Colombian towers – an under-explored opportunity

Experienced tower industry lawyers Norton Rose Fulbright turn their analytical eye upon the emerging Colombian tower market. London based Partner Daniel Metcalfe, who will be a familiar face from TowerXchange Meetups, joins Senior Associate Pablo Jaramillo from their Bogota office in an analysis which reveals a highly investible Colombian tower market.

According to the latest studies conducted by the Colombian Mobile Industry Association “Asomovil”, Colombia is experiencing a significant increase in the consumption of mobile internet services. With the falling prices of smart phones and tablets, it is expected that the number of users will continue to grow exponentially. Currently, tablets and smart phones account for more than fifty percent of the mobile communications market in Colombia, leading to very substantial data demand in a country which combines a vast geographic area (approximately 1,000,000km², approximately four times the size of the United Kingdom), that accommodates parts of three major mountain chains (with many areas well over 1,000 metres over sea level), and a scarcely populated vast expanse that accounts for almost half of the country. These geographical characteristics combined with a cellular penetration very close to 100% (with more active mobile lines than inhabitants) and an operator mix of three large international players dominating the market together, with six other small operators accounting in aggregate for 7% market share, provide a very attractive opportunity for tower companies to exploit an emerging market with great potential.

Until very recently, the construction and installation of telecom towers in the Colombian market was not an attractive business for specialist infrastructure investors. In fact, towers were usually owned and operated by the mobile network operators themselves. Vertical integration was the preferred MNO model and as such the space for towercos in the market was extremely limited. However, the development of regulatory innovations, including the obligation of MNOs to allow access to tower space to competitors, has greatly changed that position and has begun to shape the market in a way that is similar to the standard of European markets, with specialist tower companies owning and operating the infrastructure whilst MNOs focus on sales, customer service, marketing and distribution. A defining transaction was the sale by Tigo, the third largest mobile network operator in Colombia, controlled by international conglomerate Millicom, of 2,162 telecommunications towers to American Tower’s Colombian operation, ATC Infraco in 2011, for US$182mn.

The Colombian telecoms market has a series of characteristics that make it a potentially very attractive investment for foreign tower companies. In addition to a surging demand for towers driven by mobile usage and technological advancement, and the geographic characteristics which necessitate a greater proliferation of towers to service the population, those advantageous characteristics include the macro-economic circumstances of the country, the network provider mix as referenced above, and the new regulatory framework regarding tower construction.

From a macro-economic point of view, Colombia has recently been perceived as one of the most attractive developing markets for foreign investors into the telecoms sector. A very stable political and legal regime, combined with an increasing consumption capacity, have been key in the enhanced appeal of the jurisdiction. In addition, a very strong devaluation of the Colombian Peso during the last year (from approximately COP$1,700/USD to aroundCOP$2,700/USD) provides for cheaper acquisition and development costs for international investors.

Most telecoms towers in the country are still either owned by the incumbent international MNOs (Comcel, controlled by Mexico’s América Movil, and Movistar, a subsidiary of Spain’s Telefónica) or the mid-sized Colombian network operators. As such, there are still significant opportunities for towerco acquisition through divestment strategies of the operators.

Towers and network demand are currently concentrated in the major cities and urban areas. However, mobile usage in rural areas has significantly increased during the last few years due to the Government´s initiative to bring internet to the most remote places of the country. In excess of one trillion pesos has been invested into the connectivity of rural areas since 2013. Furthermore, all network operators in Colombia are already offering 4G services to customers, although such technology is not yet available outside the main capitals and productive centres of the country. This technological advancement will drive a demand for the densification of tower networks and the addition of equipment to existing 2G and 3G sites.

The Colombian legal and regulatory framework also encourages the tower company model. In order promote accessibility to telecom services in every region of the country and the efficient use of infrastructure, the Communications Regulation Commission has issued various resolutions to provide solutions for the lack of antennas and towers available across the national territory.

