US ban dims Safaricom loans for Ethiopia entry

Safaricom headquarters on Nairobi’s Waiyaki Way. PHOTO | DIANA NGILA

Safaricom’s #ticker:SCOM plans to expand to Ethiopia have been complicated by a US State financier threatening to recall its loans following escalation of armed conflict in the horn of Africa nation.

The US International Development Finance Corporation (DFC) says that the acts of violence against civilians in Ethiopia’s Tigray region could affect the release of $500 million loan (Sh53.97 billion) to a consortium led by Safaricom.

The financing had earlier been thrown into doubt over US economic sanctions against Ethiopia related to the conflict in the northern Tigray region, which has killed thousands of people and displaced many more.

But Safaricom last month disclosed that the US State development financier was granted approval to make select investments in Ethiopia, including funding the group made up of, among others, the UK’s Vodafone and South Africa’s Vodacom Group.

The deepening conflict in Ethiopia could force the DFC to pause the investment and push the telecoms companies to source the cash elsewhere and at greater cost.

“The board approval signified initial DFC willingness to consider a loan to the consortium in the event it wins a licence but does not obligate DFC to move forward with the transaction,” the US State development agency told the Business Daily in an e-mail response.

“DFC is working closely with its partner agencies in the US government to monitor the situation in Tigray and will carefully consider its impact on any potential financing of the Vodafone consortium.”

The war pits Tigrayan forces against the Ethiopian military and its allies from Amhara and the neighbouring nation of Eritrea.

Donors suspended some budget support to the government of Prime Minister Abiy Ahmed as reports of mass killings of civilians and gang rapes mounted, raising concerns over war crimes.

The Joe Biden administration has issued economic sanctions against Ethiopia to try to pressure it to end the violence in Tigray.

“As DFC considers next steps, a critical part of its assessment is evaluating the current environment in Ethiopia, which the Secretary of State and DFC board chair has said is marked by credible reports of armed forces…committing acts of violence against civilians, including gender-based violence and other human rights abuses and atrocities,” the State financier said.

The Safaricom consortium, which also includes British development finance agency CDC Group and Japan’s Sumitomo Corporation, had agreed to take the Sh53.9 billion from DFC to help with acquisition and development costs.

It won the licence with a bid of $850 million (Sh91.75 billion) and aims to start operations in Ethiopia next year.

Part of the licence fee will be paid using debt, which will account for a significant share of the more than $8 billion (Sh863.85 billion) the consortium will invest in Ethiopia over the next decade. The DFC loan offers the consortium long-term financing on relatively favourable terms.

The international financier says its loans typically mature between five and 25 years, with repayment schedules set on quarterly or semi-annual basis.

A grace period on principal repayment at the beginning of the loan term is also common.

The interest rate is a “negotiated spread over the base-cost of funds.” Long-term US government bonds currently have interest rates of below two percent, setting a low base on which to price the DFC loan.

DFC, however, levies a series of special fees on its credit facilities, including upfront retainer (to cover due diligence), origination (payable once on first disbursement), commitment (an annual percentage on undisbursed amount) and maintenance (an annual charge to cover cost of monitoring the loan).

Ethiopia’s award of a new telecoms licence paves the way to open the market of more than 110 million people to international investors for the first time, a key part of Prime Minister Ahmed’s economic strategy.

The licence has been awarded for an initial period of 15 years. Safaricom owns a majority stake in the consortium.

Another partnership led by MTN Group Ltd, Vodacom’s Johannesburg rival, and the Silk Road Fund, a Chinese State investment group, was turned down after bidding $600 million (Sh64.77 billion). Ethiopia still intends to sell two more licences, and said it will invite a new round of offers from international carriers after some policy adjustments.

The government is also looking to sell a minority stake in Ethio Telecom, the State monopoly. The transactions are part of economic liberalisation policies by a country which is seen as presenting major growth opportunities.

Ethio Telecom had revenues of $604 million (Sh65.2 billion) in the six months to end of December 2020. Safaricom’s half-year sales to September stood at Sh118.4 billion.

A telecoms monopoly, Ethio Telecom is seen as the biggest prize due to its huge protected market. Its subscriber base of 50.7 million makes it the biggest single-country customer base of any operator in Africa.

Players like Safaricom are attracted by the growth potential in that market whose 110 million people means the country offers a penetration rate of 46 percent. By contrast, Kenya’s 52.2 million mobile phone subscribers gives it a penetration of 118 percent.

Safaricom is betting that the Ethiopian market will open up further in the coming days to allow for a mobile money licence.

Ethiopia has indicated that it will allow mobile money licence in about 12 months, a development that has excited Safaricom.

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