Rising costs threaten data centres, telcos’ operations in Nigeria

Companies operating in the ICT sector of the Nigerian economy, especially data centre operators and telecommunications firms are now facing a dire situation as the rising costs of operations in the country bite harder.

While every business in the country is feeling the pangs of general inflation and the high cost of energy, the peculiarity of data centre and telecom business makes their case more complicated.

Unlike traditional brick-and-mortar establishments that can cut down on service hours, networks and data centers must operate 24 x 7, around the clock, regardless of whether they serve a handful or millions of customers. This round-the-clock operation places immense cost pressures on these companies even as they face slow growth with a high inflationary economy.

Highlighting the challenges confronting businesses in the telecom sector when the body recently met with the Minister of Communications, Innovation and Digital Economy, Bosun Tijani, the Chairman of the Association of Licensed Telecommunications Operators of Nigeria (ALTON), Engr. Gbenga Adebayo noted that the cost of doing business in the country has risen sharply in the last few months due to a myriad of factors generally impacting businesses. He said these factors include macroeconomic headwinds such as inflation, currency devaluation; sustained difficulty in accessing FOREX at an affordable rate; rising energy costs; and the rising cost of securing telecommunications facilities and field personnel in the face of worsening insecurity, among others.

According to the National Bureau of Statistics, Nigeria’s inflation rate stood at 25.8% in August 2023, an increase from 24.08% recorded in July 2023. The floating of the Naira has also seen the Nigeria Naira get devalued with the exchange rate against the dollar rising officially to N746/$1 and unofficially to over N1,000/$1, up from the prevailing N461/$1 rate a few months ago.

For telecom operators and data centre companies, adding to the major impact of the foreign exchange is the increase in energy costs including prices of petrol, diesel, and a proposed increase in electricity tariffs. Diesel generators have long been the primary source of backup power for businesses in Nigeria, with the price per liter fluctuating between N850 and N950.

Meanwhile, petrol which is primarily used for vehicles and for homes as an alternative source of fuelling generators now hovers between N568 and N650, an increment of over 200% when compared to Q1 2023, stemming from the subsidy removal by the new government.

While noting that the hydra-headed issue of multiple taxation and right-of-way charges have continued to be the bane of the ICT sector, Adebayo said:

Outside the macroeconomic factors, the industry is also plagued by the government’s lack of will to implement some policies geared towards making the business environment conducive for the players. For instance, the government’s poor implementation of its policy on local hosting has led to continuous international hosting by many Nigerians at the expense of local data centre service providers.

According to the Chief Executive Officer of Medallion Data Centres Limited, Engr. Ikechukwu Nnamani, the poor implementation of policy on local hosting of data has remained a hindrance as it is presently impacting negatively on data centre operations.

Nnamani argued that implementing the policy on local hosting, which requires all content producers, including government agencies to host all subscriber and consumer data in Nigeria, will help drive demand as some people for whatever reason are still hosting their content outside.

Aside from the sustainability of several businesses in the ICT sector in the face of daunting challenges, industry analysts said Nigeria’s digital economy agenda now looks shaky.

He also observed that the ICT sector is being squeezed by the rising costs at a time when digital transformation is hailed as essential for economic productivity, thus casting doubt about the digital economy agenda of the government. Adeoye said all these issues would require urgent government attention if it indeed wants to build a truly digital economy with growth opportunities for every citizen.

Meanwhile, industry analysts have projected that data centre service providers and other businesses that increasingly rely on digital infrastructure to operate may have to make some difficult decisions in the coming month in response to current challenges. As the year draws to a close and businesses chart their strategies for the coming year, they will have to make difficult decisions to navigate the turbulent waters that lie ahead. Balancing the need for profitability with the reality of soaring costs will remain a formidable challenge.