The telecoms sector routinely evokes a negative reaction from the Nigerian public. According to Ode Egena in his paper “Service Quality and Customer Satisfaction in Nigerian Mobile Telephony”, 68% of mobile sub-scribers desire to change their network or are not sure. The switching intention amongst mobile users is due to the perceived poor quality of their current service provider.1 Last week, a friend in Lagos lost out on a significant transaction due to his inability to communicate with his business partner in Kaduna, in the North Central region of Nigeria, as the phone would not connect. This is one of many examples of how the state of the telecoms sector affects the life of the average Nigerian. Typically, operators are labelled as exploiters, a clear case of calling a dog a bad name to hang it. However, is the inefficiency of the telecoms sector really down to exploitation by ruthless operators?
Perception
The major argument of telecoms antagonists is hinged on the alleged underinvestment of operators in in-frastructure and human capital despite being highly profitable. This may be more perception than reality as recent data from the World Bank suggests that telecoms investment in Nigeria is at par with African economies -if not better. According to World Bank, $6.6bn was invested in telecoms infrastructure in Nige-ria from 2010 through 2012, which works out to a total of about $40 per person.2 The figure below depicts the telecoms infrastructure investment profile of some developing countries; investment in Nigeria infra-structure is higher than other comparable countries such as Ghana and Kenya. However, Nigeria is sig-nificantly behind in terms of investment per capita compared to fast growing economies such as Brazil with a telecoms investment per capita of $167. Between 2010 and 2012, Brazil and South Africa spent about $127 and $62 more per person respectively on telecoms infrastructure. This highlights the need for more significant investment if Nigeria wishes to be at par with economies it aspires to be like.
However, the true question each Nigerian should ask is: “To what scale does the current economic, social, and regulatory landscape provide a conducive environment for additional capital investment?” Answering this question will provide more salient insights into the operating environment for telecoms operators in Nigeria, which will in turn influence what we, the customers, can realistically expect from them.
Is there a business case for increased capital expenditure?
The macro-economic fundamentals of Nigeria provide a sound base to support the economic viability of the telecom operators in the country. Following the recent GDP rebasing exercise, Nigeria is now the largest African economy in sub-Saharan Africa with a GDP of N80.22trn ($510bn). Telecommunications and Infor-mation Services contributed 8.7% to GDP, which is the fourth highest contributor to GDP amongst sub-sectors. More importantly, the large and growing population combined with the improving income per cap-ita builds a case for increased profitability for operators.
However, the fundamental shift in the industry from a voice dominated environment to a data dominated environment is a threat to the viability of most operators. As at December 2012, the national monthly Aver-age Revenue per User (ARPU) was N912 (~$6), an 87.5% decrease from its 2003 level of N6,384 (~$48). The Nigerian people need to appreciate the fact that justification for additional capital investment becomes a harder sell for the management of telecom operators due to the lower ARPU.
The operators’ cost structure is equally unfavorable and a major drawback in the quest to increase capital expenditure in the country. A key component of telecoms infrastructure is the Base Transceiver Station (BTS), which essentially connects mobile phones to the network. About 15% of all BTS in the country are connected to the power-grid, which leaves operators dependent on fuel-powered sites. Fuel costs associated to operating BTS in the country account for about 60% of operators’ network costs. To put it in perspective, network costs in Nigeria are about two to three times more expensive than in other African markets due to fuel costs. It is estimated that Nigerian operators spend about N10bn a year to power their base stations.
Outside of the Numbers
Apart from the financial difficulties, the current state of security for telecom infrastructure is not encourag-ing for any potential investor. Every savvy rational investor considers the safety of its assets when making an investment decision. Unbeknownst to most Nigerians, vandalism of telecoms infrastructure is a major problem. About 2% to 3% of Nigeria’s BTS are shut down at any point in time due to vandalism, resulting in a loss of about $50m to $100m every year. Vandalism on Telecom infrastructure occasionally occurs in er-ror during excavation, but for the most part is perpetrated through acts of sabotage and theft of equip-ment. In 2013, the Nigerian Communications Commission (NCC) noted that it had recorded about 1200 fibre cuts in just a few months. These acts of vandalism are common in rural areas of the country, which are characterized by high poverty and unemployment rates. The low standard of living and lack of oppor-tunity leads youth to revert to such actions to extort telecom operators. The actions of vandals create sig-nificant expenses for operators in terms of repair and replacement costs, lost revenue, and also “appeasement” fees. From a decision-making standpoint, rolling out more equipment in an environment where the assets are not protected presents a significant risk.
