Hefty missed opportunity as State fails to seal deal

[The Daily Nation]
Story by JAINDI KISERO
Publication Date: 3/21/2007

Just the other day, a group of Arab investors led by V-Tel Communications of Dubai came here and offered to pay the Government a whopping Sh12 billion($169million) for a licence to operate both a fixed line and mobile telecommunications services.

V-Tel Communications partnered with Palestine’s PalTel as a technical partner.

To prove their seriousness, the Arab investors had gone to the extent of sending to the Government bank statements showing that they, indeed, had the money for the licence fee.

But as it turned out, the Government refused to accept the money, citing a disagreement between the Arabs and their local partners, and arguing that it risked exposing itself to endless litigation.

Basically, the deal collapsed because we have a law, which stipulates that any foreign investor putting his money in the telecommunications sector must sell 30 per cent of the shareholding of the business to locals.

The deal fell through because V-Tel’s local partners could not raise their share of the equity.

KENYA, THEREFORE, MISSED WHAT would have been the single largest foreign direct investment (FDI) in decades.

With the Arab investors out of the way, we offered the same licence to Indian investors at the price the Arabs had agreed to pay. Led by the Reliance group — one of India’s largest conglomerates — the Indians immediately went into negotiations with the Government for the lucrative licence.

After six weeks of negotiations, the Government last week announced that the deal with the Indians had flopped.

A story in the current issue of The EastAfrican says, the Indians — unlike the Arab investors — started making too many fresh demands and privileges on the Kenya government. The story narrates how the Indians had made it clear to the Government that they were not prepared to cough up Sh12 billion without commitment on several privileges, including zero import duties on telecommunications equipment, zero Value-Added Tax and sharing infrastructure with the existing mobile firms. If you want details on the excessive privileges the Indians demanded, grab a copy of the current issue of The EastAfrican.

Suffice to say negotiations flopped. The Government now says that it will put the market on the block again and invite fresh bids.

What is the way forward? In my view, this is the best opportunity for the Government to scrap the 30 per cent-local-shareholding rule. If you re-tender without repealing this rule, the next tender will also fail.

All that this rule does is to make it possible for the political elite to armtwist foreign investors to give them shares free of charge.

Whether it is Kenya, Tanzania, Uganda or any other African country auctioning a telecommunications licence, the local investors who will partner with the foreign investor will be politically-well-connected types: cronies of the President, a stalwart of the ruling party or a prominent businessman with tight connections with the ruling elite.

I am not against affirmative action in the allocation of shares to locals in new telecommunications companies. Indeed, no country has ever developed without having nurtured its own local and strong domestic capitalist class.

But what we are dealing with here is a parasitic class that insists on being given shares without having to pay for them. Whenever they are unable to raise the money either to pay for performance bonds or to subscribe for the equity, the locals will be the first to go to court to block the rolling out the investment.

Econet Wireless has been in the High Court of Kenya for years because of protracted legal disputes with its local partners.

At the end of the day, it is the ordinary consumer of telecommunications services that has suffered. Were it not for the machinations of these locals, Kenya would by now be having multiple providers of telephone services working side by side and competing in terms of both quality of services and prices.

We have to make up our minds whether what we want from these telecommunications companies is ownership of these firms by locals per se, or efficient services and low consumer prices for the ordinary user.

Fortunately for the Ministry of Information and Communications, scrapping the 30 per cent local shareholding rule should not be that difficult. Because the rule is part of subsidiary legislation, a mere notice in the official gazette by Information minister Mutahi Kagwe will do.

THE INFORMATION AND communications sector in Kenya is on a roller coaster, growing very rapidly. Total subscriber numbers for mobile phones hit a new peak of 7.1 million in October last year. Today, we are talking about a penetration rate of around 20 per cent.

Even the sick state-owned Telkom Kenya has been very active lately, cleaning its balance sheet, retrenching staff, while aggressively rolling out a CDMA fixed-wireless network in several towns.

Should we slow down the momentum merely to protect the interests of well-connected locals who won’t allow projects to roll out unless they are allowed to own shares in up-coming firms?

The Daily Nation Story by JAINDI KISERO