IDB Invest will collaborate with Millicom to improve connectivity and 4G in CALA

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Last month, IDB Invest - the Inter-American Investment Bank’s private arm - subscribed a US$50mn bond with Millicom to improve connectivity and the quality of 3G and 4G networks across different Latin American and Caribbean countries through infrastructure development. IDB’s Division Head Aitor Ezcurra conversed with TowerXchange to analyse the decision and IDB’s objectives in the region. Additionally, he shared his views on the industry as well as discussing the investment and development opportunities that the Latin American telecom industry holds.

TowerXchange: IDB has recently subscribed a US$50mn bond with Millicom to improve 4G networks in different Latin American and Caribbean countries. What were the drivers behind this decision and what details can you share on the agreement?

A proper connectivity infrastructure and the evolution of 4G coverage are two key elements that affect the economic and social development of our region. Achieving a 10% broadband penetration can generate, based on an IDB report, a GDP growth of 2-3%. Moreover, that penetration can generate a productivity increase of 2.6%. Improvements in mobile broadband allow access to the entire service ecosystem as well as connection to great informative resources that are based on that technology. The COP bond market indexed to dollars represents an historical milestone for both institutions because, traditionally, this market has been limited to companies of a certain investment grade as well as sovereigns.  

Millicom is a strategic, long-term partner for IDB Invest with a strong presence in Latin America as well as a deep understanding of the benefits that technology can bring to the region. In addition, the company has significant investment in digital infrastructure across Latin America and that supports our development agenda by boosting economic evolution in the region.

TowerXchange: What are the advantages of telecoms for IDB against other industries?

On top of being a disruptive industry, we understand that a high level of broadband connectivity directly affects the economics and competitiveness of a region. Furthermore, it helps creating jobs, boosts productivity and increases growth per capita.

Some studies have proven that the adoption of broadband services improves employment rates by 1.8% and drives businesses growth by 0.5-1.2%. An improvement in broadband connectivity also supports innovative business initiatives such as telemedicine, virtual education and e-commerce.  

At a macroeconomic level, there is a relevant positive link between broadband adoption and growth, especially once network infrastructure is made available. IDB Invest is trying to drive investment to expand broadband access to people that cannot currently access the internet and data. A proper network infrastructure and 4G coverage drives both social and economic development. They also allow access to an ecosystem of services and resources such as Uber, Fintech and Airbnb among others.

TowerXchange: There has been a lot of political and electoral activity in Latin America lately. How can politics and regulatory changes impact 4G development and spectrum auctions in different countries?

If you analyse the development of mobile communications in Latin America and the Caribbean in the last 15 years, you will see a continuous growth. Coverage has gone from 10% to 70% and most of the countries have successfully guaranteed network access, at least in urban areas. The remaining challenge is to expand coverage to rural and remote locations. This a common issue across the region that is not affected by the political orientation of the different governments. Telecoms development is a common goal for all governments and countries due the positive impact that its infrastructure development has on the country progress and the quality of life of the local population, as mentioned earlier.

Based on the above, electoral activity in the region should not impact 4G development. As it is common in infrastructure development, investment cycles depend more on economic fluctuations and future expectations. The expansion of 4G technology relies on the level of development in a country more than any other factor. Bolivia, Ecuador and Paraguay are exceptions to this rule; hence, they have the adoption rates that are comparable to the most developed countries in the region.

Although the situation differs in each country, on average, we see a sustained growth in operators’ investment since 2014. Those investments, which include commitment to enabling infrastructure and spectrum acquisition, aimed at developing 4G coverage, have achieved an initial 4G expansion but there is still a considerable need for investments to achieve a broader coverage. Investments need to continue and we need to wait and see the evolution of the economic situation in Argentina, Brazil and Colombia.

TowerXchange: What are your views on the Argentinian telecom market and the role of towercos in the country? What is the impact of its economic performance, and how do international investors perceive the Argentinian market?

We think that the Argentinian telecom sector is ready to start a period of significant growth, especially in fibre. Driven by near-term uncertainty, we see many new players repositioning themselves. In fibre, we have seen investment from American Tower in 2016. Riverwood and Blackstone also invested in Metrotel and Gigared in 2017, and Carval in July 2018.

There have been many years of under-investment in infrastructure in Argentina, and the arrival of new players brings the capacity and potential that the market was missing. The MNOs are already considering towercos as serious partners to develop their sites - towercos are no longer seen as experiments. The reactivation of network development as well as towercos’ experience, are generating a regulatory discussion and driving the best possible conditions for the future of the industry.

TowerXchange: What are your views on Mexico, Brazil and Colombia and the potential of those countries from a telecom investor perspective?

Those countries hold enormous potential for telecom growth. Firstly, service coverage has not been completed and there are segments of the population that do not have connectivity, so there is space to expand basic services. Although achieving 100% coverage is very complicated due the many communities that are located in remote and rural areas, Brazil, Colombia and Mexico have less coverage than Chile and Argentina. Mexico has taken a giant step forwards by establishing a more competitive regulatory framework and creating a favourable regime for new players that enter the market. 

Secondly, consumer demand and operators’ offer focus on data, means growing data consumption, replacing calls and text messages. Those countries are on an initial phase of that transition. 4G adoption is low, especially in Colombia and Mexico, where it is around 20%, as opposed to 70% in most developed economies. Those countries require more investment to expand, improve and maximise the benefits of 4G, allowing user to use email, videos, mobile money apps, et cetera. Additionally, local businesses would be able to provide services that aggregate value and bring more benefits. And all that without talking about 5G, that should be available in 2020.

TowerXchange: What other markets hold opportunities for telecom infrastructure development in the region?

We are identifying opportunities in the subsea cable and satellite sectors mainly. In subsea cable, there is potential to invest and improve connectivity and traffic in Latin America, the U.S. and Europe. Specifically, there is considerable potential in traffic improvement between Argentina and Brazil.

Regarding satellites, we see plenty of activity in specific country investment as well as mega investments such as the OneWeb proposal—which is a Low Earth Orbiting (LEO) constellation of 882 units that is expected to provide global internet broadband services to individual customers in 2019-2020.

TowerXchange: After the IDB’s investment in Millicom, can we expect additional similar investments to promote infrastructure development in the region?

Certainly. The bank is part of Global Connect, an initiative created in 2016 that aims to provide access to the digital world to 1.5bn people by 2020 and reduce the digital divide. Having said that, we try to focus our efforts on investments that are related to broadband connectivity: last mile, fixed and mobile network operators, IoT, submarine, satellite and fibre, as well as investments that can help in optimising the use of, and access to, broadband and shared infrastructure (towers, data centers and wholesale networks). 

As a summary, our strategy in the sector in order to reduce the digital gap by importance is to finance investment in network coverage, accessibility of mobile devices, digital alphabetisation, relevant local content and supporting exponential technologies.

TowerXchange: What is the impact of regional currency volatility for mid and long-term investors, those being that the most common profile in the telecom infrastructure sector? 

The exchange rate is a factor that investors monitor constantly and take precautions against. That said, we need to take into account that there is a heterogeneous situation if you compare all regional countries. We have some countries where currencies fluctuate more than others, so we can’t measure a specific impact. However, we appreciate that investors don’t like volatility in any sector, so we always advocate for more stability and therefore we offer local currency to our clients as long as it is available. 

I would highlight some examples and alternatives, such as Tigo’s Paraguay loan and bond, bond emission in local markets, indexed bonds emission (Milllicom COP-US$) or the direct loans in countries we have permanent treasury like Mexico and Brazil.