Cracking the Telecoms Capex Code

Michelle Remo, “Big 4″ observer
April 27, 2012 /

The global telecom industry misallocates 20 per cent of its capital expenditures — about US$65 billion each year — says a new report from PwC.

The report ‘We need to talk about Capex’ found that the industry’s capex bill is now at US$320 billion per year, but about 20 percent of capital projects provide little return on their investment. In the past 10 years, the average return on capex investment for the industry has been about 6 percent, the report, said, while the cost of the capital itself has been 9 percent.

Gary Taylor, PwC director and author of the report said: “Weaknesses in allocations are leading companies to waste about 20 percent of their capital expenditures, totalling about US$65 million per year.

“This isn’t consistent across the industry, however. Companies individual performance depends on a small number of decisive differences in how they plan capital spending, organise for accountability, and report results.”

The report studied the financial performance of 78 fixed-line, mobile and cable telecoms operators with collective annual capital expenditures of some US$200 billion. PwC also conducted in-depth interviews with 22 telecoms executives to understand what lies behind their capex performance.

The report notes that capex has been rising annually in the industry for decades, along with revenues, profits and operating cash flows. But just as growth is stalling – and turning negative in some major markets – operators face another round of expenditures for mobile broadband and fibre.

Pierre-Alain Sur, Global Communications Industry Leader, PwC, said: “This issue has been a long-standing struggle for companies in the communications space. The capital operating model which has emerged over the decades is no longer right for the industry. Many executives admit that the process of allocating and managing capital is flawed and frustrating, often driven as much by technological demands as by business objectives.

“But things are starting to change and a small but growing number of operators are now trying to tackle this issue as they look for cash to fund future growth.”

PwC’s research shows that a small number of high performers in the telecom industry are tackling the capex issue with some success, and allocating capital most efficiently. The report identifies 12 shared attributes of a well-designed capital management programme and is applicable to any type of organisation: fixed, mobile or cable, whether a new entrant to the market or an established major telecoms operator.

Added Taylor: “Our research shows that operators who crack the capex code will be rewarded with higher ROI, faster growth and superior enterprise value.

“Most operators are doing many of the right things; they are just doing them in the wrong order. It won’t be easy, but by making changes in their procedures, companies will invest resources where they’re most needed, prepare for the future more effectively and position themselves to win in an intensely competitive marketplace.”

 

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