Delays in investment are also encouraged by market uncertainty due to the current antagonistic environ-ment between operators, regulators and government. Investors in the Nigerian economy are not new to theses uncertainties, in the petroleum sector about $100bn worth of investments is being delayed due to the delayed passage of Petroleum Industry Bill (PIB) according to the international oil companies (IOCs). Such uncertainty in the telecoms sector can have a knock-on effect for the consumer. The US in the early mid 1970s was a perfect example of what market uncertainty can do. According to Jerry Hausman, a pro-fessor of Economics at Massachusetts Institute of Technology (MIT), regulatory issues delayed the intro-duction of cellular telephones in the United States for 7 to 10 years.3 The delay purportedly cost consum-ers about $31- $50bn (1994 dollars) each year. In recent times, telecom operators have been attacked by regulators or government through fines and unregulated tax charges. This does not provide the incentiviz-ing platform needed for investors to commit more funds to capital expenditure. The story of the telecoms sector will mirror that of the Nigerian petroleum industry if a proper regulatory and fiscal structure is not designed and enforced by relevant stakeholders.
Costs, Security & Uncertainty: What is the solution?
Evaluating the dynamics of the telecoms environment, it is clear that there is still a strong need for in-creased capital investment in the industry. The publicized customer satisfaction levels with telecom opera-tors serve as enough evidence for the need for improved services. However, until a solution is provided for the operators to deal with issues surrounding its operating costs, security, and uncertainty, Nigeria may not achieve the telecoms investment per capita observed in some of the emerging economies such as South Africa and Brazil. The ICT industry is critical to support the economic growth needed to maintain Nigeria’s status as the largest African economy. Hence, all stakeholders should participate in providing a conducive environment for the required capital investment to improve the telecom industry’s quality of ser-vice.
A key win would be in the area of power supply. Unfortunately, the benefits of the electricity reforms of the Goodluck Jonathan administration are not realizable in the short term. However, it is important for the gov-ernment to show its commitment to the blueprint of achieving significant growth in the generation and dis-tribution of electricity across the country. True commitment and observed improvements in the power sec-tor should serve as stimulus for increased investments in the Nigerian economy. The envisaged cost savings should be reallocated to improvement and deployment of infrastructure for more efficient service delivery to the customers.
Protection of telecommunication infrastructure in the country, especially in remote areas, is a paramount need for operators. There have been recent talks of the potential passage of a bill by lawmakers, which seeks to give telecommunication infrastructure the status and legal protection of Critical National Infrastructure as well as other critical infrastructure such as power. The bill is a step in the right direction; however a delay in the passage will endanger the $25bn investment in the ICT industry as well as future investments will be endangered for the foreseeable future. It is also important to acknowledge that passage of the bill is not suf-ficient; awareness and enforcement are the true determinants of the effectiveness of the bill. A comprehen-sive plan is needed to communicate to Nigerian residents the need to protect all critical infrastructures and the penalty for violating the law in the country.
Lastly, a well-defined and legally backed fiscal and regulatory framework is needed to eliminate uncertainty about the telecom companies’ operations and potential investment. There is need for a uniform tax and levy framework across the nation which has a legal backing. This would protect the operators from exploitative charges as well as the creation of unbudgeted new levies/taxes. Ultimately, a properly designed tax and levy framework will increase the positive perception of due process in the industry. Consequently, investor confidence in the environment will be improved and increase the probability of more capital investment in the industry.
Conclusion
It is fair to say that telecom operators are generally evaluated by consumers without consideration of the rough operating and financial environment. However, if the government and all other stakeholders can play their roles to provide a more suitable environment, then it will become crucial that each operator provides world class and cutting edge service. High expectations of a telecom investment per capita at par with coun-tries such as South Africa will be the norm. As Edward Teller said, “The Science of Today is the Technology of Tomorrow”. The delayed action to improve the effectiveness of the industry will only lead to a lag in the technological and economic development quest for Nigeria. We have attained the status of the largest econ-omy in Africa; ICT should be supported to play its role in making us an economic power on the global front.
