The search for a more investible regulatory and permitting framework

The regulation of the telecom tower industry might politely be described as a work in progress. In some countries, government appetite to attract investment into Digital Infrastructure and the Digital Economy translates into policies that attract network investment by MNOs and towercos alike, but well-intentioned policies often backfire due to the challenges enforcing policy and change at the municipal level. Indeed, it can feel like the dialogue between stakeholders in permitting and rights of way at a municipal level is the front lines of the tower industry – particularly in CALA where a significant proportion of cell sites are not fully permitted.

Towercos are selective about capital allocation and have a wide range of countries in which they can invest US$billions into digital infrastructure. Some regulatory regimes render a country’s tower market uninvestible, others merely compromise the investibility of the country – unfortunately all too few regulatory regimes actually function to encourage tower companies to invest.

Towercos are similarly selective not just from one country to the next, but from one municipality to the next. How can Federal and Municipal stakeholders attract investment in telecom infrastructure from tower companies and MNOs alike? Let’s look at the regulatory and permitting issues towercos are facing in Central and Latin America as an example.

There is growing recognition, increasingly enshrined in constitutions, that all citizens have the right to access the Internet. The benefits for economy, education and lifestyles are well documented.

Almost without exception, candidates in elections in CALA have advocated the improvement and expansion of cellular coverage. There is a growing recognition that there has been an underinvestment in infrastructure. Drafting policies to attract investment and take corrective action against market structural disincentives to invest is great, but implementation has been challenging, particularly in the context of the power enjoyed by municipal governments in much of CALA (of which more later).

One of the first things a prospective tower investor will consider when evaluating whether to deploy capital into a given tower market is the attractiveness of the regulatory environment. A light touch regulatory framework, in which government encourages but does not mandate infrastructure sharing, and in which the government stands ready to resolve disputes but otherwise stays out of pricing, is generally thought to be more favourable. Some towercos like virgin markets where no regulation or licensing regime has been drafted specifically concerning tower companies or infrastructure sharing. More frequently however, towercos are discomforted by the risk of regulation where none exists, as this makes the market and their ROI unpredictable.

There are some towercos that believe the building of telecom towers should not be regulated or licensed beyond the extent that any construction activity is, while other towercos suggest that a fairly priced licensing regime, together with clarity around taxation and property law, provides greater certainty.

An example of a relatively lightly regulated tower market which became subject to a heavy-handed regulation comes from Chile, where the 2012 ‘Antenna Law’, while well-intentioned, forced tower companies to apply for concessions, and set onerous obligations in terms of site camouflage, fees, and minimum distances between towers and schools/clinics. The Antenna law has transformed the landscape in Chile for the worse in terms of towercos’ and MNOs’ ability to deploy investment, to the detriment of the development of the Digital Economy.

Federal governments also have an opportunity to intervene in taxation regimes to facilitate the sale and leaseback of their MNOs’ towers, thus releasing capital for MNOs to invest in spectrum or network extension. While the majority of MNOs’ towers in Brazil have been sold to tower companies, Argentina’s towers remain stranded on MNO balance sheets as they are almost fully depreciated yet would incur a capital gains tax of 35% if sold. Only Telefónica’s captive towerco Telxius has been able to overcome this barrier as the asset transfer of their towers was subject to special treatment.

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Alongside regulation, foreign exchange remains one of the primary risks facing tower companies considering international investment.

Agreeing U.S. dollar denominated contracts, where possible, of course alleviates much of that risk. But even then there is a growing recognising that while dollarization can protect towercos and their investors, the majority of which hail from the US, it can hamstring MNO customers when forex fluctuations mean the real cost of leases escalates dramatically – in extreme cases, this can force contract renegotiation.

In the absence of U.S. dollar denominated contracts, regulators must simply accept that investment into their country is going to be substantially affected by the vagaries of currency fluctuation, making the achievement of network investment and coverage targets difficult to guarantee.

The value and term (ten plus years) of tower leases means some sort of link to inflation is usually a necessity. Even where indexation is technically not permitted, towercos simply have to find a work-around as signing shorter contracts would significantly compromise investibility.

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Tower companies are thriving in Central and Latin America! But if the number two challenge cited by towercos in a recent TowerXchange survey was permitting and zoning concerns at the municipal level. (Before you ask, the number one challenge was that some towercos were agreeing unsustainable terms with MNOs).

