The legal and regulatory environment for MNOs and towercos in Peru

José Miguel Porto is an expert in the telecom arena thanks to its sixteen years of activity within NII Holdings in Peru and in the United States. In this interview, he shares with TowerXchange some priceless insights into the current regulatory framework and how it could change in the imminent future, with new laws concerning environmental limitations, rural enablers as well as possible further taxations all pending approval. Furthermore, he analyses Law N. 29022 and its applicability to both MNOs and towercos, which has considerably sped up the permitting process across Peru. Lastly, Porto discloses his views with regards to the creation of Telxius and its impact on the Peruvian tower market and discusses the rationale behind tower sales from the operator’s perspective.

TowerXchange: Please introduce yourself and your professional background. 

After my law degree from the University of Chicago, I pursued various roles in the telecommunications industry and over the past sixteen years, I acted as Chief Commercial Counsel for Nextel Peru and later on as Director and Senior Counsel for NII Holdings, Inc., based in Virginia, United States.

As counsel for Nextel Peru I was responsible for network deployment in-country while at NII Holding, Inc. I acted as lead counsel for all major tower transactions for Nextel in Latin America and for the renegotiation of legacy tower deals. During that time, I represented Nextel in the evaluation and negotiation of tower deals in several jurisdictions including Argentina, Brazil, Chile, Mexico and Peru.

Amongst the most interesting tower transactions, I recall the sale and leaseback deal of 1,666 towers in Mexico and 2,790 towers in Brazil to American Tower Corporation for an aggregate amount of close to US$810mn.

Following a successful career within Nextel, Oscar Montezuma and I founded Montezuma & Porto, a boutique law firm focused in the telecommunications and technology practice in Peru.

TowerXchange: Tell us about Montezuma & Porto and its role in the telecom ecosystem. 

In light of the many changes happening in the Peruvian telecom space, we serve clients with legal, regulatory and policy advice to support them in their network deployment plans and in other aspects of their business growth.

Over the past few years, the Ministry of Transport and Communications (MTC) has been heavily focused on expanding national telecommunications networks and increasing the penetration of broadband services with several key projects such as shown in table one.

To foster innovation and technology, the Production Ministry (PRODUCE) has recently launched a productivity diversification program for the promotion of non-extracting industries such as technology with the provision of non-reimbursable grants to start-ups and incubators.

As a consequence of the government funding, Peru is now witnessing the growth of a technology start-up ecosystem fed by public funds, angel investors and venture capital firms. These start-ups are being created with the principles of the democratisation of entrepreneurship and permissionless innovation in mind, which have been promoted by the internet and the wider access to information. And while the model is quite fluid, there are still plenty of legal requirements to comply with and this is where our law firm can help, by offering a variety of advisory services to start-up companies, from incorporation to business model validation, financing rounds and exits.

We share the opinion that to the extent the MTC and PRODUCE, or another Ministry, are capable of articulating a common agenda and goals, the path towards the creation of a digital society can be accomplished. And this will have a deep transformational effect, bringing welfare and social inclusion to developing markets such as Peru.

In this context, we believe that the telecom ecosystem is one portion of a broader picture moving towards the creation of a Peruvian digital society. We like to think that our current role in this ecosystem is to foster such permissionless innovation and to continue our path towards building a digital society thanks to our academic and professional work.

TowerXchange: Can you share some details about the current state of the telecom regulation in Peru? What is likely to change if new regulations get approved?

During the current administration there has been increased pressure on consumer protection, service pricing and Quality of Service regulations. In fact, MNOs have been charged severe penalties for breaching the existing regulation and minimum QoS standards.

Additionally, since the entrance of Virgin Mobile in Peru, MVNO and rural enabler regulations have been passed in order to increase competition and the level of penetration. However, further regulations looking at access and termination for rural enablers as well as the environmental impact of network deployment are still pending.

In the short term, the regulatory pipeline includes further pricing and net neutrality regulations that may adversely affect certain commercial plans and provide less flexibility to the MNOs’ commercial offering. In addition, although unofficial, the OSIPTEL is supposedly looking at increasing certain financial contributions that, if passed, might further squeeze MNO margins.

TowerXchange: Is there a specific regime in place for towercos? And if so, what can towercos operating in Peru expect in terms of permitting, licensing et cetera?

MNOs have the right to deploy their own infrastructure or to pursue co-locations. With the introduction of towercos in Peru, MNOs have been embracing co-locations and the regulation has acknowledged such sharing activities as beneficial and went as far as granting towercos with certain benefits originally reserved to MNOs. I am referring to the applicability of Law N. 29022 which establishes a Municipal automatic approval for the deployment of telecom infrastructure.

According to Law N. 29022, an expedited automatic approval procedure should be followed to obtain a Municipal authorisation for the deployment of telecom infrastructure. Once the required documentation is submitted within the Municipality, an automatic authorisation is granted. Exceptionally, certain Municipalities have established further requirements to be met in order to obtain the automatic approval, which could hinder the deployment ability of MNOs and towercos. For example, they have set further rules in terms of zoning and have gone as far as banning deployments in certain sensitive areas.

