Wole Abu, CEO of Pan African Towers, a telecoms infrastructure company, speaks with BusinessDay about successes and challenges in the telecoms sector, the $136bn opportunity, how the two-year company is coping with the pandemic and its plans to expand outside of Nigeria
Pan African Towers as a provider of infrastructure that enables phone calls and data usage is not very visible or known to many. Can you tell us what you do?
We are a telecom infrastructure development and management company. We build telecommunication towers for mobile network operators, second-tier data operators and ISPs (Internet Service Providers) across the country. We are also providers of fibre optic services, indoor- distributed antenna services and all the kind of infrastructure that is necessary for all these businesses to deliver telecommunication services which is voice, value- added services and data to the end-user. We got our license in 2017 and started operations in July 2018, which will be two years at the end of this month. We already have major GSM companies as our customers and we are happy to have closed that quickly in the first year of operation. Among the second-tier data operators and the ISPs, we also have quite a number of them as our customers already.
During the BusinessDay ‘A National Conversation conference’, the telecoms industry was identified as a success story for the country but there are still challenges in that sector. Can you highlight those challenges?
Success depends on what you are looking at. As an industry, there have been success stories but there are players that are suffering also. You can recall what happened recently to one of the GSM companies and if you scrutinize the CDMA space, none of them survived, so it depends on the time horizon. When people talk about success, it is typically the GSM companies because of the sterling success of MTN, Airtel, and Glo. Beyond the success of these companies, there are other players: the TowerCos, then the FiberCos, and others. So, when you study overall industry, it has been more successful; more so, given the im- pact of the sector on enabling businesses and economic activities.
The advent of telcos into Nigeria and the services they render have improved quality of life in Nigeria; they have improved the way people communicate; given people access to education, health, financial services and other life-enhancing services. I would say the sector has been an unqualified success. I grew up at a time when telephones were the exclusive preserve of the elite but they have become a utility as they should in a digital economy. Yes, it has been very successful in that sense, and I am very happy that Nige- ria is doing 20 years of having GSM now. Nobody remembers how life was before then. In terms of the challenges, there are three broad categories.
The first will be the regulatory environment because telecom is always regulated everywhere. The regulation is not just about NCC but the entire regulatory and statutory environment which covers every aspect of businesses in the sector including construction permits, right of way, taxes, community issues, environmental impact assessment etc, anything that you need to do to get your services out. Even for the GSM service, to launch a product you need permission and anything that has to do with the government which sometimes requires coordination between parastatals and which may not be in sync with the private sector.
The telecoms sector is what is typically described as a very fast-moving service such that FMCG moves at snail pace in comparison. In the time a beverage company transports its products from one place to another, someone else using an email, can send billions in naira.
Telcos cannot afford to go offline for one hour. Sometimes the public sector does not understand the urgency with which we work and assume we are too pushy, so that is one big issue but it is getting better. In terms of permits, we work in a digital environment so emails can be approved even text messages can be a form of approval, you can have conference calls and move things quickly but we work with a very analogue public sector which insists on the paper record, stamps etc.
This requires travelling to Abuja and other cities to obtain permits. The whole environment of the public sector needs to be digitally transformed although the overall business environment in Nigeria is making headways. This is especially important to us in infrastructure. We have been pushing for the critical National Infrastructure Bill to be passed into law so that people do not tamper with our infrastructure. You leave your site and generator on the side of the road and people go there to steal them or de-rig your tower. These issues affect the business environment.
The other main issue is that we rely significantly on power. Off course, everybody uses power but we run a 24-hour service and we run genera- tors throughout. Our uptime is 99.99 percent so this increases cost of operation. We do not have grid power at all, we do not consider it but in a few cases, where the host community has a private arrangement for power, we do. But those instances are too few to be significant.
Even in such instances, we put a generator in such communities as a backup. This is what you do not see Towercos go through across the world. When I go to conferences where I meet colleagues from the same industry in other climes, when I talk about power as an issue, they do not even understand what we are talking about because over there you just build your tower and connect it to the grid. Here power capex is about 65 percent and almost the same with our opex so you can imagine what we are spending on power. We see a lot of room for collaboration with players in the power sector.