Unnecessarily slow permitting processes, or permitting processes that come with unrealistic or unpredictable fees, represent a de facto incentive to build unpermitted sites – a problem rife in parts of CALA. We’ve even heard reports of instances where permit applications are deliberately slowed to allow time to ascertain whether residents respond positively or negatively to new cell sites being built, enabling local politicians to assess implications for their popularity. TowerXchange has encountered countries where as few as half the cell sites are believed to be fully permitted – although in general the percentage of permitted sites in CALA is increasing.

Corrective actions could include forgiving past (uncollectable!) debts if tower owners agreed to meet a sustainable fee structure in future, combined with a temporary amnesty on unpermitted sites, providing site owners commit to having sites fully permitted by a mutually agreed deadline.

Unrealistic permitting fees simply will not stand up to legal challenge. This is exemplified by certain Argentinian municipalities who, prevented from taxing cell sites, charge as much as US$700 per month for an ‘inspection fee’ – an inspection that seldom actually takes place and, even if it did, would actually cost perhaps US$65 to fulfil! Towercos and MNOs don’t want to resort to suing municipalities, but if that’s what it takes to enable investment in digital infrastructure, they will resort to legal recourse – and there are plenty of precedents where they have been successful in doing so.

While an unpermitted tower obviously generates no revenues for the municipality, an unpermitted tower also has less capital value – it may in fact be worth less than it cost to build. As such, a poor permitting regime represents another significant disincentive to towerco investment in digital infrastructure.

Even with good permitting processes, zoning restrictions should protect a new tower from unnecessary parallel infrastructure being built nearby, to the detriment of skylines, environments and efficient land use.

There are some stark realities on the ground: “in certain municipalities if you ask for a permit it creates more of a problem, more risk, than if you don’t,” said one towerco.

“Other municipalities tell us we should build first, then they’ll issue the permit,” added another towerco.

“We analyse each site on it’s own merits, but we will make exceptions,” added a third towerco. “If we’ve done our pre-feasibility and gotten our environmental permit, we may break ground before we have our final permit, but we always like to have a clear path to full licensablity.”

However the stakes are high – the ‘soft costs’ to bring a disputed tower online can be the same, if not greater, than the build costs.

The permitting challenge is not limited to macro towers, with many municipalities reluctant to partner with towercos and MNOs to unlock the value of street furniture as potential infill / small cell sites, while others have unrealistic valuations of the opportunity. Similarly, municipalities granting rights of way can be prohibitive to trenching or hanging fibre, another critical layer of the digital infrastructure ecosystem.

Policies and attitudes to cell site permitting are so inconsistent from one municipality to the next – from one mayor to the next – that towercos increasingly seek to diversify to mitigate the risk. “I caution my teams to avoid building a whole host of infrastructure in one city,” said one towerco. “If you cross a mayor who then decides he doesn’t like poles being erected in his town, that investment can be put at risk.”

Here’s a thought that ought to send chills down the spines of Mayors and other municipal stakeholders that stand in opposition to the timely permitting of cell sites. Most countries in CALA have such an infrastructure gap that, if their municipality doesn’t welcome telecom infrastructure investment and the siting of towers, towercos and MNOs are happy to leave their citizens disconnected and move on to the next municipality where they might get a warmer reception. When a major employer locates their factory in a neighbouring town because that town’s superior wireless connectivity enables the necessary level of IoT-enabled automation, perhaps then sceptical mayors will understand what is really at stake!

The challenge of delays at the permitting level can be exacerbated by MNOs demanding that towers be built in unrealistic timescales. Again, the risk here is that this encourages unscrupulous tower companies to cut corners on permitting or, worse still, cut corners on quality, health and safety.

Subscribers, MNOs and towercos must all be aligned in an understanding that it is detrimental to demand that a tower be built in 60 days – if it takes a year, expectations must be managed, and perhaps this can serve as an incentive for MNOs to join towercos in their efforts to educate municipal stakeholders and accelerate the process.

The specific goals of education of municipal stakeholders include helping them to understand and advocate the benefits of digital infrastructure deployment – from helping residents understand that connectivity enhances the local economy and land value, to supporting tower companies and MNOs in instances where the ‘Not In My Back Yard’ (NIMBY) mentality can erupt into violence – in worst cases, TowerXchange has heard of reports of permitted cell sites being set on fire, or shots fired at contractors.

“Some municipalities recognise that we’re on the same team,” said one towerco. “We can help them build the digital infrastructure they need quicker, and we can help them draft ordinances that meet their needs and ours.”

However, in the five years TowerXchange has covered the CALA tower market, we are sorry to report that little has changed in terms of overcoming barriers to rollout at a municipal level. “Nothing is going to change while it’s not in the interests of municipalities to change,” opined one towerco at the TowerXchange Meetup Americas 2018. “Municipalities need the revenue they collect from cell site inspection fees, and they don’t want to lose control.”

