If you wake me up at 2 am and ask me what I am thinking about, the answer is power,” says Pankaj Kulshrestha, chief operating officer of Eaton Towers, one of a crop of infrastructure companies that have sprung up in the past five years to control some 15 per cent of Africa’s telecoms towers.
Such nighttime frets arise from the fact that telecoms towers – which much of Africa relies upon to enable internet access – need diesel-powered generators to keep humming. And the supply of diesel in sub-Saharan Africa is prey to theft, political upheavals and economic volatility.
As a result, the business model of “towercos” such as Kulshrestha’s, as well as the operation of some 170,000 telecoms towers and the provision of wireless internet for communications, banking and commerce in large swathes of the continent all hinge on the vicissitudes of the market in the fuel.
Goldman Sachs, Soros and Rothschild are all at diesel’s mercy
“Towercos”, which have attracted high profile investors from the West such as Goldman Sachs and George Soros, operate by buying portfolios of towers from mobile phone operators and then lease back space for their transmission equipment, reducing costs for the operators while creating economies of scale by opening up the towers to capacity sharing.
The problem is that in much of sub-Saharan Africa (aside from South Africa), the electricity supply from the grid is unreliable, necessitating the deployment of the diesel generators either as back up or, in poorly-connected rural areas, the prime source of power.
The fuel is far more expensive than mains electricity and is the largest single overhead in running towers, accounting for up to 75 per cent of costs where a generator runs for 16 hours a day. In Nigeria, for example, power sourced from generators costs around $0.35 for a kilowatt-hour – four to five times the price of mains electricity.
“The price spikes I worry less about, it’s more the supply,” says Kevin Koch, chief operating officer of Helios Towers Africa, which has 7,800 towers in and is backed by the funds of George Soros, Madeleine Albright and Jacob Rothschild.
In Ghana, which has a comparatively high 72 per cent electricity grid access, according to World Bank figures, and up to 21 hours a day of supply, this is less of an issue for towercos.
By contrast, the less-than-half of Nigerians who have mains access often only get a handful of hours of daily supply. Yet despite generous diesel subsidies of $6bn annually – equivalent to 20 per cent of the federal budget – obtaining fuel from a licensed vendor can be difficult. Compounded by frequent shortages and strikes by refinery workers, this drives many residents and businesses to pay a mark-up on the black market.
Elsewhere, the vastness of the Democratic Republic of Congo – a land mass four times the size of France– means that while a litre of diesel costs around $1.40 in the capital, Kinshasha, in the remote interior it sells for as much as $3 to $4, says Koch.
These factors have led some tower owners to hedge against fuel price increases with oil derivatives such as forward contracts, according to one advisor. More commonly, leasing agreements contain clauses that share fuel price increases with the tenants – the mobile operators. And many companies contract with several bulk suppliers to preclude shortfalls.
“We hold between 800 to 1000 litres on a site so even if there’s a two-week shortage it will be OK,” adds Koch.
Pilfering is not a guy with a jerry can, it is organised crime
Yet as tower sites are unmanned most of the time this makes them a prime target for fuel pilfering.
“Some operators will admit they are losing a quarter of their diesel to theft,” says Terry Rhodes, co-founder of Eaton, which operates 1,500 towers across Ghana, Kenya, Uganda and South Africa. “This isn’t just a guy with a jerry can – it’s organised crime. When you get deliveries you have to make sure it’s the right amount and that it hasn’t been diluted en route”.
Competition is spurring towercos to drive down costs by limiting diesel use. Many have systems that remotely monitor the level of fuel in tanks and how long generators run for. Increasingly popular are ‘hybrid’ power set-ups, comprising long-lasting deep cycle batteries that charge either from the grid or a diesel generator.
Solar power may be a partial solution
“Solar panels are an option for more spacious rural sites,” says Bob Hurley of Eltek, a Norwegian Nasdaq-listed company that has developed more than 500 power systems for towers in Africa at a cost of around $30,000 each.
In the long run this makes commercial sense. A study by the mobile industry body GMSA claimed that adoption of green power in Ghana, Cameroon, Senegal and Nigeria could realise annual savings of up to $200m and reduce diesel consumption by more than 70 per cent.
Yet even though prices of photovoltaic panels have fallen dramatically in recent years, the initial capital expenditure involved can still be prohibitive, according to Rhodes. The economics only add up where a site is unlikely to obtain a grid connection, which delivers far cheaper electricity.
Ironically, in those sparsely-populated areas the business case for renewables is even weaker. The lower density of mobile subscribers means there is less revenue per user – a factor that puts off operators from expanding network coverage in the first place.
The calculus could change however, due to a combination of commercial and policy pressures giving a push away from costly diesel.
Towerco deals to reach $10bn in the next three years
Perhaps the biggest driver towards greater energy efficiency is rising consumer demand. Mobile subscriptions in sub-Saharan countries have grown to 475m from 90m in seven years, but fewer than one in three Africans has a mobile phone, according to GMSA.
As 3G is rolled out, some industry figures believe the number of towers needs to double.
This opportunity for investment is attracting international investors such as Goldman Sachs, which participated in a $490m capital raising earlier this year deal by Nigeria-based IHS, the continent’s biggest independent towerco with 8,250 towers.
Savings will also be required to fund acquisitions as mobile operators shed infrastructure assets and towercos expand their networks. Analysts estimate there will be $10bn of tower outsourcing and building deals in the next three years as high costs drive consolidation in markets with multiple mobile operators.
The scramble for more towers is on
Bharti Airtel this week sold 3,100 towers to Helios for around $500m and plans to offload a further 8,000 across 12 countries in deals that could raise $1.5bn for the Indian telecoms group. Meanwhile, Eaton, Helios, IHS and rivals American Towers Corporation are battling for ownership of 11,000 towers being divested by MTN Nigeria for an estimated $1bn, in what would be the biggest deal yet in the sector.
In addition, the gradual removal of government fuel subsidies – Ghana and Egypt have recently upped petrol product prices – will provide impetus towards the uptake of low-pollution fuel cells, which use the power generated when hydrogen is combined with oxygen, says Kulshrestha of Eaton, although he reckons it is “some way off”.
The technology is already being deployed in India, where Intelligent Energy is installing hydrogen fuel cell powers units, originally developed to power electric cars, at 4,000 tower sites.
The issue could be resolved by the roll-out and improvement of electricity grids and several governments talk big on their aims to boost generation capacity. But despite moves aimed at electrifying far-flung hinterlands – such as the privatisation of electricity utilities in Nigeria– towercos aren’t holding their breath.
“We see a lot of development programmes sponsored by the World Bank pushing electrification out,” says Koch of Helios. “This year in Tanzania we have electrified 80 out of 3,000 sites. But we don’t expect the electricity company to bring the power to us.”
Michael Pooler
Culled from FT.com
