Trends in Nigerias telecommunications sector

Trends in Nigerias telecommunications sector CHAPTER 4 This section reviews the various trends in the flow of FDI in Nigerias telecommunications sector; the pre-liberalisation era and the post liberalisation era of the sector putting into consideration the circumstances that led to this policy change by the government of Nigeria. The determinants of telecoms FDI and its impact on Nigerias economic growth is analyzed taking note of the trend in inflow before and after the adoption of the liberalisation policy (1980 and 2008) 4.1.1 Pre-Liberalisation Era: Move towards Liberalisation (1980-1999) Prior to 1980, the telecommunications sector was viewed as a strategically imperative but comparatively neglected sector in Nigeria. It was one of the most undeveloped telecoms sector in Africa as it was largely characterized by poor performance manifested in low profitability, large unmet demand for services, poor technical and operational quality of service, and absence of new services. The sector was heavily dominated by the state-run monopoly-NITEL In spite of the mounting hitches of the telecom sector in Nigeria, the need for its privatization was not felt until the mid 1980s with the commencement of the structural adjustment programme (SAP). Between 1988 and 1991, the Technical Committee on Privatization and Commercialization (TCPC) carried out a comprehensive diagnostic appraisal of NITELs operations and adopted the commercialization option because the enterprise was considered strategic. The aim of this sector reform was to increase competition, lead to greater managerial autonomy and improve the incentive structure through the eradication of some of the principal-agent problems (Jerome, 2002). The resort to privatization/commercialization was informed by several considerations. First, by 1985, the quantum of resources required to sustain the state owned enterprise (SOE) NITEL had become an excruciating burden on Nigeria. Second, it was predicted that a carefully planned privatization programme would be an effective strategy to improve efficiency of operations, broadening share ownership, attracting foreign investment and reduce government participation where the private sector has the capabilities to operate more efficiently and lastly, the success of developed countries privatisation programme (Jerome, 2002). Prior to commercialization, NITEL operated as a very inefficient monopoly grappling with lack of clear policy direction, counterproductive bureaucratic red tape and a myriad of other problems. These negative factors put together prompted the government to make policy changes towards FDI. Subsequently, the telecommunications industry in Nigeria witnessed the deregulation of telecommunications services in 1992 through the promulgation of Nigerian Communications Commission (NCC) Decree, No. 75 of 1992, introducing private participation in the provision of telecommunications services in Nigeria, thus ending the state-owned NITELs monopoly of the sector and ushering in competition. The federal government, through the promulgation of Nigerian Communications Commission (NCC) Decree No. 75 of 1992, introduced private participation in the provision of telecommunications services in Nigeria. The telecommunications business was hereby open to foreign operators in different telecommunications se rvice areas to improve the sectors efficiency (Jerome, 2002). During this period, the government issued a new policy framework and set the following sector targets to increase telecommunication growth rate to an annual minimum of 13.5% such that 10% of the rural communities are served in the short term, 30% in the medium term and 60% in the long term; achieve a teledensity of 1.5 by 2001 by installing 1.5 million lines and 1.2 million mobile telephone lines. Install 8 million fixed lines by 2005; and ensure that in the medium term, telephones are within 5 kilometres walking distance in stead of the current 50 kilometres (Tella et al, 2007). All this and even more was achieved within a short period of time after foreign investors entered the telecoms market. Under the new dispensation, NITEL was denied access to subsidies, privileges and other forms of soft capital that enabled it to compete without improving efficiency. More importantly, commercialization was quickly followed by deregulation, which put an end to state owned NITELs monopoly of the sector. NITEL responded to the competitive environment by articulating a strategic plan aimed at ensuring growth and retaining a greater market share. The company was reregistered as a public limited company (Plc) under the Companies and Allied Matters Decree of 1990 with a completely new capital structure of fully paid 55 million ordinary shares of N100 each, giving an equity base of N5.5 billion and a new gearing ratio of 3:2 (Jerome, 2002). The companys stature as a fully commercialized enterprise invariably meant greater expectation from government, consumers and the general public. However, the commercialization of NITEL has not been a huge success as NITEL still operates like the civil se rvice, with functions structured within hierarchical and poorly coordinated departments and service provision organized along geographical lines corresponding to administrative regions in the country. 