At several round tables at the TowerXchange Meetup Americas 2018 we heard the same cry for help we hear in Africa and Asia – that towercos need an independent industry platform through which to maintain a regulatory dialogue with government stakeholders.

While it would be challenging to agree on the detail, a reference document or a uniform siting rule template would be useful. Such templates exist, but are proprietary to towercos and thus difficult to position as independent. “We have a set of model rules which we share with government stakeholders,” said one towerco. “They go all the wat to the technical standards defining what infrastructure should look like to be permitted, although often it doesn’t need to go to that level.”

An industry association could create and share a repository of best practices and case studies of smart regulatory frameworks, perhaps including a library of documents written to explain the tower industry to different stakeholders: Federal and Municipal governments, even consumers.

Is it realistic to expect an industry association or similar platform to act at a municipal level, given that there are 2,400 municipalities in Argentina and a further 3,000 in Mexico alone? Perhaps not – that’s a lot of boots on the ground, and a lot of people to educate and influence. “You need a well-connected lawyer, not a trade association, to get things done at a municipal level,” remarked one towerco.

Targeting high profile, influential municipalities may be a more realistic goal, particularly if the municipalities concerned harbour ambitions of building smart cities.

But if acting at a municipal level is unrealistic, what could an industry association strive to achieve at a Federal level? One desirable outcome is to lobby at Federal level for a ‘shot clock’ or similar, wherein municipalities would have perhaps 90-180 days to respond to a cell site permit application. If no response is received, and if the permit application and build specifications comply with pre-agreed criteria, the site is considered permitted and construction can commence.

While a shot clock regime was introduced in Brazil a couple of years ago, implementation and enforcement at municipal level has proved challenging. Similarly Colombia has decent regulation at national level that prohibits municipalities from slowing the deployment of infrastructure, but many municipalities don’t know how (or don’t want) to implement. This only reinforces the importance of educating stakeholders.

Peru provided a positive example of educating stakeholders. There, an association representing MNOs and some towercos launched a campaign to increase awareness of the need for infrastructure, and did so hand-in-hand with the government. The campaign helped, but it was a one-off initiative.

Meanwhile, Puerto Rico provided a negative example of the risks of failing to educate stakeholders. While hurricanes caused over 80% of wireless networks to fail in Puerto Rico, very few telecom towers collapsed – the downtime was primarily related to power. However, because this was not properly appreciated, the response has been to implement minimum distances between towers and to require public hearings which only make it tougher to build towers in the territory.

Besides education, another objective could be to seek to have selected government property made available as cell sites – from government buildings to post offices and transport infrastructure. Although again even here there is a downside: “rights of way on public property can be revoked, and thus lack the necessary long term certainty,” complained one towerco.

A note of caution: aggressive lobbying trying to force permitting and rights of way has been known to backfire, to the detriment of the tower industry. For example, moves in the U.S to secure public rights of way for telecom infrastructure operators left some municipalities feeling suckered, and there has been a backlash, most notably in California. In order to have the greatest chance of success, towercos must speak with a unified voice, and carriers must also contribute to the debate.

“We see a major market opportunity, and huge pent up demand, for new towers in CALA, but that opportunity continues to be hindered by permitting chaos,” complained one towerco. Regulation and, in particular, site permitting remain significant barriers to investment for most tower builders in the CALA, and indeed worldwide.

The challenge will be exacerbated as next generation networks are rolled out: 3G sites might have been 500m apart, 4G 200-250m apart, but 5G could require sites to be as little as 100m apart. Just moving from 4G to 5G is going to require at least four times as many sites. Permitting is a bottleneck now. If we cannot resolve our challenges around cell site permitting, we may not be able to unlock the potential of 5G and all the benefits it brings to the Digital Economy.

The tower company business model is still not widely understood, but that in itself offers an opportunity to present ourselves as the solution, not the problem. Governments and municipalities don’t want three single tenant structures next to one another, cluttering the landscape and wasting valuable land resources – the tower industry exists to propagate a more efficient sharing model.

While permitting is clearly too complex, if permitting and zoning were too open there would be risk of overbuild and a proliferation of structures. It is incumbent upon all of us in the tower industry to raise this discussion to a higher level; to present tower companies as a means of cleaning up permitting, as the solution to parallel infrastructure, and as enablers of smart cities. As an industry we need to have a co-ordinated approach to regulatory dialogues, and we need to articulate a consistent message that the tower industry is not a cash cow for fees and taxation, but is a means of attracting investment into Digital Economies.