Danbatta
ADEYEMI ADEPETUN, in this report, writes on the move targeted at strengthening financial health of industry players.
Although the liberalisation and deregulation agenda of Nigeria’s telecoms sector started about 20 years ago, regulation and competition in the network industries are still central concerns.
With the opening up of the sector and the rise of competition in service provision, the need to ensure adequate level playing field has become vital.
Today, the telecoms sector, across the globe is not immune against challenges, which continued to disrupt projected growths. In Nigeria, the last 15 months have been tough. The telecoms sector has been stretched by the challenges of interconnect debts, drop in revenue (owing to some directives including NIN-SIM directive) and COVID-19 pandemic.
Amidst these challenges, and for the sector to remain afloat, the country is set for review of the capital structure for licensees in the telecoms industry. This is aimed at strengthening the financial health of the players, both tier 1 and tier 2.
Nigerian Communications Commission (NCC), which is saddled with this task, has set parameters that will determine the sanctity of investments, liquidity in operational funding, and ensure sustainability of the Industry.
To actualise this, the Commission, in its usual consultative approach to regulation, recently released a consultation paper on the determination of capital structure for all its licensees, detailing its plans and seeking stakeholders’ inputs on the planned new capital structure.
Capital structure depicts the manner in which a licensee finances its operations and growth by using different sources of funds, which are debt and equity. Debt can be in the form of long-term loans, bonds and long-term notes payable, while equity is in the form of retained earnings, preferred stock and common stock. Therefore, capital structure is the mix of different securities used in financing a firm’s investment and each of these sources of finance is associated with different levels of risk, return and control.
Soaring Interconnect Debt
According to the NCC, an audit of the financial status of the telcos revealed that some of them are not in good health financially. The audit, which was propelled by the lingering interconnect debt, which the regulator said is above N70 billion as at 2020, was said to have revealed the true status of the operators leading to the increasing debt in the industry.
The Guardian gathered that the debt rose from N20 billion in 2013 to N165 billion as at June 2018. But NCC in in the document proposing a new capital structure for the operators, said: “The Commission recently conducted a review of the financial health of its licensees as a fallout from the systematic crisis faced by some of them, mostly associated with huge indebtedness and huge deficits in shareholders’ funds. The outcome of the review raised concerns and accentuated the widespread issues on capital structures and unsustainable debt to equity ratios of a substantial number of the licensees.
“This requires a mechanism that will pre-emptily set parameters and monitor compliance; this is both imperative and a necessity that will protect the market,” NCC stated.
Recall that in 2020, the Executive Vice Chairman of the NCC, Prof. Umar Danbatta had urged the telecoms operators to settle the huge interconnect debts among themselves, noting that this should be resolved in the wider interest of the industry.
Danbatta said the “interconnectivity indebtedness valued at over N70 billion is a big challenge to infrastructure expansion and inimical to healthy competition,” which are needed for facilitating the digital economy in Nigeria.
Danbatta, who frowned on the slow pace at reaching settlement over undisputed interconnect bills among the affected operators, said with over 90 per cent of pre-paid customers on mobile networks, “operators have no reason not to be settling their interconnection bills as and when due.”
What the New Capital Structure proposes
As such, to forestall a collapse of the industry, the regulator said there is an urgent need for a new capital structure for the telecoms companies.
In the document titled: ‘Consultation Paper on Determination of Capital Structure for Licensees in the Communications Sector in Nigeria’, the Commission had set up a Committee in March 2020 to review the existing capital structure in the sector and determine whether there is a need to set any benchmarks or parameters. The Committee was said to have conducted a technical review of a sampled population of current licensees, cutting across 15 licensing categories.
“It is clear from the outcome of the technical review that the Commission needs to act on time, to forestall a systematic and sector-wide collapse and its possible impact on the economy and national security of Nigeria. The outcome of the technical review of the sampled licensees supports the need for a consultation process that will facilitate a determination of an ideal capital structure that will protect and sustain the communications sector in Nigeria,” the Commission stated.
