Why State should worry over impending collapse of Telkom

What you need to know:

  • According to Dr Matiang’i, Telkom Kenya’s dwindling fortunes will put the success of the national broadband strategy, including  the plans to roll out Huduma Centres at risk.
  • Well informed sources have intimated to the Sunday Nation that the French have also decided to play hard ball, sending signals that if the issue of additional funding by the two shareholders is not resolved, they would  let the company go under receivership.
  • The company’s plan is to leverage on the acquired 800 MHZ spectrum resource to deploy and run an LTE network and therefore offer ultra-fast broadband which will put it way ahead of the competition.

Clearly, the government is yet to think through a clear strategy on how to handle  the impending exit of France Telecom  from the shareholding of Telkom Kenya – even as the country’s third mobile operator in terms of subscribers sinks deeper  into financial distress.

The uncertainty around the fate of what was once one of the largest state corporations with a workforce of more than 23,000 employees is captured in a recent letter by Information and Communications Secretary, Dr Fred Matiang’i, to President Uhuru Kenyatta.

Writing in October, Dr Matiang’i argued that the insolvency of Telkom Kenya was bound to affect negatively the government’s plans in the ICT sector.

According to Dr Matiang’i, Telkom Kenya’s dwindling fortunes will put the success of the national broadband strategy, including  the plans to roll out Huduma Centres at risk.

Dr Matiangi’s main worry would appear to be the fate of the National Optic Fibre Backbone.

“The backbone is in serious jeopardy of coming under abrupt disruption under the insolvency of Telkom Kenya at any time,” he said in the letter. 

Built with taxpayers’ money in 2005, its management was handed over to Telkom Kenya in 2011 under a five-year exclusive operations and maintenance contract.

“We hereby ask your Excellency to use your office to intervene and weigh in on the critical actors in government to take urgent action on the matter of Telkom Kenya,” the minister pleaded.

PRESIDENT'S INTERVENTION

But why did Dr Matiang’i decide to seek the President’s intervention?

In a sense, it amounts to admission that key government departments, “the critical actors” as Dr Matiang’i describes them, might not be pulling in the same direction on the matter.

Last year, Dr Matiang’i attempted to terminate the optic fibre backbone contract but was overruled by the Attorney-General.

Still, Dr Matiangi’s concerns over the fate of optic fibre backbone would appear to be a minor issue.

The big issue is whether the government should pump in more money into the company or let it die.

In December last year, the company requested its two shareholders, the Kenyan government and France Telecom, to provide funding to make it possible to refinance a Sh11.9 billion loan owed to Orange East Africa, a subsidiary of  France Telecom.

The two shareholders were also requested to provide a further Sh 2.3 billion to fund the firm for the second quarter of 2014.

But the government made it clear that it would not put any more money into the company.

Well informed sources have intimated to the Sunday Nation that the French have also decided to play hard ball, sending signals that if the issue of additional funding by the two shareholders is not resolved, they would  let the company go under receivership.

Is the government prepared to let go and what does it imply for competition in the mobile telephone market?

Is having one profitable mobile telephone company - Safaricom Limited - in the long term interest of the country?

At one point in October, it seemed that a solution to Telkom’s problems was in the offing after a Vietnamese company, Viettel Ltd, came to town and announced that it had entered into negotiations with France Telecom to purchase its 70 per cent stake.

Curiously, the Vietnamese also asked the government to sell to them 10 per cent of its stake because they intended to assume a dominant 80 per cent stake in the company. But the Vietnamese later pulled out.

There’s no doubt that Telkom Kenya is in financial dire straits. Last year, its annual revenues stood at Sh9.4 billion, compared to revenues of Sh12 billion a month for Safaricom.

The average revenue per user was Sh200 compared to Safaricom’s Sh546 per user. Subscribers were 2.2 million, compared to 5.5 million for Airtel, 2.2 million for yuMobile and 21 million for Safaricom.

The accountants measure of earnings before interest, tax depreciation and amortisation, was a negative Sh2.6 billion.

REVIVING FIRM

In 2012, and in accordance with the shareholders’ agreement, the two shareholders were called upon to fund a balance sheet restructuring excercise that was supposed to get the company out of insolvency.

With the government having failed to put in its share of the cost of restructuring the company’s balance sheet, the government shares were diluted from the original 49 per cent, down to 30 per cent.

Who will want to buy Telkom Kenya? The main value proposition is the spectrum – the airwaves that carry communication signals and the infrastructure which it holds.

Away from the limelight, a major scramble for spectrum is going on between mobile companies in Kenya.

The stakes are high indeed because, depending on what happens to Telkom Kenya, it’s collapse could free up a significant band of spectrum, including what was originally allocated for older technologies.

Indeed, the explosion in the demand for data traffic in Kenya has placed a very high premium on spectrum.

This is mainly driven by an unprecedented penetration into the Kenya market by data-connected devices such as smartphones and tablets that drive network traffic far more than traditional devices such as basic phones.

In particular, the exponential growth in consumer demand for data-heavy applications and videos has put enormous pressure on services that use wireless spectrum.

The upshot is that companies now fear that their existing spectrum allocations may soon be overwhelmed, leading to slower connections, longer download times and more call drops.

This explains the recent decision by market leader Safaricom to acquire the spectrum held by yuMobile.

With the stakes so high, the looming spectrum crunch in Kenya is inevitably going to evolve into a game of big money and big politics

Safaricom is clearly way ahead. The company’s masterstroke was when it recently clinched the national police communications and surveillance project.

SCRAMBLE FOR SPECTRUM

It has negotiated an arrangement where part payment to them will be in the form of issue of the 800 MHz spectrum which will be released from broadcasters after digital migration. This is, therefore, guaranteed.

The company’s plan is to leverage on the acquired 800 MHZ spectrum resource to deploy and run an LTE network and therefore offer ultra-fast broadband which will put it way ahead of the competition.

In a sense, the move by Safaricom was pre-emptive. Influential individuals were fronting a deal where all the spectrum that would have become available after the digital migration would be given to a public-private partnership between the government and Korea Telecom.

According to this arrangement, all operators would then purchase 4G services from Korea Telecom on a wholesale basis.

By clinching the police contract, therefore, Safaricom snookered the Koreans.