4.1.2 Liberalisation and FDI promotion Era (1999-2001) After the first step towards deregulating the telecoms sector by the military government in 1992 to boost the sectors development failed, and also due to the inefficiency of NITEL, the democratic government in 1999 further saw the need to liberalise and encourage foreign investment in the telecoms sector. As foreign investors seemed to have the expertise and finances required to provide telecommunications services in Nigerias market which was served by the monopoly of NITEL. The liberalization of Nigerias telecommunications industry started in the early 1990s and accelerated in 2000, after the election of a democratic government. By 2001, foreign investors were issued licences to commence operations. Prior to the auction of the license, Nigeria was viewed as a high-risk investment country, however, from 2001 all the companies have recorded impressive trading profits (Ndukwe, 2008). This could suggest that the factors that encouraged foreign firms to invest in Nigerias telecoms sector and the substantial improvement in the sectors efficiency was as a result of the regime shift. The democratic government encouraged greater private sector and foreign firms participation in the delivery of telecommunications services in Nigeria to introduce competition in the sector, and to strengthen ongoing reform efforts to embrace full privatization of NITEL with a view to overcoming prolonged constraints on telecommunications performance and growth (Jerome, 2002). There fore, it can be said that the involvement of the democratic government during the liberalisation era acted as an important locational advantage that encouraged market seeking FDI such as telecommunication service firms to invest in Nigeria. Some of the policies embarked on by the Nigerian government to attract foreign investors as a result of the introduction of the SAP are the establishment of the Industrial Development Coordinating Committee (IDCC), investment incentive strategy, the privatization and commercialization programme, and the shift in macroeconomic management in favour of industrialization, deregulation and market-based arrangements. Evidence from literature also found that the macro policies in place before the SAP discouraged foreign investors (Odozi , 1995). Some of the other incentives for foreign investors include the new Nigerian Enterprise decree in 1989 which authorized 100% foreign ownership in any new venture except those in banking, oil, insurance, and mining. Furthermore, the military government decreed the establishment of the Nigerian Investment Promotion Commission (NIPC), the commission was charged with the responsibility facilitating the process of businesses set up in Nigeria and thereby reducing the time required to set up a foreign affiliate)as well as the liberalization of the foreign exchange market. The government also introduced a new visa policy to enable genuine foreign investors to acquire entry visa to Nigeria within 48hours of submitting the required documentation, furthermore, the expatriate quota requirement for foreign nationals working in Nigeria was replaced with work permit. The government also provides non-fiscal incentives to foreign investors in the telecommunication sector in addition to a tariff struc ture that ensures that investors recuperate their investment over a reasonable period of time, bearing in mind the need for differential tariffs between urban and rural areas. Rebate and tax relief are provided for the local manufacture of telecommunications equipment and provision of telecommunications services (UNCTAD, 2010). These, with amendments, are the policies implemented by the Nigerian government to attract foreign investment. The relative success of this era, though very little flow of FDI inflow entered the country initially, marked the beginning of increased foreign investors interest in Nigeria. As a result, there has been discernible change in the relationship between telecoms FDI and economic growth in Nigeria after these policies were implemented. Subsequently, the reform undertaken resulted in increased profitability, network expansion and modernization of telecommunications services in Nigeria. 