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State loses ownership grip in Telkom Kenya

By - | December 4th 2012

By Jevans Nyabiage

NAIROBI; KENYA: Government is set to cede more control over Telkom Kenya in yet another move to save the telecom service provider from debts.

Touching revelations earlier this year showed that the firm was sinking in debts of at least Sh51 billion. It sought a Sh10 billion bail-out from the Treasury and its main shareholder France Telecom. 

However, in an effort to save the firm from debts, the Cabinet recently approved to convert the Treasury’s loans in Telkom Kenya into equity as part of a plan to recapitalise and restructure the balance sheet of the company.

In return, France Telecom would also have to convert its loans to equity.

“This will enable Telkom Kenya to properly capitalise and regain competitiveness in the market,” reads the brief in part that was sent to the newsrooms on Thursday, November 22.

The Government and France Telecom have agreed to write off and convert part of the Sh34 billion shareholder loan they advanced the operator. Effectively, this means the Government’s share in the fixed-line monopoly will drop to 40 per cent, while France Telecom will have a controlling stake of 60 per cent.

The Government in June this year moved in to bail out the operator by extending to it Sh2.5 billion and could inject another Sh2.5 billion, with a set of conditions though.

Its other main shareholder France Telecom gave it Sh5.1 billion. The conversion of government debt into equity would free up the company to borrow funds from the market for investment.

When a consortium led by France Telecom paid Sh27 billion for 51 per cent stake in Telkom Kenya, it signaled a new era for the then State-run fixed-line monopoly.

The aim of the privatisation was to create efficiency at the operator that had been weighed down by a bloated workforce of more than 18,000, debts and political interference that put its books in the red.

Following its privatisation in December 2007, France Telecom was expected to steer Telkom to profitability in three to five years in preparation for the eventual prize: listing at Nairobi Securities Exchange.

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Under the terms of the sale of the company’s majority control to a consortium involving France Telecom (40 per cent) and Alcazar Capital (11 per cent), the telecoms services provider was to be listed within three years at the earliest – which was December 2010.

The company has, however had it rough with stiff competition from market leader Safaricom, Airtel Kenya and Essar, trading as yuMobile.

Telkom Kenya continues to drag itself in the GSM mobile network, where acccording to the Communications Commission of Kenya recent statistics, it controls only 0.8 per cent of the voice traffic! Safaricom, the market leader in the mobile telephony segment controls about 80 per cent of the voice traffic and revenue.

Price wars

Five years after its takeover, Telkom continues to bleed heavily. It has had to rely on its main shareholders to inject more cash to remain afloat. Questions are emerging on how Kenya is gaining for sale.  So far, more than 15,000 employees have been sent home since the Frenchman started the restructuring, but this hasn’t made things any better.

Even though there are immense opportunities in the fixed-line telephony market where it enjoys monopoly, most of the telephone booths were vandalised into scrap metal.

“Without fixed lines, they tried to catch up with Safaricom; too late, we still feel they will transfer their inefficiency in fixed lines to mobile. I waited for three years to get a fixed line,” Dr XN Iraki, a lecturer at the University of Nairobi School of Business says.

Last year, the operator chalked up a historic net loss of Sh18 billion, after making sales of Sh9.2 billion.

The firm’s management attributes the loss to vicious price wars in the mobile telecoms market that were initiated by Airtel Kenya when India-based Bharti Airtel took over the operation in 2010 and due to capital intensive projects it has undertaken.

“Since the company was privatised in 2008, we have been working on boasting the network and integrating our systems which involved a significant investment from the shareholders,” Telkom Kenya Chief Executive Officer, Mickael Ghossein (Inset left), said. 

“The market dynamics in the telco sector have also changed drastically and thus we have had to incur the expenses of ensuring that our network is up to standard.” As it looks, the debt-ridden firm is far from being rescued. The operator has had to depend on its shareholders for regular bailouts. But the Ministry of Information and Communications distanced itself from the company’s financial problems. “This is a purely Treasury issue,” Information permanent secretary Bitange Ndemo said, in response to our queries.

