Financing subsea cables in Latin America
Subsea cables that are key to economic growth in Latin America are expected to require more than $1 billion in new investment over the next five years.
The move to 5G wireless will require a significant increase in new subsea cable construction.
Cable developers whose cables will be open to market use — as opposed to dedicated to a single tech company — enter into long-term contracts with companies that want to use the capacity in exchange for large upfront payments and smaller payments over time that can be used to pay construction and operating costs.
Several new subsea cable projects are under development this year in Latin America. The impetus is coming not only from 5G, but also the ongoing Latin America tech boom and steady growth in the use of data, bandwidth, telecom subscriptions and internet connections.
Subsea cables are built between locations that have significant communications traffic. Chile and Brazil, who are already home to significant data center and other investments from global tech giants, are becoming major hubs for Latin America.
The global subsea cable market is expected to be valued at $22 billion by 2025, more than doubling from 2019, and $30.4 billion by 2027.
A significant portion of this growth is in cables connecting Latin America to the rest of the world.
Subsea cable development within the Americas has been increasing steadily, with four cable systems going into service in 2017, five cable systems put in service in 2019 and eight more new cable systems expected to be in service by the end of 2020. During this period, new Americas cable systems included connections in Latin America.
A new trans-Atlantic cable has been built every year for the last five years. Three more new cables are planned in the next two years between South America and Europe.
At least one new trans-Pacific cable was built each year from 2016 through 2019. Eight new trans-Pacific cables are planned through 2022. Trans-Pacific development is of particular global interest after the US government blocked a proposed trans-Pacific cable by Google and Facebook connecting Los Angeles and Hong Kong on the basis of national security concerns in 2019.
Latin American tech boom
Latin America has had an influx of investment in digital and other high technology businesses. This tech boom is being driven by young and tech-savvy citizens with high rates of mobile and internet usage, paired with investors interested in fintech and data startups and services in the region. Data centers and telecom, fintech, agtech, and e-commerce companies are growing and attracting substantial investment, particularly in Brazil, Chile, Colombia and Mexico. Governments in the region have taken steps to attract investment in tech startups.
Chile, in particular, has been an attractive base for such enterprises due to a reputation for long-term stability and economic performance and international and government support for incubators and technology innovation. Chile is home to numerous data centers belonging to big names like Google, CenturyLink and HP.
Brazil, the largest country in Latin America and the world’s eighth largest economy, has benefited from venture capital support in this area and investments from major players, including Amazon, Google and Oracle. Scala Data Centers recently announced plans for construction of its third data center project in the State of São Paulo. The State of São Paulo has seen tech investment volumes in recent periods greater than the combined tech investments in all of Chile, Colombia, Argentina and Mexico combined.
Colombia has also emerged as a leading destination for new tech investments. Colombian tech start-up Rappi secured, when it was made, the largest-ever investment in a Latin American tech startup with a total of $1.2 billion raised. This year HostDime, a global leader in data center infrastructure, announced the construction of the largest data center in Latin America in the Bogota suburbs, hosting data processing, comprehensive IT solutions and advanced technological infrastructure in security, stability and implementation of smart data and big data. The Colombian government has been actively promoting investments in technology and tech startups for more than a decade.
Mexico has seen recent investments from Microsoft, which announced in February 2020 that it will build its first set of cloud data centers in Mexico as part of a $1.1 billion investment in the country over the next five years. HostDime also has co-located cloud servers and dedicated servers in Mexico.
More than half of Latin American GDP is expected to be based on the digital economy by 2022. About $380 billion is expected to be invested across the region in digital technologies over the period 2019 through 2022, with almost three quarters of that investment dedicated to mobility, cloud services, data and social media.
About 99% of international communication is by cable, and mostly subsea cable, making subsea cable projects critical to GDP growth.
Many Latin American countries are moving forward with 5G wireless. If 5G is the vehicle for driving faster, subsea cables are the roads. As 5G becomes available on land, more efficient subsea cables will be needed in support.
The Chilean telecom agency, Subtel, was expected to launch a 4-part request for proposals for 5G networks in April 2020. The COVID-19 pandemic has delayed the launch. No new date has been set.
The Brazilian telecom regulator Anatel may postpone a 5G spectrum auction from 2020 until early 2021 due to COVID-19.
Telefónica Telecom in Colombia is expected to launch 5G services this year. Telecom Argentina is expected to launch 5G services by 2022.
The spread of 5G to Latin America follows 5G network announcements in 2018 by the United States and South Korea and in 2019 by the United Kingdom, Australia, Switzerland, Finland and Spain.
Latin America is expected to have 3.5 million 5G connections by 2021, 17 million in 2022 and as many as 75 million by 2025.
Bandwidth in Latin America is expected to grow 63% by 2022, reaching 1,430+ terabytes per second, or more than 10% of interconnection bandwidth globally. As much as 31% of this growth will be driven by the content and digital media industry.
In recent years, emerging technologies such as containers, big data, the “internet of things” and artificial intelligence have taken on greater relevance for companies in Latin America. COVID-19 is helping to accelerate this trend. Stay-at-home orders have highlighted the importance of efficient digital infrastructure to keep services running.
