Should a hostile 3rd World investment Climate Impede an Entrepreneur?
Case study: Nigeria's Telecoms Industry

Contents
Hostile Environment
Case Study: Nigerian Telecom Industry
Reducing the Effects of Infrastructure Costs
Another Success Story


A hostile investment climate has always been cited as the greatest impediment to Investment in third world countries. We may focus on Nigeria to enumerate the features of this climate. Furthermore, some of these may be peculiar to Nigeria.

1. Inadequate or total absence of Infrastructure,
2. Slow Judicial system, which may negatively affect prosecution of common business crimes like fraud and resolution of business disagreements.
3. Inadequate law enforcement capabilities, with the resulting negative impact on business development and operations,
4. Policy somersaults by Government, and its agencies.
5. Unchecked corruption in high places
6. Absence of credible official demographics
7. Activities of militants in the Niger delta oil producing area,and kidnappings
8. Frequent religious and tribal clashes.

In Nigeria, the first issue appears to be the most visible and infamous, with special regard to electricity supply. All the other factors are relevant. In addition, road construction and infrastructure maintenance is very slow.

These factors result in high production costs and uncompetitive prices of the products.
Manufacturers then produce off shore for export market. Some are even relocating to lower production cost centres and try to import into Nigeria to tap the market. Many Nigerians import the goods and are able to escape customs tariffs put in place by government to protect local producers by some corrupt means.

For many, Nigeria is a “no go” country when it comes to manufacturing and many other forms of business and investments.

Furthermore, Nigeria has a negative reputation as:

1. A transit zone for drug trafficking,
2. A centre for advance fee fraudsters
3. And recently, the country of origin of an intending terrorist airline bomber.

The question in this discussion however is : Should these factors impede a genuine entrepreneur?
The answer, according to this paper is : Not in most cases.
Unfortunately, this is not the consensus in the international business community. Any thing or mention of Nigeria is forbidden.

We would therefore examine external investment in the Nigerian economy, using the Telecommunication industry as a case study.

Case Study : The Telecom Industry

The country opened its mobile telecommunication sector to the public through an auction for mobile licences in 2001.
At the end of the bidding, the licences were secured by three operators, MTN (Second largest operator in South Africa), little known Econet Wireless, and the mobile arm of Government owned NITEL (Nigeria Telecommunications Limited), for US$285 million each.

Conspicuously absent were industry giants like Vodafone and Orange. To many, it was like paying $285 million for a piece of paper that would not guarantee profitability because of Nigeria’s low literacy level and the high cost of providing the services as a consequence of poor infrastructure.
Government’s promise to improve infrastructure by providing steady power supply, put in place a fiber optic transmission backbone and even launch a communication satellite did not materialise soon enough.
The satellite was launched on May 13, 2007 with great fanfare only to wobble out of orbit and to begin its fall to Earth, after barely eighteen months.

The result is that the telecom operators had to go on with practically no infrastructure in place.
There were operators already in the country which provided less than 500,000 fixed lines the largest of which was the Government owned NITEL.
Many of the other smaller operators did not operate beyond Lagos, while very few added, at the most, two other cities.
NITEL was able to leverage its own existing infrastructure to roll out services at less than half the price the new licensees (MTN and Econet Wireless) provided theirs.

MTN completed its own Nation wide digital microwave transmission backbone by February 2003 and by March 2005, had 7.67 million active subscribers in its Nigerian network giving it an ARPU (Average Revenue Per User) of US$40 .00 compared with US$29.6 in South Africa and US$23.00 in neighbouring Cameroon.

This was however achieved through hard work, and a massive capital investment of US$888.1 million in the country, as it had to, among other peculiarities, coordinate the logistics of supplying about US$6 million worth of fuel monthly to power the electricity generators in more than 2,000 base stations and mobile switching centres across the Country. This is a great challenge when you consider the condition of most of the roads, and measures that had to be instituted to check pilferage, and security in the stations. Its capital investments during the same period in South Africa and Cameroon were US$280.2 million and US$31.2 million respectively. See 2005 reports

The statutory requirements for public companies to publish their financial reports obviously opened the eyes of other Telecom operators to profitability of the Nigerian market , after viewing MTN’s financial reports since year 2002.
This has attracted several other operators who have since configured innovative ways to get round the hostile investment climate issue. MTN today has at least eight competitors in most Nigerian cities.
As at December 2008, it had 23 million active subscribers in Nigeria, almost equal to the total number in Southern and Eastern Africa combined.See Reference.

This has also revolutionalised the whole telecom sector, in which latest reports indicate that Nigeria is the biggest telecom market in Africa, with MTN having 28 million subscribers.
See reference.
Zain, (name by which the original Econet Wireless is now known) has the largest subscriber base in its group in Nigeria and still records an increasing customer base. Ref.

Also of interest is the news that the industry was the third largest contributor to Nigeria's Gross Domestic Product in year 2005.

The real question here is : can we just ignore markets at this period of financial meltdown just because the country is not measuring up to social, political and economic expectations?
True enough, countries meeting those expectations will attract greater investments more easily.
The truth is that higher entry costs into a market will also affect competitors.

This is a clear indication that a big market may not necessarily reside in a country with low production costs and excellent investment climate.
Identifying similar locations, especially in the third world, may create more markets to existing products with positive impact on the international economy.

Achieving this will require a knowledge of innovative ways to reduce the high production costs caused by poor infrastructure and other factors in the hostile investment climate.

