During the third TowerXchange Meetup Americas, TowerXchange hosted a panel entirely focused on Argentina to discuss the current state and future outlook of the country’s telecom market as well as several roundtables looking at the investibility of Argentina, its challenges and opportunities. During the Argentina panel, we welcomed on stage four experts representing different sides of the local telecom ecosystem and we now report on key highlights and lessons learned from the panel as well as roundtables hosted during the two-day event.
TowerXchange welcomed on stage Clarisa Estol, now Secretary of Investment Promotion within the Ministry of Telecommunications of Argentina, who has previously held various relevant roles within the private sector - as President of Banco Hipotecario among others - and is the first government representative publicly speaking at a TowerXchange Meetup.
Representing the towerco sector was Juan Cueria, well known to the TowerXchange’s community and currently VP and COO within Innovattel/Torresec, a build-to-suit towerco active in Argentina (as well as Colombia, Peru, Ecuador, Panama and Puerto Rico).
On the banking/investment side, TowerXchange invited on stage Miguel Ángel Arrigoni, President of Argentinian consulting and investment firm First Capital Markets and Gonzalo C. Arauz, Investment Officer TMT & Venture Capital within the International Finance Corporation.
Good time for a change
The new Argentine government took office in December 2015 and inherited a country in a very bad state. Since its assignment, the government has been working extremely hard to address crucial issues such as the fiscal debt, debt holdouts, restrictions in terms of both import and export, and heavy subsidies, while setting the ambitious goal to reduce inflation to a single digit in four years.
And if April 2016’s inflation rate rise was the highest in fourteen years (at 6.9% vs 3.1% in March), the jump was mostly due to the elimination of both energy and transportation subsidies in the greater Buenos Aires region.
The new government is well aware of the challenges ahead and has appointed Alfonso Prat-Gay as Minister of Economy. Prat-Gay is a forex expert who headed the National Central Bank from 2002 to 2004, when he won the Euromoney Central Bank Governor of the Year award after having reduced inflation from 40% to 5%, with an economic growth of +8%. And he isn’t the only business-minded leader appointed by Macri who chose Juan José Aranguren, former President of Shell Argentina, to lead the Ministry of Energy.
A country in need of towers
While dozens of towercos wait for “the right time” to make a move in Argentina, Innovattel entered the country before the 2015 elections and shared with the audience a few highlights of its journey.
In fact, while the BTS firm already knew most of the telecom players in the country, a strict financial due diligence was needed prior to its operational launch. For this purpose, Innovattel hired financial advisors who suggested that market was eventually going to open.
Since then, Innovattel has established its presence in the country and started working on build to suit (BTS) projects for two leading operators. Another towerco, Tower 3, reportedly owns forty sites in Argentina but TowerXchange is yet to make direct contact with its executives.
According to Innovattel’s Cueria, operators in Argentina can barely handle the very high demand for extra capacity and new coverage and towercos are the obvious answer to the problem. But while Innovattel can enjoy a certain degree of first mover advantage when it comes to negotiating terms with operators and contributing to shaping up a towerco-friendly environment, they also faced the challenge of raising capital in a virgin market with such a troubled past.
while Innovattel can enjoy a certain degree of first mover advantage when it comes to negotiating terms with operators and contributing to shaping up a towerco-friendly environment, they also faced the reality of raising capital in a virgin market with such a troubled past
The encounter with Albright Capital Management - as explained by Cueria - was very timely as the firm had previously invested in the energy sector in Argentina and agreed to grant a five-year term US$45mn facility to the BTS firm.
On this note, Arauz commented that the IFC started looking at the potential of the tower business in Argentina eighteen months ago and since then so much has already changed: operators are definitely feeling more pressure and working harder to density their networks. However, while some short term concerns are less worrying, the overall long term scenario still needs to improve, especially when it comes to the financial landscape.
One of the crucial issues that will ease the entrance of new towercos in the country is the improvement and simplification of the regulatory and permitting landscape. Innovattel has been very vocal since its arrival in Argentina with regards to the gaps in the system and what would be needed for the landscape to improve. And Cueria commented that so far, authorities have been very receptive. The necessity for coverage and capacity is a crucial issue in the country with as many as 4,600 subscribers per site and by simplifying its framework, Argentina will be able to attract more investments from the private sector, including mobile network operators.
Greenfield projects encounter a certain degree of limitation, especially since municipalities retain a lot of power in terms of permitting. With call drops rife, the ever growing demand from society in terms of improved QoS is likely to gradually change the attitude of municipalities towards permits and greenfield projects.
According to Estol, the key is moving in the right direction rather than too fast and the Ministry is now working closely to same-party members of various municipalities to address permitting issues. A pilot project with the Buenos Aires’ municipality has already started, favoured by the fact that Macri used to be the city Mayor and has given up its role in favour of his vice after the elections.
Experts within the Ministry and other relevant bodies have been meeting every two weeks to draft a new telecom regulation which is now ready for approval by the Congress. Estol added that every other meeting includes stakeholders from the industry.
