Q&A: Vodacom Tanzania outlines it's new 4G approach

17Oct 2018
PETER NYANJE
DAR ES SALAAM
Financial Times
Q&A: Vodacom Tanzania outlines it's new 4G approach

Do prevailing conditions support multitudes of mobile telecommunications companies competing in one market space? Is the regulatory framework fair to these mobile network operators? Does Tanzania have the necessary skills to have locally-

Vodacom Tanzania Limited chairman ALI MUFURUKI.

groomed people to run these companies? In the second part of his interview with Financial Times Staff Writer PETER NYANJE, Vodacom Tanzania Limited chairman ALI MUFURUKI responded to these and other questions regarding the state of the mobile telecoms industry in Tanzania...

 

QUESTION: Though Vodacom Tanzania performed well and made a profit last year, the financial results did not please its shareholders who expected more in terms of dividends. What factors dampened the profits?

ANSWER: Let me first of all offer some clarification. The profit that the company made in the year under review is not less than expected. Actually it is very high. We made a profit of more than 170bn/-.

The dividend which was paid out this year of 17.3/- per share, is higher than the dividend paid last year, which was 12.4/- per share I think. So we improved our commercial performance as a company, our profitability, and also we improved in terms of dividend payout.

The shareholders who explained some unhappiness about the amount of dividend were referring to the fact that although we kept our promise… I should also add that we kept our promise.

According to the prospectus for the IPO. we made a commitment to shareholders that in a year which the company makes a profit, we will pay 50 percent of all profit after tax as dividend. This year we paid 60 percent as dividend, last year we did the same.

But in this particular year there was an unusual once-off transaction; the sale of Vodacom Tanzania’s stake in a company called Helios Towers Tanzania Limited. Vodacom used to have a stake in this company and as it consolidated its business elsewhere around the world, it offered to buy the Vodacom stake.

Vodacom was paid a significant amount of money for the stake, and that appears in our books as profit, but it does not come out of normal commercial operations.

It was not prudent to pay dividend on such kind of money, nobody does that. In the AGM I gave an example that if you sell an important asset such as a house, you don’t take that money and celebrate. You go and buy another house, probably a better house. If there is some money left (after that), then maybe you can celebrate with that money.

In our case, we are going to use that money for investment that we want to make in improving our infrastructure and increasing our competitiveness in the market. So that money was taken out of the dividend pool. We paid out the profit that we made out of commercial operations, and that produced 17.3/- per share.

I thought that in the end the shareholders did understand because I spoke to about three or four of them who raised this question, that they understood where we are coming from and that in the long term it is better for the company to take that kind of approach, as opposed to spending all its profit for short-time gain that would not necessarily be good for the company in a few years’ time.

Q: Vodacom Tanzania’s latest annual report has hinted at over-regulation and policy unpredictability among factors which impede not only Vodacom, but all other players in the telecoms sector. Which specific regulations are detrimental to your operations and what should be done to fix things?

A: In the year under review we had three particular incidents of regulations which we thought were quite troublesome.

The first was strict and very aggressive enforcement by the regulator of SIM registration rules which requires companies to make sure that all subscribers on their network have been properly identified and are the ones in real life who are actually recorded as our customers.

Given the long history of this industry in this country, all companies have hundreds of thousands - may be even millions - of subscribers who may have changed their SIM card or used wrong identification or wrong names and address particular during registration.

Since those are now found in violation of this particular rule, the regulator levied heavy fines not just on us, but also on other operators for having such kind of people in our networks.

The requirement was for us to company, and to company it meant we had to purge or take these people off our network. We had to go through our database and find and remove every single person who did not meet that particular compliance standard, and in the process we lost hundreds of thousands, more than half a million subscribers, who are revenue generating. So that affected revenue. We are now busy trying to re-register them, but some of them didn’t come back and that affected our business.

In this particular case we think that because of the complexity of the problem itself and long history of registration of subscribers in this country, that the fines were a bit unfair because we are talking about billions of shillings in fines.

The regulator could have been more lenient, but he was not. But now we have done it, we have cleared our database.

The other instance of regulation that was troubling, was the very sudden demand on the network to connect with the government’s own electronic revenue collection system.

As you know, we are a very high tech business; we use computers in running our business, we use computers to count our money, we use very complex computer systems, and when you are asked to connect with another computer system which is outside your realm, there are risks involved.

Computer system experts need to sit down and write what they call applications, programme interface to connect to another system and do so securely, make sure that you are not exposing your system at risk.

It all cost a lot of money and it was being demanded of us in a very short period of time which we thought was unreasonable, and also under the threat of penalties.

So we spent billions of shillings hiring consultants and experts to help us write this interface that enabled us to connect with the government computer system to enable the government to monitor our revenue generation and accounting.

We think that we could have been given more time and we even believe that it was unnecessary because if the government did it in order to verify that the tax returns which we make every month are accurate, they have not been able to find that we were lying.

The same thing which we were reporting is the same thing they are seeing now. So it is the product of mistrust that exists between the government and private sector.

But it has real consequences for the business because, as I have said, it cost us a lot of money and caused a lot of tension across the industry. Our executives were being threatened with serious consequences if they couldn’t comply immediately.

The third is imposition of maximum termination rates on the industry that will make Tanzania the cheapest, or the lowest cost in the whole of Africa, when they are finally done because we are in some kind of glide path… progress for years until we reach the level that the regulator has demanded.

Now some people, consumers in particular, will tell you that is a good thing because making a phone call is going to be cheap. But they don’t understand that this is business and because it is a business, we have to recover our cost.

If the price goes below cost and we start losing money, what will happen is that people will not make the necessary investment to make sure that the quality of service remains high.

