Communications
Why it is a good time for investors in telecoms infrastructure
Public ambition and funding capital are driving on the biggest infrastructure projects of our time
The European Commission last year (9 March 2021) set a new target for the implementation of secure and sustainable digital infrastructures by 2030 to ensure that everyone in the Union has access to gigabit connectivity whether fixed or 5G. The EU's "digital decade" will require a constant monitoring of progress, whether through its Digital Economy and Society Index (DESI), annual reports, strategic roadmaps, or co-operation between Member States. But, most importantly, it requires funding.
Last year's digital infrastructure roll-out commitment comes more than a decade after the Commission, in 2010, set out its digital agenda to 2020, which had called for more to be done "to ensure the roll-out and take-up of broadband for all, at increasing speeds, through both fixed and wireless technologies, and to facilitate investment in the new very fast open and competitive internet networks that will be the arteries of a future economy."
Meanwhile, in the UK, plans were originally announced for a full fibre nationwide network by 2033. However, this was thought to be too slow and the target date was brought forward to 2025 and changed to gigabit capable broadband nationwide. The National Infrastructure Report, published in November 2020, changed the goalposts by saying that "the government is working with industry to target a minimum of 85% Gigabit capable coverage by 2025...".
Ambitious targets
It is all very well for governments to set ambitious targets, but the ability to meet these depends on a number of factors. It is much easier to roll out new networks if there is a high degree of competition in the market and there is a demand for high-speed connections. The latter is dependent on the degree to which society has become digitalised – and this has been driven forward recently by the pandemic and remote working. Another factor is an effective and stable regulatory regime. On the whole, most of these factors test positive in both the EU and the UK.
The next big factor is the cost of creating the new infrastructure and the availability of funding. This is where it becomes more difficult. The cost of passing a property varies wildly from country to country. In Spain, where above ground connections tend to be used, pre-existing infrastructure, such as ducts and poles, are readily available and accessible; the average cost is €200-250. In Germany, this rises to an average cost of €1,000-1,500, partly because most of the fibre is underground and there is a lack of existing infrastructure that can be used or upgraded. With 34 million homes to pass, this gives a build cost of at least €34 billion in Germany alone.
Who pays?
So who picks up the bill? Typically the main burden falls on the incumbent fixed-line provider, as, although the political ambitions are always expressed in a technology neutral way, the main focus remains on the fibre to the premises. Public funding has a big role to play, especially in areas where there is no or little commercial incentive to invest in new infrastructure.
However, there is a third and increasingly important source of funding. Investors and investment funds are turning their attention and money to telecoms infrastructure, which has become a "hot" investment area. The rise of the telecoms mobile infrastructure companies, such as Cellnex, was one of the big investment stories of 2021 and funds are available and plentiful in 2022.
But just passing a property does not give a return unless the property uses the new network. The good news for investors is that the take-up rate has doubled since 2012 and is now at an average across Europe of 47%. So potentially good news for investors; but they need to bear in mind country differences – the take up rate in Spain is 71% but in Italy it is only 14%.
Underskilled and overbuilt
There are two big issues to overcome. Firstly, the lack of skilled workforce. In Germany there are 3,000 jobs listed on the Glasfaserausbau website and, in the UK, Manpower estimates that 15,000 jobs need to be filled. This is something that the industry has been grappling with for some time.
The other is the danger of overbuild. If all of the planned roll outs happen in Germany and the UK then coverage will exceed 100% of premises. In the UK, research from Ing Research published earlier this year suggests that coverage of 200% will be achieved. Is this a good thing? In theory, it ensures competition in the market, but in practice it means that the more attractive areas (densely populated) will have multiple offerings while other areas will still end up missing out.
Good times
This is a good time for investors in telecoms infrastructure. Public ambition and funding is helping to drive on the biggest infrastructure projects of our time. The returns on investment are there, but care is needed to choose the right horse to back. There are over 100 AltNets in the UK alone, not all of them can survive.
Connect with one of our experts
Jon Fell Partner, International Head of Telecoms, UK jon.fell@osborneclarke.com +44 20 7105 7436