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Infrastructure Sharing: A cost-effective strategy for operators

February 28, 2013

Infrastructure sharing has emerged as one of the most efficient models for rolling out telecom towers in India. In the rural areas, in particular, tower sharing has led to vastly improved project economics. The trend gathered momentum in 2007 with the formation of Indus Towers, a joint venture between Bharti Airtel, Vodafone India and Idea Cellular. Since then, several operators have hived off their tower infrastructure into separate companies offering tower services to the industry on a shared basis. Independent tower companies like GTL, Viom Networks and ATC India have also emerged as large players in this space.

While tower sharing  led to significant benefits for operators, the payback could have been even more had the average tenancy ratio been over 2x. The current average tenancy ratio in India is 1.7x, which is 32 per cent lower than the global average of 2.5x. With growing rental and energy costs, the current level of sharing will not be able to sustain profitability in the long term. In fact, most of the tower companies are already struggling to make profits.

Further, tower infrastructure sharing needs to be balanced and optimised. Viom Networks, with one of the highest tenancy ratios of 2.4x, has a fairly unbalanced tenancy ratio across the country. While some towers are occupied by up to four tenants, some struggle to get even a single one.

Moving beyond towers

There are several models of infrastructure sharing based on the type of resources shared. These resources include active compo-nents like base stations, radio spectrum, microwave radio equipment, antennas and switches; passive components like antenna mounts, base transceiver station shelter, power supply, inverters, generators, AC and battery banks; and transmission backhaul like optical fibre and DSL for intermediate links from the site to a central station.

Of these, active component sharing and backhaul sharing are yet to be tested in India. While the infrastructure sharing regulations permit active as well as backhaul sharing, no significant efforts have been made on this front.

However, given the cost pressures and declining profitability across the telecom industry, it will soon become a necessity rather than a choice for operators to adopt these models. Also, with the increase in demand for data services, the sharing of underlying broadband infrastructure like optical fibre cable (OFC) backhaul and 4G towers will also gain traction. Network sharing will be the most cost-efficient way for operators to recover the high cost of spectrum and attain substantial data traffic volumes in a price-sensitive market like India.

In fact, the trend has already begun with the launch of the National Optical Fibre Network project. The project aims to connect 250,000 gram panchayats across the country through the laying of over 500,000 km of OFC network. This network is likely to be leased out to multiple operators who can use it as backhaul to provide wireless data connectivity.

The latest initiative in the telecom infrastructure sharing space has been taken by Bharti Airtel. The company recently acquired telecom equipment-maker Alcatel-Lucent’s 74 per cent equity share in Alcatel-Lucent Managed Network Service India, the joint venture that currently manages its pan-Indian broadband and fixed line network. The entity will now operate independent of Bharti and will invite equity participation from other players – a replication of the Indus Tower’s infrastructure sharing model in the tower segment.

“With our new innovative model, we are breaking ground in an industry that is on the verge of massive data growth. This model, along with our recently launched Network Experience Centre, will provide us greater control over the delivery of a world-class data experience to customers across our networks,” said Sanjay Kapoor, the outgoing chief executive officer of Bharti Airtel, in a press statement. The model is favourable against the current backdrop of operators trying to retain customers and encouraging them to increase their telecom service usage or avail of value-added services. As in the case of tower infrastructure, sharing of core networks will cut costs, help reduce operators’ investments and unlock value that operators could spin in independent entities.

Another emerging trend in the telecom infrastructure space is that of green sharing. With the government imposing obligations on telecom companies to reduce their carbon footprint, tower companies have to adopt renewable energy solutions and reduce their dependence on diesel. However, setting up renewable energy systems like solar photovoltaic, solar-wind hybrid and biomass entails high costs. To deal with this issue, industry players have come up with a strategy to share the cost of renewable energy systems. The Tower and Infrastructure Providers Association has already selected two renewable power developers to carry out this task.

Going forward, with the increasing deployment of data services (3G and 4G) and the expansion of telecom networks in rural areas, many infrastructure-sharing models will emerge as operators compete to roll out services in a fast and cost-effective manner.

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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