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Towering Hurdles: Challenges in the telecom infrastructure space

February 28, 2013

Regulatory issues and declining operator margins have slowed down investments in the telecom infrastructure industry. Though the industry has matured over the past decade, infrastructure providers are still grappling with issues related to low tenancies, high energy costs, right-of-way (RoW) challenges and new radiation emission norms, among others. Considering this, the government has taken initiatives such as promoting renewable energy solutions and providing infrastructure status to the telecom infrastructure industry.

tele.net takes a look at some of the key issues and challenges faced by the segment…

Low grid power availability in rural and semi-urban areas is a key concern for telecom infrastructure providers. Due to inadequate and unstable electricity supply, telecom tower companies use diesel generators to power their towers. This is despite the fact that high diesel costs, which constitute about 50 per cent of the opex for a tower, continue to impact operators’ bottom lines. The recent partial deregulation of diesel prices, which has led to price hikes, has further impacted the profitability of tower companies and operators. As per industry estimates, such price hikes are expected to result in a financial burden of about Rs 210 billion for tower companies over the next year. Diesel pilferage at different stages of the production value chain will add to this burden.

Meanwhile, securing RoW is a key challenge in telecom infrastructure development. Companies setting up towers are required to seek multiple approvals from the regulatory authorities, which delays development. Further, each state has its own rules and regulations for granting permission for erecting towers, which results in cost escalations.

Another issue is the decline in the tenancy ratio of telecom towers following the cancellation of 2G licences. Several operators have either shut down their business or are scaling down operations following the apex court’s verdict. This has impacted tower operators who aggressively developed infrastructure in anticipation of telecom service growth. As a result, the annual revenues of tower companies from rental income are set to take a hit of Rs 25 billion. Also, overcapacity of towers would reduce rentals, further affecting revenues.

Moreover, the new electromagnetic radiation emission norms, which require companies to limit radiations from towers to one-tenth of the previous levels, means that these players will now have to compromise on signal strength in order to reduce tower radiations while new towers will have to be erected to maintain the quality of service. The cost associated with building new towers will also have financial implications for companies that already have a huge debt burden. In addition, the government has disallowed companies from installing towers in lanes that are narrower than 5 metres, and rooftop towers with multiple antennas. The Telecom Enforcement, Resource and Monitoring cell of the Department of Telecommunications (DoT) will conduct random audits of towers across the country and impose a penalty of Rs 500,000 per tower for violating norms.

The slow deployment of 3G/4G networks in semi-urban and rural areas is also impeding growth of the telecom infrastructure industry. Though operators have already set up 3G networks in urban areas, the coverage continues to be inadequate and user experience remains poor. This calls for network augmentation, but operators have shelved their network expansion plans due to uncertainties about return on investments, poor uptake of 3G services, rising debt and issues related to the validity of 3G roaming agreements.

Further, the Telecom Regulatory Authority of India’s (TRAI) recommendation to bring all infrastructure providers under the unified licence regime is unfavourable for the industry. As per the recommendation, infrastructure providers will have to pay 8 per cent of their annual gross revenue as licence fee. Currently, they do not have to pay any licence fee. Meanwhile, operators pay an annual licence fee for providing telecom services, which means that the implementation of TRAI’s recommendation could lead to double taxation as infrastructure providers will pass some of the cost to the operators. This would discourage operators to share towers, thereby affecting the tenancy ratio.

The TRAI recommendation to limit foreign direct investment in telecom tower companies to 74 per cent could also impact the industry. This would pose a major challenge for companies such as the American Tower Corporation, which holds 100 per cent stake in its Indian subsidiary. Also, the move could jeopardise tower companies’ plans to offload stakes in their business to reduce debt.

Financing remains a key issue for the telecom infrastructure industry, which has matured over the years. Investments in the industry have a gestation period of 25-30 years, which impacts investor interest. The subdued response to the initial public offering of Bharti Infratel is an indication of the unattractiveness of the industry at the moment. Also, tower companies such as Reliance Infratel have postponed the listing of their shares on the bourses several times due to the weak market sentiment.

Revival initiatives

The focus on powering telecom towers through renewable energy has been growing due to the high energy costs and carbon emissions associated with setting up towers in rural areas. DoT has directed companies to power telecom towers through such solutions. As per the department’s new regulations, at least 50 per cent of rural towers and 20 per cent of urban towers should be powered through hybrid energy sources (renewable and grid power) by 2015. Though there are concerns regarding the intermittent nature of renewable power, it is being seen as a key solution to reduce energy costs.