Ways To Reduce Costs Resulting From Poor Infrastructure And Hostile Investment Climate.

The Nigeria Communications Commission (NCC) the industry regulator for telecoms operation in Nigeria, has advocated equipment sharing among the operators to reduce operating costs in the industry and the mushrooming of telecom masts in Nigerian cities and towns. Operators may rightly question the wisdom in what may result in lowering of entry costs into the market for competitors.

However, an operator may deliberately install a greater capacity and lease this spare capacity to its competitor to reduce its own operating costs. This is not advocating the establishment of an infrastructure provision subsidiary (although not undesirable). The price to the competitor must be reasonable and make good business sense as the goal is to substantially reduce operating costs.

A good example in electricity generation may illustrate this.
A 30 KVA generating set cost just 15% less than a 50 KVA set by the same manufacturer. The operator whose needs rarely exceeds 30 KVA may spend just 16% extra to purchase a 50 KVA set, and may lease the spare capacity to a competitor.
Experience has shown that the increase in fuel consumption, and maintenance cost of the 50 KVA set will not be substantial, provided it does not operate close to its maximum generating capacity. Both owner of the infrastructure and competitor are winners in this arrangement.
The competitor sees good business decision and will not have to spend as much to acquire and operate the infrastructure, while the owner will have a net reduced operating cost and the tax credits of the capital expenditure.

This type of cooperation already exists in the Agricultural Industry. Bigger farmers process primary and poultry products of local farmers at concessionary prices.
The result of this cooperation is that they have developed a close relationship among themselves and consequently formed a very powerful pressure group able to influence government policy in their interest.

In addition, an operator may have the first option in the event of a sale by a distressed party.
This last advantage is of great importance.
Many business operators get distressed as a result of high working capital requirements, to finance both core operation and in addition provide infrastructure. The banks in Nigeria typically lend at about 20% interest per annum.
Collaborating this way ensures little duplication of infrastructure assets in the event of a merger.
MTN’s major rival for a long time in the Nigerian telecom market was Econet Wireless, which changed temporarily to Vodacom, and later to Vmobile, then to Celtel and now, to Zain. It is the opinion of this blogger, that, had there been such collaboration with MTN in the earlier years, where they both shared infrastructure, the latter might have had a significant influence, if not the first option in the purchase of the former.
There would have been very little duplication in infrastructure required to operate the merged industry profitably.

A second way to reduce infrastructure cost, when entering the market, is to approach a distressed operator for lease, or co- use of its assets.
The possibility of having the first option of purchase, in the event of a sale is very high for the reason stated above. The new operator can stall its intended purchase of equipment for as long as possible.
If the sale materialises, the new buyer can take its time to modernise the new company by purchasing state of the art equipment, which in the telecom industry can be very crucial to excellent service and competition.
Also, telecom equipment, like most IT equipment quickly become obsolete.
If it goes otherwise, the co- user can bid its time as a result to the lease agreement, to get its own modern equipment. Even electric generating sets are becoming more fuel efficient by the day. Even then, telecom equipment is getting more sophisticated by the day.
It is expected that equipment, which not only use less power, but capable of withstanding the tropical heat without the use of energy consuming air conditioning, will soon be in the market. The base stations should then be able to tap power from greener sources such as solar or wind energy.

Collaboration may not be as easy as it requires considerable humility by operators.
A stronger partner must not be arrogant and must be seen as working for the common good. It should not polarise groups and must not be seen as divisive.
If some differences arise among the industry operators, it must not associate with any faction, but must be seen as a unifying agent and must deal even-handedly with them. It should not polarse factions and must not be seen as divisive.
These virtues are highly regarded in several parts of Nigeria.

Operators in the third world market must be sensitive to price changes. Many dwell too long on super profits derived from operations as a result of high expenditure on infrastructure. They fail to adjust prices promptly in response to the dynamics of the market.
The telecom market in Nigeria is very dynamic. One cannot imagine that a Subscriber Identification Module (SIM) card, which sold for N18,000 (roughly US$150) in year 2001 now sells for N200 (US$1.50) today.
As competition set in, the operators adjusted prices promptly. This is very crucial for profitability and market share.

One might rationalise that the Nigerian market only serves telecoms.
Then you must read Pamela Wu’s story.

She was told her business partner(not a Nigerian this time), who took off with hundreds of thousands of US dollars investment seed money, was in Nigeria. She then came to search of her.
During her search, her attention was caught by the big business opportunities she saw in the country.
She then took the challenge and started “Big Treat”, a company now listed in the Nigeria Stock Exchange.
In her latest report she wants to establish more factories as Big Treat cannot meet the demand for its pastries in the Nigeria market in spite of the fact that she is competing with well established local bakeries and still has to contend with all the negative issues in the Nigerian investment climate.

It is not likely that this condition of poor infrastructure, harsh and unfriendly investment climate, and bad reputation will continue in Nigeria for ever.
One can draw lessons from the situation in the telecoms industry. Within the space of 10 years, active telephone lines increased from about 500,000 lines to 70 million. This situation could not be imagined prior to year 2001.
We cannot entirely discount a similar pattern for electricity, and other infrastructure in Nigeria. By then, those who have remained on the sidelines may find it too late to jump in, as those who took the risk would have secured a foothold.

After all China is still officially a Communist Country, and before its reforms of the late 1980s all enterprises were Government owned.
Today, it is the toast of investors.

The golden advice is “Strike While The Iron Is Hot”.