REPORT ON SOLAR SOLUTION FOR CELL SITES

Prepared by: Prepared on Expert Guidance of:

Pallav Shahdeo Sunil Kumar Pandey,MBA Telecom 2nd year Circle Project Manager,AITTM Reliance Communication,Ranchi

Telecom Infrastructure Industry in IndiaPassive infrastructure sharing (tower-sharing) gaining significance: Passive infrastructure being one of the most important components of a mobile network, the same has been a critical area of operations for telecom companies in the past. However, with increasing competition posing an urgent need for telecom companies to expand their coverage and sharpen their focus on core operations so that they can sustain and improve their market position, passive infrastructure has assumed the status of an independent industry during the past few years.

Overall, sharing of infrastructure, passive as well as active, is beneficial for all parties involved as it brings along significant operational as well financial savings, thus enabling the companies to minimise duplication of efforts and costs and improve profitability.

Functioning of a Tower Infrastructure :

Company: A tower infrastructure company provides passive infrastructure on a sharing basis to telecom

operators.

The role of a tower infrastructure company may be summarised as follows:

- Site planning, keeping in view the network rollout plans of prospective customers.

- Site acquisition, including entering into long-term agreements with land owners.

- Obtaining of necessary regulatory approvals.

- Erection and commissioning of tower and allied equipment.

- Provision of support services such as backup power, air-conditioning and security.

- Provision of turnkey solutions to telecom companies such as sourcing of equipment, testing and maintenance.

Types of Towers:

Telecom towers are broadly classified on the basis of their placement as Ground-based and Roof-top.

(i) Ground-Based Tower: Erected on the ground, ground-based towers (GBTs) are taller (typically 200 to 400 feet) and are mostly used in rural and semi-urban areas because of the easy availability of real estate space there. GBTs involve a capital expenditure in the range of Rs. 2.4 to 2.8 million, depending on the height of the tower.

(ii) Roof-Top Tower (RTT): Roof-top towers (RTTs), which are generally placed on the roofs of highrise buildings, are shorter (than GBTs) and more common in urban and highly populated areas, where there is paucity of real-estate space. Typically, these involve a capital expenditure of Rs. 1.5 to 2 million.

It is the height of a telecom tower that determines the number of antennas that can be accommodated, which in turn determines the capacity of the towers, apart from factors such as location and geographical conditions (wind speeds, type of terrain, etc.). Hence, typically, while GBTs can accommodate up to six tenants, RTTs can accommodate two to three tenants.

Master Service Agreements:

A tower infrastructure company normally enters into separate Master Service Agreements (MSAs) with its occupants/tenants. MSAs are signed between tower infrastructure companies and telecom operators (tenants), and clearly spell out the overall tower requirements of the tenants, the pricing terms, and other binding terms and conditions between the two parties.

Key Terms under MSAs between Tower Infrastructure Companies and Telecom Operators Rental Rentals are specified, depending on factors such as:

- Type of tower (GBT or RTT): Tower rentals are normally higher for GBTs as compared with RTTs. In some cases, the rentals may also be computed as a percentage of the capital invested.

- Location: In the case of strategically located sites (congested areas, city centre, highways) and in hilly terrains, tower infrastructure companies may charge a premium over the standard rentals.

- Level of sharing on towers: As sharing increases, tower infrastructure companies usually pass on a percentage of the cost saving to their tenants. At present, discounts range from 10 to 20% for twin sharing and from 20 to 30% for triple sharing.

- Tenure: Tower infrastructure companies usually offer more attractive terms for longer tenure MSAs as they lower occupancy risks for them.

- Number of sites: Tower infrastructure companies may also offer discounts on standard rentals, which may range from 2 to 5%, depending on the number of sites to be rolled out in accordance with the MSA. So, a larger number of sites may mean higher discounts for the telecom operator.

Tenure The tenures of MSAs generally range between 10 and 25 years. The rentals stated in the MSAs are generally applicable over the tenure of the contract, with provisions of periodic revision (mostly annual).

Tenancy Generally, each active electronic module is considered a separate tenant. For instance, if a player has entered into an agreement with a tower company for its GSM services and thereafter wants to install additional equipment for alternative services (Third Generation (3G), Wi-max, CDMA, etc.), the same would be treated as additional tenant(s) for the purpose of the agreement.

Statutory Clearances/ Approvals

MSAs clearly specify the list of approvals and clearances to be taken by the tower companies. Generally, all the approvals pertaining to passive infrastructure are obtained by the tower infrastructure company. However, any approvals pertaining to active components are largely obtained by the telecom operators.Operating Expenses Fixed Charges Expenses such as security and maintenance are usually borne by the tower infrastructure companies. Space/Ground Rental Space/ground rentals are usually borne by the tower infrastructure company. Any excess over a pre-specified level is generally shared with the tenants.

