies have begun adopting renewable energy sources in their energy mix, meeting the DoT requirement of increasing the proportion of hybrid-powered tower sites to 75 per cent in rural areas and 33 per cent in urban areas by 2020 is a formidable challenge. This is because hybridising a tower site involves significant capex, which is not desirable in a scenario where tower companies are struggling to meet their operational expenditure requirements. To ensure the mass implementation of green technologies, the government will have to look for ways of providing financial aid to tower companies.

The way forward

The growth of the tower industry is directly linked with the telecom services industry. As the latter is going through a data revolution, the tower industry will need to innovate to keep pace with the changing needs of operators, which are looking to invest in small cells and Wi-Fi for meeting data requirements. According to an analysis by Deloitte, tower companies will have to start interacting with new ecosystem partners like Wi-Fi providers, cable players and other emerging solution providers apart from existing telecom and equipment companies. Indus Towers, the leading player, has taken a step in this direction by securing a contract with the New Delhi Municipal Corporation (NDMC) for setting up digital networks across NDMC areas. As per the contract, Indus Towers has to equip 3,000 light poles with 2G, 3G or 4G technology over a span of three years. This project will help create common infrastructure that can be shared by multiple telecom operators for providing mobile and broadband services in Delhi. The poles will be upgraded with LED lights, CCTV cameras for video surveillance, Wi-Fi access points, and optical fibre networks to backhaul telecom traffic.

In India, operators are expanding network coverage by rolling out next-generation 4G networks and increasing their 3G presence. According to Deloitte, the increasing data usage is expected to make the stand-alone data tower segment expand at a compound annual growth rate (CAGR) of about 125 per cent till 2019-20, while other towers are expected to grow at a CAGR of 1.89 per cent. However, this growth can be realised only if the debt-heavy tower industry has access to sufficient low-cost funds. To address the situation, TAIPA has approached the Ministry of Finance for allowing tower companies to raise low-cost funds through tax-free bond issues. The industry association feels that this will help them increase infrastructure investments and reduce debt.

Given that the tower industry has a pivotal role to play in the telecom sector’s growth, it is essential that sufficient attention is paid to improving the state of the telecom infrastructure segment.

 
 
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