TowerXchange market study: Structuring infrastructure sharing in Bangladesh

Towercos stand poised to acquire half of Bangladesh’s 29,900 telecom towers within the next two years, creating operational and environmental efficiencies, reducing parallel infrastructure, and accelerating network extensions and QoS improvements. Market leader Grameenphone established their wholesale division and began leasing their towers in 2010, edotco entered in 2013 and now operates 8,200 towers for Robi, while Veon has carved out their towers with intent to monetise. However, the future structure of the tower market remains uncertain pending the establishment of a regulatory regime conducive to towerco investment.

With a population of around 160mn packed into a land mass just under 150,000km² (smaller than Iowa!), Bangladesh is one of the most densely populated countries in the world. According to the CIA Factbook, GDP per capita PPP was just US$3,900 in 2016, although the economy has grown at an average rate of around 6% in the last twenty years. At 73%, mobile penetration is good for such a poor country, and extends well even in rural areas, but ARPU remains among the lowest in Asia.

There are currently four significant mobile network operators in Bangladesh, with Grameenphone (GP) the market leader with 59.3mn subscribers. Telenor owns 56% of the equity in GP, Grameen Telecom Bangladesh owns 34% and the remaining 10% is traded on the stock market. GP’s network covers 99%+ of the population, with 12,000+ 2G sites and 10,000+ 3G sites; with a blend of approximately 55% green field towers, 45% rooftops. GP has been leasing out their ~7,800 towers on a commercial basis since 2010, and claims to have 45% revenue market share from infrastructure sharing.

Veon (formerly VimpelCom) is preparing #2 operator Banglalink’s towers for sale, with the portfolio set to be optimised through consolidation of sites duplicated by the edotco portfolio. Banglalink has been promoting their towers for co-location since 2015 and is believed to have a tenancy ratio a little over 1.2x. Banglalink has 5,890 sites, around half of which are suburban and rural green field towers, the half urban rooftops, plus a hundred or so in-building solutions (IBS).

#3 operator Robi, majority owned by Axiata, and #4 operator Airtel merged in 2016 and the integration of their networks is well under way. Axiata now own 68.7% of the combined entity, Airtel retain 25%, while NTT DoCoMo owns a further 6.3%.

Axiata’s towerco edotco entered Bangladesh in 2013 and trades under a certificate of no objection from the BTRC. edotco now operates a network of 8,200 towers, the majority of which were transferred from Robi. As a result of the Robi and Airtel merger, edotco is currently assessing which sites in the ~3,800 Airtel portfolio it will absorb into its own portfolio, with a significant proportion of overlapping sites likely to be decommissioned.

Banglalink and edotco are also in the early stages of analysing overlap, and hope to identify over 1,000 sites which could be consolidated and decommissioned.

Of Bangladesh’s other MNOs, Teletalk is a state-owned MNO that leans heavily on co-location in their network planning strategies. CDMA operator Citycell has both nominal market share and tower count, and as recently as October 2016 was temporarily shut down by the BTRC for non-payment of fees. Speculation continues that Citycell will be sold.

A healthy crop of ISPs, WiMAX and other non-tradition operators also co-locate on hundreds of towers.

A well embedded culture of infrastructure sharing exists in Bangladesh, with bi-lateral swaps since the early days of GSM rollout, and towers leased on commercial terms since the Bangladesh Telecommunication Regulatory Commission (BTRC) released their amended guidelines on the matter in 2011. With around 6,500 tenancies on 29,900 towers and rooftops, the prevailing tenancy ratio in Bangladesh is around 1.22x.

Around 1,000 towers are built every year, but there is substantial parallel infrastructure in Bangladesh, leading some commentators to speculate that decommissioning alone could result in the removal of 5,000+ towers and yield an uptick of 0.2-0.3x in the prevailing tenancy ratio.

GP’s 3G rollout is nearing completion but the next significant impetus for adding points of presence will be deploying 4G, with spectrum auctions scheduled later in 2017 – although the auctions have been postponed in the past. The need to raise capital for 4G spectrum and rollout, and the drive to rollout more efficiently on shared infrastructure, may see more towers built by, and sold to, independent towercos.

GP report that it takes around 130 days to build a ground based tower, or 110 days for a rooftop, assuming technical acceptance and receipt of a non objection certificate from landlord. In contrast a tower co-location can take as little as 15 days.

Regulator has unique opportunity to attract tower industry investment into Bangladesh

Given the appeal of Bangladesh’s culture of infrastructure sharing, and the efficiencies towercos can generate, why have we not seen more towercos invest in the country?

