Comoros Telecoms – The challenges of privatizing Africa’s remaining state-run monopolies

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Comoros is a tiny telecoms and Internet market but has failed to develop as successfully as its more competitive neighbors in the Indian Ocean. All attempts to open the market and to privatize the state-run monopoly telco Comoros Telecom have run into the sand. Russell Southwood looks at what has happened in one of Africa’s smallest market and what lessons it might hold.

The Comoros are an archipelago of islands in the Indian Ocean off Madagascar: there are six islands that make up the independent state of Comoros and a seventh island, Mayotte, which is a French Overseas Department. According to the 2012 stats it had a population of 0.5 million and a GDP per capita of US$831.

The history of liberalization and privatization in Comoros goes back to early 2000s and perfectly illustrates the kind of chequered two-step that happens. The Government of the country agrees privatization and/or liberalization and then proceeds to implement it in such a way that failure is guaranteed.

Whenever the Government is short of donor funding or soft loans, it goes through the motions of taking action and when that moment passes it lets things slip. In the case of Comoros it got outstanding loans forgiven as part of the HIPC process on the condition that it would privatize Comoros Telecom.

In 2007 Twama Telecom was awarded a licence (without a competitive bidding process) in exchange for commitments to four leisure ports and the supply of three speedboats to establish a daily service to each island of the Union. It was agreed that there would be a five-year exclusivity for both itself and Comoros Telecom.

It was established as a subsidiary of the Kuwaiti-funded Comoro Gulf Holding (CGH) which has other commercial interests in the islands (including a Bank, a former hotel and a large area of seafront in Moroni that has been earmarked for development). It had no previous experience of running telecoms. In due course it failed to invest and its licence was in 2013.

These kind of direct deals can be found wherever privatization is on the cards. There was a similar one in Chad that has now been revoked and they are nearly always agreed by local politicians directly with one of the few foreign investors. The terms are always that a monopoly franchise is changing hands.

In 2012 it was agreed that 51% of Comoros Telecom would be sold to a strategic investor, a further 15% would go to local investors and employees and the remaining 34% would stay in Government hands. A social plan was put in place that underwrote redeployment, retraining and retirement, all things that are important because Comoros Telecom is a major employer. The international fibre assets of the company – including the FLY/LION 3 connection to Mayotte and Madagascar – were to be transferred to a JV and the buyer would get a shareholding in the JV. Five serious bidders came forward, including Telma, Telecom Mauritius, Viettel and Portugal Telecom.

So how many jobs were at stake? There were 1,100, of which it is said 700 were actually surplus to operating requirements. Once the social plan described above had been announced, Comoros Telecoms fairly rapidly added a considerable number of new staff. As a result profitability declined from about 16% to 3% in 2012. As informed insider told us:”It was typical monopoly behavior. They seem to be working behind the scenes to slow things down”.

So why were so many investors interested in such a small market? As someone familiar with the sale told us:”It’s an unexploited market. It has 35% mobile penetration where the GDP level would imply it should have 80% penetration.” This is always true of those countries where there is effectively one operator: for example, the telecoms market in Ethiopia would be considerably larger if the incumbent was privatized.

In order for the privatization to go ahead on a secure basis, the Government needed to pass laws to set a liberalization framework. So two laws were put to the legislature: one covering general reform of the sector, opening up its liberalization and the second covering the sale of Comoros Telecom itself.

The Government decided to withdrew the second of these two laws as among other things there were legislative elections and the MPs did not see this as a vote winner. Lots of people work for Comoros Telecom (including at one point the wife of the then Minister) and the prospect of job losses was not palatable. Furthermore the first of the two laws was significantly delayed because of “drafting errors”.

Instead Comoros Telecoms, which has considerable institutional and financial clout in such a small place, made a sweetheart deal to ensure its continued existence. It agreed to cover the debts of the state power corporation in exchange for the privatization process being dropped.

So now the situation is that the market has been opened up but effectively no-one can enter it. For there has been a history of companies trying to set up – with various shades of legality - but on each occasion they have been frozen out by Comoros Telecom, with the simple blocking tactic of not interconnecting.

For a while, Comoros was raising funds by selling passports which increased its GDP for a while but ended in tears as these kinds of schemes do, when one of the diplomats selling the passports kept most of the money. But now the pressure is back on again to find new sources of revenue.

So the Government is looking at issuing a second licence and has appointed consultants to help select an operator. An announcement will be made shortly. There is also talk of a 3rd and a 4th licence. It will be interesting to see whether this second licence gets granted and implemented.

In terms of small markets, an interesting comparison is with Sao Tome and Principe, Africa’s smallest country, where Unitel has started operations in competition with Portugal Telecom-owned CST. Things can change where there’s both political understanding and a will to do it.

The dilemma faced in these circumstances might be described as the donor trap. If you don’t give money to small, poor, dodgily run places then they get more unstable and attract rich, dodgy people. Guinea-Bissau and drug dealers is a case in point. But if you simply keep giving money without conditions, what incentives are there for the Government to change its behavior? And even when you set conditions, what can you do when they’re not met?

Let’s be clear what’s happening in Comoros. A job creation scheme for a 1000+ people in a nation of 0.5 million is being supported by the Government over increasing the wealth of all by allowing competition. Lack of competition has led to high prices for both mobile and broadband and as a result, the economic impact of wider penetration (of the kind found in neighboring Mauritius) has not been felt.

Perhaps the time has come to draw up a list of countries of this kind and simply blacklist them. Each one could have a short description of why telecoms and internet investors should not bother to take any time getting involved. The list would run from large markets like Ethiopia and the Comoros would probably take the position as the smallest one.

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