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TELECOM SECTOR HIGHLIGHT ON PASSIVE INFRASTRUCTURE SHARING
This note briefly explores issues relating to sharing of passive infrastructure between telecom operators.
Passive infrastructure sharing generally refers to the bilateral sharing between two operators of their passive infrastructure (e.g., telecom towers) in order to maximize the number of sites available to the operators for deployment of their active telecom equipment. Operators may pursue passive infrastructure sharing to achieve, inter alia, the following goals: (i) reduction in capital expenses for network rollouts; (ii) reduction in operating expenses for operating infrastructure at multiple sites. Passive infrastructure sharing is especially suited to new market entrants and for network rollouts in areas where an operator does not have significant market penetration (e.g., in rural areas); and (iii) reduction in environmental compliance costs.
One of the drawbacks of bilateral sharing is that each operator is constrained by their individual strategy and network rollout requirements and these objectives may conflict with the other operator’s requirements for sharing and new site development.
Two or more operators may pursue passive infrastructure sharing through a new special purpose joint venture entity to reduce such conflicts and to increase efficiency. In a typical structure, two or more operators will form a new joint venture entity for the purpose of operating the tower assets of each operator (TowerCo).

Each operator transfers its tower assets to TowerCo which will then lease back the space on each tower to the operators for installation of their active telecom equipment. TowerCo operates as a separate legal entity from its shareholder operators and may generate further revenues from leasing tower space to third party operators. This model is well suited to operators having their own established networks in a given territory and seeking to focus on their respective wireless businesses.
Telecom

A sample structure for this model of passive infrastructure sharing involves each operator transferring (by way of demerger) its tower related business from the remainder of its telecommunications business and merging the same into a new TowerCo. The diagram above illustrates this model.

Significant advantages of this model of passive infrastructure sharing include: (i) the ability of each of the shareholder operators of TowerCo to streamline their processes and focus on developing their respective wireless businesses; (ii) reduced operating expenses due to use of pooled resources for maintenance of TowerCo-owned sites; and (iii) the ability of this model to unlock the real estate value of the leases held by each operator by raising new rent revenues from lease of tower space to third party operators. The nature of this sharing model is more complex than bilateral sharing and requires operators to ensure that their long term

TRANSACTION DOCUMENTS

TowerCo sharing deals are typically structured using the following agreements:

  • Joint Venture Agreement / Shareholders Agreement – agreement between the operators to form TowerCo and includes corporate and ownership matters relating to the same. This form of agreement may also include matters relating to development of new Sites by TowerCo;
  • Asset Transfer Agreement / Scheme of Demerger – agreement to hive down tower assets from each of operators for transfer to TowerCo through an asset transfer agreement / scheme of demerger approved by the relevant High Court;
  • Sub-lease agreements / contractual arrangements for lease of tower space to shareholder operators – agreement between TowerCo and each shareholder operator covering the commercial terms for deployment of the relevant shareholder operator’s active telecom equipment at TowerCo-owned sites. This form of agreement may also be executed as a modified Master Services Agreement;
  • Master Services Agreement – agreement between TowerCo and each operator utilizing TowerCo’s sites, wherein TowerCo contracts to provide certain deliverables for operation and maintenance of the passive infrastructure, security of the sites and emergency maintenance and power backup services. In exchange for TowerCo’s services, each operator pays a fee to TowerCo for deployment of the operator’s active telecom equipment at TowerCo sites.

In addition to the above, various additional agreements may be required depending upon the specifics of the transaction. This note does not considered any legal and regulatory requirements relating to formation of TowerCo, transfer of tower assets into TowerCo, any issues relating to transfer of foreign exchange outside

KEY LEGAL ISSUES

Compliance with Regulatory Regime

PTA approval may be required depending on the nature and specifics of each tower sharing transaction. For example, a passive infrastructure sharing transaction based on the model set forth above may attract additional licensing requirements for TowerCo to operate tower assets as an independent company.

In addition to PTA approval, a passive infrastructure sharing transaction (especially one based on the model set forth above) may attract additional regulatory approvals and/or other requirements (depending on the nature of the transaction) including approval of the State Bank of Pakistan (applicable where foreign-owned operators are involved), approval of the Competition Commission of Pakistan and/or requirements of the Securities and Exchange Commission of Pakistan.

Due Diligence

Due diligence prior to undertaking a passive infrastructure sharing transaction is essential to ensure that all legal and regulatory requirements relating to the portfolio of tower assets being shared between operators is met. Due diligence in a passive infrastructure sharing transaction may include:

  • ensuring that underlying land leases for sites are duly executed, are valid for a sufficient term as commercially required and do not contain any provisions prohibiting site sharing;
  • obtaining any third-party consents including landlord / creditor consents as required;
  • ensuring that the shared sites are not subject to any previous preferential rights granted in favour of another operator; andverifying that no objection certificates from regulatory authorities and municipal authorities are valid and subsisting.
In addition, due diligence in a passive infrastructure sharing transaction based on the TowerCo model discussed above may include:
  • fulfilling incorporation requirements of TowerCo; and
  • conducting tax, accounting and financial due diligence of the other operator’s tower assets portfolio.
If you would like further information on any issue raised in this note please contact:

Shabbir Harianawala – s.harianawala@hmcobnr.com
Owais Aziz – owais.aziz@hmcobnr.com

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