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The Nigerian Telecommunication Sector - Challenges and Cautious Optimism

Proshare

Wednesday, September 20, 2017 / 2:50 PM /FDC

Background of the Telecom Sector
The Nigerian telecommunication sector is the largest segment of the Information and Communication sector. Nigeria has one of the largest telecom markets in Africa. The Nigerian Telecommunication sector has evolved over the years to an oligopolistic market structure (a small number of firms have the majority of market share). The sector includes a strong multinational presence. The leading players are MTN, a South African based multinational company with a market share of 37.21%, Airtel (an Indian based multinational telecommunication), Glo (a Nigerian multinational company) and 9mobile (formerly Etisalat).

The sector over the years has contributed immensely to Nigeria’s economy and the lives of Nigerians. The advancement of mobile phone usage from basic phone telephony to new enhanced services and the introduction of new technology within diverse sectors of the country have seen the sector grow massively. The sector has experienced rapid growth and helps in e.g. easier banking services (bank mobile apps) and access to e-learning platforms to Nigerians.

However, the Nigerian telecommunication sector saw stalled growth during the second half of 2016 leading to delays or deferrals of expansions and upgrades to networks and this trend has continued into Q2’17. The GDP Q2’17 result showed that the telecommunications sector contracted by 1.92%. The major challenges facing the sector are low consumer purchasing power, currency movements and the recent loss of global investors. The inaccessibility of the dollar in the economy resulted in weak macroeconomic conditions. Nigeria’s weak macroeconomic conditions have led to weak labor market dynamics (high unemployment and underemployment), reduced disposable income and poor corporate performance.

To ensure longterm growth and sustainability, the sector needs to focus on innovative business practices by investing their assets in more creative services that focus primarily on meeting consumer needs and establish a regulated minimum market price. These will create new streams of income for operators and mitigate the decline in their traditional revenues.

Prior to 2014, Nigeria was attractive to both local and foreign investors due to a stable currency and rise in oil prices. However, in 2016, there was a significant fall in oil prices which resulted in the shortage of dollars and depletion of external reserves, revenue shortfalls, high inflation and ultimately a recession. The naira’s severe devaluation by 215% to $490/$ as at 30th December 2016, compared to $155.71/$ at the start of 2014 pushed up the costs of imported items such as RF Coverage Equipments (Node B) and Transmission Equipments (Optical Fibre) which stifled expansion plans of most network operators from expanding their service capacity. The sector has also been affected by a reduction in consumer demand due to lower disposable income in consumption.

Challenges in the Nigerian Telecommunication Sector

There has been a decline of GSM mobile subscribers as the market grapples with shifts in product options. Consumers are moving away from traditional cellular services to data bundle packs, which allows them to use Over the Top (OTT) services. Q42016 saw an increase in total GSM subscribers of 0.84% to 154 million (mn). However, subscribers dropped in Q12017 by 1.38% to 152mn; Q22017 results were worse, dropping 6.15% to 143mn.

Telecom operators and Internet service providers are currently at loggerheads to deliver data at relatively cheaper prices. The fierce price competition among telecom operators on their voice and internet data has led to the contraction in the sector revenue over time. Consumers benefit from temporary low prices only in the short run. The sector has also contended with OTT players that utilize technology to convey voice/video calls at a fraction of traditional voice call costs. While Nigeria’s data bundle prices are the lowest in subSaharan Africa, they are priced below actual costs which can harm the sector and puts longterm customer benefits at risk.

Smaller mobile network operators find it hard to survive in the market which leaves an industry dominated by few players. These few players will increase their market share and have the power to influence prices. Prices can more than double which can have a negative effect on the levels of consumption.

In recent years, Nigerian companies have had difficulties accessing foreign currency (FX) to finance their dollar/FX debt. The telecommunications sector was no exception. Etisalat Nigeria has been adversely affected by both a financial and management crisis. Etisalat obtained a $1.2 billion foreignbacked guarantee bond in 2013 to upgrade and expand its operations, but has been unable to meet its obligations since 2016. Etisalat’s outstanding loan has adversely affected 13 Nigerian banks. Given the macroeconomic climate, it is expected that banks will record a substantial amount of nonperforming loans (NPLs) due to the debt crisis. Such a scenario will adversely affect their profits (a 12% decline is expected in 2017) and their ability to meet their activities.

There may be a decline in their equity instruments impeding their ability to absorb losses. Zenith Bank’s exposure to the Etisalat loan, which accounted for N80bn of the total loan, was about 3.5% of Zenith’s total loan book. The 2017 half year results of most banks have shown a substantial decline in their loans to customers in order to minimize and stabilize risk assets. First Bank has reduced its loans by 6% to 2 trillion (trn) in H1 2017. In a bid to prevent high NPLs in the future, banks are expected to further reduce their loans to retail clients and firms.

Global influence gives a company easy access to revenue. Raising capital in international markets helps to grow the business, meet daily obligations and minimize cost. It strengthens the business through exposure to new relationships. It diversifies business risks across a broader customer base. The recent exit of one of the major foreign investors from the telecom sector raised concerns about the reluctance of other investors entering into the mar

Solutions to the Challenges in the Nigerian Telecommunication Sector

To ensure sustainable growth, the sector is in need of reform. Previous changes (e.g. the Nigerian Communications Act 2003) are outdated as they focus on how voice calls are regulated and not on matters that relate to the new technological era. The focus today should cover competition in the sector, the market and other services the telecom sector is linked closely to such as finance, technology and media services. The current government has shown its commitments in creating an enabling environment for the private sector to contribute innovative solutions to allow consumers to benefit from Information Communication Technology (ICT) advancements. This will in turn bring about efficiency and productivity in the telecom sector and eventually enhance economic growth.

To solve the issue of artificial low prices, a regulated minimum price level has to be put in place by the government and regulators. Big and small telecom operators can compete on the quality of the network and customer services they provide. The sector’s regulator, the Nigerian Communications Commission (NCC), should ensure that the quality of service provided by telecom operators are enhanced through an emphasis on the strength of their signals and the quality of their data services. Customers can also play a part in regulating prices by valuing and promoting services that offer the best customer experience and not those that offer only the cheapest price.  

Since the exit of Etisalat’s major investors, there have been recent reports that three telecommunication giants, Orange (French telecom group), Britain’s Vodafone Group and India’s Bharti Airtel,1 are in the race to take up the investment opportunity and buy 45% of Etisalat’s stake. Such a move will inevitably boost the telecom sector as it will attract improved technology into the country to drive better quality service.  

Although the telecommunication industry has gone through turmoil, it can bounce back from its recent challenges and boost economic growth. With the sixth consecutive decline (0.3%) in year on year inflation to 16.05% and the simultaneous appreciation of the naira, the sector will see a steady growth in its activities. To drive economic growth, it needs to establish new reforms and review existing policies and regulatory actions to monitor the health of the sector. To ensure longterm growth and sustainability there is a need to improve on general business processes/practices to create new revenue streams, recreate existing products, diversify into new areas for which the resources and capabilities are available and establish a minimum market price.  

This will result in increased investors’ confidence and will enable operators to serve multinationals including Small and Mediumsized Enterprises (SMEs) that are dependent on their internet services (better quality service). The sector needs to be considered important to Nigeria’s economic development as it provides the infrastructural backbone for new digital economy that drives socioeconomic development across all sectors in the economy (ecommerce, Mobile banking). Investments in operating telecom infrastructure are essential for economic growth as proper infrastructure leads to efficient operations of the sectors involved in the economy.  




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