Lessons from Kenyan firms for Safaricom’s Ethiopia entry

The entry of Safaricom into Africa’s second most populous, yet closed economy is seen as a monumental breakthrough for the telco whose growth locally was tapering from a mature market.

It is welcome news for investors after the firm posted the first decline in profits in nine years to Sh68.67 billion from Sh73.65 billion the previous year.

The decline came from reduced M-PESA revenues as a result of free transactions of Sh1,000 and below during the first year of the coronavirus pandemic.

However, the decline in revenues has also been witnessed in voice and messaging streams as growth in new customers slows down in Kenya’s mature and extensively connected population.

Ethiopia offers new ground for growth with Safaricom’s versatile approach set to offer efficient services backed with a pledged $8.5 billion investment infrastructure over the next ten years.

Read also: Why Safaricom share price rally is now pulse of the NSE

But Safaricom will need to learn how to do business in Ethiopia which unlike Kenya’s liberal economy, is still controlled heavily by the State.

One, Safaricom whose success has hinged on their financial service platform, M-PESA, will not yet be able to launch the product in Ethiopia since the government has limited the service to Ethio Telecom barring foreign players from participating in financial services for a year.

The State-run Ethio Telecom will sell 45 per cent stake which means the new buyer will have a heads up on Safaricom in the mobile money space if the Kenyan company will be granted the license to operate financial services later.

Safaricom will, however, have to study the experience of other Kenyan based companies that have made inroads into Ethiopia, which while fortunes vary tells the fact that it is a different ball game.

A speculative British firm, Atlas African Industries Ltd, failed in its upstream oil venture in Kenya but quickly sought to diversify into glass making in Ethiopia.

It sought to launch the Chancho Project – a glass bottle manufacturing venture just 45 kilometres north of capital Addis Ababa and obtained a 100-year land lease certificate and construction licence covering an area of 5.5 ha in close proximity to established infrastructure and intended mine sites for the materials needed to produce high quality bottles.

The Chancho Project was underpinned by the signing of a memorandum of understanding with leading Ethiopian brewer, Raya Brewery Share Company, offering an offtake agreement to regularly supply glass bottles to Raya in substitution of the imported bottles.

However, its entry into Ethiopia through the acquisition of TEAP Glass soon turned problematic after the subsidiary was embroiled in a tax dispute.

Soon after, the Ethiopian Revenue and Customs Authority (ERCA) seized $2.4 million from the subsidiary’s account to clear the tax liability.

The company failed to reverse the move despite lobbying the Americans, the British and Canadian diplomatic channels.

“In 11 May 2016 we have been subjected to a complete injustice, through the summary removal of approximately $2.4 million from TEAPs bank account with the Development Bank of Ethiopia by ERCA. ERCAs actions stem from a tax claim made against Ardan Risk & Support Services (Ardan) which categorically relate to periods prior to Atlas involvement with Ardan. Atlas has received legal advice that neither it nor TEAP has any liability for any such taxes under Ethiopian law,” the firm said before it went under and subsequent delisting in Kenya and the London bourses.

Read also: Number of M-PESA agents double during Covid-19 pandemic

While this is a cautionary tale, not all Kenyan companies have had a rough ride in Ethiopia.

Electricity producer, Kengen, has been successful launching into Ethiopia, booking Sh440.3 million in last year’s operations from drilling geothermal wells in Tulu Moye area.

Kengen won a Sh5.2 billion tender from Tulu Moye Geothermal Operations Plc—an independent power producer located in the eastern region of Ethiopia — to drill wells and offer geo-scientific survey.

The firm also won part of a Sh7.6 billion contract to supply geothermal drilling services to the Ethiopian Electric Power in February 2019.

While Ethiopia offers Safaricom a springboard to expand rapidly, offer diversified products and build its continental presence, it will need to navigate carefully in a volatile country with strong State controls and evolving economic and political undercurrents.

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