Variable Costs like Fuel and Energy Charges Such costs are charged from tenants on the basis of their actual consumption.

Increase in Variable Costs Most MSAs also provide for pass-on of any escalations in variable costs to the tenants.

Lock-in-Period Most MSAs specify a lock-in period. Moreover, in the case of termination of contract by the telecom operator during the lock-in period, there is generally a provision of penalty on the tenant.

Penalty Clauses Rollout: Usually MSAs provide for penalties for delay in the deployment of towers beyond the date specified in the agreed rollout plan.

Service Level: Most MSAs specify the services levels with respect to power availability, uptime for regular and strategic sites, and other operations and maintenance parameters, and also the penalties on tower infrastructure companies in the case of failure to achieve the same.

Industry Structure:

At present, there are broadly two kinds of operators in the domestic tower infrastructure industry:

Tower infrastructure subsidiaries, which are the spun-off tower divisions of the telecom-operator companies ;

and

Independent tower infrastructure companies (ITICs)

Tower Infrastructure Subsidiaries: In India, Bharti Airtel Limited, Reliance Communications Limited, and Tata Teleservices Limited have hived off their tower assets into separate tower infrastructure subsidiaries, namely Bharti Infratel Limited, Reliance Infratel Limited, and Wireless TT Infoservices Limited, respectively. Also Bharti Infratel Limited together with Vodafone Essar Limited and Idea Cellular Limited in a joint-venture agreement has created India’s largest tower infrastructure company – Indus Towers Limited, which has an estimated portfolio of around 85,000 towers.

Tower Portfolios of Operator-Promoted Tower Infrastructure Companies/ Telecom Operators

Company Name Background Tower Portfolio

Reliance Infratel Limited -Reliance Communications Limited’s subsidiary 52,000

Bharti Infratel Limited -Bharti Airtel Limited’s subsidiary 35,000

Indus Towers Limited- Joint venture Bharti Infratel Limited, Vodafone Essar Limited,

and Idea Cellular 125,000

Wireless TT Info Services Limited -(WTTIL) + QuippoTata Teleservices Limited’s subsidiary WTTIL merged with Quippo Telecom Infrastructure 25,000

Others BSNL, Mahanagar Telephone Nigam limited (MTNL), Sistema Shyam TeleServices, Aircel etc.

85,000

Hiving off of tower divisions into separate companies is strategically beneficial for telecom operators as it leads to significant unlocking of value while simultaneously improving operational and capital efficiencies. The parent telecom company benefits from reduced incremental capital requirements, lower operating costs, and a favourable capital structure, while the tower infrastructure subsidiaries gain an advantage in terms of an assured occupancy from their parent, which in turn may serve to attract other tenants.

Independent Tower Infrastructure Companies:

Over the past few years, a number of ITICs have ventured into the domestic telecom tower industry. These include, among others, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, Tower Vision India Private Limited, Aster Infrastructure Private Limited and TVS Interconnect Systems Limited.

Illustrative List of Some Third Party Tower Companies in India

Company Name Existing Tower Portfolio

GTL Infrastructure 9,500 towers

Xcel Telecom 1,500 towers

Essar Telecom Infrastructure 4,000 towers

Aster Infrastructure 1,000 towers

Others 2000

Source: Market sources, ICRA’s estimates

These companies have their business model based largely on the following two approaches:

Contract Approach

Anticipatory Approach

Under the contract approach, tower companies set up tower sites going by the requirements of the telecom operators, and the terms of the contract are specified beforehand in the MSAs signed by the two parties. Under the anticipatory approach however, tower companies set up tower infrastructure at sites with reasonable demand potential and subsequently invite telecom operators to set up their network on these towers. The latter model involves higher business risks as the tower company may not be able to achieve reasonable tenancy for its tower infrastructure and at profitable terms.

ITICs versus Tower Companies: ITICs, especially those following the anticipatory approach, are usually at a disadvantage as compared with tower subsidiaries as ITICs do not have assured occupancy on their tower portfolios. Moreover, as most large telecom companies in the country have their own tower subsidiaries, the market for ITICs consists largely of regional operators and new entrants, in whose case credit quality can also be a concern. Nevertheless, in certain cases, ITICs are in a better position to address the needs of growing telecom operators who have recently received licences and spectrum to launch operations in new circles because of flexible rollout plans that are more suited to new entrants. Moreover, ITICs differentiate themselves by offering flexible payment terms to mobile operators (for

instance, backended payment structure), which enables the mobile operators to reduce their costs in the initial years.

Economics of the Model—Tower Infrastructure Companies

The key points relating to the working of tower infrastructure companies are discussed in following bullet list.

