How the French got their way in battle for Telkom Kenya

(HornTrade) – France Telecom has quietly negotiated a sweetheart deal with Kenya’s Treasury that guarantees the company liberal privileges including lucrative contracts to exclusively manage and control assets built by the government at a cost of millions of dollars.

The French company is co-owner with the Kenya government of Telkom Kenya Ltd, having paid out $369 million in 2007 for a 51 per cent stake in the former state-controlled monopoly.
The marriage has been a rocky one, especially after France Telecom sprang a major surprise on the Kenya government by demanding to be paid back a massive $325 million on the grounds that some of the assets it had paid for could not be traced in the company’s asset register.

So high were the stakes that the French government itself stepped into what was basically a commercial dispute, summoning diplomatic muscle to press France Telecom’s case during a recent visit to Paris by Prime Minister Raila Odinga.

The details of the deal that finally resolved the dispute are still being kept secret.

However, The EastAfrican has learnt that under an agreement signed on behalf of the parties by Treasury Permanent Secretary Joseph Kinyua and France Telecom’s chairman and chief executive officer Michel Barre, Telekom Kenya will immediately take over management and control of the government’s 20 per cent interest in the fibre-optic cable company Teams Ltd.

On top of this, France Telecom is to be granted an exclusive operational and maintenance contract for the government-owned, multimillion-dollar nationwide optic fibre network known by the acronym NOFBI.

Covering 4,233 kilometres through Coast, Western, Nyanza, Central and North Eastern Provinces, NOFBI was built by the government in 2007 at a cost of $60 million.

According to informed sources, the rights over NOFBI will come in two parts: First, an exclusive contract to operate and maintain the network for which Telkom Kenya will earn fees; and second, a contract to manage the commercial operations of the network.

With Telkom Kenya already owning the Mombasa-Malaba backbone optic fibre cable, control of NOFBI will put the French Telecom-controlled company in a strategically advantageous position vis-a-vis other fibre optic cable operators.

It basically gives the company extra capacity to carry large volumes of traffic for customers across the country — and to provide onward connectivity through the 20 per cent share the government has relinquished to it in Teams Ltd.

The details of the actual cash amounts that the government has promised the Frenchmen under the new agreement are still scanty.

But well-placed sources told The EastAfrican that the deal includes a commitment by the government to immediately pay arrears on debts that government ministries owed to Telkom Kenya before it was privatised in 2007.

The amounts in question come to a figure of Ksh1.1 billion ($13.75 million).
In addition, the government has reportedly also made a commitment to pay Ksh300 million ($3.75 million) to Telkom Kenya on behalf of the Kenya Broadcasting Corporation. This debt was also owed prior to the privatisation.

Thirdly, the government will pay into Telkom Kenya’s pension fund a sum of Ksh69 million ($862,500) to address shortfalls in the fund.

Fourthly, the government has pledged to pay $10 million on Telkom’s behalf to enable it to acquire a 3G licence from the Communications Commission of Kenya.

A payment of Ksh175 million ($2.18 million) will also be released to Telkom Kenya for services already rendered for operations and maintenance of NOFBI.

The government has also consented to its shares in Telkom Kenya Ltd being pledged as collateral security for 49 per cent of the company’s borrowings from external lenders.

To cap it all, the government has pledged to give Telkom preference over competitors in provision of voice and data services for ministries and contracts to manage private telephony networks.

Clearly, the sweetheart deal has given the struggling Telkom Kenya a new lease of life. It carries major implications for the competitive landscape of Kenya’s telecommunications sector.

How the Frenchmen agreed to climb down from their demand for a massive $325 million to accepting under Ksh4 billion ($50 million) remains intriguing.
Indeed, France Telecom went into the negotiations in combative mode, charging that Telkom’s historical liabilities had turned out to be much higher than was disclosed during the privatisation process.

The Frenchmen claimed a huge Ksh10 billion ($125 million) on the grounds that Telkom had overstated the network equipment in the assets register.

When the government replied that France Telecom did not have a case because they had been given adequate time to conduct due diligence on Telkom before paying for their 51 per cent share, the Frenchmen nearly went ballistic.

“It is a fact that the government allowed restricted and chaperoned access for bidders during a very short period of time.

The physical inspection of the entire TKL network across Kenya was not possible,” said France Telecom’s counsel for mergers and acquisitions, Ceolle Amayen, in a letter to the government.

France Telecom also slapped the government with a Ksh1.6 billion ($20 million) demand on the grounds that Telkom subsidiary Gilgil Telecom Industries had been overvalued.

The company additionally claimed Ksh2.5 billion ($31.25 million) on account of unsupported bank balance and suspense accounts.

It charged that the current regulatory environment of the telecommunications sector was detrimental to fair competition because of Safaricom’s dominant market position.

At one stage, it appeared that the Frenchmen were giving the government an ultimatum to either accept their demands or face the prospect of them pulling out of the country.

In Brief

France Telkom will get:

Key infrastructure

Inherit Govts 20percent shares in TEAMS Ltd, the fibre-optic cable operator for free,

Exclusive operational maintenance contract over the 4,233 km, $60million government-owned nationwide optic fibre network NOFBI

Free 3G licence. Treasury will pay CCK $10m for the licence

Working capital

Clearing of government telephone and capacity arrears

Clearing Kenya Broadcasting Corporation capacity debt

Clear pension contribution deficit

Maintenance fee for NOFBI

Business support

Tender government of Kenya 49 percent shares in the firm as collateral for Telkom Kenya foreign debt


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