IFC’s Head of TMT for Latin America, Guillermo Mulville is based in Buenos Aires and has an in-depth knowledge of Argentina’s dynamics. Much has changed since President Macri came into office and his attempts to re-open the doors to international investors are being positively perceived. However, the country still has to prove itself and in this analysis, Guillermo shares with TowerXchange readers insights into its telecom sector, MNOs’ investment plans and potential for the creation of an independent tower market.
Argentina has the fourth largest population in Latin America and is the third largest economy after Brazil and Mexico, representing around 10% of Latin America’s GDP. The local mobile telecom sector accounts for less than 4% of the country’s GDP, indicating that there is strong growth potential.
The new Government is actively working to improve the business environment and to re-build external relations. In just a few months, President Macri’s administration has liberalised the foreign exchange market, devalued an appreciated currency, and reached an agreement on the long-standing dispute with sovereign debt hold-outs, opening up the international capital markets to the corporate sector.
However, resumed economic growth is only expected for the second half of the year. Inflation remains stubbornly high and the Government is taking a gradualist approach to addressing the huge fiscal deficit it inherited from the prior administration. In the telecoms sector, the Government has appointed very professional and committed teams at the ministerial and regulatory levels in order to tackle the challenges ahead.
At IFC we are very bullish on the country and its telecoms sector. The recent spectrum auctions, added to the new political and economic environment, provide the ingredients for a new phase for the sector following a long period of underinvestment. Approximately US$9bn of investments are now expected by MNOs in the next five years.
Carriers - what’s changing and why?
The new authorities took the immediate decision to merge the sector’s two regulators, AFSCA and AFTIC, into the National Entity for Communications (ENACOM). And last month, ENACOM received congressional approval to begin a reform of the Digital Argentina Law which was passed in 2014. The new context is expected to promote convergence and competition, and eliminate discretionality.
MNOs had been starved for spectrum for many years. Economic mismanagement under the Kirchners affected investments, resulting in serious QoS issues as MNOs were ill-equipped to deal with increased traffic.
The allocation of 4G spectrum in 2015 was well-received by MNOs, which ended up paying a total of US$2.2bn, 13% above the base price. While capacity and QoS are improving, the new phase of infrastructure deployment has only recently commenced. Mobile broadband investments will be key. According to GSMA, current 3G and 4G subscriber penetration will increase from 37% to 56% by 2020. This context provides for a favorable outlook for infrastructure sharing business models.
Argentina’s mobile market has a structure which should also favor infrastructure sharing. SIM penetration is around 140%, with 90% of unique subscriber penetration and over 28mn mobile broadband connections. Blended ARPUs, even after the recent devaluation, stand above US$7. Market share is evenly distributed between the three main operators: Claro (América Móvil) with 33% of market share, Movistar (Telefónica) with 32% and Personal (Telecom) with 32%. Nextel, recently bought by Grupo Clarin’s Cablevision, has a 3% market share but is expected to become more prominent once it invests beyond iDEN. But for this it will require additional spectrum.
Are towercos likely to enter Argentina anytime soon?
Argentina has over 16,000 cellular towers, the third-largest tower count in the region after Brazil and Mexico. However, practically all towers are MNO-owned. Historically, there have been many inhibitors to the development of an independent tower model. These included long periods of macro instability, limited long term financing, high inflation coupled with inadequate inflation adjustment indices, regulatory uncertainty and an interventionist government policy and high levels of perceived corruption (Argentina ranks 107th among 168 countries ranked by Transparency International). In particular, foreign exchange restrictions meant that MNOs accumulated substantial Peso-liquidity, which in a high inflationary environment with FX constraints prompted them prioritise capex over opex.
Local MNOs, previously skeptical of infrastructure sharing, now seem open to embracing the model. MNOs face accelerated build-out needs, for which they need built-to-suit partners. Without considering Nextel, we estimate that the three large MNOs will pursue a combined 1,500-2,000 new sites per year in the next couple of years alone.
Local MNOs, previously skeptical of infrastructure sharing, now seem open to embracing the model. MNOs face accelerated build-out needs, for which they need built-to-suit partners. Without considering Nextel, we estimate that the three large MNOs will pursue a combined 1,500-2,000 new sites per year in the next couple of years alone
In our view, the outlook has changed completely in just a few months, but this will not imply an avalanche of new independent tower operators until the new landscape is assimilated. So far, there have only been few announcements of signed master lease agreements, Innovattel/Torresec being the first independent tower operator to announce that they have secured BTS contracts with two of the leading wireless operators in Argentina, for which they have raised financing from Albright Capital Management.
Interestingly, the Ministry of Telecommunications and ENACOM are working with the city of Buenos Aires to make available public building rooftops for mobile antennas, helping improve capacity in one of the highest populated areas of the country. Furthermore, they are in negotiations with other municipalities to improve the tower permitting process.
The development of the sector will also depend on the continued improvement in the overall business environment. High inflation rates and still unreliable indices imply that leases will likely be US$-denominated over the medium term, which is of course beneficial for towercos but which constitutes currency mismatch risks that MNOs typically want to avoid. Also, while restrictions on future repatriation of funds has in theory been addressed, banks are wary of such risks and still require political risk mitigation, such as that provided by multilateral financiers like IFC. Taxation is another issue which may delay a faster development of infrastructure sharing. An income tax rate of 35% is particularly hefty in Sale-and-Leaseback transactions, in which the towers have been carried in MNO books at cost in an accounting context of no adjustment for inflation. Also, operational taxes, such as 21% VAT for any lease operation, a wealth tax of 1% on the book value of assets, added to gross income tax, corporate income tax and various stamp taxes, are obstacles to faster sector growth.
Finally, while we see strong interest in Argentina from many middle market towercos, the market is watching closely the decisions of América Móvil and Telefónica of creating their own infra-cos.
Country risk vs opportunity
Country risk is evidently high on investors’ minds. However, having been an outcast from the international markets for such a long time does provide interesting investment opportunities now that the Government is undertaking market friendly policies through credible and highly committed technical teams.
Agreement with the debt holdouts [Note of author: this is expected mid-April, so we assume already achieved by the time this article is published] was arguably the last impediment in terms of allowing Argentina to graduate from an “exotic market” to an “emerging market” once again. Presently, we see a short window of opportunity in which equity and debt investors can expect to obtain high risk-adjusted returns.
High inflation, high fiscal deficit and the perceived risk of repatriating funds are still worries for international investors but in our mind these risks are offset by the sectorial opportunities arising after a decade of underinvesting.
At IFC we have a long history of investing in Argentina. Our current portfolio amounts to over US$1bn, while we have mobilised additional third party funds in excess of US$550mn. The bulk of such portfolio is in infrastructure projects, with financial markets, agribusiness and technology accounting for the balance.