The Treasury, the custodian of public investments believes the firm still has a future. Most of the debts, about Sh38 billion was owed to its parent company, France Telecom. This means that even when the operator appeared to be in bad shape, France Telecom has been squeezing interest payments and other fees from the loans disbursed. But for how long will the Government continue to pump taxpayers’ money into Telkom Kenya?

There are those who believe that the firm lacks strategic direction to turnaround the company. Communications Workers Union Secretary General Benson Okwaro, says, “I don’t think there is prudent management at Telkom Kenya — they have not faced business the way it should be.”

Okwaro’s union has had to battle with the company during retrenchments. He says there is a lot of turnover in top management. In the last few weeks, the firm has seen the exit of about five senior managers — in communications, legal, marketing and finance departments. “The management style does not create a conducive environment to enable business to pick up,” he adds, “The Government as a key shareholder must move and put things right. There is need for control measures.”

Iraki says Telkom is frozen in time in terms of prospects because it failed to change.

“It is a victim of Schumpeter’s creative destruction. Telkom was never prepared for mobile revolution, its reaction shows; they should have used their fixed phones for cable TV and Internet, they left Zuku to do that,” he adds.  “The French way of doing things might also be generating a cultural conflict,” Iraki says, adding that the Government should sell its entire stake in Telkom and leave the buyers to sort the problem out. 

Too optimistic

“No one will fail to make a call because of that. Safaricom and Airtel are not owned by government...and give us great service. We should not continue pouring money into a hole...when we can see... and there is nothing wrong with accepting that firms like us have a lifespan from birth to death.”

Peter Wanyonyi, a telecoms consultant echoes similar sentiments, “Telkom Kenya is a text-book case of privatisation gone wrong.”  “Remember that one of the objectives of privatising the telecommunications behemoth was to get it to ‘get with the times’, invest in new technology and actually pay for its own upkeep. It is clear that the Government was too optimistic in this case.”

“Telkom Kenya has not invested in new technology to any significant extent, and has instead turned to serial loan-begging to sustain itself. Its parent company and the Kenya Government are now pumping in a total of Sh10 billion — but for what?  It is clear Telkom Kenya doesn’t offer anything new or innovative in the market as yet,” Wanyonyi adds.

Wanyonyi says Telkom Kenya needs to get onto the value added service innovation curve. “It has to offer something new, something we don’t yet have in the market in Kenya — for example, unbeatable data packages accompanied by excellent coverage in at least Nairobi and Mombasa — for customers to take it seriously. At the moment, that is not happening, and the company will continue to struggle.”

Jokingly, a telecoms insider who prefers to remain anonymous, says, “Sell it to Safaricom. Seriously, I don’t see that France Telecom is making a great deal of effort to make Telkom Kenya competitive.  I am not sure it can be saved.”

“The Government must try though, because the loss of prestige would be too great to bear.”

“The case of Telkom Kenya calls for an informed and independent feasibility study before Treasury can put in more money. The current scenario is akin to securing less value for money for the investment,” says Stephen Mutoro the Secretary General, Consumers Federation of Kenya (Cofek). The irony, which raises eyebrows, is that the more the taxpayer chips into Telkom, the less the government control,” says Stephen Mutoro the Secretary General, Consumers Federation of Kenya (Cofek).

He says, what Telkom Kenya needs is to restructure the company and separate its operations three-fold, first its fixed lines and CDMA into a single subsidiary; second, Orange Mobile and Money transfer; while data could be on its own. More focus as relates investments would be on data and cellular.  The sale of Telkom Kenya remains to be the most expensive transaction in the history of privatisation in Kenya.

There is no single transaction that has cost the taxpayers as much money. The Government had to pay billions of shillings in preparation of the sale and to make the sale of Telkom Kenya shares visible. The social cost of the transaction was even higher. Thousands of employees were and continue to be sent home.

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