The third major issue is capital structure and access to capital. This is a capital-intensive business and deals in the industry are very large. When Eaton were selling their towers late last year 5,000 towers went for $1.5 billion, so you have an idea that if a country like ours still needs 30,000 towers to achieve our broadband penetration target if you do the rough maths you know how much more is needed in terms of investments to go just into Towercos. We have not talked about fibre optics which is not there, we have not added the other aspects either so I think as at the last count from the minister we still need $136bn worth of investments for Nigeria in the infrastructure space. We do not have that kind of money so that capital has to come in from private equity firms and DFIs [Development Finance Institutions], and they need to have that comfort that the right governance around that money is in place both from the company and from the environment and the country risk perspective. So, when certain government officials make statements that put Nigeria in a funny light, they downgrade you. Even if you are doing good business in Nigeria you have fallen off the radar. Meanwhile, this is a very good asset class because Nigeria is a massive country with a huge infrastructure gap. People are still coming by the way, but they are cautious; if risks go up, costs go up. Our stock market here is too thin to offer support while our debt market is virtually non-existent with just one or two companies able to offer long term funds for infrastructure development.
How has your company reacted to these challenges?
First and foremost, these are not new challenges and anyone that has been in the telco space knows that power, community, regulatory and other forms of challenges have always been there. We play in this area so we understand the challenges too. For example, in the aspect of energy, you must hedge against the volatility of diesel by making sure your supply chain for power is very solid and resilient. We have deployed hybrid solutions that harden our infrastructure against energy shocks. In terms of attracting capital, corporate governance and ESG practices are non- negotiable for a management team and business. We instituted excellent corporate governance practices from ground zero. I do not think any company in Nigeria has found that easy but the good thing is that because of the particular asset class that towercos fall into, we got appetite from many people, many private equity firms who are interested and we have been successful in that area too.
Then the MNO [Mobile Network Operators] themselves, I would say the market conditions were also favourable for us at the time we launched. They needed a credible alternative to the existing players in the market and we were able to provide that alternative. One company cannot build all that infrastructure, it is too much concentration risk and stressful for everyone. So, we came in at the right time and our vision was desiring good things to come out of Nigeria and Africa; I would call it our contribution to national development. We do not believe in aid, we believe in trade, investment and growth. We believe that Nigerians and Africans who have the right expertise can also help build these infrastructures so that also drives us; and we put together a world class management team to drive this vision along with a board that is aligned with this vision. The reality is that there is capital outside looking for good businesses to invest in at the right scale and we are at the right scale. We are at the right scale and big investors are comfortable with our management team and customers which are among the biggest companies on the stock exchange.
So that is the strength of our receivables. If you look at our credit rating, we have great ratings because our receivables are coming from very credible people, we are not a B2C [Business-to-Consumer] and even this period of the pandemic only strengthens the case that we are a good type of asset class to invest in because we have secured contracts which means our revenues are not seasonal and we can plan long-term. For investors who are looking for assets that give good returns over the long term and will even grow, this is the right asset class to invest in. Finally, we constantly engage with key stakeholders in our communities of interest to ensure. A mutually beneficial relationship is always assured.
What are your financial engineering strategies to tackle challenges and take on opportunities the market provides?
The first thing is that we have a single currency policy to manage exchange rate volatility, so we try to denominate a lot of liabilities in local currency to ensure we can meet our obligations. This strategy is also aligned with our supply chain and downstream contracts with suppliers do not have this exchange rate volatility. It also feeds into what I would call the Pan-African strategy of good customer care since our customers prefer to make payments in local currency to match their revenue which is mainly Naira. We acknowledge that there are strong reasons for people insisting on payment in foreign exchange, however, this will put a lot of pressure on CFOs and the CBN to source dollars for mundane things.
This strategy also helped our customers because we could have asked to be paid in dollars but that would cause additional stress to the organisation. Additionally, we are careful about the capital structure in terms of balancing our equity to our debt, we are very financially disciplined. So internally we make sure that we review all capex that has significant volume and is evaluated using risk parameters. We are enjoying what we call ‘second-mover advantage’ having learnt from the mistake of people that went before us. You can check from the financial statements and see that a company can be big and making losses with little return on assets. As I said, we are focused on profitable growth and good returns on the asset. We want to be sustainable and grow a company that will be there for the long- term, so we avoid pitfalls that can blind- side a company. The board has been very helpful and we have a lot of savvy people and the financial advisers who help us in ensuring we make the right decisions. That discipline of saying no to some kind of money and ensuring equity providers have the same type of philosophy has helped us a lot.
In light of new digitisation drive for businesses and the nation amid the COVID-19 pandemic, what is your vision for Pan African Towers?
