INSIGHTS

Sector Deep Dive #6 - Digital Infrastructure

Infrastructure Asia organized 2 deep dive sessions on digital infrastructure to gather views from nine industry players on the opportunities and challenges for digital infrastructure in Asia.

InfraAsia recently asked several Southeast Asian and South Asian government officials what do their countries need more: Data centres? Fibre? Telecom towers? Their response was “all of the above”. When asked what they see as the biggest use for digital infrastructure: Home-based education? E-commerce? Work-from-home? Telehealth? The response was again “all of the above”.

Everyone is now aware of the importance of digital infrastructure. Why still focus on it?

The Covid19 pandemic has increased the importance of digital connectivity to ensure work, education and living continues despite being more home-based, and investments and deployment of digital infrastructure have correspondingly accelerated. In addition, the pandemic has also accelerated the move to cloud by several years. The needs are very pervasive. For example, digital infrastructure is also needed to improve logistics & supply chain, disaster management etc., said Arun Kant (Leonie Hill Capital).

Boutheina Guermazi (World Bank) shared that studies have estimated that “every 10% increase in broadband penetration in low and middle income countries result in a commensurate increase of 1.38% of the GDP¹”. Hence, the sector can play a big role in supporting economic recovery.

However, many in Southeast Asia and South Asia remains unconnected. In an International Telecommunication Union report, it was mentioned that fixed broadband subscriptions in every ASEAN country, except for Singapore and Vietnam, were below the global average. In terms of internet usage, Cambodia, Indonesia, Myanmar and Philippines were below the global average of around 50%.

Srivats Kumar (Facebook) indicated developments are highly country dependent. Different countries are at different stages. Indonesia, for example, has a developed towers market, whilst the Philippines is just opening up the towers market now. Isabel Chatterton (IFC) also observed that more data centres were being developed in India and Indonesia within emerging Asia.

With governments’ fiscal situation more strained as resources are diverted to address the pandemic, could there be ways to increase private sector investment in digital infrastructure?

Sharad Somani (KPMG) shared that private sector has historically been investing in digital infrastructure, and the revenue models are robust. Luca Tonello (SMBC) concurred that there had been heavy private sector involvement already, particularly in data centres (which alongside renewables have continued to attract capital during the pandemic).

As many of the best-in-class investors and developers are multinationals, some of their successes and challenges they faced offer some reference how the private sector have already successfully financed a number of assets. However, assets which create connectivity such as fibres and cables will also require a proactive government involvement in the form of clear regulations to further attract private capital.

Giles Proctor (Agile DC) commented that Asia has fewer availability zones compared to developed markets. In that regard, government facilitation and putting in enablers can be important to increase attractiveness to international investors and developers. Experiences in countries like China and Indonesia showed that allowance for foreign ownership, a single government window to process approvals (particularly for land acquisition and easements), and availability of electricity are key enablers. Isabel Chatterton (IFC) agreed, and cited IFC’s work in the Philippines, where they worked with the government to significantly reduce the timing for government approvals for new digital infrastructure. That combines with a good regulatory framework and greater long term certainty to make certain countries more attractive to international investors and developers.

Are there areas that will be important for the next wave of digital infrastructure?

A few themes could feature more prominently for digital infrastructure.

One area, as Sharad Somani (KPMG) highlighted, is cybersecurity, which will increase in importance. As it stands, companies like Princeton Digital are already putting a lot of focus on this aspect.

A second area is sustainability. Digital infrastructure like data centres are large consumers of electricity, hence more efficient energy use and use of renewables need to increase. According to Giles Proctor (Agile DC), data centres are a good baseload and consistent consumer of electricity, and data centres that have their own power generation sources can even work with governments to smooth out peak electricity usage in the system.

