During the fifth edition of the TowerXchange Meetup Americas, Eduardo Wiñazky, telecom consultant and former Head of Municipality and Infrastructure Management at ARSAT, moderated a roundtable discussion on Argentina. Permitting and taxation were key themes, as the country’s pioneering towercos continue to endeavor to overcome barriers at municipal level from restricting Federal intent to stimulate investment in infrastructure for the Digital Economy. Argentina needs more towers - how can we work together to ensure we can close the infrastructure gap quicker?
Volatility remains an issue
While inflation in Argentina is targeted below 20%, it seems more realistic to expect it to float around 30%. So how can towercos overcome the intrinsic volatility of contracts, prices and leases?
While indexation remains prohibited in Argentina, this doesn’t necessarily mean contracts have to be shorter - there are contractual work-arounds, and towercos are issuing ten-year contracts with clauses and conditions that insulate them from the effects of inflation. Some tower companies are dollarising their contracts with operators, although it was noted that this can put operators in a bad position in case currency devaluation gets out of hand. Other towercos have opted to take the risk and bet on the country’s economy settling down in the future. The risk linked to issuing contracts in local currencies seems bearable for now, as there isn’t significant M&A driving transactions of scale and, in any case, landlords are generally unwilling to negotiate contracts in foreign currencies.
The entrance of towercos in Argentina has led to an improvement of the contractual conditions of ground leases since they’ve been able to negotiate long term contracts that protect their new builds and the carriers’ activities. And while there remains a degree of scepticism on the part of Argentinian landlords around the security of long term deals, some towercos report ground leases of 15-20 years with renewal clauses.
Some towercos complained that landlord expectations in Argentina were at risk of rendering some locations uninvestible as the gap between what it would cost to lease the land and what the site could generate was too narrow to be financially viable. Other towercos suggested Argentina was as rational as any other market: “if a landlord will not agree a rational lease rate, you just go next door.”
Sale and leasebacks remain unlikely in near term
When it comes to M&A, taxation still poses significant limitations, indeed the transfer of sites between Telefónica and Telxius was made possible as an inter-company transfer, hence under special terms. With its captive towerco Telxius already on the ground in Argentina, Telefónica seems more likely to continue to carve out and transfer, rather than sell their towers. It remains to be seen whether Claro would spin off their Argentinian towers into Telesites, but TowerXchange would not be surprised to see Telesites in Argentina within the next two years.
Is the towerco business model being accepted?
Participants agreed that Telefónica and Claro have been easier to deal with in Argentina since many of their opcos in other countries are already working with towercos. But there are cases with Personal (mainly due to staff turnover) and in general across the MNO landscape where the towerco business model had to be explained from scratch.
One thing was apparent during the discussion: MNOs want more towers and they want them soon. In many instances, they are working with towercos in order to speed up the deployment of new sites but this isn’t easy for towercos either! As an example, Personal is working with towercos for 972 new sites but to date, only ~200 of those had been deployed in the year to date.
Permits and taxes remain a critical issue
The real bottlenecks are still permitting, municipal taxes and site acquisition with the addition, for some participants, of the complexity of sourcing qualified labour.
With each municipality issuing their own laws, it’s crucial for towercos not only to understand each layer of rules, but also to educate municipalities on the advantages of working with infrastructure companies.
Municipal fees and the time required to secure permits are key pain points and not easy to overcome. In fact, towercos agreed that to date, little progress has been made to push back on the disproportionate inspection fees that municipalities charge for each site. Fees that in some cases – e.g. in Buenos Aires – can reach as high as US$700pcm, representing a 70% tax on the prevailing lease rate! And this is particularly frustrating since in most instances these inspections never take place!
Disproportionate municipal fees have contributed to the fact that many legacy cell sites in Argentina are unpermitted. If the tower industry is to legalise such sites, and establish a new higher standard of permitting, then fees must be sustainable.
Towercos around the table came to the conclusion that one way to solve the problem is to agree on a fair fee and present this to the municipalities. It was suggested, for example, that the actual cost of a site inspection was US$65.
Since the entrance of towercos, and after years of negotiation and some successful legal battles against the inspection fees, MNOs have largely passed the problem to towercos, even though some contracts suggest municipality fees are the responsibility of the infrastructure owner, others refer to liability belonging to the owner of the antenna. However, towercos agreed that they have the right skill-set to solve this critical issue.
Towercos came to the conclusion that while they can work smoothly with some municipalities, the differences in rules from one jurisdiction to the next makes it extremely complex to streamline any process. Some towercos are already active in over 80 municipalities but there are 2,400 municipalities across Argentina! The group agreed that there are ways to push their agenda such as the creation of a towerco association to drive dialogue at the Federal level, or working with the right, well connected lawyers at local levels.
