5 October 2021
For thousands of years, localities have needed to evolve their connectivity to remain relevant, competitive and economically prosperous. Be it transport systems, which have migrated over the centuries from being marine dominated to a focus on land and air connectivity, or communications systems, which have progressed from telegraph systems to telecoms and satellite networks, populations’ ability to keep pace with technological developments has been directly tied to their fortunes.
Today, the challenge is meeting the needs of society progressing at speed towards ubiquitous digitisation and keeping connected with a competitive environment that is increasingly global in nature. This requires a new kind of network to ensure communities are set up to access the services and socio-economic benefits both bring.
However, due to shifting industry dynamics and disrupted business models, traditional telecoms operators in the private sector can no longer be expected to provide the entirety of communications infrastructure of the future. Along with the utility-style status these networks are gaining, this is forcing municipalities and local authorities to step up and drive the change.
Such migration in responsibility from well-funded corporate to under-funded public body requires a new type of funding structure that accounts for the unique nature of technological risks and constrained nature of government budgets. One that makes maximum use of alternate sources of capital, combined with in-depth knowledge of technology asset lifecycles and the expertise to support the development of the networks in a sustainable, effective and capital-efficient way.
Though demand for new infrastructure was there long before the COVID-19 pandemic, the past 18 months has served to highlight both the benefit and necessity of digitising everyday services. It’s also highlighted the importance of connectivity for all of society: consumers, businesses and governments alike. Underlying the discussions taking place in community and town halls up and down the country is the need to build advanced, powerful and cost-effective networks that connect even the most remote of communities to the most international of services.
Connected cities also need to be “smart” cities. A smart city is a framework that optimises technology to develop, deploy and promote sustainable operational practices to meet the growing demands of urbanisation.
But they are only justifiable in today’s world if there are both economic efficiency benefits that stimulate growth and employment, and considerable sustainability improvements. With corporate and national climate pledges being both reaffirmed and strengthened globally, and ESG-conscious investors more willing than ever to express their opinion on sustainability expectations, the allocation of capital has to be done through a green lens.
Governments, local authorities and municipalities focused on securing cost and climate efficiencies in urban logistics and transport, waste management, education and health are themselves looking to these new networks to guide them. Deploying new and emerging technologies to help manage traffic flows, waste collections and transport systems can both save the public purse money and offer significant emission savings.
But new network infrastructure is needed to handle the data for these innovations, the associated technologies such as smart meters, and the 5G-driven Internet of Things (IoT) connectivity that facilitates them.
Without these network innovations, policymakers face the challenge of supporting sustainable economic growth within the confines of the existing infrastructure and without threatening the achievement carbon offset targets. Something that will only become harder to achieve over time.
More holistically, for the greatest long-term potential social-economic benefits to be realised, governments and businesses will need to progressively integrate with local communities and where possible share resources and amenities. This will result in more collaborative networks that will share inputs and outputs, services and people.
Building networks is complex. Historically the task was undertaken by a select few operators –either those holding a natural monopoly or acquiring one by taking a spectrum ownership position. However, the fragmented nature of today’s telco industry and disaggregation of its value chain has rendered the traditional investment model unviable.
Instead, telcos are funding shared infrastructure assets that have different ownership arrangements. Increasingly, both active and passive network assets are being shared, and the role of anchor tenants is more significant to help de-risk private network business models. Such a solution has emerged as a leading mechanism for securing the capital expenditure needed to upgrade networks to fibre and 4G/5G, especially where it’s impossible to build more than one network or the economics of self-build are prohibitive
There is also the rise of the wholesale-only model, the separation of retail from network businesses, such as at TDC in Denmark and CETIN which operates across Central and Eastern Europe, and in the future, there will be growth in the number of private networks. Competition drives innovation and improved affordability, but also diminishes returns and leads to an inefficient allocation of capital. Striving for this balance is central to the long-term economic sustainability of the telecom industry, and ensuring countries and cities are at the forefront of technological development.
Indeed, cities are likely to benefit from enhanced connectivity if telecoms operators’ business models are reshaped and the deployment of capital is focused and optimised; new business models may offer superior outcomes for all compared to legacy models of the past.
But regardless of what shape they take – and there is no single private network model that can collectively meet the individual needs of every town and city – it leaves a period of readjustment ahead. One in which there will be a trade off between the need for telcos to accelerate their reinvention and recalibrate their value-creation formula with a societal need for infrastructure investment.
Either way, a smarter allocation of capital than has ever gone before will be a big part of the solution, as like the infrastructure it’s required to fund, one size no longer fits all.
Macquarie’s unique combination of specialist technology asset financing capabilities, residual value risk and lifecycle management expertise can support operators, businesses and local authorities with these developments.