Publicly listed telecom company Safaricom recently made its official entry into Ethiopia, launching its telecom business with a nod to mobile money expected within a month.
business daily spoke with the company’s CEO, Peter Ndegwa, for an update on its rollout and financing plans for the new venture, as well as the strategy for launching the M-Pesa service in Ethiopia.
You have just received an M-Pesa Wink for Ethiopia. What strategy do you envision for the product there? Will it be a mirror of Kenya?
Even when we entered the country, we expected to receive a mobile financial services license. There are still a few elements of legal procedure to operationalize the law that allows a foreign operator to access a mobile money license.
But in terms of getting a license, it’s a foregone conclusion. What we need to clarify over the next 10 days is the terms and what we need to do and all that. On the product side, we are clear because remember, we already have a suite of products in Kenya, and in other M-Pesa Africa markets.
So we’re researching what customers are using, which mobile financial services products are currently being launched, and then we’ll decide which ones we’re going to use.
Money transfer is almost basic, but in terms of other products, we don’t have to go through a learning curve like we did in Kenya. We will, for example, launch an application from the start, so that users have the choice between USSD or the application.
On the merchant side, we will clarify with the Bank of Ethiopia what we are allowed to do initially. I think we can do a lot more soon enough. Certainly, merchant payments such as Lipa na Mpesa would be straightforward. But on the credit side and for these other more sophisticated products, we will formally go to the Bank of Ethiopia and find out what we can do, the things that require approval.
You recently entered into an equity and debt agreement with the International Finance Corporation. What is the impact of the equity transaction on your shareholding in the Ethiopian unit?
At this stage, only IFC will enter the shareholder family. It is at an advanced stage, but it is subject to approval on both their side and our side. All shareholders must approve IFC’s entry.
It’s one of those where, if it’s not approved by a shareholder, it won’t happen. The intention would be about $160 million in equity and about $100 million in debt.
The intention is that Safaricom will continue to hold a controlling interest so that we can consolidate Safaricom Ethiopia PLC in our financial statements within Safaricom Plc.
Safaricom currently owns 55.5%. After this agreement, if that happens, we will not go below 50%. When IFC comes in, everyone will be diluted proportionally and Safaricom will have about 51% or so. In terms of debt, it must match our needs or IFC’s request. Initially it is likely that IFC will receive around $1 million, and in the future they may syndicate with others if we need more, but this one is subject to future review.
What is the capital expenditure so far by Safaricom in Ethiopia, and what level of capex do you plan to invest over the next year?
We have indicated that over a five-year period we will spend approximately $2 billion. The distribution of debt and equity will depend not only on the ratios we need to maintain locally, but also on the need to mix between dollar debt and locally denominated debt so that we can also be able to ensure that it is effective from a currency perspective.
The level of debt we take on also depends on the tax consideration. Local tax laws will dictate the balance between equity and debt.
So far, we have invested around $300 million. Including the license, we spent about $1.2 billion in total. We gave a forecast for the year that we would spend the first year, about 60 billion shillings, or about $500 million. So we’re in tune with that. This does not include the amounts we pay for mobile financial services, but this will be announced in due course.
Have you entered into a binding framework with the Ethiopian government on the expatriation of profits, given the problems we have had in the past with companies not being able to take forex out of the country?
Investing in a country in the field of GSM, as well as mobile financial services, is a long-term game. We invest a lot of equity and debt. When we entered, the government had plans for when it was going to change the foreign exchange policy, and the timing of that matched the time we thought it would take us to start repatriating dividends. We won’t start repatriating dividends in the first five or six years, even if we break even in the fourth year. We expect the government to have done a lot of reforms by then.
There is also the aspect of being able to access the dollars. For the first three years, at the very least, we wouldn’t need dollars because usually the flow is in place because we send material and usually we finance it with debt or equity from the main financiers of the company. .
And then all local costs are also funded by local debt which we are already starting to access from local banks. So what the government had said was that they would prioritize telecommunications as a critical sector and therefore would be able to allow us to be on the priority list for FX.
Are you concerned about the security situation in parts of Ethiopia and the potential effects of your deployment?
The conflict has existed for some time, even when we got the license. For us, like everyone, including Kenya, we would like to see a peaceful settlement because that is what will secure business in the future.
The signal that the conflict is being resolved and the internal mechanisms to try to achieve a peaceful resolution are what we are most looking for.
Of course, we get a lot of support to understand how the security is in the country. We have specific security advisors that allow us to see which zones to be in and which zones not to be. Currently, we have not been affected as we are still at an early stage in terms of deployment.
In fact, getting a vibrant and functioning GSM and mobile financial services sector will help the country.
What are your other projections for the number of users in Ethiopia, given that you find an established player in the market?
We generally do not give indications on the number of customers. But for Ethiopia, given that it is a new venture, we will be able to report to investors and journalists what we think the first year numbers will be. We are now at around 300,000 customers but it is still very early. We expect that by the end of April next year, we will have covered around 25 cities and around a quarter of the population from a coverage standpoint, which is also part of our licensing requirement.
→ [email protected]