Finding funding for new cable projects
11 September 2012 | John Hibbard
This summer saw the collapse of the Pacific Fibre subsea cable project. The proposed 13,000km link between New Zealand and Australia to California, US, decided to cease operations after failing to raise the required NZ$400 million funding.
The story highlights just how tough it is to get new cable projects financed in the ongoing economic conditions.
This is even true when there is a powerful and persuasive business case. Investors and banks have reservations about parting with their money when there is any level of risk.
So with the economic woes they may well insist on an increased proportion of high-quality pre-sales in order to be part of the funding of a cable.
The need for pre-sales is even more the case with private cables where the owners are not major users of the cable. If carriers are cable owners, they will use the cable for their network so initial and future capacity purchases are seemingly assured. This is strengthened even more when the carriers are Tier 1.
Achieving a high level of pre-sales can be difficult with a private cable particularly when it is in a competitive market with other (existing or new) cable systems. So can private cables succeed in the current difficult economic environment?
Yes they can, but without key anchor customers, it will be difficult. This is partially the reason why there is a current leaning towards consortium/club cables where the owners are a series of major carriers who have the greatest requirements for the cable.
An apparently obvious way for a private cable to succeed is to have some significant carrier owners. The purpose of the carrier investing in a cable is primarily to get connectivity at the lowest possible price. The cable is seen as infrastructure which supports the products that it sells to its customers. It may not see the cable as a profit centre and as such desires lowest prices and is not overly concerned with dividends. On the other hand, the private investor is interested in financial returns and hence wants higher prices to generate hefty dividends. Hence there can be a tension if you have a mix of both investor types.
Pension funds are showing stronger interest and represent an owner that is looking for steady returns over an extended period. A philanthropic investor might also fit that motivation. Certainly the Development Banks fit that on cables where the business case is not strong enough to attract investors but a country needs the cable. Suppliers might also be investors as in the case of Apollo but that could generate tension over the price of the system.
In the Pacific, Atlantic and Indian Ocean regions, the world will need more cables before the current economic woes are behind us. The challenge for the globe is how will the funds be found and what will the future cable ownership structure look like?
John Hibbard is CEO at Hibbard Consulting. He can be contacted at: firstname.lastname@example.org
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