NIGERIA: TELECOMMUNICATIONS SECTOR ROUNDUP

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000924

SIPDIS

STATE PLEASE PASS TO FCC, EX-IM, AND OPIC

E.O. 12958: DECL: 06/09/2015
TAGS: ECPS ECON NI
SUBJECT: NIGERIA: TELECOMMUNICATIONS SECTOR ROUNDUP


Classified By: Consul General Brian L. Browne for reasons 1.4 (b) and (
d).


1. (U) Summary. Since digital mobile licenses were awarded
in 2001, Nigeria has improved from 400,000 telephone lines
-- the world's third lowest telephony per capita rate -- to
10 million lines. This expansion has moved the country from
a telecom emerging market to a quickly maturing market. There
is strong competition, increasingly from the Chinese who
offer the advantage of deeply discounted loans. Having
graduated the euphoria of simply having a phone, the Nigerian
new consumer demands low prices and quality service. The
stiff competition along with other economic factors may
affect future prospects for some service providers. The
Nigerian Communications Commission (NCC) recently announced
fixed wireless (FW) operators can offer nationwide services
starting in February 2006 under a unified license, putting FW
operators in direct competition with the more popular Global
Service for Mobile communications (GSM) providers. Telecom
sector deregulation and growth has been in Nigeria, a country
where most other reforms have been slow to take root. End
summary.

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TELECOM DEREGULATION A BIG SUCCESS
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2. (U) Nigerian telecommunications deregulation has been a
success. In 2000, Nigeria's over 130 million people were
reliant on a paltry 400,000 telephone lines with parastatal
telephone company, NITEL, as the only telecom provider. In
January 2001, the Nigerian Communications Commission (NCC)
offered four national Global Service for Mobile
communications (GSM) licenses, and additional regional fixed
wireless (FW) licenses, sparking an unprecedented rollout to
meet pent up demand. Four years later, the telephony rate
has jumped from .4 lines per 100 individuals to an estimated
5.6 lines per 100. Most of this increase is due to GSM
lines, which total eight million and are still increasing. A
recent international information and communications
technology research study estimated the Nigerian mobile
market has achieved less than one third of its potential and
predicted subscribers to number 23 million by 2007.

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CHINESE EQUIPMENT ENTRANTS AND THE CHEAP FINANCING
THAT INGRATIATES THEM IN NIGERIA
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3. (C) Chinese equipment companies want a piece of the
Nigerian telecom pie, and their government is willing to
guarantee rock-bottom financing terms to help them gain
market share. One American company, Harris Communications
Systems Nigeria (Harris),is being seriously affected. Part
of the Harris Corporation Microwave Division, the largest
supplier of microwave systems in North America and a
worldwide supplier, Harris has been the most dominant
microwave telecom equipment player in Nigeria, competing with
companies like French-owned Alcatel, German-owned Siemens,
and Japanese-owned NEC. Harris Nigeria Country Manager,
Peter Yap, said Harris confronts increasing numbers of
contracts bid by Chinese companies advantaged by Chinese
government backing on "crazy financing terms." At a time when
changes in the banking sector, political uncertainty in
Nigeria make project financing difficult, the Chinese
Government is eagerly guaranteeing loans at three percent
over six years (a one-year moratorium with five years to
repay). The best Harris can offer is five percent with a
two- or three-year repayment. Even this is a no-profit
stretch made just to keep the business, according to Yap.


4. (C) In May 2005, the Nigerian Ministry of Communications
signed a USD 200 million deal with China's Huawei
Technologies Company (Huawei),and a USD 95 million contract
with Chinese-owned ZTE, to provide telecom networks in
Nigeria's rural areas. Both were underwritten by Chinese
Development Bank (CDB) loans. Industry experts are skeptical
these projects will be implemented. They note the
difficulties in verifying and monitoring projects in remote,
rural areas. Additionally, the project cannot produce
sufficient returns to repay the CDB loan. The CDB, analysts
argue, is apparently willing to overlook Nigeria's poor track
record on rural development projects, in hopes of promoting
the Chinese presence in this country. Telecom interlocutors
such as Yap and J.P. Snijders, Chief Regulatory Officer of
Vmobile, are convinced China's telecom interests now, is a
conscious risk--perhaps a "loss leader" for more lucrative
oil contracts later.


5. (C) Harris believes more serious problems with Chinese
companies are down the pike. Yap is worried Chinese telecom
equipment suppliers will illegally transfer technology,
pirating the Harris microwave technology to build and sell
for themselves. For example, Huawei approached Yap with a
deal to offer Harris microwave equipment under a Huawei
umbrella contract with the GSM operator, VMobile. Huawei
will supply all equipment needs for one of Vmobile's network
expansion areas. For equipment that it does not itself
manufacture, such as microwave components, Huawei will look
to external sources like Harris. Huawei has set the deal up
to be attractive to all players: Vmobile benefits from good
financing terms and the reliability of Harris product, and
Harris still gets a sale. However, Yap strongly believes
this could be a vehicle for technology transfer of microwave
equipment where Harris currently holds its comparative
advantage for the Nigerian market.