A third area is to improve inclusiveness. Innovation in commercial structuring could play a part. Boutheina Guermazi (World Bank) pointed out that, for example, aggregating demand in the Pacific Islands increased the market and made the offering more appealing to investors. Tong Yew Heng (NetLink Trust) also shared that sharing of digital infrastructure could be another way to reduce duplication in capex in the overall system, which consequently make digital connectivity more affordable to end-users. Srivats Kumar (Facebook) commented that as the infrastructure intervention gets situated closer to rural establishments, the cost of infrastructure per ‘connected’ individual is likely to be higher than a comparable infrastructure intervention targeting a tier 1 or 2 city with a good degree of population density. The traditional telco model is an integrated one, hence it may take some effort, such as joint planning and deployment with a roundtable of stakeholders or changing the mindset to share towers, fibre etc., but the end result is worthwhile as it helps to make digital infrastructure economic.

A fourth area is leap-frogging. Many developing economies have a relatively clean slate, hence can consider the most suitable technology. Smartgrids, more effective tunneling to lay cables, newer commercial models which allow internet access with zero or no cost, 5G and microwave for last mile coverage are just some of the examples Arun Kant (Leonie Hill Capital) said the market can consider. Taking reference from other countries/counterparts could also be a good launching pad. Tong Yew Heng (NetLink Trust) indicated Singapore managed to achieve 100% access to the fibre network within 5 years, and there were many lessons that could be gleaned from that process. One key factor was the presence of a strong regulator. Having a skilled workforce and ecosystem with experience in fibre rollout was also important. Detailed management practices such as being able to follow installation timings were also key to population acceptance. Although NetLink Trust benefited from lessons from earlier rollout of cable television, they also had to adapt to their own situation before customer complains about installations start to come down. As technicalities are similar in the same industry, tapping on peers’ experience and also tapping on the ecosystem of companies who have gained experience with these peers could also help countries be more effective in their own implementation.

A fifth area is to leverage with commercial bank debt. Many types of digital infrastructure can be implemented initially without debt, but the ability to bring on mid to long term commercial debt could lower funding cost. As ticket sizes for debt to digital infrastructure are smaller and loan tenors are shorter that for traditional infrastructure, Luca Tonello (SMBC) indicated commercial bank lending to digital infrastructure can be interesting for banks. However, there is a need for banks to adapt, and combine real estate and infrastructure skill sets so as to properly assess sponsor quality, location, non-fully contracted model etc., but more banks are now open to support this sector.

It is clear from the 2 discussion sessions that digital infrastructure is a sunrise sector and needs remain huge on many fronts. Whilst private sector has been able to invest in this sector in the past, given the massive needs, the need to implement quickly and the competition for international investors and developers, governments may need to take a more proactive role to put in place enablers. Listening to the 9 discussants, it requires determination and effort to put in place the enablers, but the challenges are indeed surmountable as some countries have started to attract investment at scale.

¹ _{Kim, Y., Kelly, T., and Raja, S., Building broadband: Strategies and Policies for the Developing World, The World Bank, 2010}

This article was collated by Seth Tan and Lavan Thiru, Infrastructure Asia. Special thanks to insights shared by:

• Tong Yew Heng, CEO, NetLink Trust
• Giles Proctor, President and Co-Founder, Agile DC (invested by Digital Colony)
• Srivats Kumar, Network Investments – Emerging Markets Development, Facebook
• Sharad Somani, Partner, Head of Infrastructure Advisory and Head of Infrastructure, Asia Pacific, KPMG
• Luca Tonello, General Manager, Structured Finance, Asia-Pacific, SMBC
• Boutheina Guermazi, Director of Digital Development Department of the Infrastructure Practice Group, World Bank
• Varoon Raghavan, Chief Operating Officer, Princeton Digital Group (invested by Warburg Pincus and Ontario Teachers Pension Plan)
• Arun Kant, CEO, Leonie Hill Capital
• Isabel Chatterton, Asia Pacific Regional Industry Head, Infrastructure & Natural Resources, International Finance Corporation (IFC)