Subtel, the Chilean telecom agency, is leading development of the Asia-South America Digital Gateway, a proposed subsea cable expected to be between 15,000 and 22,000 kilometers in length with landing points in the Juan Fernandez Islands and Easter Island in Chile and at two locations to be determined in Asia.
Feasibility studies for the project were funded by the Development Bank of Latin America, CAF.
Subtel expects to create a public-private consortium to develop the project. The timeline for launching the RFP process has not been set yet.
Chile is also exploring potential engagement on this project with other countries in South America who would benefit from connectivity with the Gateway cable.
The project would complement a number of other recently built subsea cables serving Chile. Google built a private cable called Curie that connects Los Angeles with Valparaíso and has a spur to Panama. Google built the Curie cable to improve resilience for its data center in Santiago. The Curie cable was successfully installed and tested in November 2019 and is expected to go on line in the second quarter of this year. The Curie cable is reserved for Gmail, YouTube, Search and Google Cloud data transmission.
América Móvil and Telxius are building a 7,300-kilometer Pacific submarine cable along the west coast of South America to connect Puerto San José, Guatemala with Valparaíso, Chile and with additional landing points in Salinas, Ecuador, Lurín, Peru and Arica, Chile. The Pacific cable is expected to be ready for service at the end of 2020.
Chilean telecommunications company Grupo Gtd is building the 3,500-kilometer Prat cable with 12 landing points along the Chilean coast. It will go on line this year.
The Malbec subsea cable, a 2,500-kilometer subsea cable linking Rio de Janeiro and São Paulo with Buenos Aires, is currently in the final stages of construction and is expected to open for use in the third quarter of 2020. Malbec is being developed by Facebook and GlobeNet.
The South Atlantic Express, SAEx1, subsea cable will run from Cape Town, South Africa to Fortaleza in Brazil and then will connect to Virginia Beach in the United States. The project is expected to be ready for service in March 2021. A second phase, SAEx2, is also planned to connect South Africa to Asia. The route from South Africa to Virginia is 14,720 kilometers.
Seaborn Networks has a portfolio of submarine cable systems that includes the 10,500-kilometer Seabras-1 cable between São Paulo and New York that delivers the lowest latency route between Nasdaq and the Brazil Stock Exchange. Seaborn Networks plans to add the SABR cable, a 6,200-kilometer subsea cable that will be the first southern Atlantic route between South Africa and Brazil and the ARBR subsea cable that will link Brazil to Argentina. It is expected to start construction this year.
The ARBR cable will be the newest and most direct route between Argentina and the United States due to its interconnection with Seabras-1. Notwithstanding chapter 11 bankruptcy filings by Seabras 1 Bermuda and Seabras 1 USA, these expansion plans are continuing to move forward.
The EllaLink project, a 10,119-kilometer subsea cable connecting Brazil and Portugal, is currently under development and is scheduled to be in service in 2020. The European Commission committed €25 million to support the project via the “Building Europe Link to Latin America” program. An older cable, Atlantis 2, commissioned in 2000 that connects Brazil and Argentina to Portugal and Spain, currently also runs this route, but its capacity and speed are significantly lower than the newer cable. Atlantis 2 is nearing its end of life, based on the typical 25-year useful life for a subsea cable.
Another cable that connects Brazil to other countries is the GuyaLink cable, planned to run from Kourou in French Guiana on the northeastern coast of South America to Fortaleza, Brazil. This project remains subject to diligence and investment approval.
Improvements to existing cables are also underway. The 2,000-kilometer Tannat cable, operational since mid-2018 and connecting Santos, Brazil to Maldonado, Uruguay, is being extended to the nearby coastal city of Las Toninas in the Buenos Aires province.
All of these submarine cable projects are privately sponsored.
Historically, roughly 90% of subsea cables have been developed and financed by consortia with multiple owners. In some consortia, each owner brings its own financing, whether from the owner’s balance sheet, from an equity raise or from corporate debt. In other consortia, the financing is at the level of the joint venture company.
The number of subsea cables being developed and financed by a single private owner has increased. Single private owners accounted for roughly 5% of subsea cables historically. However, from 2019 through 2021, single private ownership of new cables is projected to be on par with consortia ownership of new cables. Increasingly, tech majors have started developing subsea cables for their own exclusive use.
Subsea cables that will be available for market use typically contract for long-term capacity commitments called “IRUs” or “indefeasible rights of use.” The holder of the IRU makes a lump-sum up-front payment for a right to use part of the capacity on the cable. Smaller periodic payments are then made over time for operation and maintenance.
Large up-front IRU payments can reduce the need for long-term financing. However, it would not be unusual for a sponsor to delay contracting for the full cable capacity until the project is far along in development. Most cables available for market use also reserve a portion of capacity for the spot market or short-term contracts.
Subsea cables have been financed by commercial banks, multilateral development banks, export credit agencies linked to key equipment suppliers, private equity funds and other sources of equity. Project financing for subsea cables comes with challenges, including complex rights to the cable’s path across multiple jurisdictions and the risks inherent in a partially-merchant project.
Older subsea cable operators may face challenges competing for business in an over-saturated market or against superior technology. To the extent that an existing cable is not fully contracted with long-term capacity commitments, the market value of its service may decrease below the levels originally projected when that cable was first installed. The average life of a subsea cable is around 25 years, but with improvements, an existing cable can be upgraded and its useful life potentially extended.