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The next digital wave in Asia

/ 04:02 AM October 12, 2021

The COVID-19 pandemic has increased the importance of digital connectivity to ensure that work, education, and living continue despite people being more home-based. Investments and deployment of digital infrastructure have correspondingly accelerated to improve disaster management, logistics, and the supply chain.

A small increase in broadband penetration in low- and middle-income countries can have an outsize positive impact and play a big role in supporting economic recovery. Broadband penetration in almost every country in the Association of Southeast Asian Nations (Asean) remains below the global average, but this is changing as more data centers are being developed within emerging Asia.

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The private sector has historically been investing in digital infrastructure, and the revenue models are robust. Some of the successes and challenges in the past offer insightful lessons on how the private sector can successfully finance digital infrastructure. One thing is clear: It cannot be done alone, and proactive government involvement is required to enable further private capital to flow.

Some of these enablers include allowance for foreign ownership, a single government window to process approvals (particularly for land acquisition and easements), and availability of electricity. Combined with a good regulatory framework and greater long-term certainty, these make a country more attractive to international investors and developers.

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So what are the key themes going forward for digital infrastructure?

First, sustainability. Digital infrastructure like data centers are large consumers of electricity, hence more efficient energy use and use of renewables need to increase. Interestingly, data centers are a good baseload and consistent consumers of electricity. Many have their own power generation sources and can even work with governments to smooth out peak electricity usage in the system.

Second, inclusiveness. Innovation in commercial structuring such as demand aggregation, and sharing of digital infrastructure to reduce duplication in capital expenditures, could play a part in making prospects more appealing to investors. The traditional integrated telco model would require joint planning and deployment with a roundtable of stakeholders. This will help manage cost as the infrastructure intervention gets situated closer to rural establishments, thereby increasing the cost of infrastructure per “connected” individual.

Third, leapfrogging. Many developing economies have a relatively clean slate and hence can consider the most suitable technology like smartgrids, more effective tunneling to lay cables, newer commercial models that allow internet access with zero or no cost, and 5G and microwave for last-mile coverage.

Fourth, leverage with commercial bank debt. Many types of digital infrastructure can be implemented initially without debt, but the ability to bring on mid- to long-term commercial debt could lower funding cost. As ticket sizes for debt to digital infrastructure are smaller and loan tenors are shorter than that for traditional infrastructure, commercial bank lending to digital infrastructure can be interesting for banks. However, banks need to adapt, and combine real estate and infrastructure skill sets to properly assess sponsor quality, location, and non-fully contracted models. More banks are open to supporting this sector.

Fifth, cybersecurity. Many companies are putting a lot of focus on this subject, and this is expected to accelerate largely due to stakeholder demands.

It is clear that digital infrastructure is a sunrise sector, and the needs remain huge on many fronts. While the private sector has invested considerably in this area, governments may need to take a more proactive role given the need for quick implementation and the competition for international investors and developers. The challenges are surmountable—some countries have started to attract investment at scale.

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This article was collated by Seth Tan and Lavan Thiru from two deep dive sessions on digital infrastructure with the industry on opportunities and challenges for Asia conducted by Infrastructure Asia (Singapore). Special thanks to Tong Yew Heng, Giles Proctor, Srivats Kumar, Sharad Somani, Luca Tonello, Boutheina Guermazi, Varoon Raghavan, Arun Kant, and Isabel Chatterton.

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