Google’s CSquared describes Africa’s next broadband investment opportunities

CSquared CFO Alexander Kiel predicts fiberco consolidation and leaseback deals in Africa in this detailed insight into digital infrastructure investment ahead of his speaker role at TMT Finance Africa in Cape Town 2019:

What’s the business case for broadband services in Africa and how will 5G disrupt the market in the next few years?

The investment case for broadband in Africa is quite strong, due to the congruence of positive trends on the demand side. First the need for connectivity continues to rise, buoyed by the ever-growing population size of the continent. As we all know, young people are always early adopters of technology; that explains why your 10-year old niece will probably find out how to sign up and access the Disney Channel on Youtube on your new smartphone, before you even figure out how to place a phone call on it. So, Africa’s youngening population is driving up the need for high-speed internet. In addition, as a whole, Africa’s economy continues to grow; according to a report by the African Development Bank, Africa’s economic growth reached 3.5% in 2018, and is projected to reach 4% in 2020.

This trend holds even if you exclude South Africa and Nigeria, the two largest economies on the continent, which actually pull down the continent-wide average, due to sluggish growth in those markets. Notwithstanding long-observed inequalities, this growth will likely improve the spending power of the populations in Africa, and ultimately, allow them to spend more on telecommunication services, which were previously considered superior goods, but now prove out to be a necessity on a daily basis. So the combined effect of a growing number of tech-savvy young Africans (who are hungry for connectivity and all the content it opens up), and the higher spending power should contribute to make the case for broadband services much easier and palatable for investors.

5G will further increase data and densification requirements. Entrepreneurs will develop applications and services to leverage 5G, which will put an emphasis on low latency and high speed. We can certainly expect the case for investment in broadband infrastructure to become even more pressing.

Fibrecos like CSquared, which builds and operates infrastructure networks on a wholesale and open-access basis, will be critical to make the investment cases work. This is because there will be a high demand for expansion out of the high-density/high spending-power areas, and these investments will only make sense if the infrastructure is fully utilized, and hence shared among service providers through the intermediary of a fibreco.

Taking into account the huge demand for data on the continent, do you think the current level of investment is sufficient?

Despite recent advances, there is still an infrastructure gap to meet the data needs in Africa, mostly within the metro fibre space. As we survey the continent, we see a large quantity of submarine cable to bring internet capacity to the coasts of Africa, with many more under plan. Similarly, for the most part, there have been significant deployments of terrestrial long-haul fibre networks, to move the capacity from the landing stations on the coasts to the cities, sometimes across countries.

The biggest challenge is still the lack of adequate infrastructure to move the content within the cities. As data consumption increases and the latency requirements become more stringent, wireless backhaul solutions will become obsolete. Operators have been slow in systematically adopting fibre as the medium of choice for backhaul, hence the insufficient investment in that space.

In addition, owing to the steady growth in relevant content, consumers are now interested in broadband connections at home; we have seen FTTH and 4G/LTE fixed wireless access deployments in a few markets, but outside of South Africa, Mauritius, and maybe Kenya, they have yet to reach the scale necessary to meet the demand.

What role do you think public authorities can play in this matter?

Public authorities should play the role of enabler for infrastructure investments. This could take the form of improved training programs to ensure that operators can recruit qualified staff locally, clear and supportive licensing and tax regimes which promote and protect investments into infrastructure and services, and country-level regulations which remove barriers to the deployments of infrastructure, such as cumbersome right-of-way processes and restrictive import rules which delay projects.

Public authorities can also commit to commercialize the assets under their purview. In many instances across all regions of the continent, public authorities have deployed fibre networks, most often on the long-haul segments (backbone). Tanzania, Uganda, Guinea, and Sierra Leone come to mind in this regard. However, those assets often end up being underutilized by the operators, who cite issues with quality of service, and pricing for access to the infrastructure as the main reason.

We believe that the governments should enlist the assistance of the private sector for operating and commercializing those assets, under innovative win-win models of partnerships, such as PPPs or concession-types of agreements.

Who are the leading investors within this market and how is this market changing and consolidating?