4.1.3 Post Liberalisation Era (2001-2008) During this period, the sector recorded strong growth in the Nigerian telecommunications sector especially in the fixed-line market; also, private operators have recently increased investments as the market plans for the expected boom in internet broadband. Between 2000 and 2009, the telecommunications sector has contributed to Nigerias economy in various ways such as the creation of direct and indirect employment in the economy. Also, reliable telecommunications networks has improved the productivity and efficiency of other sectors of the economy such as the banking, stock transaction, e-payment, distance learning, e-health and other commercial transactions are now ICT enabled hereby enhancing the quality of life (Ndukwe, 2004). It has further assisted the country to attract FDI into other sectors of the economy; theoretically, greater FDI flow into developing countries that have better telecommunications networks (Lydon and Williams 2005). Which will invariably improve the standard of living of the inhabitants, as the number of people that have direct access to telecoms services have increased; previously telecoms services was seen as useful to and affordable for the educated and wealthy people in the country. Also through competition, it has helped improve sector efficiency and the costs of services and the telecommunications products such as phones, laptops, etc have become affordable for the average Nigerian population. Lastly, it has been a source of revenue generation for the government in form of tax. NCC (2006) reported that MTN paid N9.8million tax to the Federal Government of Nigeria, while the workers paid N 1.1 billion as tax to the government. The company also paid N34.8 billion to the government for license fee, duties and other statutory payments to the government. At the end of 2007, MTN had paid a total tax of approximately N150 billion since it began operations in 2000. The government has earned a total of N250 billion from spectrum licensing fee (NCC 2008, Mawoli, 2009). The rising share of greenfield projects amoung FDI investment in Nigerias telecoms (as in the case of MTN and Etisalat) reflects the effects of opening the sector to competition and the shrinking number of assets to be privatized (World bank, 2006). With the liberalization of the telecommunication sector, Nigerias telecommunications sector is evidently experiencing rapid growth. Figure 4.2 below shows the trend of telecoms FDI inflow into Nigeria between 1999 when the sector was liberalised and 2008; obviously the growth of the telecommunications sector in Nigeria has exceeded all estimated forecasts. With this growth rate between 1999 and 2008, theres enormous growth potential in the market, as there has been a continuous increase in demand for telecom service because of the market liberalization and massive telecom investments from foreign MNCs. Figure 4.3 below shows the increase in telecoms operators in Nigeria and other African countries. In the first quarter of 2008, there were 22 telecommunications operators in the country, compared to only the monopoly by NITEL as at 1999 (NCC, 2009). Over recent years, all branches of the telecom industry have generated considerable growth and the telecom industry has emerged as a main motor of the countrys economy. It is only the oil sector that has seen more investment and telecom is now seen as the second most lucrative branch for investment in Nigerias economy. As a result, Nigeria presently possesses Africas largest and most promising telecom market. Even though Nigeria is trying to meet up with other countries in terms of providing phone technology at an affordable price and doing so reliably, the market has taken significant strides in its development (Ariyo 2005). Concomitant with the encouraging volume of FDI inflow for the telecoms sector was a very successful policy which succeeded in effectively changing the pattern of FDI flow into this sector. This growth potential has also attracted foreign operators that have recently acquired some of the private players (HSBC global research, 2009). Such as in the case of Zain which was formely owned by Econet and was later acquired by Vmobile, in July 2010, Zain announced the sale of 100% of its shares to Bharti Airtel at $10.7 billion on an enterprise basis. The sectors contribution to Nigerias GDP increased from 0.6% in 2001 to 2.8% in 2008 which is an increase over fourfolds. This can be attributed to the increase in foreign investment in the sector. Also, the sector recorded a real GDP growth of 32.54 percent in the first quarter of 2010 compared with 31.75 percent recorded in the first quarter of 2009. The figure below shows the performance of the sector in the first quarter of 2010. The total telecom productivity capacity, number of connected line, competition, GSM telecoms services, service quality, FDI inflow and employment generation in the telecoms sector improved significantly after full liberalization. However, the industry is still currently facing some challenges such as high operation costs and service tariffs of the telecom companies as a result of the poor electricity supply in the country (Mawoli, 2009). 