Telcos’ liquidity squeeze puts network quality at risk

Telecommunication companies are hitting the brakes on capital expenditure this year as mobile service providers grapple with a cash squeeze arising from record financial losses.

Nigeria’s network quality, which has recorded mixed fortunes lately, is set to worsen as a result of the telcos’ planned reduction in capital expenditure, according to some industry experts.

According to GSMA, the mobile industry’s financial performance has slowed down in recent years due to falling naira revenues and worsening economic conditions.

The situation has led the country’s biggest telcos to announce a reduction in capital expenditure this year.

In 2023, both MTN Nigeria and Airtel declared losses. Airtel recorded a loss of $89 million for its year ended March 2024, and MTN Nigeria’s loss was N137 billion for the year ended 2023. Both telcos blamed the naira devaluation, rising inflation, and worsening macroeconomic conditions in the country.

The naira has fallen from N461/$ in March 2023 to N1,303/$ as of March 2024. MTN and Airtel have hinted that they won’t be spending as much on capital expenditure and will rely more on existing infrastructure.

Airtel Africa, in its financial statement, said: “Having considered all the above-mentioned factors impacting the Group’s businesses, the impact of downside sensitivities, and the mitigating actions available to the group including a reduction and deferral of capital expenditure, the directors are satisfied that the Group has adequate resources to continue its operational existence for the foreseeable future.”

MTN Nigeria, in its Q1 2024 results, noted that its consistent and extensive network investment over the past few years has helped it build the flexibility to optimise our capex deployment.

It said: “In this regard, we plan to reduce capex (excluding leases) for FY 2024 and aim for a capex intensity in the upper single digits. We will optimise latent capacity and implement radio planning strategies in order to minimise any potential impacts and disruptions to our network quality.”

For context, MTN has spent N1.08 trillion on capex in the last two years, and Airtel Nigeria has spent $545 million in the same time period.

“The service providers will continue investing in digital infrastructure to support the digital economy in Nigeria, provided that the economic and regulatory environment improves in a way that supports sustainable investment,” GSMA, said in its report, ‘The Role of Mobile Technology in Driving the Digital Economy in Nigeria: A Partnership between Mobile Service Providers and Government to Support Nigeria’s Future Growth and Prosperity,’ which was unveiled in Abuja on Thursday.

The global association for telcos noted that despite the sector’s N33 trillion GDP and N2.4 trillion tax contributions in 2023, the industry is facing several significant challenges.

“The overall financial performance of the industry in recent years has not been sufficient to support the capital-intensive nature of the business,” it said.

GSMA explained that operating costs have increased significantly in the recent period due to increases in the cost of power for sites due to the rapid increases in fuel price, high and rising costs of tax compliance, and increased demand for forex due to contractual obligations for rollout.

“Underlying these trends in revenue and operating costs has been the deteriorating macroeconomic situation in Nigeria. The high levels of inflation have pushed up the cost of many inputs into the mobile service providers’ businesses,” GSMA highlighted.

The industry body said mobile service providers need to generate sufficient revenue to cover their operating costs and support this level of capex over the medium term. When this is not done, operators are likely to cut back on either capital or operating expenditures or both, it said.

“This results in a shrinking sector which leads to subscribers receiving a poorer quality of service and delays in coverage expansion,” it explained.

GSMA noted that telcos will not be able to pay as much tax in the short term and that digital adoption in the country will slow down in the medium term.

Angela Wamola, head of Sub-Saharan Africa at the GSMA, said: “High-speed connectivity is the bedrock of any digital nation… Future policies should be geared towards reducing the cost and complexity of infrastructure rollout to encourage investment and boost the adoption of mobile broadband.”

The slowdown in capex by the telcos may exacerbate network quality in the country, which has not been at its best. Everyday, Nigerians on X complain about network quality.

To improve connectivity, especially access to fast internet, the Federal Government believes it needs $3 billion to fund an additional 120,000km of fibre optic cables. As of the end of 2023, only 78,676km of fibre optic cables have been deployed in the country, and broadband penetration stood at 43.53 percent.

Nigeria’s plan to achieve 75 percent of fibre optic cable target by 2027 and increase broadband penetration to 90 percent is also now being threatened.

In his remarks at the GSMA event, Karl Toriola, MTN Nigeria’s chief executive officer, noted that the telecom sector was faced with numerous challenges, including insecurity, high operation costs, and taxation.

He said: “The return in the telecommunication sector is poor, and there are no dividends for investors, but on the contrary, other sectors are declaring bumper profit, we are continuously investing massive amounts on infrastructure.”

Gbenga Adebayo, Chairman of the Association of Licensed Telecom Operators of Nigeria, noted, “The industry can only be sustained if we have a continuous flow of investments. As we speak, people are cautious to invest because of the many challenges that we have had from currency devaluation to high cost of business.”

To combat rising prices and other challenges, telcos are currently asking the Nigerian Communication Commissions for permission to raise their tariffs, the first such increase in about a decade.

“The industry is not sustainable, we need a tariff hike, other other sectors are increasing theirs, we are the only ones restricted and it is placing us in a very difficult space,” Toriola, MTN’s CEO declared.

Adebayo, ALTON’s chairman, argued that a price review should be a simple regulatory process and that the government should not use the sector as a palliative to solve people’s problems. “We must price right to sustain the industry; we must price right to have the right investment,” he said.

GSMA also recommended that Nigeria remove retail tariff price control regulations, allow periodic tariff reviews, or set a competitive price band for telcos.

Bosun Tijani, minister of communication, innovation and digital economy, argued that rising tariff prices is not the singular solution to mobile operators’ problems.

“There are tons of other things that we must do to ensure that the business environment is conducive for the investors in this space. And the government is active, including in the tariff conversation,” he said.