And then people are going to have cheap services but low quality cheap services. We are not going to be able to offer different options that will allow people to access internet at very high speed and very good quality use experience.

This will become difficult if you are doing a business which is loss making. So we were asking the regulator to base their decision on scientific facts - not only on some kind of unilateral instinct or even political objectives.

We protested to the Fair Competition Commission about this particular rates imposition and we are going to get a hearing. So that is ongoing, but we have complied. But immediately it cost us money and it continues to cost us money, affecting our budget performance last year and even now.

Those are three areas of regulations that have had serious impact on our business, and we will continue talking to the government and the regulator about these things. We think some of it is simply due to a lack of understanding on how this industry operates; we will continue to educate each other.

Q: Vodacom Tanzania recently bought spectrum in the 700Mhz band. What new services should be expected from Vodacom from this new spectrum and by when?

A: The new services include 4G, which is what gives you a (better) data experience. Most of our network within Vodacom is 2.5G and 3G. We have 2.5G which is a bit of voice and data, but the data was not that great. 3G is better in data, but now we have 4G which is even better in data.

These days people are using a lot of WhatsApp, a lot of social media, a lot of internet innovations. People want to sit down with their gadgets and create programmes and so on and so forth. We want to be everywhere where Vodacom has a network with that kind of strength. We were being limited by spectrum... now 700Mhz is the kind of spectrum that will enable us to build 4G infrastructure, to improve where we have 2G to 4G, where we have 3G to 4G.

We have a sufficient amount of resources to actually build one of the most formidable, if not the best, networks in the country and we are very excited about this and we hope that the government is going to be supportive, not only of our efforts but also the efforts of other telecom operators.

If you have been following the news, last week we signed a $20 million deal I think with TTCL where we bought capacity from their fibre optic network that we are going to use for the next ten years.

So you can see our ambition; because TTCL has built a nationwide fibre optic backbone and we want leverage on that to build a 4G on top of that fibre optic network, and if you go to villages as far as north of Tanzania or west of Tanzania, you should be able to access high speed internet the same way that you do here in Dar es Salaam.

That is our plan. It requires a lot of money, a lot of investment. Fortunately we have that money and we are going to be deploying it very soon, during this budget year and years to come.

Q: You are a supporter of mobile network operators’ consolidation. But some people argue that might just encourage monopolistic behaviour patterns among these MNOs. What is your argument for a MNOs amalgamation?

A: I don’t think it would result in a monopoly because we are a regulated industry. If it were an industry which just operates free of any regulations, it would have been easy for one or two people to gang up together and simply control the market for themselves, and do a lot of mischief.

But here we have a strong regulator in the form of TCRA. I have just talked about the termination rates, where they stepped in and said this is the maximum I want you to charge.

So if there is any kind of cartel behaviour or monopolistic behaviour, first of all you have users who can go to the FCC and complain about it, but long before they do that TCRA will intervene.

But I want to tell you why consolidation has always been important. In most markets, in early stages of development, everybody who could get a license went and bought a license and wanted to build a network.

But not everybody was able to raise enough money fast enough to build a business. So some of them fizzled out, and then you have remnants like 10 companies maybe; all have licenses but may be only two or three are the more powerful companies, and the rest are struggling.

They are struggling in that they cannot raise the money, they cannot offer services, and they just give the industry a bad reputation. And what do they resort to?... lowering the prices and causing price wars.

We have seen price wars in Tanzania, we have seen price wars in Kenya, and what these price wars end up doing is bringing the bigger companies, especially, to their knees.

Companies become big not because they have customers or because they are rich, but because they are making investments in their networks.

If you have all kinds of players who, because they are not able to offer good quality products, offer bad products but at lowered prices, to a level where it becomes actually below-cost for big operators. What then happens is that the bigger operators become hesitant to make investments, because when you invest big, you lose big.

  1. at Kenya. How many operators do you have there? You have Safaricom, you have Airtel, you have Telco... three. Look at South Africa, how many operators do you have there? You have MTN, you have Vodacom, you have Cell C. Look at the UK, how many do you have there? You have O2, you have Vodafone, and I think you have Dutch Telecom or one of those.

The market always moves towards consolidation. And those three cannot be friends between themselves, they cannot sit down and agree, they have to compete. Because if they don’t compete and succeed, they are going to die and they are going to die at a very high price.

So we should not be afraid of consolidation because consolidation is a very good thing. But also, and this is what I tell government officials... if we made 170 billion/- last year, where do you think most of the money went? Who do you think got most of the money? The government.

So the government needs profitable companies. But if we start losing money... out of all the companies that we have here, only two are making money. Their accounts are known, only Vodacom and Tigo are making money. What does that mean? Only Vodacom and Tigo are paying taxes. The other companies are losing money, and they are struggling to stay alive.

Countries like Kenya have recognized that. Last year Safaricom made a $350 million profit, or is it 700? I don’t remember the number, but it was said that they made more profit that all the other listed companies combined.

What does that mean? It means that for the government of Kenya, Safaricom has become a strategic national asset; not only does it create so many jobs, but it also creates a communications infrastructure which the government also uses. While also paying a lot of taxes.

In Kenya, the government has shares in Safaricom; it is a big shareholder in Safaricom. Some of the money comes direct to the government as dividends, the rest of the money comes to government directly as tax.

In Tanzania, we have the government as a shareholder in Airtel. It holds 40 percent; it loses money.

We have the government as 100 percent shareholder in TTCL. It is in the interest of the government to make sure that the telecoms industry is sustainable because if it is not, it is losing money already on its own existing investment.

This is not just our fight alone; it is the fight of the government of Tanzania as well, and I think this is one area where we can come together and strategise instead of fighting one another.