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Inside Bharti’s loan strategy bleeding Airtel Kenya dry

FINANCIAL STANDARD
By Frankline Sunday and Macharia Kamau | November 9th 2021
By Frankline Sunday and Macharia Kamau | November 9th 2021
FINANCIAL STANDARD

Telkom Kenya CEO, Mugo Kibati and Airtel Kenya CEO, Prasanta Das Sarma when they appeared before the Senate ICT Committee at County Hall, Nairobi on October 22, 2021, on the status of their merger. [Boniface Okendo, Standard]

At the height of the heated debate on the proposal to declare Safaricom a dominant player in the telecommunications sector, one of the firm’s senior executives took a veiled dig at one of their competitors.

He had been asked to comment on criticisms from competitors that Safaricom’s market share made it impossible for other operators to effectively compete and grow their subscriber base.

“We have invested tens of billions of shillings to maximise our coverage in the Kenyan market, and we’ve been consistent in this investment, but some of our competitors are best known for changing colours,” he said. 

The snide comment was aimed at Airtel Kenya, which between 2004 and 2010 changed ownership thrice, during which it rebranded four times.

More than 11 years since Bharti Airtel purchased Zain and rebranded to Airtel Kenya, the dynamics of the country’s telecommunications market have changed significantly. 

On the one hand, Safaricom’s detractors say the company has become too big and that no competitor can carve out a sizeable market-share along the main market segments to effectively compete.

On the other hand, analysts say the firm is simply reaping the fruits of its investment, while others term it “curious” how other service providers are able to continue operations despite almost two decades of loss-making streaks.

According to the latest financial report from Airtel Kenya, the company made Sh5.9 billion in losses for the year ended December 31, 2020, more than double the Sh2.7 billion reported in the previous year. This has pushed the firm’s accumulated losses to Sh77.4 billion as of December last year, putting it in a net liability position of Sh43.7 billion.

Further, Airtel Kenya has Sh52.3 billion in shareholders’ loans that the company says provide liquidity for operations.

A close analysis of Bharti Airtel’s latest annual report indicates a pattern where the parent company loans billions of shillings to its subsidiaries each year, shackling them in a debt cycle and interest costs that may be eroding any operating profits due. The loan to Airtel Kenya shot up 12 per cent within a year to Sh52.3 billion by December last year from Sh46.69 billion in December 2019.

The loan attracted an interest of $15.25 million (Sh1.7 billion).

While ultimately the loan is owned by Bharti Airtel, it is layered in such a way that one subsidiary advances money to the next until it gets to Airtel Kenya.

Some of the subsidiaries do not have any other revenue stream other than the interest income generated by the loan.

Though Airtel Kenya registered a loss of Sh5.83 billion in the period to December 2020, it is notable that it registered an operating profit of Sh1.7 billion.

Despite the impact of the pandemic that crippled many businesses last year, the telco saw a considerable jump in its revenues to Sh26 billion from Sh21 billion the previous year.

However, finance costs of Sh3.12 billion, which included payments to service the Bharti Airtel loans as well as Sh4.5 billion in foreign exchange losses, sank the telco into deep losses. 

Airtel Africa did not comment on the pattern of lending across subsidiaries and the effect this has on operational costs. 

According to the firm’s annual report, Bharti Airtel last year lent 61.3 billion Indian rupee (Sh92 billion to its subsidiaries, down from 67.1 billion Indian rupee (Sh101 billion) in the previous year. 

In turn, the subsidiaries made 81.5 billion Indian rupee (Sh122.89 billion) in repayments to the parent company, more than double the 32.8 billion Indian rupee (Sh49.46 billion) in loan repayments made in 2019. 

The report explains that “Bharti Airtel extends financial assistance in the form of investment, loans or guarantees to its subsidiaries from time to time in order to meet their business requirements.” 

“The company recognises its investment in subsidiaries, associates and joint ventures at cost less any impairment losses,” said the telco in the report. 

“The said investments are tested for impairment whenever circumstances indicate that their carrying values may exceed the recoverable amount...”

Bharti Airtel has a total of 103 subsidiaries, comprising associate and joint venture firms spread across Asia, Europe and Africa.

The firm’s investment in its subsidiaries stood at 153.3 billion Indian rupee (Sh231 billion) as of December last year, up from 285.5 billion Indian rupee (Sh430.49 billion) in the previous year. 

Airtel Networks Kenya is the most prominent of the subsidiaries associated with its Kenyan operations.