4.2 Determinants of FDI into the telecoms sector of Nigeria It is important to note that various factors determine the choice of a firm to invest abroad. Because this case is that of a service firm where their services cannot be easily exported or traded, FDI is the best option. This is market seeking FDI therefore its determinants might be different from that of non-service firms. Theoretically, a firm must possess ownership of some firm-specific tangible or intangible asset or skill that gives it an advantage over other firms (Ownership advantage) before it can engage in FDI (Dunning, 1988). From the discussion above the determinants of foreign investment into the Nigerian telecommunications sector in the early 2000 till date can be deduced to be the following: 4.2.1 Liberalization of the sector The first sector specific step Nigeria took to attract foreign investment was to liberalize the telecommunications sector therefore opening it up to foreign investors to allow competition and efficiency. This is the most fundamental factor for attracting FDI because if there is no opportunity to invest in a country (other than purchasing the current operator, where that option is offered), there can be no FDI (Worldbank, 2006). By deregulating the domestic telecommunications sector, the Nigerian government predicted that this would make the telecoms markets attractive to foreign investors which was the same strategy adopted by developed nations to improve the state of their telecoms sector. The democratic government embarked on the reform of public enterprises, including privatization, within the framework of macroeconomic reform and liberalization which has been a successful strategy to attract FDI into the telecoms sector of the country (Afeikhena 2002). There was no way foreign investors would have invested in the market without the liberalisation policy which makes it the major determinant of FDI into the sector. 4.2.2 Regime type Positive improvements have taken place in Nigeria since May 29, 1999 when democracy replaced the flurry of military governments. The democratic government encouraged a number of strong-willed actions in an effort to attract foreign investors into the country (Fatoki 2006). It is obvious that during the military era, foreign firms did not have the interest of investing in Nigerias telecoms market despite the first move towards liberalizing the economy by the military government in 1992 until during the democratic era in 1999 when foreign firms entered the market the following year. Also, the involvement of the democratic government in 2000 encouraged market seeking FDI as it served as a locational advantage for telecommunication service firms to invest in Nigeria. 4.2.3 Market size and growth After the liberalisation of the sector, strategic foreign investors were drawn into Nigeria to seek new market opportunities, higher returns and diversification of risks. The failure of NITEL to meet the demand of subscribers must have influenced foreign investors been that they have prospects to gain large market share because of their knowledge, familiarity and past experiences of foreign investment in other developing countries (as the first entrants MTN and ECONET are multinational firms who have previous investment in other developing countries). With the success of the first few entrants into the sector further attracted more foreign firms into the country in subsequent years despite the perspective of Nigeria as a high-risk investment country. Theoretically, the investment incentive for market seeking FDI such as telecom firms who seek to expand their market presence by increasing their penetration in local markets is the market size and growth. These firms focus on local production and local sale (as opposed to exporting) they hereby place high emphasis on market size, market growth, and consumption ability (Na and Lightfoot 2006). As this is the case for Nigeria telecoms sector whos main aim is to serve domestic markets and become competitive in other ways-such as through proximity to the market and being able to respond to changing local circumstances and preferences (Lim 2001). Moreover, tapping the demand for services in a host country requires a physical presence when services are difficult to trade, which implies that FDI in services is likely to be market-seeking. 4.2.4 Institutional Environment Various policies and incentives were adopted by the government to attract FDI in Nigeria. Such institutional factors (as mentioned above) include the 100% foreign ownership, the NIPC, the visa policy to enable genuine foreign investors acquire entry visa to Nigeria within 48hours of submitting the required documentation, work permit in place of expatriate quota for foreign nationals, quick return on investment, rebate and tax relief provided for the local manufacture of telecommunications equipment and provision of telecommunications services. This factor directly affects business operations and has further encouraged foreign investors in Nigeria telecoms sector. 