Submarine Cables: Financing and Long- term Investment Models
Once the viability of a submarine cable project is analysed, from technical and socio-economic viewpoint, careful considerations is needed on the venture composition alongside financing and investment structure.
There is no longer question about the key importance of affordable broadband communication for the development of a country its public welfare and its economic growth. This has been the key driver for impressive growth rates witnessed in developed countries, and no less impressive expected growth rates, not only in emerging market, but also in what appears to be mature markets. Adding to this the multiplication of data services, the emergence of big data, and the overall willingness to access all services and data in a non-discriminatory fashion, broadband market is still anticipating healthy growth around the world, and in particular in MENA region.
Havelet Finance Limited provide provide a tailored made financing and long-term investment structure for submarine Projects.
Financing and Long- Term Investment Requirements for Submarine Cable Projects
Upon implementation of large infrastructure projects, submarine cable projects require heavy upfront CAPEX investment with the ongoing operational expenditure being relatively low (usually less than 6% of the CAPEX per annum) which should be funded by cash inflows generated by the project. In general the funding requirement for this type of project could be split into two categories:
Pre Ready For Service (RFS) date:
Cable build CAPEX, payable to the main manufacture and cable installation supplier and other contractors involved in project management of the build
Operational and team costs during the cable build phase, including any presales and marketing expense during the build phase.
Payments required to secure IRU onward capacity needed for the end to end circuits (if applicable) Post RFS date: Ongoing operational costs until the cash-flow from the capacity sales covers the OPEX of the company.
The typical build timeframes for submarine cables would be in the region of one to three years depending on the cable length and the complexity of the marine operations.
Financing and Long Term Investment for Submarine Cable Projects: Investors Interests and level of involvement
For the project initiators, the need for involving additional stakeholders can be motivated by two factors:
- Additional financing (Passive equity financing)
2. Political and commercial influence (Strategic partnership) A passive investor, such as a general investment fund, once convinced by the feasibility of the project and its potential return on investment, might require, in addition to the acquired equity, to be represented at the Board of Directors (BoD) but shall not interfere in the daily operations.
However a strategic partner would demand some level of operational control, either by taking over 50% of the management control or by filling some of the key executive positions. These details are generally agreed upon within the Shareholder’s Agreement. On the other side the project initiators will be reluctant to give away management control unless is strongly justified by commercial and/or political upside brought by the new strategic partner.
The upsides are generally in one of the following categories:
- Financial and political support to the landing of the cable abroad
2. Accelerating authorisation and regulatory approvals nationally
3. Provide customer base from cable RFS; It is essential to be guaranteed at least one of these upsides before considering new strategic partnership. Having stated this, it is not uncommon to be imposed a strategic partner, generally a landing party, for the mere feasibility of the project.
Different ownership approaches
There are three main ownership structures that are common in the submarine cable industry. They usually differ in nature and the specific commercial objectives that are to be achieved.
Private Cable — wholly owned by investment vehicles In this structure, investment is made by one or several strategic investors (such as sovereign funds) to profit on the commercial opportunity created by underserved growing demand in the specific region or countries. More importantly the investment enables wider strategic development of other vertical sectors (e.g. Telecom, ICT, Education) that depend on availability of reliable fair-priced international connectivity.
The investors involved usually have a wider portfolio of regional investments and are looking at a cable investment to support some of their other interests. The interests here could range from development of specific industry such as education and R&D as in the case of the Qatar Foundation with GBI, to protecting national and regional interests by creating secure and reliable communication links with the particular country or region. In the case of the direct shareholders being Investment Funds, the cable does not generally allow for direct investment by an operator nor provide exclusivity to specific operators.
These are nondiscriminatory and provide open and fair access to the cable capacity for all access seekers. The investment vehicle might also be directly owned by an operator or telecom group that sees direct synergies in owning a subsea cable. This is the case with Orascom’s MENA cable, and Reliance’s Flag. The latter has invested heavily in the deployment of its worldwide submarine cable system, in order to economically offer managed wide area network services over the six continents.
The decision making procedures are similar with the other private cables enabling quick and efficient decisions to be made — with the added influence of preserving the strategic wider aims of its investors and enablement of adjacent markets. In this case the decision to expand or upgrade might be based on a strategic direction for development of the region or specific enablement of industry sector in the region. As these cables base their business case on overall demand projections and underserved market need, they do not require any customer’s pre-commitment.
The initial cost is borne by the raising capital exercise and the cable products will be offered and sold to all operators without (usually) exclusivity given to specific entity.