Estol highlighted that the government created the Agency for Investments Promotion with the main goal to attract foreign and private investors in Argentina and the Agency is now pushing for a law to stimulate public–private partnerships (PPPs) that could further contribute to new initiatives in the country.
The Ministry is now focused on avoiding mistakes that other countries have made and skipping any intermediate phases to create a solid regulatory environment. In order to involve all relevant parties in the process, they are holding meetings with potential investors and operators.
There are approximately 15,000 towers in Argentina, but the country is immense and networks as they stand haven’t been able to cope with the ever growing demand for coverage and capacity. According to Cueria, each MNO has approximately 4,000 new sites planned over the next two years, an aggressive rollout that simply cannot be realised without the help of third parties especially since the local telecom industry has the capacity to build a maximum of 500 towers per year!
Innovattel noted how MNOs have so far been receptive to the idea of consolidating parallel infrastructure, but the paradigm is still shifting and some players retain a more traditional view of building their own sites as a competitive edge. In spite of operators needing the help of towercos, Innovattel admitted that its entrance in the market wasn’t easy and its first rings were sites where operators had struggled for ten years.
Argentina needs as many as 25,000 new towers to improve the quality of service which continues to lag other CALA nations due to the lack of investments. At 500 new sites per year, it would take operators about twenty years to reach acceptable standards! With three players, Claro, Movistar and Telecom Argentina, enjoying similar - and very healthy - market shares (around 30%) and without a strong push from the regulator, not much has been done to improve the QoS even in Buenos Aires.
Taxation, indexation and inflation all pose challenges to tower sales
While the pace of build-to-suit activities is likely to pick up in the very near future, questions remain with regards to how fast operators can commit to selling their tower portfolios. In fact, as noted by Arrigoni, the sale of towers in Argentina is hindered by the high level of taxation: 35% capital gains tax among others. That said, Arrigoni continued by discussing the National Trust Law which includes a very attractive tax treatment for foreign investors.
Specifically, the structure of the trust law is similar to that of the U.S. securitisation law, which makes it a very strong tool in terms of its judicial safety. Investing via a trust structure means that the investor owns mezzanine bonds and is allowed to pay interest and dividends without having to pay withholding taxes.
IFC’s Arauz added that the IFC has been discussing tower sales with MNOs for over five years and other factors that stopped them were the impossibility to repatriate funds as well as the devaluation of the local currency. Now these restrictions are fading, while their capex is increasing, so MNOs might be more open to the idea of transferring towers to fund network deployment.
Both IFC and First Capital Markets highlighted their openness to lending capital to international businesses looking at entering Argentina.
Indexation is illegal in Argentina and while a way around it could be to re-negotiate contracts annually, this solution might not be ideal for listed entities and their long term investors. Even if able to index, high levels of inflation would still require towercos to possibly re-negotiate contracts every six months so the goal of reducing inflation is of primary importance
Another crucial limitation with regards to doing business in Argentina is the impossibility to index contracts to inflation. Indexation is illegal in Argentina and while a way around it could be to re-negotiate contracts annually, this solution might not be ideal for listed entities and their long term investors. Even if able to index, high levels of inflation would still require towercos to possibly re-negotiate contracts every six months so the goal of reducing inflation is of primary importance and a priority according to Estol.
Arrigoni stressed the fact that contracts can be negotiated in US Dollars and since the government has freed mobile network operators to raise their tariffs, this might contribute to their acceptance of contracts negotiated in US Dollars.
The tower industry needs certainty and continuity
While Argentina has embarked on a completely new journey, politically and economically, questions remain with regards to its ability to ensure continuity after the Macri’s government. Arrigoni stressed that Argentina is going through deep and radical changes that are affecting the entire society. However, via the elections Argentinians have chosen to address these macro-economics and social problems and are tolerating some much needed but tough adjustments. And even if Macri were not to be re-elected at the end of his term, the opposition seems to be relatively aligned with his forward-thinking approach.
Wrapping up, Arauz summarised the key steps the government is working on, including the much needed solution of the holdout bonds crisis, issues related to its forex and the elimination of subsidies and subsequent adjustment of tariffs. The latter was never a popular move but, in spite of some resistances, the popularity of the government didn’t decline after it. In his own words “Argentina is in need of drastic solutions after years of reckless attitude towards the economy.”
Disclosing some of their future plans, Innovattel expects its Argentinian tower count to rise to approximately 500 sites by next year. Cueria lived in Argentina for eleven years and noted how the country has a long history of ups and downs and is now entering an “up” phase which Innovattel is planning to take full advantage of.
Thanking panellists for their participation, TowerXchange highlighted how the presence of a government representative at the event spoke volumes about the country’s commitment to change and to opening up to international investors from the telecom tower sector and beyond.
In spite of a certain degree of enthusiasm and a very promising future, we always need to remember that the tower industry operates a long term business which requires a high degree of certainty to function. Building a tower and investing in infrastructure is a solid game based on long term planning and in order to succeed in Argentina, towercos are likely to need some further reassurance which TowerXchange is optimistic will soon be offered.
