Strategies for shrinking former incumbents: double or quits in Togo, Gabon and Congo-Brazzaville

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A significant number of Africa’s former incumbent telcos are in deep trouble as their fixed line network subscribers shrink and their mobile operations take a market share beating from larger operators (see issue 442). Their key shareholders - African governments - seem incapable of acting decisively to stop the rot. Russell Southwood look at three different companies - Togo Telecom, Gabon Telecom and Sotelco in Congo-Brazzaville - whose current situation neatly illustrates what’s happening.

This week saw the Chinese Exim Bank extend a US$31 million loan to Togo telecom. The company said that it would use the money to develop its Illico product, the CDMA 2000 fixed voice and data solution (usually from Huawei) that has been able to turn around the steady decline of fixed voice customers in a number of markets.

Most of Togo Telecom’s Internet subscribers are now using this product. However, there are a number of local blogs that illustrate that the quality of service delivered by Togo Telecom is at best variable and that it is costly to replace these handsets when they fail.

Worse still, in the future when there is plentiful bandwidth from the four new international cables that will be operational by 2010, this equipment will be just too narrowband. CDMA 2000 has no upgrade path for these subscribers who probably imagine their handsets will be useful for at least three to five years.

Since most Government incumbents will need to find anywhere between US$50-200 million in terms of capital investment every year, this Chinese financing must seem like a welcome relief. However, the idea with loans is that they are paid back. Togo Telecom’s gearing on a US$31 million loan is relatively modest but pity the management of Ethiopia’s ETC that has a loan of US$1.5 billion.

Paying back loans depends on having an honest and competent management who are capable of calculating what will be required in revenue terms to service these kinds of indebtedness. It would be nice to think that indebtedness would make these state-owned companies act more efficiently but it seems unlikely. No African Government has ever addressed over-staffing at telcos except as it waves the company out the door to a new buyer.

In February 2007 Maroc Telecom announced it was going to spend US$79 million buying Gabon Telecom. Parent company Vivendi announced that it had bought a company that had 30,000 fixed line subscribers and 250,000 mobile subscribers (some 30% of the market). According to the company’s press release, Gabon Telecom and its mobile subsidiary Libertis were generating 137 million euros (US$189 million in revenues). All this was based on the information provided by the seller, the Government of Gabon.

However, the report of the Government’s public accounting body, “les commissaires aux comptes”, which is responsible for auditing Gabon Telecom’s accounts while under public ownership, subsequently painted a rather bleaker picture. Indeed it refused to sign off the 2006 accounts. It said that the fixed line operator has lost FCFA50 billion (US$112 million) and its mobile arm, Libertis, had lost FCFA5 billion (US$ 10 million). Losing US$122 million on a claimed turnover of US$189 million was quite an achievement even when judged against the standards of incompetence set by the worst of Africa’s incumbents. Also losing money on a mobile operation of this scale requires a special skill not available in many other African countries.

Whilst the Government said Gabon Telecom had 30,000 fixed line subscribers, the audit body discovered that in fact there were only 22,900 subscribers.

Furthermore the auditors were scathing about the management of the company:”The examination of contracts shows that the majority have been entered into at an extremely high price compared to the market price. Furthermore, customers have been billed for services that have not been provided or only provided at a much lower level than promised.” And as usual, the past management spent money like water and has kept no clear records of what it spent it on, particularly for staff expenses, cars and petrol allocations.

As a result, the company’s outstanding loans had gone up from FCFA68.8 billion to FCFA79.2 billion and its debts have almost doubled from FCFA142 billion to FCFA221 billion.

From this grim point, Maroc Telecom and Vivendi have been able to report much better news in their Q1, 2009 results. Turnover in the third quarter was FCFA17 billion, a 15.9% increase on the previous year.

Its mobile arm now has 471,000 subscribers, an increase of 20% and almost a doubling from the position when the company was sold. It now has 35,000 fixed line subscribers, up 40%, and 19,000 Internet subscribers, an increase of 73%. All of which illustrates that private owners can actually turn some of the most chaotic and failing companies into something like efficient enterprises. However, we say this before the new owners of Nitel have been selected and take on that particularly demanding task.

Meanwhile in Congo-Brazzaville, the Government’s loss-making telco incumbent Sotelco seems to be dithering its way into an uncertain future. The Minister of Post and Telecommunications Thierry Moungalla made a surprise visit this week to see how the « structurual measures » that the Government has been trying to put in place over the last several years have been taking effect. He was told about the long-standing problems and the dysfunctional central network system, the result of a number of years of civil war.

Apparently the Minister was told that Sotelco’s engineers were awaiting the arrival of an expert who would help them to relaunch and get better equipment as they went along. In addition, “sensible administrative measures” (unspecified) were being put in place. However, there was limited cable capacity as the network was now saturated. The expert will apparently know the cost of getting the network back on its feet.

This slow decay and collapse has been going on for more than a decade in what the local press in a sweep of understatement describe as a “difficult period.” Rather than acknowledging that the company requires investment that the Government does not have, the Government seems to be stumbling forward on a “make do and mend” basis. No country will attract serious investment if its phone system doesn’t work. The alternative, which the Government shows no sign of considering, is to sell the loss-making company for a token price. Result? No more losses being borne by the Government and investment capital to modernize the network. What’s not to like?