Expected reforms versus NIMBY and other disruptive attitudes
One positive aspect is that the current Federal government is supporting infrastructure sharing and the towerco business model as a way to improve quality of service and coverage across Argentina and enable the development of the Digital Economy. But while the support at a federal level is there, local governments can still torpedo the positive changes occurring in the industry.
The stereotypical “business as usual” mind-set of many public entities across Argentina is jeopardising the efforts made to improve not only the telecom sector but the overall national economy.
And while towercos wait for game changers such as the Convergence Law – not due to until 2020 – to come into full force, they need to keep educating local authorities, lobbying and negotiating their way through the complexities of doing business in Argentina.
Some participants mentioned cases of successful lawsuits against local municipalities across CALA which led to positive results but for now, the idea is to try and push for the change without lawsuits. However, with Argentina agreeing a new US$50bn aid package with the International Monetary Fund this past June and the need to rationalise budgets, towercos agreed that municipalities will depend on their current revenues more than ever in the future.
Another issue is the Not In My Back Yard (NIMBY) mentality still hitting hard in some municipalities. To please local communities, some municipalities have agreed to only allow one towerco to build in the area. A decision that flies in the face of fair competition and could lead to an increase in lease rates in the future.
The group touched upon an upcoming resolution on interconnection which will require public infrastructure owners (e.g. utility companies) to open their assets up for sharing. The rules are vague and will require towercos to sit with these companies and possibly strike private deals. And while the interconnection law aims at solving coverage problems across the country, once again the way it’s drafted causes confusion among telecom players. In one towerco’s words “Argentina is a major opportunity but hindered by this kind of chaos!”
Permits and slow rollouts
When it comes to obtaining permits, towercos admitted that while they are diligently seeking all the required paperwork, they might start a new build without all the necessary permits in place as long as “they see a path to full licensability”. In other words, they know they’ll be able to get the permits but the lengthy process pushes them to start deploying in the meantime. That is a risk but a risk that many towercos are willing to accept amid the complexities of the current permitting regime in Argentina.
MNOs – or towercos – are held accountable for slow rollouts when they often aren’t responsible. “You can follow all the rules, submit your package, get your pre-feasibility done, and you can still find the final permit is being held up as the municipality tests the community reaction,” said one towerco. The timeline to obtain pre-feasibility permits is such that consumers should stop blaming MNOs and start pressuring their mayor and municipality to improve quality of service by accelerating rollouts, not hold them up!
To date, most towercos seem to be focused on urban infill projects, rather than concentrating on rural sites. So while for the time being MNOs and towercos are working to densify urban coverage, they will need to start rural rollouts at some point – also to fulfil MNOs’ coverage obligations – and those projects might result in easier permit processes as some communities might welcome the idea of obtaining signal for the very first time.
Conclusions
The past twelve months have been tricky for Argentina at many levels. The country is once again dealing with macroeconomic challenges but the government is deeming the current economic slowdown as temporary and has been bullish about growth from Q4 onwards. The government is forecasting a 10% YoY increase in infrastructure spending in 2019, as a result of a Public Private Partnerships programme that is being approved, which could have a positive impact on the tower sector.
On the other hand, towercos report difficulties in doing business which are very typical of emerging tower markets and the inception phases of any new industry. Therefore, TowerXchange expects another tough year ahead for Argentina’s pioneering towercos, but expects success in the medium to long term.
There is a substantial infrastructure gap in Argentina - a huge need for network densification and extension - and towercos can finance and build new sites quicker than MNOs. Some municipalities are prepared to work together with towercos to negotiation new fees and ordinances that make taxation legally justifiable, sustainable, collectable and that puts an end to the historical practice of not permitting sites to avoid fees. But educating one municipality at a time is going to be a slow and painful process in a country of 2,400 municipalities. An industry voice is required at a Federal level.
A country like Argentina, with its complex rules and business environment which at times almost seems to incentivise a lax attitude to permitting, is a fertile field for undisciplined towercos and TowerXchange expects some of them to try their luck and get some new towers built. But a rational tower permitting regime and M&A market will eventually emerge in Argentina, and tower entrepreneurs will make the best returns if they abide by the fundamentals of the business model: building good towers in good locations, with (eventually) a full set of permits. Because at the end of the day, many will seek an exit and will realise the best valuations if their towers are a low risk acquisition for the likes of American Tower and SBA Communications!
