Economy

Safaricom saves billions in new deal with Vodafone

collymore

Safaricom chief executive Bob Collymore. FILE

Telecoms operator Safaricom has renegotiated its procurement agreement with Vodafone Plc, cutting down the Sh2.1 billion annual fees the UK company has been earning from the Kenyan firm in the past couple of years.

Also read: M-Pesa pact earns Vodafone Sh2bn in licence payments

Vodafone Plc, which is the single largest shareholder in Safaricom, earned the money through an agreement that guaranteed it a six per cent commission on all supplies obtained through the UK firm’s sales and services arm.

Safaricom has been riding on Vodafone Sales and Services Limited’s global price book, supply chain and technical expertise in the sourcing of the equipment.

Kenya’s leading telecoms operator bought goods and services worth Sh35 billion last year, translating to a commission of Sh2.1 billion for Vodafone – at the rate of six per cent.

But under the new agreement that came into effect in the year ended March 2012, Safaricom paid a flat fee of €4 million (Sh412 million), cutting the Sh2.1 billion commission paid under the old agreement by 80 per cent.

Bob Collymore, the Safaricom chief executive, said the new deal has since coming into effect to date saved the company over €40 million (Sh4.1 billion).

“We have converted from a variable to a fixed rate for greater certainty and to secure a more favourable deal for Safaricom,” he said.

Though a huge relief to the Kenyan telecom operator, the new agreement highlights the lopsided nature of the previous contract, which saw Vodafone’s commission average Sh2.1 billion annually or nearly a fifth of Safaricom’s net profit in the past two years.

Aside from the commission on the procurement deals, Vodafone earns dividends and licence fees for Safaricom’s revolutionary money transfer service, M-Pesa.

Mr Collymore said that although the flat rate will rise to €6 million (Sh618 million) in the current financial year, the new deal continues to save the company billions of shillings for its purchases of mobile phones, computers, and telecoms equipment.

“All of our Sh35 billion spend is being negotiated … we are now able to access greater cost savings at a significantly reduced participation fee,” he said.

Investors will be waiting to see the impact of the massive cost savings on Safaricom’s earnings, which have come under pressure from a vicious price war in the voice market – its biggest revenue stream.

Safaricom’s net profit dropped to Sh12.6 billion in the year ended March compared to Sh13.1 billion the year before as higher operation costs pulled back the rate of revenue growth to 13 per cent for a total of Sh107 billion.

Safaricom has been spending billions of shillings in network upgrade even as it expands coverage of voice and data services to keep pace with its growing customer base.

The Kenyan telecoms operator has relied on parent Vodafone’s economies of scale to access relatively cheaper hardware and services in a bid to lower its cost base. It has now become clear that the old contract was written to disproportionately benefit Vodafone.

Under the agreement, Safaricom bought goods and services from the Vodafone and other parties based on the UK firm’s global price book – meaning at relatively lower costs.

Safaricom mainly buys mobile phones from Vodafone Sales and Services Ltd (VSSL), sidestepping the more expensive direct purchases from Nokia, Samsung, and Huawei among other manufacturers. It has now become clear that whatever savings Safaricom made through this special purchasing channel were being deeply eaten into by the six per cent commission that Vodafone has been levying for all purchases, including those made directly from other parties.

Safaricom’s financial statement indicates that the Kenyan telecoms giant bought goods and services worth Sh10.5 billion from the Vodafone Group in the year ended March.

This means that at the stated total commission of Sh2.1 billion, the company also paid a six per cent charge for the remaining Sh25 billion worth of goods bought directly from suppliers like Huawei, Cisco, and Oracle – using the UK firm’s price list.

“The annual spend of Sh35 billion for network and IT capital and operating expenditure is spent directly with global suppliers such as Huawei, Cisco, Oracle, and NSN,” Mr Collymore said.

“In line with our policy to leverage our relationship with Vodafone, we purchase (mobiles) through Vodafone because it is cheaper to do so … We then sell these phones at essentially our cost to the market in Kenya,” he said.

Safaricom has deepened its foray into the mobile handset and computer retail market in the past three years as it seeks to grow its earnings and expand the uptake of data services and competitively priced products. Renegotiation of the procurement agreement is set to turn the focus on Vodafone’s earnings from M-Pesa, which has become the fastest growing business at Safaricom.

Safaricom operates the M-Pesa business on a licence from VSSL, which owns the rights to the popular money transfer service. On a quarterly basis, Safaricom pays VSSL a fee not less than 10 per cent of revenue from M-Pesa. The licence fee payment is capped at 25 per cent and guarantees VSSL earnings from the service whether or not it is profitable.

M-Pesa, which was introduced in 2007, broke even last year.

Under the agreement, the payout to Vodafone moves closer to the lower threshold with an increase in the number of active M-Pesa subscribers.

The number of active M-Pesa users grew marginally to 14.9 million at the end of March compared to 14.01 million in the same month last year.
This arrangement earned Vodafone at least Sh1.7 billion from M-Pesa alone in the year ended March, up from a minimum of Sh1.2 billion the year before.
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