South Africa’s MTN treads on fine line in $5 billion Nigeria dispute

CAPE TOWN // Rough and tumble business is nothing new to Africa’s biggest mobile operator MTN but, in taking on Nigeria, the company has unleashed a bitter dispute that could cost it billions of dollars.

In late October the South African telecommunications firm was stunned with a US$5.2 billion dollar fine from Nigeria’s Nigerian communications commission (NCC). The amount is equal to two year’s profit for MTN Nigeria, the most profitable subsidiary of the company, which has an Africa wide presence.

Its transgression was a failure to cut off about five million subscribers on its network with no verified identification. Nigeria has introduced requirements similar to those in the UAE whereby mobile subscribers must provide proof of identity when registered with their sim card.

The Nigerian regulations were introduced a few years ago to clamp down on insurgent groups such as Boko Haram from using untraceable mobile phones for communications.

The regulations are also intended to sweep Nigeria’s thriving fraud and kidnapping gangs from the networks. As the deadline for the requirements came and went in August, MTN failed to cut off five million or so undocumented subscribers using its sim cards, perhaps betting the authorities would let the transgression slide. At worst the company may have anticipated a small fine that would have been more than offset by the revenue from the now illegal connections.

As one of the largest investors in Nigeria, MTN is important to Africa’s biggest economy and it may have gambled that the authorities would be reluctant to risk confrontation. If so, this was a mistake. Instead, the response was swift and harsh. “MTN should operate in the rule of law – the same rule of law that protects investment,” says Tony Ojobo, the NCC spokesman.

MTN is familiar with the sometimes fluid legal environments of the emerging markets in which it operates. The company is present in 21 countries with 500 million subscribers, making it one of the world’s largest telecommunications players.

There is an important difference between the number of mobile connections – the metric traditionally used by the industry to measure market size and penetration – and what is termed mobile subscribers. The latter refers to a single individual that has subscribed to a mobile service – but that person can hold multiple mobile connections (ie sim cards).

MTN has been especially aggressive in expanding into markets where others are more timid; it claims to be the largest provider in war-torn Syria, and obtained a licence to operate in Iran at a time when international sanctions kept rivals at bay.

The company is not shy about rolling up its sleeves and duking it out either. In 2013 the Turkish mobile phone company Turkcell took MTN to court, accusing it of paying bribes to secure its Iranian licence. Turkcell also alleged that MTN promised to influence the South African government’s vote at the International Atomic Energy Agency (IAEA) on discussions around Iran’s nuclear programme in 2005 and 2006.

MTN emerged unscathed in no small part because the Turks struggled to convince US, European and South African courts to accept jurisdictional responsibility for the case.

Several reasons are being floated for the firm’s Nigerian miscalculation. First, bad luck may have played a part. The senior Nigerian political figure, former finance minister and one-time presidential candidate Olu Falae was kidnapped in September by Fulani tribesmen.

He was soon released after a ransom of 100 million naira (Dh1.7m) was reportedly paid, but the seizing of such a prominent figure became a major public issue in Nigeria. The public demanded justice and attention soon turned to the unregistered mobile phones that the kidnappers had used – these were traced to numbers on MTN’s network and were found to be among the unverified sim cards that should have been cancelled.

An NCC investigation found MTN had a large amount of unregistered sim cards for which it could not account.

“These SIM cards with invalid registrations pose a grave security risk to the country,” the NCC investigation report said. “The recent kidnapping of the former finance minister Chief Olu Falae is one example of this risk.”

Another factor which may have played its part in MTN’s undoing is the emerging rivalry between Africa’s two largest economies. South African businesses have spread across the continent, competing with locals and so breeding resentment in many countries, including Nigeria.

Another diplomatic niggle was the discovery of almost $10m in cash last year aboard a Nigeria registered aircraft at a South African airport, alleged to be an off-the-books Nigerian arms procurement for its military. South Africa has a thriving arms sector but its law requires a time-consuming vetting process of the client country. Pressed by the Boko Haram insurgency in the north, Nigeria’s equipment-starved military allegedly tried to bypass the official channels to speed up the procurement of infantry weapons and, in doing so, angered South Africa.

Authorities seized the cash and returned it only in October following protracted legal and diplomatic wrangling.

Ultimately though, MTN’s troubles may have come down to hubris. Back home its shareholders have squarely blamed the company. The largest of these, the Public Investment Commission (PIC) – the pension fund manager for state employees that fills a similar role to the wealth funds of the UAE – is after blood. The MTN Group chief executive Sifiso Dabengwa has resigned but the PIC appears to want more bodies on the street.

“A lot more people need to take collective responsibility for the fine, for the alleged failure to comply with regulatory requirements,” says the PIC’s chief executive Daniel Matjila.

Meanwhile, MTN is scrambling to get the fine reduced and repair the damage and the former Group chief executive Phuthuma Nhleko has been brought back in to run the company.

Working in MTN’s favour is the uneasy view from the investment community that MTN may be victim of a shakedown intended to plug a hole in Nigeria’s widening budgetary deficit.

The collapse in the oil price – which provides more than 90 per cent of the Nigerian government’s revenue – has left the government scrambling for funds, and the $5.2bn sum is equal to a quarter of the fiscal budget.

The newly elected president of Nigeria, Muhammadu Buhari, voted in on an anti-corruption ticket may want to balance aggressive anti-corruption action but without alarming investors that such actions are a smokescreen for alternative ways of squeezing them for money.

Already it appears the authorities may be softening their stance and are prepared to talk: “Shareholders are advised that the Nigerian authorities have, without prejudice, agreed that the imposed fine will not be payable until the negotiations have been concluded,” MTN said on Monday.

MTN may get some reprieve but the message that Africa’s biggest economy remains a tricky place to do business will not be lost on outsiders.

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