MTN, Stanbic IBTC and Effective Regulatory Regime

Recent actions by two regulatory agencies have stirred up a lot of dust. On October 20, the Nigerian Communications Commission (NCC) fined MTN Nigeria $5.2 billion or N1.04 trillion for failing to disconnect 5.2 million improperly registered Subscriber Identification Module cards or SIM cards. About a week later, the Financial Reporting Council (FRC) slammed Stanbic IBTC Holdings Plc with a N1 billion penalty for alleged misstatements in the bank’s 2013 and 2014 financial reports. The FRC, among other rulings, also banned Mr. Atedo Peterside and Mrs. Sola David-Borha, chairman and chief executive officer of the bank respectively, from vouching for the integrity of any financial statements in Nigeria.

These landmark decisions have, expectedly, generated all manner of reactions, from the legitimate to the ludicrous. Beyond merely examining the two cases, we shouldn’t fail to take advantage of the unique opportunity offered by these unusual developments. One way of not allowing the controversies generated by these regulatory actions from going to waste, I think, is to use them as an opening to look at the state of regulation in our country today, to assess the dangers of both regulatory abdication and regulatory abuse, and to focus our minds on the metrics for achieving effective regulation in the country.

First, it is not in doubt that there are strong economic, governance and policy justifications for regulation even in the most free market economy. To be sure, advocates of free market believe that the best way to allocate scarce resource in a society is through the “invisible hands” of the market and that the market self-regulates. But it is also a settled position in Economics that the market does not always deliver optimal results. The market sometimes over-produces; sometimes, it under-produces; and sometimes it fails to produce goods that are deemed desirable. In short, there are instances when the market fails. It is also a settled position that the state has a big role to play not only in creating the rules and institutions that make the existence of the market possible, but also that the state has an obligation to correct market failures where and when they occur.

Some of the instances of market failures that provide the economic basis for government intervention or regulation include when there is no adequate competition that will guarantee optimal outputs or competitive prices (monopoly), when the producers have more information than the consumers in a way that puts the consumers at a disadvantage (information asymmetry), when desirable goods are jointly consumed and it is difficult to exclude non-payers (public goods), when private transactions have positive or negative impacts on those not party to the transactions (externalities) and when the private profit motive is at odds with values or needs of the society like reducing inequality, promoting the dignity and sanctity of human life, and providing security (strategic social interests).

It is on account of some of these reasons that private firms and private transactions in sectors such as utilities, financial services, food and drinks, healthcare, transportation, education, construction, security etc., are not left simply to the forces of demand and supply or just to the codes of professional associations but are regulated by the government. Beyond correcting for market failures, regulation is politically justified because government has a responsibility for the protection and the overall welfare of its citizens. It is also worth stating that regulation is a core responsibility of the state, one that cannot be outsourced no matter how lean our conception of the state is, and is one of the parameters for measuring the effectiveness of governments.

While liberals and libertarians will continuously spar about whether we need more or less regulations, the fact that we need regulations for the proper functioning of a market economy is not at issue. While it is true that regulation adds to the cost of doing business and creates what economists call deadweight loss, regulation is a given in certain sectors in a capitalist society. It is not anti-business, not anti-investment. However, the challenge is how to have regulatory agencies that will be rule-bound and knowledge-driven, that will not take counter-productive actions, that will not be captured by vested interests, and that will not abuse the massive powers entrusted to them. Having ineffective, wrong-headed, corrupt, malleable, and whimsical regulatory agencies defeats the economic, social and political justifications for regulation. Such manifestations are worse than the anarchical situation of having no regulation at all.

These prefatory observations made, I will quickly look at the recent decisions made by the two regulatory agencies mentioned above, with more emphasis on one than the other because of legal reasons. The NCC hammer on MTN shocked more than a few Nigerians not only because of the prior perception of NCC as more pro-operator than pro-consumer but also on account of the magnitude of the amount involved. The telecoms regulator fined MTN N200,000 for each of the 5.2 million SIM cards the telecoms company did not register properly, amounting to a whopping $5.2 billion or N1.04 trillion! Without doubt, the huge fine has real implication for the profitability of not just MTN Nigeria but also for the South Africa-based MTN Group Limited, which derives at least a third of its revenues from Nigeria. Within a few days, the share price of the parent company plunged by close to 20% on the Johannesburg Stock Exchange (JSE) and trading in the company’s shares was suspended at some point.

