Reforms in the Nigeria Telecom sector: Key to sustained growth and quality of service

Telecommunications is a key sector that contributes to economic growth and one that can help lift Nigeria out of recession.

It has created approximately over 2.5 million jobs over the past 10 years, reaches across all industries, and holds the potential to modernize multinationals, SMEs and their supply chains. It continues to provide mobile banking services to help bank the unbanked, provides access to e-learning platforms to help facilitate training and development, and brings healthcare services to rural regions, via telemedicine and text message counselling, amongst many other services.

Until June 2016, the telecoms sector was growing rapidly and comprised 9.8 percent of Nigeria’s GDP but this growth has now stalled, with the sector at a strategic crossroad. Several factors have converged simultaneously, which could materially impact the industry and undermine its potential to drive economic growth and stimulate the Nigerian economy as a whole.

Firstly, from a structural perspective, the current weakness in the local economy has resulted in relatively low consumer purchasing power and continues to place pressure on the industry and its operators. The weak Naira has made the importation of much needed telecom equipment into the country difficult, and the upgrading of towers and service capacity expansion too expensive to conduct on a large scale. Operators are now either deferring or delaying upgrades or expansion of their networks and customers are starting to feel the impact. Signal quality has been affected, incidences of dropped calls have increased, and overall customer service quality has declined. Nigerian consumers have every right to demand more and should never have to settle for poor network quality or services.

Secondly, to further compound matters, consumers continue to move away from traditional voice (cellular) services and are switching to data bundle packets, which allow them use over the top (OTT) service providers such as WhatsApp, Skype and Facebook; to make phone calls inexpensively over broadband connectivity. This switch requires massive investment into telecom tower network densification, as new 3G and 4G technologies are rolled out. These network upgrades can only be done if there is adequate financing and a suitable business case.

Thirdly, there is an ongoing data bundle “price war” between incumbent telecom operators and internet service providers; with a frantic race to deliver cheap gigabytes of data, for rock bottom prices. On the surface, these prices appear good for the consumer in the short term, but in the long run, this price war will put many operators out of business, as these current bundled offerings are priced well below their actual costs to network operators. According to Research ICT Africa, the price of data has decreased by over 65 percent over the past two years, squeezing margins and pushing smaller mobile network operators to the brink of collapse.
Long Term Industry Implications

Artificially low data prices are designed to drive out competition. This type of practice is called “predatory pricing” in respect of which there are restrictions in many parts of the world. These pricing wars never work out well for consumers, as they typically result in initial temporary low service prices, just long enough to force out the competition.

Then, without warning, the few remaining players take over market share and suddenly double, or even quadruple prices, as they are the only remaining game in town. It’s easy to identify anticompetitive pricing, as we know what it costs the telecom industry to secure internet bandwidth.

A good example of healthy competition which has led to improved quality and product service offerings is mobile phones. The competition between Apple and Samsung and others has forced all parties to constantly launch new and improved products. Competition leads to fair market pricing which has enabled mobile phones to be purchased by the masses. The current problem in the telecoms sector is that we don’t have fair market pricing – the price of data bundles in Nigeria is presently amongst the lowest in Sub Saharan Africa. While market forces drive the industry, governments and regulators must shape the mobile economy by setting the policies and regulations that will deliver a healthy, competitive and sustainable mobile sector alongside consumer protection for all citizens.
The way forward

Given the tremendous potential that telecommunications has to jump start and stimulate the Nigerian economy at all levels, we need the help of government and regulators to play the role of referee and establish a level playing field.

Bismarck Rewane, a former member of the National Economic Advisory Team and CEO of Financial Derivatives explained, “There has never been a more paramount time for investment and reinvestment in the telecoms industry. This is because of its profound direct and indirect impact on national productivity and output. The telecoms industry is not only a positive contributor to GDP growth in Nigeria but is also an enabler of other key sectors in driving productivity and output. The investment multiplier and reinvestment accelerator will go a long way in getting Nigeria out of the current recession.”

We recognize the free market principles of business and competition, but we also note the artificially low prices that are having a negative effect on investment and growth within the sector. Both large and small mobile network operators are currently working to try and mitigate the current challenges related to squeezed margins, and in other cases generating losses, and lack of direct access to foreign currencies, with the smaller firms struggling the most to compete. Reduced competition will be a lose-lose situation for all operators, and the public as a whole.

The recent default status of Etisalat Nigeria is a prime example of how it can all go wrong. Etisalat is the fourth largest telecom operator in the country, but as a direct result of the company’s razor thin margins on its current service offerings, and against the backdrop of the devaluation of the Naira, the company has failed to meet its obligations to its lenders.

Regulatory efforts need to be made to ensure that all sides survive and the quality of service levels continue to be enhanced, by having the regulatory bodies insist the mobile network operators focus on additional customer metrics such as, measuring their signal reach, network uptime and improved quality of a data services.

A regulated minimum price level will help stop the downward spiral of the telecoms industry and allow all telecom players, big and small, to compete on network service and customer service quality. With government help overseeing the sector, ensuring that all current players survive. The NCC can issue more spectrum licenses and make up revenues when additional spectrum is auctioned and mobile network operators roll out into new rural areas.

We also need to consider the telecoms sectors as critical to our nation’s economic development and, as such, place the sector on the critical national infrastructure list. This important designation will give operators priority access to much needed foreign exchange and the procurement and purchase of telecom upgrade equipment for the networks.
Finally, mobile network operators serve millions of SMEs and multinationals that are dependent on internet access – a half day service disruption results in large revenue losses for various businesses throughout the country. It is imperative that the government, regulators and international institutions continue to define and refine strategies to increase growth and ensure the long-term sustainability of the Nigerian telecommunications sector thereby also boosting investors’ confidence and signalling to the international community that we truly remain open for business.

 

Chris Lawson