State of Telecom Industry in Pakistan

Looking at the comments on this site about “tower sites for sale” it appears that cell phone tower related  business transactions are a major contributor to the telecom sector in Pakistan. And this seems to be true for Asia in general. I came across this article from Financial Express, India:

Ugly steel towers, with oblong boxes stuck on their sides. No brand ambassadors and no branding either. But, as mobile telephony majors rush to expand their network across India, the 15-metre tall towers that pick up and relay signals from one place to the other are becoming one of the hottest business activities in the information and communication space. Even a year back, few among investment bankers would buy the idea that passive infrastructure like towers could create value for the shareholders of telcos. New technologies like WiMax could today add to the bonanza and widen the scope of the passive infrastructure business. The towers in future will not only be rented by GSM and CDMA service providers, but also telcos who adopt WiMax technology. With 1,20,000 tower sites in the country and a demand for a pan-India telecom footprint extending beyond the semi urban landscape, there would be an increase of at least 200% in the number of sites, industry people say.

Investments to the tune of Rs 66,000 crore wil be required for setting up an extra 2,20,000 towers over the next three years, going by the current cost of Rs 30 lakh for a cell site, according to estimates from Cellular Operators Association of India (COAI). If the number of wireless subscriber base in India is to reach 577 million by the end of 2017, the network would require 3,75,000 towers, given an average tenancy of 2:1, say Kotak Institutional Equities Research estimates. First, it was the third party independent service providers like GTL Infrastructure, who sensed a business in creating the passive telecom network. GTL hopes to have 25,000 towers in the country by 2011. At present, its towers are rented by five operators in several places, mostly in non-metro cities and semi-urban areas. And their business model does not stop at GSM and CDMA telecom service providers. “We hope that in future, internet service providers (ISPs) and WiMax vendors will also rent our towers,” says Rupinder Singh Ahluwalia, executive vice-president of GTL. Their plans include use of land near the towers to set up communication kiosks for e-governance, wherever there is an opportunity. Rolling out infrastructure in one of the world’s fastest growing telecom market requires heavy investments.

Tata Teleservices Ltd (TTSL), for instance, is rolling out mobile infrastructure in two new circles-Assam and North East. “We will be investing around Rs 300 crore for building the infrastructure and a major part of it will be for putting up the telecom towers,” says the company’s eastern region head, Sanjeev Khera. The newly-formed tower company, Wireless TT Info Services Ltd (WTTIL)-a 100% subsidiary of TTSL-will set up the tower infrastructure in the North East and Assam. One of the future sources of revenue for WTTIL will be sharing its tower infrastructure with the other service providers both present and the new license applicants. Khera’s senior colleague, Anil Sardana, managing director of TTSL, has already been talking about a definite road map for the tower company. TTSL will have 10,000 towers by March 2008.

It is planning to divest up to 49% stake in the new entity and the process of divestment is at an advanced stage. “TTSL has appointed investment bankers and has received a huge response from around 30 players. The disinvestment process is expected to be completed in six months,” says Sardana. A few years back, erecting, functioning and maintenance of the towers were the sole responsibilities of the mobile service providers and like ATMs in the banking, infrastructure was captive and there was no sharing. But everything changed when telecom service providers started sharing the infrastructure because of the lack of space in cities, need to have faster rollout and to minimise the capex cost. The telecom subscribers’ boom and the need to have connectivity beyond the semi urban boundaries and in inhospitable terrain have changed the entire telecom infrastructure business. One has to read the analysis prepared by the equity research analysts either for their telecom clients, third party tower companies or independent industry estimation to see the quantum of the business that waits for those who want to set up telecom towers and rent them to the telecom service providers. The economics of the tower business is not too complex.

The capital expenditure of setting up a tower is around Rs 30 lakh. The average rent every month is Rs 35,000. So if there is one tenant, the break even will happen in 10 years, with two tenants, it is 7 years and for three tenants, 5 years. The result is that, in the last one year, all the top telecom players, except the public sector Bharat Sanchar Nigam Ltd (BSNL) have spun off their tower business into a separate entity. While creating separate businesses, the aim of the service providers is to create a capex savings, unlock the value for the shareholders as well as improve EBITDA margins through sharing of towers. Will the new cost equation, saving close to 20% of ownership costs to telcos, bring in goodies for mobile subscribers too? According to Bharti Enterprises managing director Akhil Gupta, when the mobile operators are talking of passing benefits to the customers, it includes two kinds of benefits. “First, it will expand coverage very quickly, especially to the rural areas.

Secondly, tower sharing brings down operational costs for the operator,” says Gupta. He believes that it is for the individual operators to decide how and when they pass the benefits to the consumer. Sardana of TTSL says service providers would like to monetise the assets and plough the cash into the core business of providing mobile telephony service. “Sharing of infrastructure reduces both capital and operating costs for mobile service providers, and with this we would like to optimise our operational efficiencies,” he adds. So while Reliance Communications Ltd created a 100% subsidiary Reliance Telecom Infrastructure, Bharti, Vodafone and Idea have agreed to merge their towers in 16 circles, where Vodafone has its operation. Indus Towers-the new company with a 42:42:16 shareholding pattern-will manage the passive infrastructure business for these telecom companies for 16 circles.

But, in the rest of the seven circles, Bharti will build the infrastructure through its 100% subsdiary Bharti Infratel. Gupta says Bharti, Idea and Vodafone are just promoters of Indus Towers. “They won’t get any special benefits as the towers will be shared with all operators, including CDMA players, on a non- discriminatory basis. And we are expecting a good response,” he asserts. The Indian telecom service providers have developed a unique business model for creating the passive infrastructure, hiving off of tower business into an independent unit and selling a stake to interested parties. While companies like Bharti do not have any immediate plans of sharing other kind of passive infrastructure, independent companies like GTL have plans to diversify to other areas of wireless applications to encash more revenue opportunities. Sardana sees the future in more involvement of the foreign companies in the telecom infrastructure services. The foreign investment rules in the telecom infrastructure services allow 49% FDI without any prior approval and 100% with approval from the Foreign Investment Promotion Board. “We can expect an increasing number of foreign players to enter the Indian market with their expertise in handling the telecom tower business,” says Sardana .