As per industry experts, the cost of deploying a combination of renewable solutions and diesel is lower than that of deploying only diesel-based solutions. The tower companies are ready to adopt renewable power solutions, but prefer the operational expenditure model over the capital expenditure model due to the high costs of setting up renewable energy plants. In this regard, several tower companies are collaborating with renewable energy service companies. The Tower and Infrastructure Providers Association has selected Mahindra & Mahindra and Creative Mark Engineering Solutions to set up renewable energy-based power plants near telecom towers and sell power to tower companies at a predetermined rate based on a pay-per-use model. Also, Bharti Infratel has selected OMC Power for supplying renewable power to the former’s off-grid towers and towers located in areas with poor grid access.

The grant of infrastructure status to the telecom tower industry has been a positive move. This will allow tower companies to avail of benefits such as higher limits for external commercial borrowings, lower import duties, viability gap funding and exemption from excise duty on telecom infrastructure equipment.  Tower companies can now avail of medium-term loans at 3-5 per cent interest rate from the international market instead of short-term loans at 12-14 per cent from the domestic market. Moreover, they will be provided a tax holiday under section 80-IA of the Income Tax Act. However, the associated benefit of accelerated depreciation (linked to the infrastructure status) would not result in major gains for the industry as the cost of the majority of towers has already been depreciated.

Despite these challenges, the infrastructure segment remains a key growth driver for telecom services in remote and rural areas. Going forward, government support and the transition to renewable energy solutions for powering towers are expected to drive the growth of telecom infrastructure.

Future growth drivers

The main factors that will drive the adoption of renewable energy sources in the telecom sector are:

•Expansion of towers: With urban areas reaching saturation in terms of coverage, operators are looking at Category C cities (suburban areas) for their expansion programme. As establishing renewable energy systems at greenfield sites involves fewer issues than brownfield projects, these areas are suitable for renewable energy-based off-grid systems, as the cost of land is also low in remote regions. In order to meet the TRAI mandate, operators prefer to deploy green solutions at new sites.

•Fiscal incentives: Fiscal incentives have played an important role in promoting off-grid applications. The high capex is a key deterrent for operators to adopt renewable energy sources for power. In this context, fiscal incentives may drive adoption in the initial years.

•Rising cost of diesel: Diesel is a regulated commodity in India but is likely to be deregulated in the future. Diesel prices have been increasing, and the trend will gain momentum after deregulation. With another 100,000 towers expected to be established over the next two years, the telecom industry will not only drive the demand for diesel, but will also be responsible for about 8.4 million tonnes of carbon dioxide emissions. Moreover, diesel usage involves the issue of pilferage. These challenges are likely to force operators to adopt renewable energy solutions.

•Falling costs: A decline in the prices of solar wafers, cells and panels over the past two years has resulted in lower solar project development costs. Manufacturers are starting to achieve quality and reliability standards in the mass production of these applications. There would be further innovations as the prices of technological components are declining, and entrepreneurs are studying local conditions and assessing user requirements. Since the affordability of these applications is the main impediment to their adoption, lower costs and a corresponding decline in retail prices will be critical for driving demand going forward. For instance, the cost of electricity generation from stand-alone solar photovoltaic (PV) plants has reduced from Rs 15 per kWh to around Rs 10 per kWh in the past two years, while that from diesel generators is around Rs 15 per kWh (assuming an average diesel price of Rs 36.50 per litre and the diesel consumption of a typical genset at 0.4 litre per kWh). With economies of scale in the PV module segment, the cost of developing such projects would reduce further while diesel prices are likely to increase.

Also, increasing commercialisation of off-grid applications and technological innovation by entrepreneurs are also driving down the manufacturing cost of basic solar off-grid applications.

The way ahead

Going forward, an additional 100,000 towers are likely to be established, driven by the deployment of new technologies like 3G and long term evolution. This tower roll-out will result in a high demand for diesel, which will add to operators’ opex. Though diesel prices in India have been below the cost of procurement (regulated by the government), the recent price hike and the likelihood of these prices being pegged to international market rates in the future weaken the business case for using this fuel for power generation.

Therefore, the trend of switching to renewable energy will strengthen in the coming years. The small beginnings that have been made on this front will see significant growth with more companies adopting alternative energy sources to meet their power needs. Innovations, and research and development will also play a significant role in this regard.

 
 

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