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Orange on the spot for inflating Telkom Kenya subscriptions

BUSINESS
By Macharia Kamau | January 29th 2017
Orange on the spot for inflating Telkom Kenya subscriptions. (Photo Courtesy)

France’s telco Orange is on the spot for inflating subscriber base for Telkom Kenya, according to the Communications Commission of Kenya.

This has raised questions as to whether the mobile operator manipulated the numbers to appear attractive to investors and customers prior to selling its 70 per cent stake in Telkom Kenya last year.

Orange, which acquired Telkom Kenya in December 2007, was reporting the number of subscribers in a model contrary to guidelines issued by CA. The regulator requires operators to keep a 90-day record, which helps give the true nature of service reach by weeding out inactive customers.

When the new owners Helios Investments took over and did a quick audit, they found that the subscriber numbers had been inflated by nearly double. In the quarter to June, the firm reported a subscriber base of 5.2 million but in the quarter to September, this dropped to 2.9 million after adopting CA’s recommended 90-day formula.

When prodded about the substantial drop in customer numbers, the new management at Telkom Plaza gave a generic response, saying it had adopted the international best practice in reporting subscriber numbers, which is also in line with CA recommended standard. This entails keeping a 90-day record of active customers compared to the 120 days active customers used by the Frenchmen.

“Following the change of ownership of Telkom Kenya in June 2016, the company embarked on several transformation initiatives led by the new management and leadership team. A key component of the transformation programme is the adoption of international best practice reporting and full compliance with local regulatory requirements,” said Telkom Kenya.

“Consequent to the above, the reporting of mobile subscribers for the company has adopted the Communications Authority of Kenya (CA) recommended standard of a 90 days revenue generating cycle.”

Telkom Kenya said this would not have any underlying impact on the business performance or operations of the company arising from this change in reporting.

Bullish

Telkom Kenya’s new owners are however bound by a non-disclosure agreement with Orange, that apparently forbids them from talking about the state of the operator. According to sources close to the firm, Orange had wanted discretion in regards to the information getting out of the company and had requested this to be a condition in the sale agreement.

The French operator did not respond to our queries.

In June last year, Orange sold its 70 per cent stake to Helios Investment Partners. In the agreement, Treasury acquired an additional 10 per cent stake in Telkom Kenya for a symbolic Sh1 from the company’s new owners, Helios Partners.

Helios Partners now controls 60 per cent stake through a Mauritius-registered company, Jamhuri Holdings. The transaction value was however not given although it is thought to be about Sh8 billion. Treasury will, however, take up about Sh12 billion owed to the French owners by Telkom Kenya, being 40 per cent of the Sh30 billion in shareholder loans.

Helios Investments is however bullish that it can steer the firm into success despite the past failed attempts. While still clutching on its plans to turnaround Telkom Kenya, including how long it would continue using the Orange brand, it said that the ‘transformation programme’ it had embarked on has achieved a degree of progress and expects a complete turnaround.

“The Board and management of Telkom Kenya are pleased with the current progress of the transformation programme and remain committed to working towards achieving positive results,” said the statement by Telkom Kenya management.

Telkom Kenya was privatised in December 2007 in what was expected to give the fixed line operator a new lease of life. This was to enable it stay competitive in what had then emerged as a cutthroat business that saw mobile operators edge out the firm in an industry where it had enjoyed  monopoly status for decades.

Preparing to hand the firm to a private sector operator had been a painful process for the Government. Thousands of employees that had to be retrenched, and the Government spent billions of shillings making the company attractive for the investor that was expected to steer the telco back to its glory days.

Telkom Kenya had about 18,000 employees in early 2005. In 2006, the firm implemented one of the biggest retrenchment programmes ever seen in Kenya, sending home 7,307 workers at a go. The privatisation is estimated to have cost more than Sh120 billion in eight years.

Cleaning up the operator’s books in readiness for privatisation in 2007 cost Sh85 billion. This was paid off by transferring the 60 per cent stake Telkom owned in Safaricom to the Treasury.

The transaction advisor, the International Finance Corporation (IFC), was paid Sh291 million for its services, and Communications Authority of Kenya, then CCK, was paid Sh3.4 billion to enable Telkom Kenya acquire a mobile cellular licence, ostensibly to make the parastatal more attractive to prospective buyers.

The Government went ahead to pay Sh8 billion towards offsetting the liabilities of the pension scheme and agreed to pay a Sh5.8 billion loan advanced to Telkom by a consortium of local banks to meet retrenchment costs. In all, the Government paid Sh13.8 billion in retrenchment costs. It also undertook to pay Sh15 billion in tax arrears to the Kenya Revenue Authority.

Despite the social and monetary investments that went into the operator, Orange did not have much success in turning around the fortunes of the firm that analysts have always said had an arsenal like no other telecommunications company. In addition to a workforce well grounded in communications technology, the firm operated a fixed line that spanned the country but which served nearly no purpose in the nine years that Orange was in charge.

Difficult to catch up

The line has been wasting away and its subscribers declining year after year to stand at a measly 81,000 at the time of Orange’s exit. The number of landline subscribers stood at about 300,000 in 2008 but this came down to 216,469 in 2013. Before the advent of the mobile, the Government had ambitions of growing this to 1.5 million.

Orange started from scratch with introduction of a GSM network but would find it difficult to catch up with telcos that had had a head start. At the time of its exit mid 2016, the operator report having five million customers (which has been contested by CA and since revised to 2.9 million) against Safaricom’s 26.6 million.

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