Case study: the launch and expansion of TowerCo of Madagascar

Laurent Roineau joined incumbent fixed line operator TELMA as CTO shortly after privatisation at the end of 2006, launching Madagascar’s third mobile network, rolling out 250 GSM sites and upgrading others wireless transmission technologies (satellite and microwave). Laurent subsequently became deputy CEO at Electricity of Madagascar, where he re-organised the maintenance of passive infrastructure, before becoming General Manager of TowerCo of Madagascar in November 2011.

TowerXchange: Please tell us about the evolution of TowerCo of Madagascar.

TowerCo of Madagascar is financed by two major private equity shareholders. We setup the company processes, and led the recruitment of most of our 30 employees. We acquired 50 sites in late 2011 via a sale and leaseback transaction with incumbent operator TELMA. Transferring the towers to an independent towerco created the opportunity to develop co-location services for a portfolio of mostly urban towers, with the potential to achieve high tenancy ratios.

So TowerCo of Madagascar was not a green field operation, but we subsequently have ongoing exploitation and build-to-suit activities to setup new sites for TELMA and have nationwide co-location contracts with Airtel, Orange, Gulfsat and several broadcasters to develop usage of the portfolio.

We rolled an out 50 additional sites in 2012, taking our current tower count to 100 at the end of 2012, and in the next 18 months will rollout over 100 more sites. Those additional towers consist of an order for 32 additional build-to-suit sites for one operator, as well as two projects in which TowerCo of Madagascar is working in consortiums for PICOM with World Bank funding; one to build 21 sites in the southeast of the country, and another to build, operate and own broadband transmission infrastructure between Tulear and Mahajanga, for traffic collection and potential connection with two submarine cable landings.

TowerXchange: What are the core capabilities managed in-house by TowerCo of Madagascar, and what is outsourced?

We have three core activities; the promotion and sale of capacity on our infrastructure sites, the rollout of new build-to-suit sites, and the quality monitoring and optimisation of power consumption. We also have support functions in finance and in legal, for customers and suppliers.

The breakdown of capex for a new site is typically 60% infrastructure, 40% energy. TowerCo of Madagascar are pushing a power saving approach with our operator partners, enabling us to offer lower cost lease rates and reduce our own capex and opex. While 97% of the initial 50 sites we acquired from TELMA were connected to the grid, many of our new build-to-suit sites, including those funded by the World Bank, are in isolated rural areas where we’ve deployed solar and some wind power with a longer term payback, and agreed a different fee structure with the operators.

While TowerCo of Madagascar uses in-house project managers to oversee the acceptance of sites, site deployment is 100% subcontracted. We think it’s important to ensure a high level of externalisation of non-core activities, but if an activity is not done correctly by a subcontractor, we internalise it. Exploitation is 95% externalised with KPI close monitoring - TowerCo of Madagascar maintain a procurement and performance management role to ensure best in class service delivery.

TowerXchange: It sounds like TowerCo of Madagascar almost has two business models - an urban business with a relatively conventional tenancy leasing business model, and a rural business extending coverage and transmission. How does the management of those portfolios differ?

We have three distinct strategic approaches - one for urban towers, one for rural build-to-suit sites and a third for the sites we’re building as part of the consortium funded by the World Bank.

Our urban strategy is affected by the current political crisis in Madagascar, which has meant investment in 3G broadband has mostly been delayed. For now we are largely meeting our clients’ needs using our existing infrastructure - less than 5% of our new site rollout is in urban areas. However, with the international community pushing for elections before the end of this year, this may unfreeze economic development and broadband requirements. With the expertise TowerCo of Madagascar has developed in co-location sales, multiple technologies and the optimisation of site infrastructure utilisation and power usage, we’ll be well placed to catch wave of new site requirements for 3G.

When managing our rural build-to-suit programme, it’s important to only setup new sites where there is full potential for co-location. We never setup a site when there is any concurrence in location. If one of our client operators requires a site at a certain grid reference, if there’s an existing site between 200m and 3000m from that proposed new site, then the existing site is raised to the customer as having the potential to accept their tenancy.

It is a delicate balance to encourage co-operation and tower sharing between operators to optimise capex. We have internal framing protection rules and are cautious to protect the confidentiality of our customers.

Whenever we setup a site with a real co-location opportunity, the initial structural design has capacity for the equipment of two operators, but the energy systems are adapted to the requirements of just the first tenant, typically with a small margin of +20% to ensure flexible “time to market” capacity expansion for the tenant.

Our third strategic approach helps us optimise the deployment of public and World Bank funds. The structural and energy capacity of sites built under our World Bank contract are defined by a Public Private Partnership agreement. The agency that manages the project is called Projet d’Infrastructure de Communication pour Madagascar (PICOM), and we bid for the infrastructure part of a tender that they issued as part of a consortium together with construction company Camusat and Madagascar’s three leading operators, Orange, Airtel and TELMA. With the three operators engaged, we are able to anticipate the needs of those operators and avoid building sites that might remain unused, and we’re able to consolidate revenue generated from these rural and deep sites to get the right equilibrium of capex, opex and lease rate pricing.

TowerXchange: How do you select and finance energy solutions for off-grid sites?

So far we’ve used a capex model for the rollout of energy solutions, rather than using an opex or ESCO model. We are trying to optimise procurement, managing an integrated “home made” scheme but mixing suppliers to achieve the best solution technically and economically. Our batteries come from Europe, our regulation systems come from electric power equipment suppliers, and our PV usually comes from an efficient and reliable supplier in Asia, and it’s all 100% fully certified in terms of IEC requirements.

The reason we’ve used a conventional capex model for energy is because the current economic situation in Madagascar means local financing is not easy to find and is expensive, so leased solutions for energy will incur substantial financing costs.

We monitor each solution to measure the return on capex capital deployed and to optimise opex - when you put heavy capex into solar, usually the opex is low. Maintenance is 100% subcontracted, with different fee schedules depending on distance to the site.

TowerXchange: How does the tropical climate in Madagascar affect your operations?

The climate pre