Public Private Partnership (PPP) As per the World Bank’s ICT organisation, “a Public Private Partnership (PPP) is an agreement between the government and private organisations to develop, operate, maintain and market a network by sharing risks and rewards”.
The involvement of public entities within private projects, in particular complex international telecom projects generates benefits for the whole value chain. Providing that government’s incentives relate to public welfare rather than personal profit PPPs tend to enable higher risk projects with lower return expectations to be feasible.
The involvement of private players also impacts and decreases the project risk for the public sector, as it ensures higher quality of service and some anchor customers. Additionally, the combination of private player’s purchasing power and the security of public support lead to much lower TCOs of the project.
For the public sector, it is also interesting to trade influence with private financing. Indeed, the direct involvement of public entities often results in shorter lead time and critical project speed. There are many forms of PPP that have been used in the telecom sector such as:
Consortium type where one or more government entities take direct part in the consortium is probably the most commonly used in submarine cable ventures. For example in the ACE cable public contribution reached more than 50% of the total cost. The WACS project includes DRC’s SCPT; both SEAMEWE-3 and SEAMEWE-4 include the Communication Authority of Thailand therefore demonstrating direct involvement from public sector.
Pre-sale Commitment, where a public entity commits to buy in advance a major chunk of the available capacity, could also be found. This generates some initial positive cash flow, and facilitates further financing.
Management Contract or Build, Operate and Transfer (BOT) type of agreement, where the public sectors gives a private player the responsibility for deploying and operating the network on its behalf against annual fees or following a revenue sharing agreement. We note that this is more to be found in the terrestrial fibre business with examples across Africa.
Subsidisation: government can also subsidise the deployment of an infrastructure it believes is essential to the welfare of its citizens. In this scenario, just like for the pre-sale commitment, there is no ownership of the project nor control over the project, from the public sector.
Financing and Investment Options For Submarine Cable Projects
Financing and Long- term Investment options for submarine cable projects might be used either to provide direct funding of the project or for securing shareholder contribution.
Increasing leverage might lead to financing decision to improve the project’s IRR. Although the raising of financing often proves opportunistic and in order to have well balanced financial sheets,
It is generally accepted that OPEX should be financed via short term facilities, whereas CAPEX should be financed with long term credits or equity. This section deals with various alternatives for project finance and differentiation is made between short, medium and long term financing.
Project Financing For Submarine Cable Projects
The structure of project financing for submarine Cable projects relies on future cash flows for repayment of the project finances. The assets or rights held under the project act as collateral for the finance. Governments or companies prefer project finance for long gestation projects or for joint venture arrangements or collaboration arrangements.
Projects in developing countries often find the support of Development Financial Institutions (DFIs). DFIs are backed by developed countries and provide guarantees to risky loans as well as direct financing or even, in some cases, equity contribution to a project proven to benefit the development of underserved countries or region. This type of financing was part of the establishment of the previously mentioned WIOCC entity, the key shareholder or EASSy cable. The figure below shows the structure of WIOCC’s financing.
The complete DFI long term loan comprises the direct financing of three DFIs, AfDB backed by 53 African countries and 25 non-African countries, France’s AFD and Germany’s KfW, as well as from the World Bank’s IFC.
Vendor financing For Submarine Cable Projects
In a highly competitive manufacturing industry such as telecom equipment, financing from the equipment vendors becomes a strong selling point. Indeed new telecom initiatives such as subsea cables and large mobile deployments are always CAPEX intensive, and revenues and related cash inflows only starts after the first phase of deployment.
This evidently generates a spike in the need for funds at an early stage of the project. The later CAPEX commitments are set, the easier it is for the operator to generate the necessary cash due for payment. This in turn will have a significant impact on the project IRR, as it postpones cash outflows and reduces the need for upfront financing, leading to lower financing costs.
Documentary Credits
Documentary credits are debts raised from a bank or a financial institution, for the sole purpose of the acquisition of a specific good. Once all terms are agreed, the whole transaction is based on a set of predefined documents that guarantee the right delivery of the request goods, under the agreed conditions. In practice three parties, the vendor, the buyer and its bank, all sign a joined credit agreement according to which, once the goods have been delivered and the vendor is able to prove it (with a pre-agreed set of documents such as commercial documents, transport documents, bill of landing.
Our Service Includes;
• Loans in euros or other currencies at the request of the client.
• The maximum amount of financing is up to 100% of the investment cost.
• Corporate refinancing of both operating and under construction enterprises.
• Long term and flexible payment schedule.