Obligations apply to tower owners to share their infrastructure in exchange for a fee which is subject to certain maximums in accordance with the legislation^[1], depending on the characteristics of the tower. There are certain exceptions to the sharing obligation, for example if there is a lack of feasibility from a technical or physical perspective, but the broad application exists. There are no regulatory restrictions that limit the participation of foreign capital in the telecom service market, and, as in most other industries, there is no minimum threshold of national ownership for MNOs or tower companies. Investments made by foreign companies are treated on the same basis as investments by domestic persons.

A third element of the regulatory framework that makes the Colombian tower market attractive for foreign investors is the new law of security over movable assets, pursuant to which securities granted by the tower companies to their lenders (although the law applies across sectors) can be registered quickly and efficiently (and at only notional cost) in a public system. The purpose of the registry is to ensure that the creditors, whose loan benefits from the relevant guarantees or security, will have seniority as against other creditors in a liquidation or other insolvency process. The public visibility of the records will also guard against malpractice by companies in offering competing security to other credit providers.

However, Colombia is not without its challenges. The first issue with the Colombian legal regime for tower companies lies in the lack of a unified legal framework that specifically regulates the construction and operation of towers. Currently, the right to install these antennae is governed by the land use plans of each municipality; there is no unified national code or set of rules. Therefore, the ability to obtain relevant permits to build towers is dependent on the support of each different municipality (although this requirement for local district permitting is not exclusive to Colombia). That being said, each municipality is bound by central regulations which dictate the time period within which a permitting decision must be made (45 days from application). Despite this complication, the permits required for tower developments are relatively streamlined with only one permit being required per tower (rather than separate planning, building, and/or environmental requirements), with one exception being where antennae are constructed within space that is subject to regular air traffic, in which case tower companies may also need to meet other specified requirements established under international aeronautical standards.

A second challenge that creates difficulties for the development of tower infrastructure in Colombia is the lack of land availability within the Colombian urban centres. Although this is attractive for tower companies in as much as it drives a need to share towers, it can be an issue if operators seek to preserve competitive advantage, particularly with respect to lucrative inner city towers and therefore turn against the towerco model for these sites. This challenge has been mitigated to an extent by Resolution 4245 of 2013, which regulates the infrastructure sharing agreements between tower owners and the other operators and grants operators access to previously unavailable infrastructure. The Resolution does not assist in breaking down barriers for new urban build to suit developments however, which is adverse to the creation of a dynamic market place amongst tower companies and improvements of network capacity in these areas.

Whilst the geography of Colombia presents its advantages, these are not without counter-balancing difficulties. From a purely physical standpoint the construction of towers and antennae in certain areas of the country will require additional manpower and machinery in order to access the location and perform maintenance, and grid availability still presents a challenge for continuity of power services for towers particularly in remote rural areas. This will increase transportation and general costs, although it is notable that the towercos currently operating in Colombia have power costs as a pass through.

Although relatively minor in effect, an additional challenge for foreign investors is the complicated foreign exchange regime that Colombia has in place. The Colombian Central Bank operates an exchange regulation regime (largely for statistical and anti money laundering purposes) under which declarations on the entry of dollars and their repatriation have to be filed and registrations have to be permanently updated. Furthermore, the Superintendence of Corporations of Colombia has the authority to impose very stringent sanctions to corporations that are not in compliance with the foreign exchange regulation regime. Therefore, despite the relatively low impact that compliance with the FX regime has, investments may be deterred based on the assumption that an additional regulatory burden is placed upon investors.

The nature of the operator market, the regulatory support for the model, the availability of land, the geography of the country and the surging demand for network and data capacity all contribute towards an attractive opportunity for tower companies in Colombia.

Challenges do exist, but challenges exist in every jurisdiction and Colombia’s regulatory framework would appear to be one within which tower companies can develop their business more easily than others where a successful towerco model has already emerged.

Whilst the jurisdiction has already seen towerco activity, Colombia could be set to be the next boom market for the tower company model.

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[1] Resolution 4245 of 2013. Article 10. The provider of infrastructure, networks and/ or services of Telecommunications or the operator of television may negotiate freely the remuneration in exchange for the use of the shared infrastructure (…)

(…) Under no circumstances the remuneration for the sharing of electric infrastructure for the provision of Telecom services can be superior to the following annual figures (…)