Peter Ndegwa explains Safaricom's Ethiopia market strategy

Listed telco Safaricom has recently made its official entry into Ethiopia, launching its telecommunications business with a mobile money nod expected within the next one month.

Business Daily sat with the company’s chief executive officer Peter Ndegwa for an update on its rollout and funding plans for the new business, as well as the strategy for launching the M-Pesa service in Ethiopia.

You have just received an M-Pesa nod for Ethiopia. What strategy are you eyeing for the product there—will it be a mirror of Kenya?

Even as we went into the country, we were expecting that we were going to receive a mobile financial services licence. There are still some legal process elements to operationalise the law that allows a foreign operator to access a mobile money licence.

But in terms of getting a licence that is a foregone conclusion. What we need to clarify over the next 10 days are the terms and what we need to do and all that stuff. On the product side, we are clear because remember, we already have a suite of products in Kenya, and in the other M-Pesa Africa markets.

So we are conducting research on what customers are using, among the currently launched mobile financial service products, and then we'll decide which ones we go with.

Money transfer is almost basic, but in terms of other products, we don’t have to go through a learning curve like we have done in Kenya. We will, for instance, launch with an app from the very beginning, so that users have the choice of USSD or the app.

On the merchant side, we will clarify with the Bank of Ethiopia what we are allowed to do at the beginning. I suspect we'll be able to do much more fairly early on. Certainly, merchant payments such as Lipa na Mpesa would be straightforward. But on the credit side and for those other more sophisticated products, we will go formally to the Bank of Ethiopia and find out what we can do, the elements that need approval.


You have recently agreed an equity and debt deal with the International Finance Corporation. How does the equity deal impact on your shareholding of the Ethiopia unit?

At this stage, only IFC will come into the shareholder family. It is at an advanced stage, but it is subject to approval both on their end and also on our end. All shareholders need to approve for IFC to come in.

It is one of those where if it's not approved by one shareholder it won’t happen. The intention would be approximately $160 million of equity and about $100 million of debt.

The intention is Safaricom will continue to have a controlling stake so that we are able to consolidate Safaricom Ethiopia PLC into our financial statements within Safaricom Plc.

Safaricom at the moment has 55.5 percent. After this deal, if it happens, we will not go below 50 percent. When IFC comes in, then everyone will be diluted proportionately and Safaricom will have about 51 percent or thereabout. In terms of debt, it needs to be as much as we need, or as much as IFC has appetite for. Initially, it's likely to about $1 million from IFC, and in future they may syndicate with others if we need more but that one is subject to future consideration.

What is the investment outlay so far by Safaricom in Ethiopia, and what level of capex are you looking to put in over the next one year?

We have signalled that over a five-year period, we will spend approximately $2 billion. The split of debt and equity will be dependent on not just the ratios we need to retain locally, but also the need to mix between dollar and locally denominated debt so that we can also be able to ensure that it's efficient from a currency perspective.

The level of debt that we take is also dependent on the tax consideration. The local tax laws will indicate the balance between equity and debt.

So far we have put in capex of approximately $300 million. Including the licence, we have spent roughly $1.2 billion in total. We gave forecast for the year that we'd spend in the first year, approximately Sh60 billion, which is about $500 million. So we are in line with that. That does not include any amounts that we pay for mobile financial services, but that will be announced at an appropriate time.

Have you reached a binding framework with the Ethiopia government on expatriation of profits, given the problems we have seen in the past of companies being unable to move forex out of the country?

Investment into a country in the GSM business, and also mobile financial service, is a long-term play. We are putting in a lot of equity and debt. When we went in, the government had plans for when they were going to change the policy around foreign exchange, and the timing of that was in line with the time we thought it would take for us to be able to start repatriating dividends. We won't start repatriating dividends in the first five or six years although we break even in year four. We expect the government to have made a lot of reforms by then.

There is also the aspect of being able to access dollars. For the first three years, at the very least, we wouldn't need any dollars because generally the flow is in because we are sending equipment in and generally we are funding it with either debt or equity that's coming from the key financiers of the business.

And then any local costs are also being funded through local debt that we are already starting to access from local banks. So what the government had said is that they would prioritise telecommunications as a critical sector and therefore be able to allow us to be on the priority list for FX.

Are you concerned about the security situation in some parts of Ethiopia and the potential effects of your rollout?

The conflict has been there for a while, even by the time we got the license. For us, just like everyone else including Kenya, we would like to see a peaceful settlement because that's what will secure business into the future.

The signal that the conflict is being resolved and the internal mechanisms for trying to get a peaceful resolution is what we watch for more.

Of course, we get a lot of support to understand how security is in the country. We have specific security advisers that allow us to see which areas to be in and which areas not to be in. Currently, we have not been affected because we are still at an initial stage in terms of rollout.

Actually, getting a GSM and mobile financial services sector that is vibrant and working will help the country.

What are your other projections for user numbers in Ethiopia, given that you're finding an established player in the market?

We generally don't give guidance on customer numbers. But for Ethiopia, given it's a new business, we'll be able to signal to investors and journalists what we think the numbers in the first year will be. We are now at about 300,000 customers but it's still very early days. We expect that by the end April next year, we will have covered about 25 cities and close to a quarter of the population from a coverage perspective, which is also part of our licence obligation.

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