4.3 Impact of telecoms FDI on Nigerias economic growth Telecommunications in Nigeria has performed dual role as a traded service likewise a vehicle for trade in other sectors of the economy. Since the liberalization of the telecoms market in 2000, Nigeria has attracted foreign investors into the country and has been declared as one of the highest growing telecoms market in the world. Concomitant with this is the growth of the economy as a result of this inflow. The impact of the industrys FDI inflow on economic growth can be measured from various aspects but the four most important will be addressed in this section. Figure 4.6 below shows the revenue from telecoms as a percentage of GDP. There has been an increase in the revenue from telecoms as a percent of GDP between 1990 and 2008. In 1999 it was at 0.8% which continued to increase to 1.05% in 1992; it however dropped between 1993 and 1997 to 0.7%. In 1998, it increased to 1.35 and declined to 0.65% in 2000. However, the revenue from telecoms between 2001 and 2008 is very much higher than the revenue from telecoms recorded between 1990 and 2000. It increased from 1.5% in 2001 to 3.2% in 2004 but declined in 2005 to 3.1% and grew to 3.4% in 2008. 4.3.1 Telecoms FDI and employment generation. Subsequent to the entry of foreign investors into Nigerias telecom market, the sector has contributed to the economy in various ways one of which is through the generation of employment for a significant number of Nigerians. Over 3,500 people were directly employed and an estimated 400,000 indirect employment created by GSM operators in 2003. However in 2003, total subscribers of telecoms service were about 4million and approximately 59 million in 2008 which would infer that the number of direct and indirect employment created by the telecoms industry would have increased in manifolds (Mawoli, 2009). Though, in recent times no proper estimate has been made of the volume and impact of new employment creation due to this growth in the sector. Table 4.1 below (although a bit outdated as a result of unavailability of a more recent one) shows that the telecommunications sector accounts for the highest amount of employment creation in the whole economy as at 2005. However as at March 2010, the telecoms sector created a total of over 3million direct and indirect employment related to the telecoms service in the country. The telecoms sector has hereby increased employment through self finance businesses some of which include dealerships, cyber cafes, one-man phone boot operations, phone repairs, sale of accessories, GSM vendors, PR agencies, call centre employees, security personnel, etc (NCC, 2010). Based on this evidence, the fastest growing employer of labour in Nigeria is the telecommunications industry especially the wireless telephone service provider. This increase in employment is as a result of the liberalisation of the sector which was dominated by a single national telephone provider (NITEL), increase in competition among telecoms players thereby requiring more labour in order to meet the increasing demand for their services and improve the performance of the under-performing sector. Many young Nigerians who would have otherwise remained unemployed are finding steady employment in this sector. Hereby reducing the unemployment rate in the country, although it cannot be concluded that this sector has to large extent helped curb unemployment but it has created more employment in the economy. 4.3.2 Telecoms FDI and infrastructure development Since 2001, the telecommunication companies in Nigeria have jointly contributed to the development of the nations infrastructural facilities by investing billions of dollars in infrastructure deployments, network rollouts, upgrades and expansions due to the previous state of Nigerias infrastructure as highly underdeveloped. These consist mainly of fibreà ¢Ã¢â€š ¬Ã‚ optic cables, base stations and satellite connections, transmitting traffic between cities and to other countries. To support the mobile infrastructure, operators have also embarked on building backbone networks to improve their operations. Such investments include the construction of three networks: a core telecommunication network, a transmission network, a power supply network and also bringing in skilled ICT employees (NCC, 2010). Telecoms investment has focused on infrastructure development in the fixed and mobile networks, growing subscriber base from 17.4million in 2005 to over 24.1million in 2007. A look at a specific operator illustrates the magnitude of telecom players role in the overall infrastructure and operational investment in Nigeria. MTN which is also the operator with the highest market share has invested the most in Nigeria. After the initial network rollout, which took the lions share of its revenue in 2004, MTN claims to have allocated more than 30% of its revenue to capital expenditure (capex). During this period, MTN focused its investment on building up the transmission network to substitute for the lack of established telecom infrastructure (NCC, 2010). Figure 4.7 below shows the percentage of MTNs revenue allocated to capex. In April 2009, Nigerian operators declared that $10bn in further investment is needed for network upgrades and expansion over the next 10 years. Etisalat Nigeria has a budget to invest about $2bn to build network infrastructure in Nigeria over the next three years. MTN has also secured a loan of $600million for expansion of its operations in Nigeria (NCC, 2010). MTN has received N318 ($2.15 billion) bank loan from 17 local and international banks to further expands it network capacity across the country (Nkanga, 2010). Recently, Industrial and Commercial Bank of China agreed to provide $200 million worth of credit for another telecoms company Zain Nigeria to purchase telecoms equipment (NCC, 2010). Theoretically, the efforts of these firms to expand capacity reflect the strategic rivalry between firms in the global marketplace in order to compete effectively. 