Nigeria’s large population and growing GDP will provide lucrative revenues for the telecoms industry, if it gets the financing it needs to develop. But can one of Sub-Saharan Africa’s most significant economies shake off its high-risk image to…
Nigeria’s large population and growing GDP will provide lucrative revenues for the telecoms industry, if it gets the financing it needs to develop. But can one of Sub-Saharan Africa’s most significant economies shake off its high-risk image to attract the international investor community?
Nigeria is undoubtedly the Africa story of the moment. Unanimously feted by dealmakers and industry experts as a telecoms market with great potential, it is Nigeria’s huge population and flourishing GDP which set it apart from neighbouring countries in Sub Saharan Africa. According to the latest figures from the World Bank, Nigeria has a population of 162.5 million and GDP of US$235.9bn.
However, heavy competition between operators in recent years has caused mobile phone tariffs to plummet. This increased competition has had some impact on revenues, which admittedly remain healthy for most operators, particularly market leader MTN which made revenues of R34.879bn (US$4.024bn) in Nigeria last year.
“Telecoms is one of the biggest business sectors in Nigeria and in the past two years since Airtel has entered the market there has been fierce competition, so revenues are going down,” comments Anand Singh, assistant VP at Huawei Nigeria. “I expect that the market will be stagnant for the next few years due to the competition.”
The other key challenge for operators is infrastructure. “There is a significant deficit in the availability of power and as with other businesses, operators have to have back up generators to supply the electricity they need to run the towers and other infrastructure,” affirms Kem Ihenacho, private equity partner and co-head of Clifford Chance’s Africa practice.
The consensus appears to be that Nigeria is not coping with the rapid growth of its telecoms industry. Alongside the power issues, networks are often insufficient to deal with the substantial increases in numbers of subscribers. In the past, regulators have fined operators for poor network quality and some have had to invest significantly in networks and base stations as a result.
“Security threats and lack of power are major problems for network maintenance and network expansion,” comments a Nigerian telco executive who chose to remain anonymous. “Network availability, especially across remote locations or regions other than Lagos or Abuja needs attention, particularly lack of power and infrastructure to support the network.”
Look but don’t touch?
With socio-political risks continuing to overshadow Nigeria’s development, opinion is divided as to how attractive the market is to international investors.
“The issue for banks is more geographies than asset class,” comments a banker at a leading American investment bank. “I think Sub Saharan Africa as a whole is a big question mark. For international banks it is still somewhat difficult, as putting money into Africa still carries a geopolitical risk and there are elements around transparency. It’s holding people back from making investments.”
However, Joachim Fleury, partner and global head of TMT at Clifford Chance, says he thinks plenty of investors are looking to tap into Nigeria’s potential. “If you look at the PE houses generally, five years ago the international players showed little interest in Africa but that has changed now,” he asserts. “The likes of Helios and Actis have always invested in Africa but now some of the global funds like Carlyle are also looking. If you asked them to prioritise within Africa, it is very unlikely that Nigeria wouldn’t come up; it would probably be the first country they mention.”
There are of course some Africa-friendly entities which are open to Nigerian exposure, such as South Africa’s Standard Bank. “There continues to be substantial investment in the telecoms sector in Nigeria and as such, most major players are seeking to raise additional financing which in some cases includes refinancing of existing facilities,” comments Nina Triantis, MD and global head of telecoms and media at Standard Bank.
“Although the country risk continues to be difficult for a number of international players, liquidity in the market is strong owing to the significant domestic banking market as well as appetite from certain international players, regional banks as well as multilaterals and DFIs. Standard Bank has a large presence in country and is very active in the telecoms sector.”
Watch and wait
While some international investors may remain cautious about Nigerian and Sub Saharan African investments, it is clear from talking to a wide range of domestic and global industry experts that the country’s telecoms market is on the cusp of a growth explosion.
“I’d be surprised in five years time if any significant player in the market is wholly Nigerian owned,” comments Fleury. “All that growth offers a lot of revenue opportunities but it requires a lot of capital investment and that capital investment has to be funded. It will have to be the consolidated groups, such as MTN and Vodacom. Perhaps even telcos such as France Telecom still have ambition in that field. It’s hard to see a company’s Africa strategy as serious if Nigeria isn’t part of it.”