Other than the firm, which offers mobile telephony; data and mobile money services, there are another five companies associated with Bharti in Kenya. Nearly all of them are loss-making. Bharti Airtel Kenya BV is one of the firm’s subsidiaries in the country but is registered in the Netherlands.

It made a loss Sh2.48 billion ($22.37 million). The company, also described as an investment and holding company, had revenues of $15.25 million (Sh1.69 billion), which is in the form of interest income on a loan advanced to Airtel Networks Kenya.

The revenue was, however, eaten up by loan repayments in form of interest expense to the sister company amounting to $35.33 million (Sh3.92 billion).

Bharti Airtel Kenya Holdings BV, also registered in the Netherlands and described as an investment and holding company, made a loss of $1.29 million (Sh143 million). The firm’s key revenue source was interest income from Bharti Airtel Kenya BV to the tune of Sh3.92 billion ($35.33 million).

It is, however, servicing a loan from Bharti Airtel Africa BV and in the year to March 2021 paid $36.62 million (Sh4.1 billion) in interest expense to the company, more than what it had made during the year. 

Network I2I (Kenya) Ltd is another Bharti Airtel’s subsidiary in the country, which despite being incorporated in 2019, is yet to register any trading activity. 

Another subsidiary, Airtel Mobile Commerce Kenya BV, is registered in the Netherlands and described as an “investment and holding company.”

It made a loss of $252,000 (Sh27.7 million) in the year to March 2021. Its key asset is a shareholding in Airtel Money Kenya, where according to disclosures to shareholders, it subscribed to 5,000 shares in Airtel Money Kenya Ltd and paid $46,700 (Sh5.14 million). 

According to the report, Airtel Mobile Commerce (Kenya) Ltd’s main function is to hold the funds for the Airtel Money E-value account. Airtel also said the company does not engage in trading activities and hence there was no profit or loss during the year.

As of December last year, the firm held Sh1.13 billion in the mobile money trust on behalf of Airtel’s mobile money customers and is not available for the company’s normal business operations.

Earlier this year, the National Treasury proposed amendments to the country’s Income Tax Act, mandating multinational companies operating in Kenya to provide Kenya Revenue Authority (KRA) with income statements of their operations in the country and across the world. 

“An ultimate parent entity of a multinational enterprise group shall submit to the commissioner a return describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has taxable presence, not later than 12 months after the last day of the reporting financial year of the group,” says the amendment to section 18 of the Income Tax Act. 

The amendments are targeted at curbing transfer pricing, the process where multinationals saddle subsidiaries in high-tax jurisdictions with high operating costs and report profits in low-tax jurisdictions to avoid paying high tax.

While the practice is considered legal in many jurisdictions, tax justice campaigners have in recent years called on governments, particularly in developing countries, to remove loopholes in their laws that ensure multinationals pay little or no tax in countries where they run large operations.    

Other proposed amendments to Kenya’s tax laws include widening the definition of related parties in international transactions to include companies in low-tax jurisdictions or tax heavens. The taxman is also looking to effect country-to-country reporting, where parent companies report on earnings of subsidiaries within the respective country of operations.  

According to George Maina, a tax law expert and associate partner at Rodl and Partner, loans, guarantee schemes and hefty management costs charged to subsidiaries are some of the loopholes multinationals can exploit to pay less tax across various markets.

“Loans and guarantees between subsidiary companies can be one of the means of avoiding tax expenses, especially since companies are not obligated to reveal the interests they levy on debt procured within their own companies,” said Mr Maina. 

“However, it doesn’t always mean that transfer pricing is involved. It could be a case that the parent company is setting up new operations in a new market and requires new capital investment, which it is in a position to provide at low costs,” he added.

Maina, however, noted that companies are required to offer loans to subsidiaries on an “arm’s length basis.” 

“This means the loan borrowed from the subsidiary should be comparable in interest costs to a similar facility that can be procured from commercial lenders in the open market, for example,” he explained.  

Airtel Kenya also has loans from other lenders and as of December last year owed different financiers Sh10.94 billion.

This is, however, nowhere near the loan owed to Bharti Airtel Kenya BV of Sh52.36 billion. In the disclosures, Airtel said the loan attracts an interest rate of three per cent per annum.

The firm said the higher internal loans cushion the telco against the risk of fluctuating interest costs.

“The company’s only variable interest-bearing financial liabilities are its external borrowings of Sh10.9 billion which are set at variable rates and is, therefore, exposed to cash flow interest rate risk,” said the telco.

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