Blog Archive

Monday, April 09, 2007

Where to for Kenyan businesses? Rumination #2 - Telecommunications

Kenya just can't get a Second National Operator (Telecoms), to compete against the perennial laggard, Telkom Kenya...

First, the good news - Telkom has definitely taken a turn for the better under Kirui with better service & increased use of CDMA technologies. The recent loan of KShs 5.8 Billion (secured by an ownership interest in Safaricom) will be used to downsize the staff by 60% thus allowing Telkom a lifeline as it cuts costs.

What does surprise me is the lack of advertising by Telkom & its resellers for the CDMA service. Looking through the Sunday Nation (7 April 2007), I did not come across a single ad for the CDMA service while there were ads pushing GSM phones!

What is the story behind Telkom's absence?

The bad news:

- CCK & GoK is being sued by Econet after the license was withdrawn following the internal wrangles that bedeviled the Econet Consortium. Apparently, the Kenyan "partner" could/did not keep their part of the bargain! This includes coming up with the minimum required 30% contribution.

- After the failed take-off of Econet's network, there was a 2nd round of bidding which brought in a high bid of $170 Million from the VTEL consortium but this failed as the local partner was a no-good (Kirinyaga Construction) politically connected crook!

There were rumblings about dropping the 30% local shareholding requirement thus giving VTEL 100% ownership. A pity that VTEL did not do the necessary due diligence on Kirinyaga

So the CCK approached the second highest bidder, Reliance Group & Triton, to step up their bid from $111 Million to $170 Million. The Reliance Consotium balked unless the GOK agreed to certain concessions & condtions were made.

It was naive of CCK & GoK to expect Reliance to pay $60 Million more without additional benefits! Reliance Telecom is a smart & aggressive player in the Indian market & part of a much larger conglomerate. They are not idiots, their bid of $111 million was discounted to include costs of implementing a new network.

The GoK had cold feet about the "higher" bid after including the concessions. So Reliance also bailed.

By rejecting V-Tel's offer & then Reliance's, the GoK & CCk need to rebid... What does that mean?

  • Costs of re-bidding
  • Delays coz of re-bidding
  • Lack of serious applicats since this is bid#3. Fatigue from bidders!
  • Telkom's resurgence reduces the incentive for a SNO
  • Telkom's imminent privatisation means potential SNO bidders would rather bid for Telkom
  • Safaricom & Celtel's price war has reduced the attractiveness of the SNO licenses
  • Econet won the court battle over the "withdrawn" license and can now roll out their network
  • Finally get it right!
  • Newer technologies to be introduced
  • Fibre-optic cable to Kenya as part of the deal
  • GoK has left money on the table by not accepting VTEL's offer or Reliance's counter-offer. It is unlikely that the next round will raise bids of $170 Million.
  • Kenyans are paying higher phone/communication rates coz of inane decisions made by political mandarins/idiots who do not understand free markets & competition!
  • Reliance has the capability of building & running a quality communications system, including a fibre-optic undersea cable, that could bolster Kenya's growth as a preferred BPO destination.
  • Bid out the SNO to anyone who wants it, whether it is a consortium or not, local participation or not!
  • Shelve the SNO but offer "broader" licenses, cheap or free, to existing operators including Access Kenya, Celtel, Safaricom, Flashcom or Popote.
  • Force Telkom to share its publicly funded network with others for a modest fee.
These will increase competition & lower costs for users thus allowing for an increased level of growth necessary for Kenya to move forward!


MainaT said...

CT, I think the current players in the telecom sector are either doing what monopolies do best or not fully capitalising on the opportunities. As such I think the govt should still proceed quickly and opening the whole tender process. However, this time, they should also vet the local partners and create a list from which the foreign entities can choose from

coldtusker said...

In an "open" system, why should the govt "force" local participation?

I would rather have local firms BID for the license then invite foreign participation for technical support/knowledge!

If firms like Transcentury, ICDCIC, ICDC, Old Mutual etc ganged up, they could come up with the money needed.

A consortium with 51% local ownership should get one or more of the following:
- a "discount" for the license
- additional "points" in the bid
- an installment plan to pay the license fee e.g. over 5 years

We should encourage local participation but on BUSINESS terms not a "preferred" list subject to manipulation e.g. Sugar Importers

MainaT said...

CT, so far the issue that is making each and every tender fall over is that the foreign entities are picking local entities in a similar that tourists do when they get to JKIA i.e. any one with with a briefcase and smooth patter about which minister eats goats at their house.

PS: none/or very few of our locals would qualify on some of the technical vets that are done i.e. experience of working on similar projects. So my suggestion was to say, instead of a foreign winner of tender falling prey to local briefcase "mercenaries", lets have a tender system for the 30%.

coldtusker said...

MainaT - The problem is that working relationships can be rocky & having a partner who is "forced" on you sucks!

I think you underestimate the financial strength of Kenyan investors. The problem is that the NSE is not set up to "fund" startups whether risk capital &/or debt capital!

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