TELKOM KENYA CLOSE TO THE FINANCIAL BRINK IF REDUNDANCY PACKAGE NOT SORTED

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The redundancy package at Telkom Kenya continues to be one bullet the politicians do not seem willing to bite. One source told us:”People are sensitive to employment issues. The Government doesn’t want to be seen as insensitive.” The difficulty is that as Telkom Kenya continues to pay salaries as they fall due, the employees cannot see why they should be sacked.

One well-informed source said that the Government might adopt the approach taken with Kenya Airways employees where it stopped paying the salaries of those to be made redundant. After a few months of non-payment, the employees, realising the vulnerability of their position, settled for less than the full redundancy entitlement. But such a strategy requires strong political nerves and the Government does not have much of a track record on that score. Indeed the President and his new cabinet face choppy rather than calmer waters ahead, a strong incentive to avoid difficult issues.

So what options are there for paying for the redundancy package? Apparently the company approached the World Bank who (not surprisingly) told them to sell some of their assets. Vodafone has made an offer to the Government for the company’s shares in Safaricom which it considers too low: for which in part read that it’s too low to cover the redundancy package. Although it has not yet responded, the Government is expecting a higher offer or it will authorise sale of part of the shareholding on the Nairobi Stock Exchange. Things will only really get sorted out once a new Cabinet sits down to business and will be one of the first major decisions for the new Minister, Mutahi Kagwe (see People below).

But everyone is treading on very thin ice. Telkom Kenya has borrowed up to the hilt and we understand the Treasury has forbidden further borrowing. Although Huawei injected some working capital with its equipment package, the company has stopped investing in capital re-equipment which can only have disastrous consequences if things go on too long. There is date by which the company will be heading for insolvency but for understandable reasons those in the know are reluctant to name it. However, those close to the issue maintain that the company has stabilised at KS16 billion turnover and once the redundancy issue is sorted out is fundamentally sound.

However, although there is then talk of a strategic partner and the sale of up to 20% of its shares, full sale of the company is only talked about over a ten year timescale. But until the politicians and the company part, it will not be able to operate efficiently and make a real, positive contribution. Because “influential people” will always remain interested in drawing upon its resources informally.

For in reality, even with some growth in the market, the company could probably comfortably operate with less than 2000 employees and its core infrastructure business can probably function with as few as 500 employees. So even if the politicians steel themselves for the big “difficult” decision, there is still an unfinished agenda. No-one has yet elaborated a business strategy for Telkom Kenya that positions it in the new competitive environment. It appears too often to continue to rely on its friends to continue to protect those aspects of its operations where it continues to exercise “dominant market power”. CCK CEO John Waweru would not be human if he did not stoutly defend those parts of his legacy that he so recently put in place.

Nevertheless Telkom Kenya stands to lose business on all sides. There are a number of licensed international data gateway providers and the regulator is talking of having another international gateway for “switched” traffic. The mobile operators are understandably frustrated by the slow speed with which the international gateway issue is being dealt with and blame Telkom Kenya for the international congestion problems that exists. International VoIP traffic will erode its international business and once an agreed interconnect settlement is in place, there will be further pressure on both its local loop and backbone costs. That said, if it can reduce its staffing costs, it has a considerable asset in its infrastructure business. And perhaps the combination of this and the selling of broadband and associated service will be its saving in the long-term. Meanwhile it accumulates debt and it waits on the politicians for resolution of the redundancy issue.