Financing infrastructure

Before markets were liberalised, telephone companies were in the main government-owned institutions. When they wanted to build undersea cables, governments financed this activity and the project was carried out by the government-owned telephone company.

Liberalisation has opened the market to new competitors at both an international and national level. However competition in the building of new international fibre routes has been slower to arrive. International fibre routes are in effect a form of shared infrastructure and often shared between potential competitors. To build them requires considerable capital sums and there has to be ways of managing the risk. Unusually the risk is long-term and spread over the life of the cable, usually 25 years. Their subsequent management requires a clear framework for co-operation between participants.

In broad terms, two structures of financing have evolved to meet the conditions of a liberalised market: construction by private companies like Flag Telecom, and the Club Consortium of operators - which is the route the EASSy project has taken.

In the case of Flag, it seeks investment from countries through a combination of a contribution to the landing stations on the route, advance purchase of capacity and an element of its own financing. Subsequently Flag operates and manages the cable. The process takes a long time and it seeks to limit its risks by selecting routes with proven traffic.

The African international cable SAT3 was built by monopoly incumbent operators all owned by their governments. It raised money through a combination of their own resources (often supplied by government) and donor funding to the weaker companies involved. In addition, a number of international companies participated. Money was again raised against advance purchase of bandwidth, but each participating company was given a time-limited monopoly on the sale of that bandwidth in their own country. The participants also elected a managing agent.

Because of the perceived high level of political and market risk, Africa does not currently have a great deal of market-financed infrastructure projects. Nevertheless, as the EASSy project has illustrated, there now exists a far wider range of potential investors than just the government-owned telcos. But these potential investors have to some greater or lesser extent been excluded. (see EASSy: Who are its proposed members?) Because of Africa’s political and market risk, most projects of this sort combine public and private finance.

Therefore it is important to be clear what each type of financing is most appropriate for:

Market financing is designed to back projects that can generate a commercial return.

Soft loan financing is in part designed as a “market-gap” mechanism for use where markets are simply too high risk or the market has not yet achieved market potential for lack of investment. Its future potential will pay off but the current risk is too high for a complete financing by private funds.

Donor money is to meet social needs like lowering poverty levels. In this context, it might best be deployed where there is a clear argument that the market will not deliver a vital piece of communications infrastructure. Saving countries foreign exchange by lowering the costs of intra-African calling will have a clear impact on the poverty level of a country.

Now read: Open vs closed access or Just what is a 'Club Consortium'?