12 January 2018

Nigeria's Nigcomsat to Get Two More Satellites Costing U.S.$550 Million - Government Continues to Bet Against a Losing Position

London — Two of Africa's largest oil economies - Angola and Nigeria - have bought themselves satellites. No-one can really explain what they will do and how they will make money from them. Russell Southwood chews over Nigeria's eccentric decision to get two more satellites for the failing Nigcomsat.

On Wednesday this week Nigeria's Minister of Communications Adebayo Shittu announced in Abuja that Nigeria had secured a commitment from China for $550 million worth of financing towards two new satellites for Nigcomsat, Nigeria's national satellite company.

An investigation by Punch newspaper in 2016 concluded that the company had very few customers and was not generating the sort of level of income required to repay the financing of its initial satellite. The situation in early 2018 is not markedly better.

However Minister Shittu used its current poor commercial performance to justify the purchase of a further two satellites. He said it had been ineffective because it has only one satellite that he said could not guarantee the confidence of prospective customers.

Nigcomsat's poor performance is based on a luck of trust in the market that it can operate its satellite effectively, not its lack of back-up capacity. If it needed to address the question of back-up capacity, it could easily work with other operators to put in place back-up capacity.

The project requires US$550 million, of which the Federal Government of Nigeria was supposed to be supplying 15% of the capital. As it has been unable to do so, China Exim Bank and China Great Walls, the satellite manufacturer, have stepped in to cover the whole cost.

The Minister's explanation of how this financing deal makes sense was not clear. He said that the $550 million is not a loan but rather equity that he said would be predicated on a profit sharing agreement between Nigeria and the Chinese companies.

Keen to explain how the wily Nigerians will not be hoodwinked by the Chinese, he was reported as saying that Nigeria will not be outwitted in the sharing of the profit because Nigeria has brought nothing (in money terms) to the table. He said that profits will be shared on the basis of an agreed ratio. It is not clear how you get a share of the profit if you don't put in any equity or will there be a joint company with the Chinese in which Nigcomsat's existing satellite becomes its equity stake? Perhaps the Chinese are so desperate to keep the project moving that they have agreed to underwrite the whole project until some later date when the Federal Government will put in its 15%.

The manufacturing process will start on 27 January and the satellites will take two years to complete. The Minister described the ambition for the Nigcomsat platform as "the conquest of the entire African satellite market." However, the Minister's recipe for success in Nigeria was to say once the satellites are launched, all companies operating in Nigeria would be barred from patronising foreign companies for their satellite communications data.

There are two obvious Government policy rationales for having a Nigerian national satellite carrier: firstly, to ensure that the money spent on international satellite carriers remains in Nigeria; and secondly, to ensure that the unconnected parts of Nigeria are connected, particularly security sensitive areas like the North East.

But as is obvious from the Minister's comments above neither of these are articulated by him. So Nigcomsat has gone from being an attempt to keep satellite revenues in Nigeria to a joint company 85% owned by the Chinese that will conquer the African satellite market and is likely therefore to remit 85% of its profits to China. None of this makes any sense however you look at it.


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