Operators invest in broadband network infrastructure in Peru

The development of infrastructure is vital to Peru’s goal of increasing the percentage of the population connected to the internet. Consultancy and research firm Analysys Mason estimates that Peru requires $35bn of investment in digital infrastructure by 2025 for the country’s internet connectivity level to match that averaged by OECD nations.

To that end, the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones, MTC) proposed to spend 10% of its budget in 2019, or PEN1.2bn ($363.2m), on communications projects to digitally connect the country’s regions. Between 2013 and 2017 an annual average of $1.1bn was invested in the ICT sector.

Digital Backbone

Recognising the need for improved digital infrastructure, Peru launched an ambitious plan in 2013 to implement fibre-optic networks across the country and improve connectivity, particularly in remote areas. As such, the government awarded a 20-year concession to Mexican firm TV Azteca to develop 13,500 km of fibre-optic network covering 22 regional capitals and 180 provincial capitals, requiring an investment of $333m. The National Fibre Optical Backbone Network (Red Dorsal Nacional de Fibra Óptica, RDNFO) was to be complemented by a further 21 regional broadband projects, which would further expand the network by 31,000 km to reach some 1516 district capitals.

While the project was completed in the beginning of 2017, Rafael Muente Schwarz, president of the the Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL), told Congress in September 2018 that the network remains hugely underused. It was expected that capacity demand would reach 137 Gbps by June 2018; however, actual usage measured 21 Gbps.

Competitive Costs

The RDNFO was designed to reduce fibre-optic costs for companies and enable more Peruvians to access the technology; however, the MTC admitted that at the time of signing the concession contract it had not expected private companies to construct their own networks. There were 13,289 km of fibre-optic networks in Peru before the signing of the RDNFO, yet by 2017 private companies had constructed a combined total of 24,300 km of fibre-optic networks.

With the cost of fibre optics having decreased significantly, operators preferred to build their own networks rather than pay the $23 plus value-added tax per Mbps, which is the rate TV Azteca is forced to charge under its concession. The Mexican firm cannot compete under such a rigid price structure, which prevents them from offering wholesale discounts. “At the time it was set, $23 per Mbps was a competitive price,” Luis Andrés Montes Bazalar, former director of the MTC’s Telecommunications Investment Fund (Fondo de Inversión en Telecomunicaciones, FITEL), who worked on the formulation of the RDNFO project, told OBG. “To compete now, a network needs to be offering around $10 or less.”

Under the terms of the contract, the MTC also has to make up any shortfall in the case that revenue from the network does not cover TV Azteca’s investment and subsequent costs for operation and maintenance. Thus, public money is being used to maintain infrastructure that is competing against the more competitively priced networks provided by private telecoms operators.

Seeking Solutions

Given the underperformance of the national broadband network, in 2017 the MTC asked OSIPTEL to analyse the commercial situation of the RDNFO. The regulator delivered its assessment report in November 2017, proposing four possible solutions to improve the network’s performance: establish a commercial company; transfer the network to the government; reduce the fixed tariff; or incorporate a flexible tariff mechanism.

In September 2018 the MTC sent a proposal to TV Azteca that considers the option of flexible tariffs, such as allowing TV Azteca to offer wholesale discounts. TV Azteca acknowledged receipt of the proposal without making a counter-offer, but as of May 2019 neither the government nor TV Azteca had reported progress on negotiations.

In its fourth quarter results for 2019, TV Azteca confirmed that its management was in the process of re-evaluating its investment in the country, with the objective of determining whether the project is still compatible with the company’s strategic direction. The network did show greater levels of profitability in 2018 as a result of rationalising the cost structure and operations.

In addition, in December 2018 the MTC signed a cooperation agreement with the World Bank, under which the multilateral lender will evaluate the RDNFO, regional network projects, and the legal and contractual framework, with the objective of making them more efficient and sustainable.

