Until the mid 1980s, Africa's telecommunications sector was dominated by government-owned monopolies that provided poor service. Only 14 people per thousand had telephones - far below the world average. During the 1990s, Africa began liberalising and privatising its telecommunications sectors. Wireless and mobile telephony allowed Africa’s telecom sector to leapfrog older technologies and required less investment, while Internet growth created demand for data services. All this combined to changed telecommunications sector financing in Africa and made it more risk responsive.
Telecom Financing in Africa Prior to the Mid 1980s Prior to economic reforms, Africa’s telecommunications utilities were government owned monopolies. Telephone utilities, often operating at a loss, were financed largely from government budgets. Governments also provided loans and secured external financing from multilateral development banks for the utilities. The World Bank and the African Development Bank provided the bulk of such financings. Many governments also obtained funding for their telecom companies from bilateral sources usually Development Finance Institutions (DFIs) and/or Export Credit Agencies (ECAs) of supplier countries. At times, funding was obtained from international banks. The guarantees of governments were important given that the telephone companies were generally unbankable. Financing from Multilateral Development Banks (MDBs) and DFIs Funding, mostly long term and low priced, was mainly based on the guarantees of the governments that owned the telecommunications companies and felt a social duty to support them. Often, lenders tied financing to the purchase of equipment from the financier’s country. Most countries could not repay the loans and large arrears accumulated. Funding Backed by ECAs Export Credit Agencies (ECAs) are public agencies that provide government-backed loans, guarantees, and credit insurance to private corporations from their home country to do business abroad. These agencies support their country’s exports especially in markets considered risky and therefore unattractive to commercial lenders. Most industrialized countries have at least one ECA, which is usually a semi-official branch of their government. ECA-backed financing normally provides credit insurance that enables its country's suppliers to ship goods and/or equipment on credit to a second country. The insurance may cover either commercial or political risks or both. Loans, and loan guarantees provided by ECAs, include export credits and export credit guarantees to private banks that finance exporters, supplier credits, and buyer credits. Loans and guarantees, usually for up to 10 years, are priced to enable exporters to win important orders. However, given concerns that export credit pricing might be an instrument of trade diversion, the Berne Union, a union of the world's major ECAs, agreed upon common pricing parameters or “Consensus Rates” In Africa, during the pre-reform period, many loans could not be repaid forcing many ECAs to cut Africa's credit lines. Telecom Financing Post-1980s To understand the changes in African telecom financing during this period, it is important to understand the changes that occurred in the sector. Recent Changes in Africa's Telecommunications Sector Technological Changes The early 1990s saw the rapid commercialisation of fixed and mobile wireless telephone technologies. Many African countries/operators adopted the Global System Mobile (GSM) communications platform for their cellular networks while the Time Division Multiple Access (TDMA) and Code Division Multiple Access (CDMA) platforms were adopted for fixed wireless networks. This, together with Internet created demand for data carrying telephone networks, combined to expand overall demand for telecom services in Africa. Policy and Regulatory Changes Privatisation and liberalisation triggered major changes in the structure of the telecommunications sector by breaking up state monopolies and introducing competition that brought many new operators to the sector, including smaller operators, some with little telecom experience. The reforms put in place regulatory regimes designed to ensure a level playing field for all participants in the sector. The regulatory regime was responsible for licensing, spectrum allocation, service pricing etc. Many of the wireless mobile telephony license holders entered into management contracts with leading operators such as MTN (South Africa), Econet Wireless International, and Orascom (Egypt). Implications for Telecom financing These technological, regulatory and policy changes affected how the sector is financed. The privatisation of the sector diversified, or eliminated, state control over the telecom companies. The new companies operated commercially and priced their services to obtain a profit. As a result, they lost their grants and long-term development financing from governments, MDBs and bilateral DFIs. On the other hand, their for-profit operations and economic reforms made support from local and international commercial banks and ECAs possible. The sectorial and macroeconomic reforms, the untested newly introduced telecom regulatory regime, the advent of new operators replacing the government monopolies, and the new technologies being deployed introduced uncertainties in the business. The financing risks associated with those uncertainties were, however, mitigated by the transparent licensing regimes used in many countries; the use of experienced operators by new license holders who considered such a move necessary for their business survival; and the high demand for telephone services which generated robust and bankable cash flows on which lending could be hinged. Some of the new operators had previous experience and could leverage their links to international financiers to assist them in their new African ventures. Economic reforms - and the rapid growth of the African telecoms sector at a time the sector was in difficulties elsewhere - made Africa attractive to major equipment suppliers. Pressure from these suppliers motivated ECAs to open suspended credit lines to some African countries and encouraged the supplier's commercial banks to continue to provide vendor financing. In view of lack of government support for the companies, and the risks in such deals, financing banks designed structures to mitigate project operating and country risks. The economic reforms made possible capital market offerings and a few African telecom companies availed themselves of this opportunity. The above analysis provides the context for understanding of the various innovative instruments now being used to support the sector as described below. Innovations in Telecom Financing in Africa Due to these changes in the sector, innovations in telecom financing have been developed to deal with the changing environment and its attendant risks and