Perspectives

Connectivity and COVID-19: Upgrading digital infrastructure in the UK

7 August 2020

COVID-19 has driven greater demand for connectivity and accelerated the search for new sources of infrastructure investment. The sudden and significant increase in people working, shopping and being entertained at home has seen customer demand for telecommunications services soar. Since the beginning of the lockdown in March, Ofcom reported an increase in UK daytime broadband traffic of up to 60 per cent1. This surge in online activity, combined with the increasing digitalisation of the global economy, has added to government and regulatory pressure to improve connectivity and network capacity in the UK.

The development, operation, and management of telecommunications infrastructure in the UK has long been driven by traditional telecommunications firms. But with many of these firms facing mounting pressure to cut costs and reduce debt whilst increasing investment, the sector is rethinking its financing models and looking to alternative sources of capital to help bridge the funding gap.

"Increasingly people want access not ownership."

Guy Peddy, Managing Director, Macquarie's Specialist and Asset Finance business

Asset finance – increasing in importance

"Overall spend on telecoms connectivity has increased and the technology lifecycle has shortened quite significantly in recent years," says Guy Peddy, Managing Director in Macquarie’s Specialist and Asset Finance team. "That is having real implications for traditional telecommunications firms who are under pressure to balance additional investment in their networks with declining high margin legacy revenue streams."

Asset finance is emerging as an important tool in this fast-changing technology landscape, as Peddy explains: "Previously, operators opted to self-build. Now they are looking at alternative models to fund these technology upgrades, including asset financing of networks with third-party ownership. Operators are not necessarily using their own capital, they are sharing and renting assets. Asset finance allows them to marry the funding solution to the life cycle of the asset, which can be more efficient and help operators deliver on their sustainability targets."

Asset finance can work well for corporates where business models are in flux and there is a reluctance for risk investment in major capital expenditure projects. However, it can also work for the public sector, which can underwrite the initial investment and have private companies pay to use the infrastructure. "Increasingly people want access not ownership," asserts Peddy.

Opportunities for infrastructure investors

Meanwhile, the mobile phone towers and fibre networks that make up the UK telecommunications ecosystem are attracting the interest of specialist infrastructure investors seeking long term and stable returns that match the liabilities of their underlying investors, such as pension funds and insurers.

"There are many opportunities for infrastructure investors in the telecoms sector, because retailers currently cannot afford the significant levels of investment required and once developed the infrastructure can be shared by a number of telecoms firms." says Nathan Luckey, Senior Managing Director at Macquarie Infrastructure and Real Assets (MIRA). "The benefit of this type of institutional capital is that it’s agnostic to the retailer. The traditional telecommunications firms are more comfortable sharing network infrastructure when it’s owned by a neutral investor, rather than by their competitors."

Interest from institutional investors in the sector could offer a new source of capital to fund the development of the UK’s telecommunications network infrastructure. The sector has become even more attractive to these investors in the wake of the pandemic. "Pension funds and others have seen how telecommunications assets are less exposed to the economic cycle. People in the UK now need always-on connectivity, so the sector is now being compared to essential utilities like electricity, gas and water."

 

AltNets – a new role

Infrastructure developers are also looking for new opportunities in the UK market, creating growing interest in supporting alternative networks - known as AltNets. These AltNets are small, challenger network companies that are not as dependent on the UK’s existing copper network infrastructure as larger players.

Oliver Bradley, Managing Director at Macquarie Capital, explains: "Alternative networks, or AltNets, are becoming an increasingly common feature of the market as the push for universal high-speed broadband connectivity grows. These operators are typically nimbler than the traditional telecommunications firms and could make a big difference in helping to plug gaps in connectivity – particularly in key certain niches."

"Large players are reaching their maximum through put, which means AltNets can supplement their efforts and accelerate the UK’s progress in becoming a full fibre country."

Although, when it comes to scaling up their deployment, many of these AltNets are still deemed a risky investment for conventional lenders. This raises their cost of capital – meaning more expensive deployment and higher costs to potential customers – which can reduce uptake. 

However, proven infrastructure developers can use their expertise in finding sites, getting permits, negotiating contracts with constructors to help UK AltNets de-risk their projects. This expertise can significantly reduce the development costs of AltNets.

"Fortunately, there is no shortage of private capital from people like us and no shortage of appetite to invest in this sector. But it is creating the right investment landscape with the right risk profile that can help unlock this investment and accelerate universal connectivity in the UK," adds Bradley.

So, whilst the COVID-19 pandemic has dramatically increased demand for connectivity, it has also driven other trends in the sector – increasing infrastructure sharing, making digital infrastructure more utility-like, with greater diversity of developers. This means that whilst there are growing restraints on telecommunications firms, the changing nature of the UK telecommunications industry is providing more opportunities for private capital to support the sector.

Find out what it's like to work in MIRA's Digital Infrastructure team- Cynthia Oey's story