ANALYSIS: NCC: Driving telecoms stability through efficient regulation

Election results: Internet coverage for electronic transmission inadequate -NCC
Danbatta

The Nigerian Communications Commission, NCC, recently took a bold step to review the capital structure for all its licensees. This is aimed at strengthening the financial health of the industry players, writes OYINDAMOLA AKANNI

Determined to sustain the growth tempo in the industry, the Nigerian Communications Commission, NCC, has continued to up its game by regularly fine-tuning its regulations in sync with the dynamism of the telecoms landscape. It is against this backdrop that the telecoms regulator is embarking on a review of the financial performances of its licensees and setting 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 new capital structure being planned.

Rising debt

Over the years, the telecoms regulator had been expressing worry over the issue of interconnect debt among the operators and had often played the role of mediator, settling disputes among the operators over non-payment of the debt. This, among others, informed the decision of the NCC to review the capital structure for all its licensees.

Determined to sustain the growth tempo in the industry, the Nigerian Communications Commission, NCC, has continued to up its game by regularly fine-tuning its regulations in sync with the dynamism of the telecoms landscape.

According to the Commission, an audit of the financial status of the telcos revealed that some of them were not in good health financially. The audit, which was propelled by the lingering interconnect debt, which the regulator said had risen to N70 billion last year, was said to have revealed the true status of the operators leading to the increasing debt in the industry.

“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,” the Commission disclosed in the document proposing a new capital structure for the operators.

Late last year, the Executive Vice Chairman of the NCC, Prof. Umar Danbatta, had urged the telecom 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.

New capital structure

To forestall a collapse of the industry, the regulator said there is an urgent need for a new capital structure for the telecom companies. According to 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 intended to set out an optimal capital structure for its licensees, as the proportion of debt and equity that resulted 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 added in the document.

Ensuring stability

NCC said it desired to derive an optimal capital structure that would become a financial framework, which depicted how equity and debts were utilized in financing operations of its licensees and serve as a central pillar to the achievement of a stable communications sector in Nigeria.

According to it, the desire was 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.

The planned parameters, NCC, explained would be based on the determination of an ideal capital structure for each category of licensees and a monitoring mechanism that would ensure that a fair and stable market structure was sustained in Nigeria.

The telecom regulator noted that a licensee without adequate capital was at a possible perilous situation and there was thus a need for the determination of its capital in advance, as the capital structure of a licensee determined the overall proportion of debt and equity employed in financing its operation and keeping it afloat.

NCC explained: “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.”

Guiding law

The Nigerian Communications 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, inter alia, 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.

Riding on the back of an efficient regulatory environment, the telecoms sector has recorded several successes, which must be guarded jealously and sustained.

Code of Corporate governance

The new capital structure being proposed is also anticipated to be a boost to the industry code of corporate governance, which is being enforced by the telecom regulator to ensure stability in the industry and to prevent the incidence of company failure among the operators.  The NCC had, in 2016, revisited the telecom industry Code for Corporate Governance and allowed telecoms operators the liberty to operate it as a non-mandatory code for one year. In 2017, the NCC made the code mandatory and since then, the implementation has been smooth, designed to create transparency and business growth in the telecoms industry. One of the key items in the Code is that the offices of the Chairman and that of the CEO shall not be occupied by one person concurrently in any telecom company in Nigeria. In addition, no one can serve as a director in any telecom company for more than 15 years.

Conclusion

Riding on the back of an efficient regulatory environment, the telecoms sector has recorded several successes, which must be guarded jealously and sustained. This is why the proactive move of the regulator in coming up with new policies to ensure the stability of the industry is very commendable.