opportunities. Commercial Bank Lending Financing from both domestic and international commercial banks were the first instruments used in supporting early private operators in Africa. Major features of commercial bank funding of African telecoms include the following: - Funding is made direct to the corporate entity. - Funding is available on market terms, but with short terms and market based pricing. - Funding is guaranteed by the receivables generated by the telecom company. The company must have a good infrastructure for collecting receivables. Big international companies have an advantage with their experience in managing collections. - Amounts available from each bank are small, so a group of banks may be needed to finance one project. This raises the cost of managing the borrowing. Despite the problems, this financing instrument remains popular in Africa. Project Financing Some telecom projects have been financed on the basis of limited recourse project financing structures. Features of such deals are: - The borrower is usually a Special Purpose Vehicle (SPA) - a company set up specifically to facilitate the financing. - The shares of the telecom company as well as all present and future assets of the company are assigned to the SPV. Further, all project completion risk guarantees issued by contractor under Engineer, Procure and Construct (EPC) contracts are assigned to the SPV. - The SPV then issues debt instruments, which are backed by the assets assigned to it by the telecom companies. - The debt instruments are purchased by the lenders thereby providing funding to the telecom company. - Such deals are sometimes backed by a variety of institutions including ECAs, commercial banks and venture funds, etc. This structure has the following advantages: - It reduces the risk of lending, as the SPV may be established in a jurisdiction with lower country risk and better-tested legal and judicial arrangements. - It helps the telecom company to raise significant funding by consolidating all its debt obligations and setting criteria for admission of new debt. - It enables telecom shareholders to leverage their relationships with international banks to attract funding for the project without themselves being exposed to the lending. - Such deals make a potentially unbankable deal bankable and lower financing costs to the telecom companies. The disadvantages are that the structure is usually cumbersome, time-consuming, expensive to put in place, and success is not always guaranteed. Vendor Financing Vendor Financing is provided by an equipment supplier to the buyer of his equipment. Vendor financing is not new, although the market drivers and nature of the product are changing. During the pre-reform period, ECAs financed vendors that supplied African telecom monopolies on credit, providing export credit insurance, supplier and buyer credits, and export credit guarantees. With the debt crisis and suspension of ECA activity in many African countries, vendor financing saw a sharp decline. However, as reforms took hold, and successful private operators emerged, vendor financing revived. The major factors that have promoted it in African telecoms include: - Participation of credible telecom operators. These operators have had long, mutually rewarding relationships with the vendors who trust them and finance their purchases. - The rapid growth of African private telecom operators while the markets in Europe, America, and Asia were suffering made Africa a major source of revenues to the vendors. - The gradual re-establishment of suspended credit limits by many ECAs made ECA support available to some vendors. - The confidence earned by African operators has made it easier for them to make vendor financing a pre-requisite for equipment supply bids they receive from vendors. As the market revives and grows, vendor-financing innovations have also occurred. Some of these are described below: - African telecom requires large amounts of money to keep up with the huge demand for telecom services, especially GSM, and maintain market share. In Nigeria, for example, it is estimated that to achieve 10 million subscribers, the four GSM operators will require US$ 8-10 billion in investments. Given the amounts, vendors are resorting to “Third-Party Vendor Arranged Financing” and seeking financial institutions to arrange financing in support of their bids. Once the tender is won, they revert to the financiers to finance their sale. The vendor pays the fees to obtain the financing required and the operator does not have to arrange financing for its expansion. This approach has been used in Ghana, Nigeria, and elsewhere. - Vendor financing gives the equipment manufacturer/vendor and finance provider a direct interest in the smooth operation of the telecom company since that is how the financing will be repaid. Smaller telecom operators, though, may not have the capacity to operate the equipment and generate sufficient revenues to repay the financing. This has led to a new project structure called Establish, Operate, and Transfer (EOT). Under EOT, the vendor installs the equipment, operates it on behalf of the telecom company, and then transfers it to the company at a later stage. The vendor is in a better position to quickly develop the operator's team and the telecom company has more time to learn the intricacies of the new equipment. This mode of vendor financing is becoming important for small fixed wireless operators in Nigeria. Capital Market Issues With economic reform has come the reform of the financial sectors of many African economies. Stock exchanges are therefore becoming an active integral part of the financial system of many African countries. This has made it possible for telecom companies to access funding through capital market debt offerings, especially bonds. Such bonds have been issued in Kenya and Uganda. Bond issued in local currency enables telecom companies to match the currency of their assets and liabilities. It also makes it possible to obtain medium term local currency lending in markets where such funds are rare. As reforms unfold this method of financing will begin to grow in importance. CONCLUSIONS The financing of telecommunications in Africa has changed to follow the changes in the sector in recent years. Financing from Development Finance Institutions and Multilateral Agencies has given way to commercial Bank financing and increasingly, vendor (or vendor – arranged) financing and capital market offerings. As changes in the telecom industries evolve, both lenders and telecom companies will seek new ways of financing their activities. Financial institutions that are imaginative will gain from this effort. Experience has shown that, unlike the pre-reform government-owned telecom companies that could not repay their debt, most private operators in Africa meet their obligations and vindicate the telecom sector reforms adopted in many countries.