We can group investors in a few categories. First, governments, which have built mainly long-haul fibre networks, with debt financing typically provided by international development organizations such as the World Bank Group, the African Development Bank, etc… We have also seen some vendor-financed projects, especially in West Africa where Huawei rolled out projects through agreements between governments and the China Exim Bank.

Secondly, mobile operators have also been a significant source of funding for infrastructure build in Africa. They typically provide the investment to roll out fibre to backhaul their base stations, with little coverage provided for future fixed lines connections (e.g., fibre to the home, fibre to the business).

Finally, independent fibrecos like CSquared have also sprung up, with a focus towards building the infrastructure to serve the needs of the operators. Those mostly follow an open-access, shared model, with financing varying from localized shareholding at country level, to debt financing, and equity financing from DFIs.

In terms of changes, we have yet to see significant movement for consolidation, as has been observed in the tower space for example. We still see independent roll-outs across markets. However, since fibre, like other infrastructure, is a game of scale, we do expect some consolidation to happen over time, with it most likely to start with transfer of management of public fibre assets to private operators.

Over time, as fibrecos increase in scale and expertise, we expect to see more sale and lease-back deals between the fibrecos and the mobile operators. Those conversations have already started, and we do believe that they will mature in the near future.

What current opportunities are there for businesses/investors to get involved with fibre and 5G? What infrastructure projects are currently in the pipeline?

There are numerous fibre investment opportunities for both greenfield builds and acquisitions. For greenfield, we believe that multiple roll-outs will come online in the next 12 to 18 months, especially in the metro areas where there is still a gap; these deployments will be driven by mobile operators and independent fibrecos. There is then a need and opportunity to provide debt or equity financing to the companies rolling out these networks, with a strong potential for those opportunities in markets like DRC, Nigeria, Sierra Leone, and Guinea, to cite a few.

On the acquisition front, the need for consolidation and efficiency gains will drive such transactions; the most attractive scenario from an investor perspective would be to finance asset acquisitions from a mobile operator across multiple markets. Key targets are MTN, Airtel, and Orange, each of them with varying levels of interest in such transactions; investors might need to be prepared to pay a premium for those assets in order to increase the willingness of the mobile operator to part with the assets.

What will TMT Finance Africa Cape Town 2019 delegates learn from attending your session?

I hope the delegates will understand that there is a need for broadband infrastructure, there is an investment case to be made for this sector, and there are operators like CSquared who are ready to help deploy the capital in the areas who need it the most.

What do you think the market will look like next year and in say, five years’ time?

We expect consolidation to have taken hold, similar to what we saw with towercos. Mobile operators will embrace the concept and benefits of shared infrastructure, and will be more willing to pool their assets under the umbrella of independent fibrecos, to ensure that they increase their footprint faster, with better costs, and better efficiencies. This in turn should enable them to focus on their core businesses and innovate around products and services for end users.

We also expect the demand for content to continue to grow; already, content owners and providers such as Google, Facebook, and Netflix take steps to store content closer to the consumers, usually at datacenters on the continent. However, this only heightens the need for large fibre networks with dense capillarity which can be used to not only deliver the content into the consumer’s homes (FTTH), but also to backhaul the base stations which carry increased traffic due to penetration of 4G and 5G eventually.

This network expansion and densification requires specialized skills and focus on infrastructure, which are typically the domain of fibrecos like CSquared. So, in time we expect to see a trend where fibrecos continue to expand their networks to keep up with the content explosion, and enable service providers to focus on sales and marketing to reach every user who needs the connectivity.

What are you looking forward to most at TMT Finance Africa Cape Town 2019 and what piece of advice/information do you hope to leave with the audience?

We are looking forward to sharing our experience and learnings around building the case, making investments, and commercializing broadband infrastructure. We are also looking forward to meeting potential partners who are interested in working with CSquared to help advance roll-outs and utilization of broadband infrastructure, through various innovative partnership models.

We hope that delegates will leave with a sense of optimism around opportunities to help bring about the broadband infrastructure required in Africa. We also hope delegates will understand the importance of partnerships and collaborations between fibrecos, mobile operators, investors, and the public sector, in order to ensure optimal deployment and utilization of infrastructure.

CSquared is an African wholesale broadband infrastructure joint-venture between Google, Convergence Partners, the International Finance Corporation (IFC), and Mitsui & Co.


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