- High initial capital investments: On an average, while a roof-top tower involves a capital expenditure of Rs. 1.5 to 2 million; a ground-based tower requires a capital expenditure of Rs. 2.4 to 2.8 million. Given the high capital investments required in the business, tower companies are generally highly leveraged.

- Stable and predictable cash flow business: Once a tower asset is rented out, it usually generates a stable and predictable cash flow in the form of tower rentals from occupants over the term of the MSA between the two parties.

- Low working capital requirement: The tower business is also characterised by low working capital requirements, as most of the operating expenses (such as electricity and fuel and other variable operating expenses) are reimbursable by the tenants on actual basis. Moreover, the larger companies with a bigger and geographically spread out portfolio of networks may be able to get rentals for the towers in advance and also obtain better credit terms from their suppliers, thus further improving their working capital cycle.

- High incremental profitability: The costs of operating a tower, particularly the ones borne by the tower company such as security and maintenance and ground rent, are largely fixed in nature. Thus each increment in tenancy is accompanied by a minimal increase in costs. This leads to a more than proportionate increase in profits for every increase in occupancy.

Factors driving growth for passive infrastructure sharing: Apart from favourable industry prospects, there are several other factors too that drive increase in tower sharing, as discussed in the following bullet list.

Viability of business at low ARPUs: At present, incremental growth in the subscriber base is coming mainly from rural/semi-urban areas (also in these areas, the incremental ARPUs are relatively lower). Further, network design and planning in rural areas is different from that in urban areas, given that the population in rural areas is widely dispersed, which increases the tower requirements to cover the same number of subscribers (vis-à-vis urban areas). But as shown, even at low ARPUs, business viability can increase significantly on the strength of infrastructure sharing .

High usage and limited spectrum availability: India has one of the highest MoUs in the world, which increases the number of base tower stations (BTS) required to handle the same subscriber base. Thus while on an average, a GSM BTS can handle around 1,100 subscribers, in the case of high usage areas the figure can be as low as 600-700 subscribers, which means a larger number of cell sites would be required for the same area. Moreover, the country has the problem of spectrum scarcity, which increases the requirement of towers to maintain a reasonable level of service quality.

Quality of service: In the past, domestic telecom operators competed largely on the pricing plank. However, as mobile tariffs in India are currently one of the lowest in the world, the scope for further tariff reduction is low. Given this fact, going forward, quality of service (QoS) would become the prime distinguishing factor among the competing companies. Moreover, a rapidly increasing subscriber base and spectrum crunch would further add to the problem of telecom operators having to maintain the minimum level of QoS. Besides, with the likely introduction of mobile number portability, QoS will become more important as customers will then have a broader range of options available with limited switching costs. Thus to retain existing subscribers by preventing subscriber churn, operators will require additional infrastructure in their existing areas of operation to be able to offer better QoS.

Enhancement of profitability: Tower sharing helps operators lower their operating costs and capital expenditure and thereby earn better margins and higher Return on Capital Employed (RoCE); the overall impact on Profit and Loss is also positive. Analysis suggests that there would be net annual cost savings for mobile operators if they opt to lease towers from a tower company rather than own them.

Entry of new players and expansion plans of existing operators: Recently, several regional operators such as Vodafone Essar Limited, Idea Cellular Limited, Aircel Cellular Limited and Shyam Telelink Limited (now Sistema Shyam Teleservices Limited) have received licences as well spectrum in new circles, which would enable them to become pan-India operators in the next one-two years. Also, new licences have been issued to players such as Unitech, Swan Telecom, and S Tel Limited. Given the significant expansion

plans of new entrants over the medium term and the need for them to optimise investments in order to maintain returns, demand for towers is expected to report a sharp increase.

Shorter rollout time, a key necessity: As the domestic telecom industry is highly competitive, doing business may not be easy for the new entrants. Moreover, given that the incumbents already have the competitive advantages of widespread distribution networks, established brand names and strong subscriber base, shorter network-rollout time would be a critical success factor for the new entrants; a longer rollout time could mean loss of substantial market share to other operators. Tower companies allow players to start operations in a particular region just by installing their electronics on the readyto-use towers, thereby significantly shortening the rollout time.

New technologies to further stimulate demand: 3G services are expected to be launched in the country in 2009-10. Moreover, in order to augment their services, various operators plan to launch WiMax services as soon as they receive additional spectrum from Government. This would further increase the demand for sharing of passive infrastructure.

Summary : Its my view that demand for passive telecom infrastructure in India would continue to grow at a healthy rate, at least over the medium term, and that this increased demand would be accompanied by greater sharing of infrastructure by the existing as well as new telecom players. The need for such sharing, would be dictated by the imperative of remaining profitable in an increasingly competitive market.