A capitalist’s case for nationalising Telkom
Nationalising the company could be the first logical step to breaking it up. By Dirk de Vos.
Telkom’s management team put on a brave face after the deal was scuppered, saying the KT deal would have been nice but that it was also not essential for the company’s future.
As discussed by TechCentral’s Craig Wilson, Telkom is stuck between a rock and a hard place. It will continue to struggle and could even wither on the vine as consumers continue to abandon its service offerings.
This should not be allowed to happen. Telkom is too important for the telecommunications industry and, indeed, the country. The company’s market capitalisation is about 7% of rival Vodacom’s. By other measures though, Telkom is, by some distance, the country’s most valuable telecoms asset.
I submit that the answer to Telkom’s woes may indeed be its renationalisation. But if nationalisation is to work, it must be done by a government acting as if it were a savvy, value-seeking capitalist.
The way Telkom was partially privatised in the 1990s saw it being used by its foreign shareholders (and by government) as a way of generating as much dividend income as possible. The worst type of privatisation is the privatisation of a monopoly.
Today, it has the challenge of a shareholder, government, that can’t seem to decide whether the company should be a developmental agency or a profit-making dividend payer. It also has trade unions that won’t countenance much-needed retrenchments.
There is another problem: Telkom’s management team, which thinks it can make Telkom a successful, vertically integrated, full-service telecoms company against the odds.
Telkom’s value resides in the more than 140 000km of terrestrial fibre network already in the ground and its fixed local loop into homes and businesses. Its fibre infrastructure is 10 times greater than all other telecoms operators combined.
The provision of broadband can generate benefits for the country as a whole. The World Bank reckons a 10% increase in broadband penetration in developing countries results in an average 1,4 percentage point increase in GDP.
Simply being able to access Telkom’s fibre network on an open-access basis would result in an “instant” effective increase in SA’s broadband penetration. Depending on the numbers used, the increase in tax proceeds from a higher GDP figure would more than finance the funding needed to complete the transaction.
Government directly holds just shy of 40% of Telkom. The next biggest shareholder is the Public Investment Corp (PIC), the government’s employee pension fund, at just under 11%.
With its shares now at less than R19 each, Telkom is trading at a low six times earnings — by way of comparison, Vodacom and MTN trade at more than twice that — so it would make sense from a pure investment perspective for government to buy out Telkom’s minority shareholders and delist it. At R19, the 60% that government does not own is now worth less than R6bn. Minorities might expect a significant premium, but this is the base figure for these negotiations.
By way of illustration, government owns just less than 14% of Vodacom. This stake is now worth more than R20bn. Until now, this has served the national fiscus well. But Vodacom’s best days may be behind it.
One of CEO-designate Shameel Joosub’s first tasks, on his return from Vodafone in Spain later this year, will surely be to moderate expectations of future growth. Vodacom cannot continue to hit the profit ball out of the park indefinitely. As data starts to generate more revenue and voice less, profit margins will decline.
So, perhaps now is the right time for government to exit and to use the Vodacom proceeds to pay for Telkom’s renationalisation.
What then? I would argue that the best option would involve separating Telkom’s infrastructure, including the 8ta mobile network and the fixed local loop, from the rest of the business. The assets of Broadband Infraco and even Sentech could be folded into Telkom Wholesale.
Telkom Retail, let’s call it, would then retain all Telkom’s direct subscribers, while Telkom Wholesale retained all of Telkom’s debt, currently R8,3bn. After securing commercial arrangements between Telkom Retail and Telkom Wholesale, the government could then retire Telkom’s commercial debt and replace it with cheaper government debt, reducing the required repayments.
Telkom Retail, without much of a balance sheet but with the subscriber base and no debt, could be spun off in a privatisation. It would have more than a fair chance of success as there are some good businesses within Telkom.
From that point on, Telkom Wholesale would have to become a pure, open-access telecoms infrastructure provider. The whole process would be similar to a corporate reorganisation and could be done without affecting Telkom’s existing customers too much.
To prevent Telkom Wholesale from becoming yet another poorly run state-owned enterprise — defeating the purpose of the whole exercise — it should be managed by professional operators on a variant of the public-private partnership model.
To achieve the World Bank multiplier, instead of being incentivised only to maximise revenues, these operator managers should also be measured on how much data is transmitted through the networks under their control. Telkom Wholesale would only need to generate returns that equal the government’s costs of capital.
This secures the desired benefits of increased and cheaper wholesale broadband using existing infrastructure. To promote universal access, data flowing to and from a rural point of presence could be recognised as 10 times more “valuable” than an urban equivalent and would encourage a renewed focus on underserved, rural areas of the country.
Network managers would be responsible for basic network maintenance but also for introducing new technologies where this would increase data throughput. All retailers could access this fibre infrastructure on an open-access and neutral basis through a fibre or Ethernet clearing house.
Obviously, many details would still need to be worked through to ensure that something like this worked in practice. The whole process would need to be done completely transparently to avoid corruption and anticompetitive behaviour. The department of energy’s renewable independent power producer procurement programme provides a useful template.
Admittedly, this is a controversial approach, but we have reached the point now where the costs of inaction, both for Telkom and the country’s broadband objectives, are bigger than grasping the nettle and putting Telkom’s fibre infrastructure to work.
Nationalising Telkom is just the first step.
- Dirk de Vos is an independent commentator and head of QED Solutions
- The views expressed in this column do not necessarily reflect those of TechCentral