TELKOM KENYA ON THE FINANCIAL RACK AS GOVERNMENT DITHERS OVER PRIVATISATION

Telecoms

Telkom Kenya faces unprecedented competition and mounting debts as the Government seems incapable of putting the privatization process through with any speed. The fact that they have been loss-making for two years has been raised in the Kenyan parliament and been the subject of several articles in the local press. The company has to file company returns but unlike elsewhere, these returns are confidential documents. However the cumulative deficit is believed to stand at KS16bn (USD12.6m) and the company pension fund is owed a further KS4 bn. If the Government were not standing behind it as financial guarantor, the company would be bankrupt.

Worse still, the Government has no funds with which to allow the company to make large-scale investments. Hence the attraction of a recent deal with Chinese equipment supplier Huawei which contained a significant element of soft loan funding.

The scale of operational debts is extremely worrying and is unlikely to get any better. It owes several billion Kenyan shillings in interconnect fees to both mobile operators as more calls are made to mobiles than fixed lines. Worse still, the number of fixed lines continues to fall. Although it has a capacity for 300,000 fixed lines, currently only somewhere between 250-260,000 are in use. At one stage it owed USD3m to one of its bandwidth suppliers Teleglobe.

A report in the Standard on the holiday Monday last week identified the percentage of Government contracts that went to individuals in corrupt payments. For all sectors of Government, it varied between 3-6% of the contract value. Telkom Kenya was not mentioned by name but it would be unusual if it was the exception to this pattern. Nairobi swirls with rumours about the different forms in which this manifests itself in the company but most are unprintable for reasons of libel. However the cost of corruption at different levels is a significant drain on resources.

The company lacks a clear business strategy for the new competitive future. It talks reassuringly of partnership with new service players but still maintains a desire to compete in all markets. It’s hard to see how competing with its new customers will be a sustainable strategy. Few of its non-core business areas are likely to be profitable. Its international gateway Jambonet is almost certainly losing money as it is cross-subsidising the cost of international bandwidth, currently USD2400 per mbps:” As one ISP told us:”Price is not the issue although there will those who still complain about it. It’s much more about service and reliability. With competition, no-one will stay with Jambonet. Whereas we had to put up with days of downtime, customers will now expect things to be fixed in hours.”

The company has not got the management or technical expertise to compete in new markets and rarely does so effectively. It should have been first-to-market with a new VoIP service to coincide with the competition framework as it came into place but instead its offering will enter at the same time as everyone else’s. It has rolled out a CDMA-based fixed wireless offering which is competitively priced (KS3 against KS10 for mobile operators) which has good coverage in Nairobi but the subscriber base is only in the thousands.

Also from discussions with a range of employees at the company at several different levels there is a strong feeling of disillusionment: ”There were high hopes when the current management team arrived but now people are saying they’re not up to it.”

The bullet not bitten is the need to cut the company’s bloated workforce by at least 10,000 employees. However this has proved a substantial obstacle for the politicians as the ruling coalition’s manifesto contains a commitment to create several hundred thousand jobs, not cut them in large numbers. The level of indebtedness ratchets relentlessly upwards as the interconnect charges accumulate and the swollen wages bill continues to be paid despite advice from Telkom Kenya’s senior management that the nettle should be grasped.

How does the Government propose to get out of this mess? By selling its share in Kenya’s leading mobile operator Safaricom and using it to pay for redundancies and the shoring up of Telkom Kenya prior to its privatisation. But there’s no sign yet that a political decision has been taken and the process is well behind the timetable originally set. The untangling of this knot remains crucial if Kenya is to get the communications infrastructure it deserves.