Pan African Towers’ vision is to help businesses and people of Africa achieve their connectivity objectives in a cost-efficient manner. We are passionate about using technology to help Africans overcome poverty, drive innovation, industrialisation and digital literacy. The minister in November launched the national broadband plan and the Federal Government renamed the Ministry of Communications to Ministry of Communications and Digital Economy. That signals that even in government, people are beginning to understand that the digital economy which is well over $15 trillion is some- where that Nigeria should play.
On the other hand, it is more than just the infrastructure part, the infrastructure is at the bottom of it. So, we are going to do our part in delivering the national broadband plan. Our mission statement contains this already and the government is catching up because we have said we want to reinvent the tower space in Africa with innovative and creative business models that add value to our clients’ businesses and hundreds of millions of customers across the continent. Our vision is to build infrastructures that can democratise access to the internet in Africa. If you take Nigeria, the way telecom works, you have your mobile device which is a mobile station, then you have a base station which is the tower we built and we have hundreds of thousands of those base stations and then the switches. This is the architecture of telecoms.
It is not just the handset; you need all these infrastructures. In urban areas, there are towers but in many rural areas there are still several places that are not connected. This will require a different technique because Nigeria has small communities where putting a macro tower will not give the right returns. There is the USPF [Uni- versal Service Provision] Fund which is supposed to address all of that but it is not enough when you consider the size of Nigeria; so, it has to be a different type of investment and support. Consider Nigeria where the CBN is trying to drive agricultural policies and financial inclusion. One of the things I know as someone who has been in telecoms for twenty years is that the power of telecom to transform a rural area or war-torn zone is underestimated. We [government and the telecoms sector] need to concertedly work together. The government is beginning to align with the global technology trend, and some state governments started reducing the right of way charges; however, this is still not enough, there is a need for additional incentives for investors and telecoms should not be seen as a revenue-generating source for government, but a developmental tool. It is not just PPP for roads, there should be PPP for telecom because it is also infrastructure. It costs the same amount to build a road as it costs to build and operate a tower. The internet is the next superhighway and the next Einstein could be sitting remotely in a village. Pan African Towers would be leading this charge to transform Nigeria into a digital powerhouse.
Where does your company stand in the development of 5G and how do you intend to take advantage of the next big thing in telecommunications?
If you have been following Pan African Towers you would know we are strongly in favour of early adoption of the 5G technology. We are excited about it because the potential for digital transformation from 5G is huge. People may say use cases are not there but they are. Nigerians are entrepreneurial, and 5G is not just about the speed of the internet but also about all the activities that it can enable.
There is machine learning, 3D printing, robotics, AI, blockchain; all these are disruptive technologies that can be leveraged with 5G. The regulatory framework of how 5G will operate in Nigeria has not been concluded, but once it is, we can put infrastructures in place especially fibre in certain clusters where people have planned to use digital technology to provide life-enhancing services.
Security is a major problem, but there are simple solutions in 5G that can link everything and help with identity management. Our database can be synchronised with reliable internet, and this can improve the business environment.
There are also health benefits in solving health challenges that the country still struggles with but have been eradicated elsewhere. Solutions like sending drones to remote places, as opposed to the longer time it takes for personnel to reach, can help solve many health challenges with really simple solutions. For example, if it is water treatment, a drone can take a sample from the remote area return it to a lab in Lagos for analysis, and the results communicated to the relevant stakeholders. If a drone cannot navigate from Lagos to the remote area then it will not happen.
How would you assess your two years of operations in Nigeria and where do you see your company in 5 years?
We have to give thanks to God because we have grown phenomenally. When we applied for the license, several people also did but never took off. We were able to launch, the MNOs initially were sceptical of our ability to support them but we were able to deliver on our promise and today we are equal to any other player in the industry in terms of the relevant customers KPIs.
Some financial institutions also noticed our impressive financial performance where they see growth, efficiency and returns on assets and now they have a reference point; and it is with that confidence that PAT has been able to attract investment from one of the leading private equity firms in Africa The PE firm has seen the value we have created, they know and approve of our vision. We also have long-term debt providers who have also approved significant investment in PAT to support our growth aspiration.
With the support of our financial partners, we aim for double-digit growth and doubling our balance sheet size this year. In line with our business plan, we will pursue organic growth through build-to-suit solutions, acquisitions and new business models. The opportunities are huge and we now have the right mix of capital and talent to execute our vision. We see ourselves stabilising in Nigeria this year and by next year we would be continuing our geographical expansion which had to be suspended due to COVID-19. In the next 12 months, however, we should be entering two or three West African countries. In five years, we should be in at least six or seven countries.
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