Telecoms & Broadband Business Newsletter - September 2012

Editorial - Infrastructure investments are coming under threat

The GFC is fundamentally changing the economic environment that we have been enjoying for the last 50 years. While it is anybody’s guess what will happen in Europe the outcome there will change the finance world forever. Financial practices have already come under scrutiny but the fallout of the European economic crisis will cast even larger shadows. While banks have been busily rearranging the financial liabilities it is unlikely that they will escape unscarred. New international arrangements such as Basel III are going to fundamentally change the international capital markets – and, more importantly, access to these markets.

This is already visible in Europe and the USA where large-scale infrastructure investments are increasingly been more closely scrutinised. This would require operators to – rather than paying out dividends – start using that money for investments. Naturally, this will not been seen as an attractive model for their shareholders and the question is whether they are indeed willing to do that. In the USA we see both Verizon and AT&T retreating from large-scale fixed infrastructure investments. Mobile companies are finding it more and more difficult to finance the fibre network rollouts to their mobile towers, which are essential for them to provide reliable mobile broadband services.

Add to this the fact that, in both the fixed and the mobile market, many of the services that formed the basis of dividend generation for shareholders are moving towards OTT services and the traditional revenues from telephony and messaging are evaporating in the process. Investors here are becoming increasingly nervous about this.

Internationally we are seeing national operators merging, and ongoing industry consolidation is also taking place in Australia.

There is now increased pressure to ensure that national critical infrastructure investments are going to be made by governments who, through government bonds, have easier and cheaper access to capital. Also governments are able to much more easily spread out investments over longer periods, and they require a lower ROI. With the low cost of government bonds they stay well ahead of the game, even with ROIs of 6%, whereas private investors have far more difficulty with such investments strategies.

So far these issues have not been discussed in any great detail in Australia, as the economic situation here remains the best among the OECD countries, and also because the banks in this country have been far more responsible in their investment strategies. However the global crisis is far from over and agreements such as Basel III are going to affect (infrastructure) investments in Australia as well.

Infrastructure companies in Europe and the USA are far more aware of these changes and are studying these developments in great detail. It would certainly also be worthwhile for companies in Australia to have a look at these developments and start preparing themselves for the investment squeeze that is rapidly increasing its stranglehold.

In addition, this situation would have a serious effect on the NBN, if the Opposition were indeed would to withdraw government investments from this market and instead want to rely on private investment in this infrastructure.