Argentina: the eternal promise

Back in 2015, the hopeful arrival of Mauricio Macri and the first build-to-suit (BTS) contract inked by Innovattel painted a very promising picture for the tower industry to finally enter Argentina. Almost four years later, the reality has not come close to meet the huge expectations that everybody had for the country. The government is struggling to develop the necessary regulatory framework that can ease deployment due the strong power of more than 2,500 municipalities that coexist in the country, while high local fees, social opposition and the arduous permitting process are massively slowing down deployment for both operators and towercos. Regardless, Argentina remains the third largest CALA telecoms market by subscribers after Brazil and Mexico, and the country still holds enormous prospects for infrastructure developers and investors. I flew to the lively Buenos Aires to meet with key industry figures and further understand the barriers and opportunities that Argentina presents. Here is a report of my findings. 

Despite being the second largest country in the region, there are just around 17,000 towers spread across Argentina’s vast geography and the lack of infrastructure in rural and remote areas keeps slowing down the socioeconomic development of the Republic. The reality is that the country still needs 20,000 towers to achieve acceptable levels of coverage, and the number goes up to 50,000 to match the quality and capacity of neighbouring leaders Chile and Brazil. The Argentinian Agency of Investment estimates that the industry requires between US$2bn and US$5bn, and despite all difficulties, development banks, private equity funds and infrastructure players are all eyeing potential opportunities, while the three MNOs gear up to accelerate deployment and improve the level of coverage and capacity.

2018 was a harsh year for Argentina. Its weakened peso experienced a historical devaluation, inflation overpassed 50% and consequently, its external debt increased massively, making access to credit very tough. Moreover, the biggest drought in the last 40 years contributed to what Macri called “the perfect storm” - and that storm inevitably hit the telecoms industry.

In spite of all of the above, it was not all bad news. After the merger with Cablevision, the cable broadband unit of Grupo Clarín, Telecom Argentina absorbed Nextel’s portfolio and the new consolidated giant announced a two-year investment plan of US$5bn to boost connectivity through a considerable infrastructure upgrade and expansion. The MNO has since been exploring different investment tools and it recently received a US$450mn loan from the International Finance Corporation (IFC) to continue expanding broadband coverage, mainly in remote and underserved areas. Moreover, earlier this month, Telecom obtained another US$100mn credit from Santander and J.P.Morgan that will help the operator to finance a recent deal with Nokia, who will be supporting Telecom’s fibre and infrastructure expansions.

At the end of last year, Telecom Argentina became the market leader with a portfolio of 6,553 sites made of 5,084 owned towers and 1,469 co-locations. The company, who is very open to the idea of working with infrastructure partners, had some trouble in 2018, as towercos were only able to deliver 340 new sites out of the 1,000 concessions that the telco handed over. By the end of 2019, the company expects to have added over 700 new towers to its portfolio and the initial 30% of sites designated to towercos might increase, since the MNO is currently considering a shift on its deployment strategy.

América Móvil’s Claro was a pioneer as the first MNO to start working with towercos back in 2015. The MNO, which applied its regional strategy to Argentina, is outsourcing around 35% of its upcoming deployment to infrastructure developers - but that will not be more than 300 new towers, as Claro is currently focusing on modernising 1,000 sites that require a 700MHZ band upgrade for 4G integration. The company owns over 5,500 sites and works mainly with Torresec, Evotech, Atis Group and GME.

With a slightly smaller portfolio and more than 1,500 co-locations on its competitors’ sites, Telefónica has signed master agreements with both Telxius and SBA in the country, while also partnering with other independent players through individual agreements. Telefónica actually became the first and only Argentinian MNO to sell part of its portfolio to a tower company when they transferred 323 towers to Telxius. The operator plans to build only 100 new towers in the upcoming months and less than half will be deployed by towercos. However, before the year ends, the company is likely to open a bid for towercos but the actual number of sites and requirements have not been revealed yet.

Towerco penetration among MNOs is relatively low compared to surrounding countries, but all three operators have now started to understand the benefits of outsourcing their sites’ deployment. Nonetheless, Argentinian operators are very used to the concept of allowing access to each other’s towers - and they even share electricity bills, as having your own meter is a complicated issue. We continue to see more and more collaboration within the industry, but there is still a certain reluctance against the adoption of the towerco model.

First, permitting obstacles are forcing operators to take risks and build sites without permits wherever they need to, as they cannot afford to fail to provide the service to their customers in such a turbulent context. Towercos, contrarily, are not always willing to assume those risks, at least independently and without a contractual guarantee from the operators. And indeed, there is a cultural barrier: although infrastructure is not telcos’ core business, they have been deploying sites for a long time and some executives are very reluctant to share responsibilities, they don’t trust third party standards or are afraid to lose their jobs. Furthermore, in early 2018, an infrastructure developer sealed an exclusivity building agreement with a municipality in Matanza, forcing MNOs to work solely with them for their local deployments and setting a rather dangerous precedent.

In Argentina, MNOs have expressed their objections for towercos to get involved in urban and innovative deployments and they prefer to deal with them only for traditional sites. On the other hand, towercos claim that they just receive assignments and search rings for the most challenging areas, where MNOs have previously failed to deploy due to excessive local taxes, long permitting processes or logistical issues.