The lack of defined regulatory guidelines for towercos is currently the number one inhibitor of tower company investment in Bangladesh. The attractiveness of the market is compromised by mooted restrictions on MNO equity participation in towerco ventures, restrictions on foreign direct investors acquiring majority ownership of assets, and by a tax regime which currently disincentivises operators from leasing independent towers in favour of bi-lateral swaps.

The BTRC’s amended infrastructure sharing guidelines of 2011, which remain in force at time of writing, effectively mandated infrastructure sharing, and the Commission has made commendable progress toward engendering a culture of infrastructure sharing – more than 20% of towers built by Robi, Bangalink and Airtel have been shared since the guidelines were issued in 2011, compared to very few prior to the publication of the guidelines.

The BTRC are currently considering industry feedback to a 2016 consultation process, with a view to drafting guidelines for the licensing of independent towercos in Bangladesh.

The BTRC reportedly have an inclination to restrict National Licenses to a maximum of two towercos, which might make it difficult for an MNO to inaugurate a competitive process to gain full value when monetising their towers. Given that the draft regime also suggests the prohibition of MNO equity participation in those licensed towercos, the field of prospective licensees is substantially narrowed: more than half the world’s towers and rooftops are owned by towercos that are themselves majority owned by MNOs, including 76% of Asia’s sites.

The current limit on foreign direct investment in towers, with a precedent set with a maximum shareholding of 49%, is also being discussed as part of the consultation concerning Bangladesh’s towerco guidelines. A continuation of the 49% FDI limit would further reduce the pool of prospective towercos who could invest in Bangladesh, potentially keeping international towercos (with deep pockets!) at arm’s length, thus further suppressing tower valuations, while precluding the participation of proven, innovative towercos in the market.

There are three tax challenges to be overcome for towercos wanting to invest in Bangladesh; taxation of the initial tower transaction, the differential treatment of VAT between leased and swapped sites, and potential revenue levies.

When transferring tower assets MNOs have two options; demerger or outright sale. A demerger may be more tax efficient, but can take a year or more to complete. However, expediting the investment by pursuing an outright sale exposes the transaction to both VAT and capital gains tax on any value beyond that which is recorded in the seller’s books, thus incurring significant taxation.

Towercos also face an operational taxation issue in Bangladesh. If an operator leases a site from a towerco, they must pay VAT, but if they lease a site from another operator they are eligible for a VAT rebate. At present the law prohibits an equivalent rebate on the commercial rental of infrastructure. This constitutes a significant disincentive to MNOs leasing towerco sites.

The BTRC are also considering implementing a a revenue levy at a rate which is an order of magnitude higher compared to, for example, Myanmar, where a fixed fee of ~US$12,000 plus 0.5% of revenues are payable annually. Towercos have played a critical role in accelerating rollout in Myanmar, where the network has expanded from ~1,500 towers three years ago to 9x that figure today.

It is not fair to critique the Bangladeshi towerco licensing and taxation regime before the guidelines have been released. The BTRC has already made significant progress in the promotion of bi-lateral and commercial infrastructure sharing, and tower companies are already investing in the country.

There is no such thing as a perfect regulatory regime to encourage investment in telecom infrastructure – different stakeholders will lobby for different priorities, and the interests of the tower industry and their MNO partners are only two parties to consider, alongside the interests of consumers, landlords, and the need to maximise taxation revenues for the public purse. However, with at least two international tower companies standing poised and ready to invest substantially in the market, and with three of Bangladesh’s MNOs intent upon creating deep partnerships with towercos, what is needed more than anything else is clarity of what the regulatory regime will be in Bangladesh.

The electricity grid in Bangladesh is relatively reliable; most outages are planned and are the result of load shedding due to exponential growth in demand. Only around 25% of sites (mostly core, hub, HVC and remote sites) need backup DGs, although backup battery banks are widely deployed. Cell site autonomy is increased at sites that are difficult to access during monsoon rains. edotco have shared some interesting anecdotes about delivering portable generators by boat to maintain uptime during rainy season!

edotco has also pioneered the use of solar technology across “a large number of sites” in non-commercial power (off-grid) zones. edotco has rolled out their Invendis-powered RMS solution ECHO to over 1,200 sites in Bangladesh.

Power is currently a pass through, but some MNOs are pushing towercos to provide energy as a fixed cost.

What does the future hold for Bangladeshi towers?

The market is primed for towerco participation on many levels: a deeply rooted culture of infrastructure sharing proven by substantial initial lease up, an opportunity to add value both by densifying networks for 3G and soon 4G, but also to make the network more efficient by sharing resources and decommissioning parallel infrastructure. If a conducive regulatory licensing and taxation policy can be implemented, the tower industry stands poised and ready to invest hundreds of millions of dollars into Bangladesh, releasing capital for 4G spectrum and rollout and helping to realise the country’s National Broadband Plan.