“Bringing in consultants from the World Bank was a wise move because it looks better for all parties when someone neutral is recommending amendments to the concession,” Jose Miguel Porto, partner at local company Porto Legal, told OBG.

Montes is of the view that the RDNFO can become economically viable once the proper pricing method is in place. “This is high-quality infrastructure that Peru needs to make the most of,” he told OBG. “To capitalise on the opportunities, changes to the business model and tariffs are necessary. For example, if you group the tariffs for the RDNFO and the regional networks together rather than price them separately, I think you could charge $10 per Mbps.”

Regional Projects

Another part of the RDNFO that has not met initial expectations is the portfolio of a supplementary 21 regional projects that were supposed to be finished by 2018. Instead, they have faced multi-year delays, due in part to difficulties in accessing communal property in rural areas.

The first projects only came on-line in late 2018, and state investment promotion agency ProInversión awarded the contracts for the final six — in Áncash, Arequipa, Huánuco, La Libertad, Pasco and San Martín — in December 2018. The MTC will fund $560m for these projects, which will be built by a consortia of providers and are now expected to be operational by the first quarter of 2021.

In September 2018 the MTC said that it would no longer accept delays. In May 2019 the ministry dissolved its contract with Redes Andinas, citing that the local provider had repeatedly breached the terms of the agreement. In 2015 Redes Andinas won a concession to build the regional networks in Cajamarca, Piura and Tumbes. FITEL, now known as the National Telecommunications Programme, will hire a new company to complete the works.

At the end of 2018 two further regional projects were added to ProInversión’s portfolio: Napo-Putumayo in the Amazon region and Manseriche in the province of Datem del Marañón. Prior to that announcement, another regional project aimed at bringing internet connectivity to isolated areas of the rainforest was declared viable.

In total, the regional projects should add some 45,000 km of fibre-optic cables to the network. Regional projects are of particular priority because network operators are not building in the more remote areas to the same extent as they are in areas where the RDNFO already operates.

Having said that, there are already some private network operators spotting opportunities in the country’s less-penetrated areas. In November 2018 US satellite internet provider HughesNet arrived in Peru offering high-speed coverage in regions where traditional players do not reach. According to the company, its satellites have the range to serve 97% of the Peruvian population.

“Until the RDNOF issues are addressed and the regional networks built, you will see alternative technologies such as satellites filling the gap,” Porto told OBG. For example, in 2017 Google’s parent company Alphabet employed its Project Loon initiative, which uses balloons to carry the equipment needed to transmit internet signals over a wide area, to digitally connect Peruvians in areas affected by floods.

Steady Investment

Private companies look set to continue investing in the country’s ICT infrastructure. In April 2019 Entel announced plans to invest $170m in Peru, including $140m to increase its mobile data capacity and coverage, and $30m for the development of fibre-optic projects. According to local press in February 2019, Claro Perú is planning to launch fibre-optic networks in at least 15 provincial cities, with fibre development to comprise 60% of its investment in networks that year.

Meanwhile, local provider Bitel – which has led the private sector in laying fibre-optic networks – announced in April 2019 that it would invest $250m in expanding its existing cable. It is also investing in base stations to support its mobile coverage and has hired China’s ZTE to launch 1000 stations by 2020. This should be welcomed news to OSIPTEL, which highlighted that investment in base stations is needed in order to keep up with demand. The regulator estimates that around 15,200 base stations will need to be added by 2023. The number of base stations in Peru increased from 6881 in 2013 to 21,294 as of the first quarter of 2018.

OSIPTEL statistics show that some 3.4% of rural households had fixed-line internet in 2017, compared to 31.6% in urban areas. Meanwhile, the percentage of households with mobile internet is 75% in cities, almost double the 42.1% recorded in the more rural areas. Reforms to the national fibre-optic network, the rollout of the remaining regional projects without further delay and continued investment from network operators in the highly competitive market is expected to greatly help boost Peru’s internet connectivity levels, especially in remote areas where it is needed the most.