Privatisation the only way to keep Telkom afloat

[Daily Nation]

Story by JAINDI KISERO
Publication Date: 3/28/2007

Finally, the Government has made the first step towards selling Telkom Kenya to a strategic equity partner.

Last week, it circulated “a preliminary information memorandum” in which it invited potential investors to put in indicative bids for a 26 per cent stake in the State-owned company.

I don’t understand why this significant development was not announced formally. I only came across the information from contacts in South Africa.

Potential investors have been asked to respond by writing a brief note to the Government confirming interest in buying Telkom.

The memorandum also contains indicative pre-qualification criteria for the tender. For instance, the Government will only look in your direction if you have an annual ICT turnover of $200 million.

YOU MUST ALSO DEMONSTRATE good financial standing, capacity to invest, and a clear vision for a future Telkom Kenya.

In this initial stages, the Government is merely teasing the market by collecting the feedback it will need when designing the actual transaction.

According to the plan, an additional 34 per cent shares of the company will be sold once the strategic investor comes in.

Where is interest most likely to come from? It is too early to predict. Suffice to note, however, that these days, the biggest players in privatisation deals in the telecommunications sector, or infrastructure in general, have tended to be South Africans, Chinese or companies from the Middle East.

For inexplicable reasons, the big European Telcoms have tended to give the region a wide berth when it comes to such transactions.

Privatisation is a very painful thing. Indeed, many Kenyans will be sent to the streets to pave the way for this transaction. The plan is to bring down Telkom’s 17,000-strong workforce to 3,200 ahead of the transaction.

In an economy that has been losing formal jobs faster than it is creating, where automatic graduate employment by the Government was discontinued several years ago, the privatisation transaction is coming at a high social cost indeed for the country.

Yet the case for privatising Telkom remains strong. If we choose to protect jobs at the expense of restructuring, then the company itself will not survive in future, let alone keeping the jobs.

Despite the fact that Kenya has experienced phenomenal growth in the telecommunications sector, and that mobile companies have become the most profitable companies in the country, Telkom is in dire financial straits.

While the number of mobile lines have been increasing exponentially, fixed line connections have fallen from a peak of 320,000 in 2002 to under 280,000 currently.

Between 2003 and 2006, turnover has declined by an annual rate of 10.5 per cent. In 2003, the corporation returned a net loss of $27 million with the figure growing to $36 million in 2005.

The point is this. If we postpone painful decisions now merely because we want to protect jobs, we will be left with a wobbly company that will sooner or later find it hard to survive competitive pressure from the more leaner and nimbler players.

Predictably, there will be voices who will oppose the deal on the grounds that we should not sell what Harold Macmillan once described as the “family silver” to foreigners.

I fail to understand why we tend to be obsessed with “owning” and controlling parastatals while ignoring the fact that at the end of the day, it is the quality and the prices of the services which these utilities offer that matters to the ordinary Kenyan.

To the majority of citizens, the mere fact that the Government owns 100 per cent of of a parastatal matters little. In fact, our own experience has shown that state ownership of these parastatals only serves the interests of the political elite and their cronies, providing them with the means of rewarding political loyalty and allowing them to appoint their relatives to boards of these organisations.

Privatisation is not popular in Africa because it removes parastatals from the control of the ruling elite.

We all know how they make money from these institutions. There is, for example, the award of lucrative contracts at inflated prices to well connected merchants. And there is also the transfer of assets belonging to paratatals (especially land and residential property) to individuals.

IN SOME CASES, MINISTERS AND managing directors have committed parastatals into massive investment into big capital projects of doubtful economic viability such as sports complexes, staff housing schemes, complete with nursery schools, games facilities and swimming pools.

Ostensibly, this is to assist workers but, in reality, it is to create kickback opportunities for well-connected contractors.

Left in the hands of ministers and politically-appointed directors and CEOs, Telkom Kenya will not be able to raise money to finance new investment or buy new equipment.

If privatisation and restructuring is implemented well, the large and sick parastatals we see today can be broken up into several small successful enterprises operating in a competitive environment and providing wananchi with competitively priced services.

Mr Kisero is the managing editor of The EastAfrican.

Privatisation the only way to keep Telkom afloat