TechNotes – Top 10 issues for telecoms infrastructure sharing

“Network sharing has become a standard part of the operating model for mobile operators, and the trend is accelerating. Operators have been able to reduce the total cost of ownership by up to 30 percent while improving network quality through sharing a variety of both active and passive equipment. 5G will be no exception, with operators eyeing new ways of accelerating the deployment of an otherwise daunting investment.”

“Network sharing and 5G: A turning point for lone riders”, McKinsey & Company

1. Current and future ownership and title: The current ownership of the affected infrastructure (and land) should be clearly understood through careful diligence and the intended ownership position should be set out in the infrastructure sharing agreement. Uncertainty around title can spill over into broader risks and liability concerning the infrastructure among the sharing entities.

2. Multi-operator joint ventures: The relevant operators may incorporate a joint venture which is created specifically for the purpose of owning and sharing the infrastructure towers and tower sites. In a joint venture, the structure of the shareholdings in the joint venture company is crucial for determining the level of control each operator has over the shared infrastructure. This model is especially viable commercially in cases where the operators have significant synergies in their respective businesses and wish to align these, or where both operators wish to retain significant control over the shared infrastructure. These structures are flexible enough to be used for both active and passive infrastructure sharing.

3. Managed network model and TowerCos: Alternatively, in a managed network model, the infrastructure is transferred to a third party (in the case of mobile masts, often referred to as a TowerCo) – a company which specialises in and takes over the ownership and operation of telecoms infrastructure. The operators relinquish ownership of the infrastructure assets, but instead purchase from the TowerCo the capacity to use the infrastructure, on a usage or fixed capacity basis. The TowerCo will also typically be free to offer up capacity on the infrastructure to other operators. A managed network model is a commercially viable option in particular where operators do not wish to tie up significant capital expenditure in infrastructure assets, or where an operator does not wish to enter into detailed arrangements to manage shared infrastructure with another operator. In some markets, TowerCos are emerging as carve-outs from operators which creates a further hybrid of the model, but is still underpinned by a form of sale and leaseback. The TowerCo’s business will be particularly interested in anticipated tenancy ratios on each site and how much parallel infrastructure and related decommissioning is planned for the relevant market – which will dictate revenue flows and profitability.

4. Operational management: Shared infrastructure requires significant co-operation between the operators to ensure effective operation, particularly around maintenance of the infrastructure (including technology refresh programmes), the terms of which must be clearly set out in an agreement. If the responsibility of the day-to-day management of the towers and tower sites is shared (as in a conventional joint venture model), the infrastructure sharing agreement should set out clear procedures for assigning responsibilities, decision-making structures, as well as methods for alternative dispute resolution in case of any disagreement between the operating parties. Because effective management of the towers is crucial for the commercial success of the venture, the ability of the terms of the agreement to clearly channel the efforts and investment of the participating operators can make or break the viability of the business.

5. Tower Use Agreements: In its most basic form, a Tower Use Agreement grants rights for the operator to install and operate its own active equipment on the passive infrastructure owned by the TowerCo. However, how these rights are described and categorised from a legal perspective is crucial for the drafting of the Tower Use Agreement as a whole, and is often dictated by local country requirements. Operators should therefore carefully consider how to structure the Tower Use Agreement (eg as leasing, licensing, or service provision), as well as other key terms, such as term and termination, extension to other sites, service levels and credits, controls of on use of space on passive infrastructure, etc.

6. Asset Purchase Agreements: In a managed model for passive infrastructure sharing, the operator transfers the ownership of its passive infrastructure assets to TowerCo which then operates the passive infrastructure and leases it back to the operator. Thorough due diligence needs to be undertaken by the operator regarding its rights over each of the sites. The TowerCo will also need to check applicable statutory rights to access the sites where the towers are located, as well as local regulatory, environmental, health and safety requirements. Other key issues to consider include conditions precedent (both those affecting the transfer of each site and affecting the transaction as a whole), price mechanisms, and provisions around shared and work-in-progress sites.

7. Build-to-suit arrangements: An operator may be left with no or limited in-house ability to continue to expand the network on which its active assets are located, meaning that the operator will normally seek to enter into another agreement with the TowerCo for the provision of “build-to-suit” services – essentially the building of new towers on the operator’s demand. Key issues to consider include remuneration, commitment to roll-out, exclusivity, process for build and local requirements.

8. Competition and Regulation: Joint ventures for the purposes of sharing infrastructure between major network operators will raise questions around competition and attract the scrutiny of regulators. Accordingly, operators seeking to implement infrastructure sharing should ensure that applicable competition rules are well understood and not infringed. However, infrastructure sharing can be structured so as to facilitate access to infrastructure for smaller operators, which will encourage competition, even if the network is owned by a more restricted number of operators who form the core of the arrangement. Beyond pure market-share issues, understanding the policy drivers in the relevant domestic market’s telecoms regulation is a crucial element of any network sharing initiative.

9. Employee transfers: Existing employees of the operators may be affected by sharing arrangements, as there is a potential for redundancies or automatic transfer of employees in certain jurisdictions. In some jurisdictions where employment laws are less employee-friendly, the operators may find that it is more commercially viable to terminate the employment contracts of the relevant employees with one operator, and then immediately form a new contract for those employees with the other operator.

10. Handover on termination: Infrastructure sharing arrangements should clearly set out the terms of a migration and/or handover upon termination of the sharing, which might involve, for example, staged migration from and/or interim parallel running on existing and replacement infrastructure, a process for decommissioning of sites and recovery of assets, and perhaps a transfer of people, records and other materials.