The progress of the industry mainly depends on successful synergies across the value chain, and towercos, operators and turnkey providers will need to have a more collaborative and flexible approach, as working together seems the only way to unlock the multiple challenges that come up when building a site in Argentina.

To this day, no towerco has been able to develop a significant footprint in Argentina, mainly due the high tax regime that has so far prevented any sale and leaseback deal. Towercos are building their portfolios organically, which requires both patience and strong financial capabilities in a country where deploying one single tower can take over six months.

The market is very fragmented and towercos own around 1,300 towers. Torresec is the market leader

with 356 sites and 300 more under construction. After paying US$30mn to Telefónica for 323 sites, Telxius was able to build only six new sites last year, and they expect to deploy 40 more before the year ends. The company is exploring alternative revenue streams and has recently closed a deal with DIRECTV, a satellite and fixed broadband provider that will become a tenant on over 80 sites. The Spanish towerco is also collaborating with local IoT carriers to install light equipment on their towers for a small fee.

GME Alliance, one of the first market entrants, has a portfolio of over 100 sites and has 30 more under construction. Atis Group, who received a US$100mn injection from Pátria Investimentos, has successfully developed a portfolio of almost 100 sites, and they are hoping to build 150 more in the next few months. Contrarily, regional leaders American Tower, SBA Communications - who are historically more inclined to grow inorganically when entering a new market - are still possibly waiting for sale and leaseback opportunities. Torresec, the first towerco to enter the market back in 2014, is said to have deployed around 100 sites.

Facing local opposition is common in Argentina especially due to the fear of radiation emissions and their impact on health. Educational and awareness programs on the socioeconomic benefits of connectivity are much needed across the country. 

One of the biggest hurdles is represented by the municipal fees asked for land use and inspection, making deployment not only slow but very expensive. Tower companies often fail to deliver their sites as fast as they would wish, and additional costs incurred throughout the process affects their balance sheets.

With so many unconnected areas, it is not difficult to identify signal gaps, so new players are now taking extra risks and building on those locations without an actual MNO order or a permit, assuming extra logistic and financial risks, without the certainty of finding tenants and exposing themselves to bureaucratic issues.

Both energy and land rent are a pass through, with the latter ranging between US$300 and 1,000 monthly and towercos charging an average service fee of US$800 on top of that.

Greater Buenos Aires, which houses 16mn residents with a mobile penetration over 120%, is the main target for both towercos and operators but more opportunities can be found in urban areas such as Rosario or Cordoba. Towercos can also benefit by partnering with utility companies to gain the right to use their infrastructure and leveraging their pre-existing relationships with municipalities. Now, MNOs are using those utility’s assets to accelerate white cups and small antennas deployment so towercos should get creative to explore potential collaborations.

MNOs have stringent coverage obligations as part of their licenses and would benefit from the expertise of towercos to achieve their targets. 

Operators deal with energy directly and all of them are already exploring more efficient alternatives to reduce their electricity bills. Argentinian telcos have traditionally relied on acid-lead batteries and diesel generators, but all of them are now considering a transition to lithium, for which the initial investment is the main barrier. Renewable energy is also an attractive prospect for the industry and although the space requirements of solar and hybrid equipment are quite high, Telecom, Claro and Telefónica are testing various alternative solutions.

Towers continuously suffer from vandalism and theft, and every tower owner is actively exploring security solutions including monitoring and surveillance systems, alarms, access control and digital padlocks among others.

In addition, some towercos are also assessing the viability of digital maintenance and monitoring systems that can control and transfer data automatically, which can improve site efficiency while adding new services to their offer.

Regulation has to play a critical enabling role in driving the industry forward. The Secretaría de Modernización and its regulatory body ENACOM are pushing forward, but politics in La Argentina move at a very slow pace. The country has a decentralised federal regime with more than 2,500 municipalities that have their own jurisdiction over land use and infrastructure development so central power is very limited.

Last year, the Secretaría de Modernización launched a National Telecommunications Plan aimed at simplifying the permitting process. The government is trying to ease MNO access to state-owned buildings and educate the citizens on the necessity of infrastructure and connectivity among other initiatives. Moreover, ENACOM is trying to create a unique entity to centralise the permitting process and the initiative is currently under discussion in Congress.

As part of the Telecommunications Plan, the Secretaría is working alongside the Argentinian Investment Agency and developing three pilot tests across the country that aim to set successful precedents of collaboration across the industry to favour deployment.

Unfortunately, those efforts have not made the necessary impact, and since 2016 the ENACOM has managed to positively impact only 70 conflicts against municipalities. The 2019 general elections will take place in October and whoever assumes power will need to take a strong stand to strengthen the power of ENACOM, increase MNOs’ QoS capabilities and upgrade the current regulatory framework to recognise the importance of telecoms infrastructure for the country’s future.

Collaboration will be critical and the industry needs to strengthen its lobbying power towards a more reasonable and favourable regulatory regime. Towercos need to be brave and creative, as they will need to explore alternative revenue streams while assuming additional risks.  For its part, MNOs need to continue embracing the many benefits of towerco collaboration and keep opening their mindsets, as they will not be able to achieve their mid-term coverage targets without the expertise and financial support offered by towercos.