The Commission said it intends to set out an optimal capital structure for its licensees, as the proportion of debt and equity that result in the lowest weighted average cost of capital. “To optimise its capital structure, a licensee can issue either more debt or equity and the new capital that is acquired may be used to invest in new assets/infrastructure or may be used to repurchase debt/equity that is currently outstanding, as a form of recapitalisation.
“Although there are many contextual issues in relation to the determination of capital structures, the Commission is focused on investments, shareholders’ funding, and the ratio of debt to equity of all its licensees. Thus, capital structure in this context refers to the proportions or combinations of equity share capital, preference share capital, debentures, long-term loans, retained earnings, and other long-term sources of funds in the total amount of capital that a licensee should raise to run its business,” the Commission said in the 18-page document.
NCC said it will review reserve as a credit balance and refer to a part of shareholders’ equity, a liability for estimated claims, or contra-asset for uncollectible accounts. It explained that a reserve can appear in any part of shareholders’ equity except for contributed or basic share capital.
Why Stability is Key
NCC said it desires to derive an optimal capital structure that will become a financial framework, which depicts how equity and debts are utilised in financing operations of its licensees and serve as a central pillar to the achievement of a stable communications sector in Nigeria.
“This desire is hinged on review of the level of risk, returns, and the associated cost of capital particularly in the light of dwindling revenue and widespread operational challenges. These planned parameters will be based on the determination of an ideal capital structure for each category of licensees and a monitoring mechanism that will ensure that a fair and stable market structure is sustained in Nigeria,” it said.
The telecoms regulator noted that a licensee without adequate capital “is at a possible perilous situation and there is thus a need for the determination of its capital in advance, as the capital structure of a licensee determines the overall proportion of debt and equity that is employed in financing its operation and keeping it afloat.”
“There is also the issue of liquidity in the sector, which will ensure deployment of more services, facilities, and assets. Liquidity is the ability of a licensee to meet its daily financial obligations as the liquid resources of a licensee are used in financing its daily business operations and thus it is central to the sustainability of its activities.
“The liquidity need of a licensee may also affect its choice of capital. Licensees that use more equity in financing their operations tend to enjoy a high degree of liquidity because debt requires payment of principal and interest from the licensees’ liquidity which will affect adversely liquidity position. In the case of equity, the retained earnings and proceed from ordinary shares can be used in financing licensees’ operation for a long period without the payment of principal, what the shareholders expect is the residual profit in terms of dividend.
“On the other hand, the ability of a licensee to sustain optimum liquidity makes it to attract more debts when there is a financial deficit when the growth and investment opportunities are higher than retained earnings. The lenders consider licensees that can sustain optimum liquidity for a long period because it signals that they will be able to meet up with the payment of interest and principal when they are due”, NCC explained.
The Place of The Law
The Nigerian Communications Commission (the Commission) is established by Section 3 of the Nigerian Communications Act, 2003 (“Act”) with the sole responsibility of regulating the Nigerian communications sector.
The Act in Section 4 (1) also outlines the functions of the Commission to include, among others, the facilitation of investments in the Nigerian communications market and promotion of fair competition amongst its licensees. Importantly, the Act also places the general responsibility for economic and technical regulation of the communications sector on the Commission.
In the light of this desire and consciousness of its powers in Section 70 of the Act to make regulations and guidelines, the Commission is initiating a consultation process that will facilitate a regulatory rule-making process as prescribed by Section 71. This process will evaluate the current status of licensees, the approaches in other jurisdictions, and the Commission’s key obligation to sustain the market structure.
The Commission hopes that this process will ignite more discussions on the financial and investment health of licensees and possibly develop a long-lasting approach that will create a fair and stable communications sector in Nigeria.
Going Forward
The Commission will develop an implementation approach that will rely on the ‘bucket list’ strategy, this will ensure that licensees are aggregated into separate lists based on types of licences, company size and current performance. Hence the implementation will be piloted, staggered and finally adopted across board. This approach will ensure that the impact of the possible regulatory requirement will be managed and licensees will have adequate timelines to build compliance capacity.