4.3.3 Telecoms FDI, Technology and Knowledge Transfer Foreign investment in Nigerias telecommunications sector has introduced new technology, research projects and initiatives which have brought significant revenue and an employment boost to Nigeria. So far, most Nigerian mobile operators, such as MTN, Zain and Glo (second national carrier), have undergone a technological evolution from 2G to 2.5G and even 3G. Following Glo Mobiles entry in 2003, the operator started operating on a 2.5G network and brought to Nigeria the benefits of value added services: Multimedia Messaging Services (MMS), Glo Mobile Internet, Glo Mobile Office and Glo Fleet Manager (a vehicle tracking application that gives the subscriber the ability to track and trace equipped vehicles which is an early implementation of an M2M (machine to machine) service). Glo was also the first operator to launch mobile access to the Internet, with other 3G licensees replicating the move soon thereafter. MTN launched an HSDPA enabled 3.5G network in June 2008, while Zain launched its 3G service in early 2009. The introduction of BlackBerry handsets is another step in the transition to next generation services. The BlackBerry was launched in Nigeria by Globacom in 2006, and MTN followed suit in March 2007. The BlackBerry platform is a powerful tool for business people across Nigeria, given the patchy fixed line and Internet penetration in the country. In May 2009, Zain contributed to further popularizing the device by introducing prepaid BlackBerry service. In Nigeria, and at the overall African level, the most immediate wave of innovation will come in the form of connectivity for the growing pools of laptop and smartphone users. In addition, mobile broadband has positive effects on societies through the development of human capital. After analyzing developments in Nigeria, it can be suggested that the rollout of Internet services has positive effects on three broad aspects of the society: development, resource management and networking. Telecommunication ser vices improve social transformation in Nigeria by bringing connectivity to remote areas and to lower income strata. In less than a decade, mobile technologies have enabled network access for a large share of the countrys population, with respect to the ability of these technologies to reach remote and sparsely populated areas both faster and more cost effectively than fixed infrastructure. The transfer of technology to Nigeria has reduced the technology gap between developed nations and Nigeria which is a great step towards development which is an essential determinant of long-term economic growth (NCC, 2010). Subsequently, there has been an increase in the number of technologies and a quality improvement of Nigerias existing technologies which both play a crucial role in economic growth. Transmission of this new ideas and technologies, adoption of high technology products from more advanced economies through FDI, are channels through which technological diffusion can spread to the different sectors of the recipient economy (Toulaboe et al. 2007). Conclusion This chapter has analysed the various determinants of telecoms FDI in Nigeria and the impact of telecoms FDI on Nigerias economic growth. The determinants are liberalisation of the telecom sector, market size and growth, regime type and institutional environment. Factors such as low transaction costs, political stability and trade openness are cannot be said to be determinants of FDI in Nigerias telecom sector as operators still face a lot of challenges in the cost of setting up and maintaining their companys operations in Nigeria such as poor power supply and security, high import duties on telecoms equipments (30-70%). Though international trade in services is on the rise, the fact remains that many services such as telecommunications are non-tradable or costly to trade. And for the telecoms sector whose products to a large extent cannot be subjected to cross-border trade, the trade openness of a host country can be expected to have less of an impact on FDI inflows in that sector. This section further discussed that FDI in the telecoms sector has contributed to economic growth through the generation of employment, infrastructure development and technology/knowledge transfer. The next chapter discusses the findings and concludes the research work.