The NCC has, unjustifiably, received mostly knocks for imposing this unprecedented penalty. The telecoms regulator has been accused of being harsh and being anti-business. It has been accused of frustrating Nigeria’s drive for foreign direct investments and of putting at risk the jobs of thousands of Nigerians employed by the country’s leading telecoms company. The fine has even been trivialised as a desperate attempt to raise money for a cash-strapped government. Additionally, an impression is being created that NCC acted impulsively and whimsically, as most wonder about the objective basis for arriving at the fine of N200,000 per improperly registered SIM card. Unfortunately, NCC’s communication on this huge fine has been more than atrocious.

But the simple truth is that NCC didn’t pull out the figure from the air. All it did was to implement the penalties stated in the Nigerian Communications Commission (Registration of Telephone Subscribers) Regulation, 2011. The 12-page regulation was published on 7 November 2011 in the Federal Government of Nigeria Official Gazette No 101 Vol. 98 and is available online through this link: http://www.ncc.gov.ng/index.php?option=com_content&view=article&id=74&Itemid=89.

This four-year old regulation provided the framework for the registration of subscribers of mobile phone users in Nigeria. According to the information on NCC’s website, one of the objectives of SIM registration is to “assist security agencies in resolving crimes and by extension to enhance the security of the state”. So it is not in doubt that there exists a valid basis for regulation on account of possible conflict between the private profit motive and overall national security. On pages 11 and 12 of the FGN Gazette mentioned above, the regulation sets out penalties for default in sections 19 and 20. Specifically in Section 20 (1), the Regulation states that: “any licensee who activates or fails to deactivate a subscription medium in violation of any provision of these Regulations is liable to a penalty of N200,000 for each unregistered but activated subscription medium.”

Given how regulations are made in regulated sectors, it is inconceivable that MTN Nigeria was not aware of the regulation, the penalty for default, and the implication of default for its business. In actual fact, operators in regulated environments have enormous legal and other resources to shape the outcome of regulations and analyse the risk to their operations. According to my findings, NCC had held series of meetings with telecoms operators asking them to deactivate unregistered lines in light of the security challenges facing the country, especially kidnapping and Boko Haram.

In early August, NCC gave all the operators a week to deactivate all improperly registered SIM cards. A few days after the deadline, NCC carried out an audit to check the level of compliance and found out that while other operators complied substantially, MTN did not comply at all. After the audit, NCC sent an enforcement team to MTN in early September and it confirmed that the company has 5.2 million improperly registered but active lines. In early October, MTN was asked to explain why it should not be sanctioned. MTN sent its explanation two weeks later, which NCC, according to my investigation, did not find convincing. The regulator then applied the rules made four years ago, after exhausting laid-down procedure.

It is possible that NCC had been lax in enforcing its own rules in the past and could thus be accused of inconsistency. But that is not a reason for not acting when a clear breach has been established. As far as I know, MTN has not denied the breach or the number of lines involved and is not alleging arbitrary or selective or retroactive application of the regulation. While I am not against a reduction of the fine on compassionate and practical grounds, even when the regulation didn’t make provision for that and this could create a bad precedent and a form of moral hazard, it needs to be taken beyond argument that a major breach has indeed occurred. Focusing exclusively on the amount involved misses the magnitude of the lines involved, diminishes the enormity of the breach, and opens us to the emotional blackmail of “too-big-to-fail”.

For me, NCC has, for once, done what any regulator or any country worth its name should do: enforce its own rules. This is why the response from the South African government has been very reasonable because South Africa is not a country of anything goes, or a country where impunity is condoned. Nigeria shouldn’t either. This is why I also think MTN is talking about negotiation instead of going to court to challenge the decision. Interestingly, the FRC is being challenged in court by Stanbic IBTC for not following the process laid out in its enabling law and regulations and for acting without cause and beyond its powers. Since the case is in court, I won’t comment on the substance of the case. But beyond the review by the Central Bank of Nigeria (CBN), I think the government should undertake an independent investigation into this issue. If it is established that the regulator truly abused its powers, appropriate punishment should be imposed, for a reckless regulator is a danger not only to the sector it regulates and the economy as a whole, but also to the government and the larger society.

As a society, our concern should be about having an effective regulatory regime that ensures the proper functioning of the market and reinforces the faith of citizens in their government and in their country. We do not have that now. Most of our regulators are indecisive and inconsistent, are open to capture by political and business interests, and are not as resourced and as knowledgeable as those they are supposed to regulate. They do not  effectively to the public on whose behalf they exercise enormous powers and do not adequately factor in the interests of the dispersed and mostly voiceless consumers. Also, the countervailing mechanism for checking abuse of regulatory powers is very thin. All these must change