How rising costs threaten Nigeria’s telecom sector

– by Ismail Olatunji

Rising operating costs have become increasingly overwhelming for most businesses in Nigeria in the past two to three years. Escalating costs of fuel, power, labour, transportation, equipment maintenance and security, coupled with forex fluctuations and availability have especially put pressure on the telecom industry, with significant impact on business growth and sustainability, necessitating a clamour for tariff increase by telecom network operators.

In acknowledgement of the operators’ plight, the Federal Government through the Ministry of Communications, Innovation & Digital Economy, and the Nigerian Communications Commission ( NCC) at a stakeholders’ meeting with Mobile Network Operators (MNOs), few days ago in Abuja, granted the request for new tariffs for telecom services, including call, SMS and data among others. The Minister of Communications, Innovation & Digital Economy, Bosun Tijani, stated that although Government would not approve the 100% new tariff regime proposed by the network operators, price increases in telecom services were inevitable. The new price regime is expected to be announced by the NCC any moment soon.

Fundamentally, the costs of diesel, alternative power, and municipal power supply have skyrocketed, while the forex rate has increased astronomically in the last one-and-half to two years. Most telecom equipment and software applications are dollar-denominated, making the major network operators and more importantly, the infrastructure companies (INFRACOs), including tower companies, data centres and internet bandwidth and international connectivity companies that provide the essential bulk backbone services that power the network for telecom firms or service to the homes and offices, equally bear a significant brunt of these cost pressures.

The operating costs of telecom business are largely denominated in dollars. Firstly, given the huge capital requirement for telecoms operations, funding is sourced from international markets, and that has witnessed more than 300% in inflation in terms of interest and principal repayment cost for these funds due to the depreciation of the naira against the US dollar, rising from approximately N500 to over N1,600 in the past three to four years. Additionally, most of the critical components required for operating and maintaining telecoms networks are sourced off-shore requiring significant FOREX. This presents a complex and difficult mismatch for MNOs and INFRACOs who generate revenue in Naira while their costs are USD denominated.

Available statistics further show that the operational expenses of major Mobile Network Operators have surged by over 300% in the last 18 to 24 months, with energy costs accounting for the largest share of their expenses. The escalating cost drivers in the telecom value chain, including fuel, power, energy, and forex, have left operators with no choice but to seek a tariff hike.

If these challenges are not mitigated as quickly as possible, the crisis will have far-reaching consequences for Quality of Service, job security, and the Nigerian economy as a whole. It’s imperative that the federal government grants the request of telecom operators for tariff increases across service offerings – call, SMS and data.

The challenging operating environment has led exasperated MNOs to cry out and make a case for tariff increases. Chief Executive Officer of MTN Nigeria, Karl Toriola, Managing Director/CEO of Airtel Nigeria, Dinesh Balsingh, and 9mobile CEO, Obafemi Banigbe, have highlighted the dire situation, stating that the telecom industry is struggling not just with profitability concerns but with fundamental sustainability, even as it is arguably supposed to be a key driver of the economy. The case for tariff increases, they clarified, is principally to enable the MNOs improve on the present infrastructure gap in order to bolster Quality of Service and broadband penetration in the country.

The Association of Licensed Telecom Operators of Nigeria (ALTON) and the Association of Telecommunication Companies of Nigeria (ATCON) have equally corroborated the need for tariff increases in order to save the country’s telecom sector from avoidable collapse.

Both the industry regulator the Nigerian Communications Commission (NCC) and the Minister of Communications, Innovation, and Digital Economy, Bosun Tijani, have supposedly acknowledged the industry’s plight, with the minister announcing that tariff increases would be approved, although not at the 100% level requested by operators.

But the fundamental reality is that if tariff increases are not approved, the current challenges faced by telecom network operators and even the INFRACOs will have far-reaching consequences for Quality of Service, job security, national security, the financial sector, and the Nigerian economy as a whole.

Here are a few ways tariff increases will impact telecom business sustainability, service quality, and the overall national economy. The telecom industry’s survival is at stake. Without tariff increases, operators may struggle to maintain quality services, leading to a decline in overall sector performance. Tariff increases will enable operators to invest in infrastructure development, driving growth and improving services.

MNOs also deserve fair compensation for their services, considering the rising costs of operations and the investments they have made and must keep making. As operators struggle to maintain operations and a decent return on investment, they are likely to be forced to cut corners, compromising on network maintenance, upgrades, and expansion. This will inevitably lead to a decline in Quality of Service, resulting in dropped calls, poor internet connectivity, and frustrated customers.

Similarly, for the INFRACOs, the rising costs of diesel, fuel, and energy will make it increasingly difficult for them to maintain uninterrupted services at their sites or their networks. In the same vein, the high cost of providing security at cell sites, securing telecom equipment, and transportation of equipment and vendors to sites for maintenance have implications on uninterrupted services. Power outages, network downtime, and reduced coverage areas will become more frequent, ultimately leaving MNO subscribers to voice, data and value added services disconnected and discontent if there are no latching incentives to alleviate their dire cost challenges.

The telecom sector is a significant employer of labour in Nigeria; the inability of telecom operators to operate profitably can pose a threat to staff retention, thereby putting thousands of jobs at stake with consequential effect on their families, dependents and social order. If operators are unable to absorb the rising costs, they will be forced to downsize, leading to widespread job losses and economic instability.

A decline in the telecom sector will have a negative ripple effect on the Nigerian economy. Reduced investments, decreased economic activity, and a decline in tax revenues will all contribute to a slowdown in economic growth.

The way forward is for the Federal Government to grant the request for tariff increases to the MNOs. To ensure that the impact of the tariff review is sustainable, Government should equally give consideration to the needs of INFRACOs, who provide back-end support for the delivery of communication services and are exposed to socio-economic impact of the escalating cost of doing business over the past few years. In addition to approving tariff adjustments to reflect the rising costs of operations for telecom operators in the country, the government should also provide incentives for INFRACOs in order for them to continue to operate and invest in infrastructure and network upgrades.

Ultimately, the sustainability and growth of the telecom sector are crucial to Nigeria’s economic development. By granting the request for tariff increases, the Federal Government can ensure the sector’s long-term viability and promote a digital economy that benefits all Nigerians.

Olatunji is a Business Analyst, based in Lagos, Nigeria.