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COMPETITION, BANKING AND FULL REFORMS CHANGE MARKET
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6. (C) The initial oohs and ahhs of average Nigerians making
their first telephone calls gave way to increased


competition and a
GSM price war broke out in September 2004. Connection
charges went from naira 20,000 (about USD 150) to as low as
one naira today, helping to boost subscriber numbers to the
eight million mark. Reduced connection charges enabled
thousands of Nigerians to own mobile phones, yet these same
Nigerians do not have the sufficient steady disposable income
to regularly make phone calls at naira 30 (USD .23) per
minute for GSM and naira 6.5 (USD .05) per minute for FW. In
the second half of 2004, new banking reform plans and the GON
reduction in fuel subsidies were depressive factors on
disposable income. Nigerian consumers were left with less
money to spend on pre-paid recharge cards for their GSM and
FW phones, leading to what some industry watchers called a
"hollowing out" effect: telecom companies earn revenue up
front on a high subscriber base, but then see low returns
when subscribers do not use the phones. Dirk Smet, Managing
Director of the Nigerian FW operator, Starcomms, said from
September 2004 to April 2005 his company's revenue per
subscriber (RPS) declined by 30 percent while South
African-owned GSM operator, MTN Nigeria, lost 25 percent.


7. (C) Operators are focused on network expansion beyond the
major urban centers, and enhanced services such as very small
aperture terminal (VSAT) services, to stay ahead of the
competition. Snijders of Vmobile says the cost of expanding
is straining most operators, with current debts from rollout
and startup costs estimated to be about USD eight billion for
total industry debt. With the price war, operators' funding
needs have only increased. He confirmed that Vmobile's
strategy includes takeover talks with UK's Virgin Mobile and,
like MTN, Vmobile is considering raising funds from the
domestic stock market. Smet believes the FW market will
consolidate through mergers or acquisitions for operators to
survive the current trend of fierce competition.

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GSM SOON TO COMPETE WITH FW
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8. (U) In February 2006, the Nigerian Communications
Commission (NCC) will award "unified" telecom licenses,
differing from licenses today specified for GSM or FW
service. The NCC stated no new operators will be licensed,
but that existing mobile and FW operators will be allowed to
provide both services for voice, data and multimedia. The
greatest effect expected is that FW operators will come
closer to direct competition with their GSM counterparts,
offering roaming services nationwide compared to their
licenses today confined to specific geographic areas.
Multi-Links, for example, is a FW provider with service in
Lagos and its surrounding areas, but subscribers cannot make
calls while in Abuja or other cities. If Multi-Links
acquires a unified license, it will operate in direct
competition with GSM companies whose call charges are about
six times higher, on average, than FW operators'.


9. (U) GSM operators seem to be fighting the general
perception that their success has led to windfall profits,
despite the debt burden of nationwide network backbone
rollouts. The Nigerian Investment Promotion Council (NIPC)
recently withdrew the "pioneer status" of MTN and Vmobile
unexpectedly, denying them further tax breaks. This, along
with the unified licenses, GSM operators say, discourages
investment in a sector already experiencing a funding crunch.

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"TAXATION": HOW CAN I GET SOME FROM THE TELECOM WINDFALL?
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10. (C) Snijders says Vmobile and other telecom companies are
increasingly asked to pay unfounded taxes and fees as more
Nigerians perceive that money is being made in the telecom
sector. According to Snijders, GON agencies which have only
marginal dealings with telecom players, are looking for such
payments. For example, the Nigerian Civil Aviation Authority
(NCAA) recently mandated a naira 500,000 (about USD 3800)
"tax" for construction approval of every base station, with a
naira 200,000 (USD 1500) annual renewal fee. Besides these
new fees, Nigeria sustains a 35 percent import duty levied on
telecom equipment. Additionally, the Central Bank of Nigeria
recently directed the NCC to approve all telecom operator
payments for intangible products such as software licenses
providing additional windows for illegal rent-seeking.
Delays and bureaucracy in the approval process usually result
in temporary withdrawal of such licenses resulting in network
problems. These costs, in addition to huge costs incurred in
providing basic infrastructure, like power, make operating in
Nigeria more expensive than most other places. Yet the
perception that operators, particularly GSM operators, are
making money here persists.

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NO TURNING BACK
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11. (C) Comment. Despite the high cost of doing business in
Nigeria, and the country's market riskiness, GSM operators
are showing no signs of scaling back, and FW operators look
forward to benefitting from the February 2006 unified
licensing. 2004 and 2005 have seen unprecedented growth in
the sector. One industry research group expects phone lines
to grow from the current eight million mark to 32 million by

2009. Besides the fact that Nigerians who have never before
used a phone are making calls, the industry has had a gross
positive impact on the economy, accounting for an estimated
USD four billion in foreign investments since 2001 if
Internet service, handset sales and service, and recharge
card production and sales are included in the calculation.
Changing the way Nigerians do business, the informal sector
has become better integrated into the economy, and artisans
and sellers are more easily reached to provide services or
goods. However, urban areas have disproportionately
benefited from the telecom revolution.

12) (C) Nigeria's telecom sector liberalization and reforms
are nonetheless fragile, like most reforms in Nigeria. The
NCC, its chair, Ernest Ndukwe, and its current regulations
and licensing procedures are conducive to business
development and investment. However, looking forward, the
GON will have to craft its economic policies carefully to
ward against unintended effects such as the banking
recapitalization reform temporarily drying up business
financing as banks restrict lending in order to shore up
their capital reserves. The GON will also need ensure
transparency and the rule of law so that all companies get a
fair chance at establishing themselves in what looks like a
growing market. However, the Chinese have apparently made a
strategic decision to sacrifice economic profit in the near
terms to obtain greater market share. To the extent the
Chinese succeeds, American companies will find it tough to
compete. End comment.
BROWNE