Under the General Administrative Law, Municipalities can declare null and void any administrative act ex oficio, including the automatic approval for the deployment of telecom infrastructure, if and when the act presents material defects or contravenes applicable laws.

So whenever there are social uprisings associated with the installation of a new cell site, it’s not uncommon for the Municipality to look for minor or non-material defects in the automatic approval proceeding (given its ex-post ability to supervise the proceeding), and in the absence of such minor or non-material defects create one, to declare the proceeding and automatic approval of the infrastructure null and void, given that (i) certain requirement(s) were not met and (ii) because the installation of the infrastructure is adverse to the “public interest.”

TowerXchange: What is likely to change in the mobile market in light of the recent 700MHz auction? 

The Peruvian government recently awarded Telefónica, Claro and Entel with 30MHz each within the 700MHz band. However, Vietnamese-backed Bitel was left out of the auction. Due to its propagation characteristics, the 700MHz band is customarily used to complement higher bands with 4G services in rural areas and to improve indoor coverage in dense urban areas. The fact that Bitel has been left out of the auction raises concerns on its ability to compete in the 4G market, especially since there isn’t any other available spectrum with similar characteristics.

Each of the awarded companies paid around US$300mn per block and have committed to the obligation to clean their respective blocks from harmful interference, mainly from broadcasting companies providing services in such bands, and to provide coverage in certain rural areas.

The amount paid for each block plus the additional cost that operators will deal with to remove harmful interference as well as to increase their footprints will certainly bring lots of pressure on their capex. So I believe that operators will rely heavily on co-locations on theirs or third party infrastructure which is good news for the sharing model. However, concerns remain with regards to the possible increase in consumer prices as a result of the added pressure on operators’ capex.

TowerXchange: Telefónica has recently transferred some of its assets to Telxius - its infrastructure company. What is the impact of Telxius entering the Peruvian market and is it likely to have any effect on how the regulator treats and deals with towercos?

Based on publicly available information, Telefónica has divested certain tower and fibre-optic assets into Telxius and is seeking to float 40% of Telxius’ shares. As long as Telefónica retains a controlling stake within Telxius, these vertical integrations could potentially raise concerns whether co-location agreements between the two are at arms-length and on similar terms with third party carriers.

The current disclosure requirements applicable to towercos preclude the ability of Telxius to enter into non arms-length dealings with affiliated companies. And I don’t foresee the regulations being affected by the entrance of Telxius in Peru.

The existing regulation requires towercos to (i) notify MNOs of their commercial offers and access conditions; (ii) submit to the regulators a copy of all executed co-location and use arrangements; (iii) make their infrastructure available to MNOs in exchange for payment, unless there are technical, legal or economic constraints and (iv) apply tax transfer-pricing regulations to affiliated transactions.

TowerXchange: In light of your experience within Nii Holdings, can you tell us what are the key drivers that push an operator to select a tower sale versus another form of financing? And which challenges and limitations do operators face while divesting their assets?

MNOs are constantly in need of financing sources to deploy, optimise and upgrade networks, run operations efficiently (including backhaul costs), procure handsets and devices and to purchase spectrum to sustain commercial operations and growth. Given that telecoms is a capital intensive industry, MNOs’ customary financing sources are the capital markets, vendor financing, debt financing and export financing. In recent times, the tower industry has made available a new source of financing through the monetisation of non-key assets such as towers.

Whenever an MNO decides it’s time to raise capital, a decision making process requires to explore each and every available financing resource to determine which path to follow. When cheaper financing resources have been exhausted, due to financial covenant constraints, liquidity or credit issues, the monetisation of tower assets might have additional benefits such as a lesser impact on EBITDA, financial covenants and earning per share. But this is true when and if the deal is correctly structured.

Some of the challenges that operators face during a tower deal include the possible lack of all required paperwork and documentation, since MNOs tend to collect what is needed to operate a network which might not be sufficient to sell a tower to an independent towerco. Depending on the quality of the information and the amount of sites in the portfolio, the process to complete a data room prior to the tower sale might take several months and can result in an expensive procedure that requires dedicated in-house and external resources.

Additionally, operators need to obtain ground lessor consents to assign ground leases which is another expensive and time consuming procedure. And some assets might not even be sellable due to lack of permits or other environment issues.

Internally, operators have to deal with a decision making process involving several stakeholders in order to determine the best deal structure. Among the factors to discuss, stakeholders will need to define the minimum standards in terms of required operational flexibility so to be able to continue their “business as usual” even after the tower sale and whether they’d prefer to maximise proceeds for higher rents or go with lower proceeds for lower rents.

All of the above need to occur while making sure that the total cost of the deal makes financial sense if compared with other comparable sources of financing.