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Cablegate: Nitel: New Management, Little Change

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 LAGOS 000524

SIPDIS

STATE PLEASE PASS FCC

E.O. 12958: N/A
TAGS: ECPS ECON EINV NI
SUBJECT: NITEL: NEW MANAGEMENT, LITTLE CHANGE

1. (U) Summary: One year into its three-year management
of Nigeria's national carrier, Nigerian
Telecommunications Limited (NITEL), the Netherlands'
Pentascope International has generated surprisingly
little change. Executives remain optimistic, but given
Pentascope's slow progress in implementing reforms,
repairing and expanding fixed line and mobile networks,
and strengthening NITEL's balance sheets, that optimism
may be misplaced. End summary.

2. (U) For months, Pentascope executives have awaited
approval of proposed structural reforms. President
Obasanjo's mid-November decision to dissolve NITEL's
board delayed consideration, and the board's nwest
members, appointed January 13, have yet to take a
decision. Pentascope's proposal calls for general
managers to report directly to NITEL's chief executive
(rather than to various executive directors) and for
territorial managers to report to NITEL's chief
technical officer, a move that would streamline
operations and hasten decision-making. NITEL's Lagos
Zone General Manager, Segun Oguntoyinbo, believes the
proposed reforms would generate "radical change," but
he is not optimistic they will be introduced anytime
soon. Decisions within NITEL are taken slowly, he
says, largely due to the need to win government
approval.

3. (U) The board's failure to approve reforms may
present obstacles to Pentascope's expansion plans. The
firm's business plan is ambitious, but progress is
slow. The plan estimates capital expenditures at $900
million over three years, calls for the rehabilitation
of existing networks, and projects the installation of
600,000 new fixed lines (to bring total installed
capacity to 1.3 million lines) and 1.2 million new
mobile lines (up from about 120,000 now) by the time
Pentascope relinquishes management control. Given the
pace of work, it is unlikely NITEL will meet that
deadline. The firm has only recently begun
rehabilitation efforts, and most observers are
skeptical of its ability to meet even the relatively
modest target of 150,000 lines per year. Network
expansion is behind schedule - managers expected to
complete the installation of new mobile lines months
ago - and future attempts will likely fall even further
behind, not least because contract terms are
unrealistically short.

4. (U) Oguntoyinbo points out that under a recently
awarded contract, Germany's Siemens and China's Huawei
Technologies have only nine months to add 250,000 fixed
lines to NITEL's Lagos network. It may be virtually
impossible to meet that deadline, but delays are
nothing new. Plans for 41 new switches have yet to be
implemented, and local fixed wireless pilot programs
are moving more slowly than expected. According to
Oguntoyinbo, NITEL has installed 10,000 fixed wireless
lines in each of two locations, but the pilots have yet
to generate significant results. If they do, NITEL may
elect to abandon fixed lines in favor of fixed wireless
networks - the latter are less expensive and suited to
both urban and rural areas - but as in everything else,
progress may be slow.

5. (U) NITEL has performed dismally over the last
fourteen years. It boasts only 700,000 fixed lines, of
which only 500,000 are even sporadically operational,
and provides notoriously poor service. Some 60 percent
of calls are never completed, and nearly 180 faults per
100 lines are recorded annually. Pentascope executives
hope to increase call completion rates to 95 percent
and reduce interruptions to fewer than 50 faults per
100 lines, but improvements have been minor. The
firm's balance sheet is weak - federal and state
governments, the military, and corporate and individual
customers owe nearly $320 million in unpaid fees - and
it typically manages to collect only 70 or 80 percent
of total annual revenues. Pentascope has recouped $30
million since taking over, but debtors have been slow
to settle accounts. Revenue collection may improve
with the introduction of pre-paid billing systems for
fixed lines, but plans are still being tested.

6. (U) Not surprisingly, NITEL has steadily been losing
market share to competitors. Lagos now accounts for
only 30 percent of NITEL's total revenue, down from 60
percent a few years ago, and customers are steadily
leaving NITEL for mobile service providers and private
telephone operators. These provide more reliable
service at comparable or lower prices, and the ready
availability of lines eliminates the months- or years-
long wait for NITEL lines. The recent entry of a
second national operator, Globacom, will likely
increase competition, but Oguntoyinbo believes the
Nigerian telecommunications market is large enough to
absorb several different players. He "appreciates the
challenge" of Globacom's entry but believes NITEL has
several advantages over its competitors. The firm's
executives know the market, he says, and have the
technical expertise and long-standing customer
relationships that others lack.

7. (U) Oguntoyinbo expects private telephone operators
to continue working with NITEL, if only to take
advantage of the preferential interconnection fees he
expects NITEL to offer. In the meantime, Pentascope
executives are doing what they can to retain customers.
In mid-December they introduced a 75 percent reduction
in NITEL's international tariffs, cutting rates from
N99 ($0.73) per minute to N34 ($0.25) per minute in off-
peak hours. Executives report a 20 to 25 percent
increase in traffic, and many expect the numbers to
improve. Oguntoyinbo hopes, if nothing else, that
Pentascope will succeed in increasing NITEL's emphasis
on customer service. The customer should be king, he
says, and NITEL should work to maintain the integrity
of its brand.

8. (U) Comment: Observers applauded Pentascope's
arrival early last year, but the firm has struggled to
meet expectations. Some believe its executives found
NITEL in a more pronounced state of disrepair than they
expected, set unrealistic goals, and are now paying the
price. Pentascope's efforts to improve NITEL's
infrastructure, expand existing fixed line and mobile
networks, and strengthen the firm's balance sheets have
been complicated by the necessity of coping with
government interference and entrenched bureaucracy. As
such, it is perhaps unsurprising that Pentascope's
executives have generated relatively little change over
the last year. If they continue to make so little
progress, it may be some time before NITEL is ready for
privatization. Oguntoyinbo believes the GON may sell
15 to 20 percent of its shares in an initial public
offering (IPO) later this year, but most observers take
such statements lightly. GON officials talked about an
IPO in August 2002 and again in November 2003 but
delayed the event both times. The process has been
botched before, and it will likely be botched again.
End comment.

HINSON-JONES

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