Telcos see investments shrink as return on capital turns negative

Telecommunication companies expect a decline in investments in their network capabilities due to the negative return on capital recorded in the last 18 months.

Operators warn that this could further deteriorate the country’s declining network quality. In recent weeks, Nigeria’s network quality has worsened, a situation that Gbenga Adebayo, the chairman of the Association of Licensed Telcom Operators of Nigeria (ALTON), attributed to reduced investments in the sector.

This situation is expected to escalate, as Karl Toriola, chief executive officer of MTN Nigeria, indicated that telcos will experience a further shrinking of investments amid worsening economic conditions. “Investments will not continue to come. No one will put in a dollar and continue to get 66 cents… We are in a big crisis,” he said during a panel session at the Financial Derivatives Company’s ‘Telecoms Industry 2.0: The Next Investment Frontier in Nigeria,’ event on Tuesday.

The Central Bank of Nigeria (CBN)’s unification of the foreign exchange market in June 2023 triggered a sharp devaluation of the naira, which plummeted from N471/$ before the move to N1043.09/$ by December 28, 2023, and N1570.99/$ by August 12, 2024.

This led to losses in the sector, with Airtel Africa and MTN Nigeria losing N1.29 trillion in foreign exchange (FX) losses. In 2023, MTN posted its first loss since its 2019 listing on the Nigerian stock exchange, N137 billion.

According to the National Bureau of Statistics (NBS), foreign investment in the telecom sector fell from $456.83 million in 2022 to $134.75 million in 2023.

Carl Cruz, managing director and chief executive officer of Airtel Networks Limited (Nigeria), highlighted that increased operating expenses are outpacing revenue growth, making investors wary of committing funds to a sector struggling to adjust to macroeconomic headwinds. Nigeria’s inflation, which reached a record high of 34.19 percent in June 2024, has raised the cost of inputs in this investment-heavy sector.

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According to the GSMA, a global body representing telcos, the industry’s overall financial performance in recent years has been insufficient to support the capital-intensive nature of the business. In its 2024 Nigerian digital economy report, the GSMA warned that the high inflation levels have driven up costs for mobile service providers, impacting their profitability and investment potential.

Bolaji Balogun, CEO of Chapel Hill Denham, stressed that telcos need to invest $1 billion annually to meet the nation’s service quality requirements.

“We cannot secure this nation without improving our digital infrastructure. Our digital infrastructure has the power to change Nigeria’s economy. While significant investment has been made in the sector, there is still much work to be done,” Balogun said.

In 2023, Umar Danbatta, former executive vice chairman of the Nigerian Communications Commission (NCC), disclosed that investments into the telecommunication sector rose to $75.6bn as of the end of 2021.

Cruz of Airtel Nigeria pointed out that the naira’s devaluation has eroded value, pushing the limits of telecom companies over the past 18 months. He noted that discussions are ongoing regarding the pace of future investments in the country, with concerns about the returns.

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He, however, remained optimistic that investments will continue, albeit at a slower pace, due to the challenging operating environment.

“Digital investment is very important. It is an enabling industry. We enable other industries to increase their impact on society. We enable individuals to improve their connectivity and be included in financial and digital inclusion. That will not stop,” Cruz said.

In their outlook for 2024, Airtel and MTN disclosed in their first quarter results that they will slow down capital expenditure spending. Over the last two years, MTN has spent N1.08 trillion on capex, and Airtel Nigeria has spent $545 million in the same period.

MTN 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.”

Airtel Africa added, “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…”

These cutbacks could jeopardise Nigeria’s goal of achieving 70 percent broadband penetration by 2025. The country already missed its 2023 target of 50 percent, with penetration at 43.53 percent in March 2024, according to the NCC.

Angela Wamola, head of Sub-Saharan Africa at the GSMA, recently said, “High-speed connectivity is the bedrock of any digital nation.”

To improve connectivity, especially access to fast internet, the Federal Government believes $2 billion – $3 billion needs to be spent on increased rollout of fibre optic cables.

Aside the naira’s devaluation, the high cost of energy, particularly diesel, has also strained telcos, forcing them to renegotiate tower contracts in recent years.

Adebayo of ALTON said, “The biggest constraint we have in the telecom industry is the high cost of energy… the heavy logistics and the capital we spend today from powering sites would not be there.”

In 2022, telcos, through ALTON, wrote to the NCC for regulatory approval to raise tariffs by 40 percent because of surging diesel prices and economic headwinds. They renewed this request in 2024 and reiterated its necessity on Tuesday.

“Pricing is needed for survival,” Toriola of MTN emphasised on Tuesday. “The government has to ensure that tariffs are good enough for businesses to thrive,” echoed Balogun of Chapel Hill Denham.

Adebayo of ALTON argued that prices of telecom services must be left for market forces to determine and not politicised.

Industry experts at FDC’s event on Thursday also called for domesticating inputs in the industry to reduce operational costs and urged the government to address issues like multiple taxation, which currently stands at 54, and offer import concessions.

Adebayo of ALTON implored the government to step up and save a sector that contributed N33 trillion to GDP in 2023 and paid N2.4 trillion in taxes.

A decline in investment in the telecoms sector will “result in a shrinking sector which leads to subscribers receiving a poorer quality of service and delays in coverage expansion,” GSMA revealed earlier in 2024.

Bosun Tijani, minister of communication, innovation, and digital economy, who was absent at the stakeholder event on Tuesday, had earlier in 2024 argued that rising tariff prices are not the singular solution to telcos’ 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.