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TELECEL IS FINDING RAINBOW’S END IN SUB-SAHARAN CELLULAR MARKET

NEW YORK-“There’s gold in them thar hills,” according to Justin Dudley, vice president of engineering for Telecel International Ltd., which has staked its claim to cellular service provision in Sub-Saharan Africa.

The mining industry is the mother lode in these countries, which are better known in the West for political instability and low per capita income. “Many of these places exist by virtue of having mineral wealth, and therefore [people] need to make calls outside the country,” Dudley said at a recent conference, “Cellular, Wireless & Cable Finance ’96,” sponsored by International Business Communications, Southborough, Mass. Satellite links, therefore, are an essential component of Telecel’s cellular services.

“Doing business in Sub-Saharan Africa is just about as risky as it gets,” Dudley conceded. But Telecel’s decade of experience has been that high risks are more than offset by low investment costs and excellent rates of return.

Dudley cited several converging influences that have propelled wireless services in Sub-Saharan Africa over the past 10 years: poor or non-existent wireline telephone systems; the loss of subsidies that developed nations employed during the Cold War to promote political allegiance; the influence of telecommunications market deregulation in Europe and Asia; and advances in wireless technologies, which offer cost-effective telecommunications solutions.

“In 1987, the World Bank told us we were nuts to ask for financing for car phones in Africa and turned us down. In 1991, they couldn’t lend us enough money. In 1993, they demanded an equity stake, which we wouldn’t give them.”

Telecel has gotten financing from the Overseas Private Investment Corp., a U.S. government agency, and from the African Development Bank. “Motorola (Inc.) and Siemens (AG) have financed 50 to 70 percent of the value of their equipment,” Dudley said.

Telecel also has sold equity stakes to local investors. “There’s lots of money in Africa. You just have to find the people who have it, which is a bit difficult,” he said. “We usually have some kind of local partner who typically owns about 15 percent.”

Telecel, headquartered in Chantilly, Va., commenced cellular service in Africa in 1987 in parts of Zaire, and now operates in 14 cities on the continent in a total of six countries.

Zaire offers a case study in the pitfalls of doing business in Sub-Saharan Africa. In this country, which has an annual inflation rate of around 10,000 percent, Telecel has gained the authority to index pricing to United States dollars. Its customers pay Telecel in local currency, which Telecel exchanges for dollars from local diamond dealers, who need local currency to pay miners. Telecel also has begun introducing prepaid calling cards in many of its service areas to help combat deadbeat customers.

In Zaire, Telecel’s behind-the-scenes negotiations defeated attempts “by a few local guys who tried to muscle in and nationalize us,” Dudley said. “(But) we have a project in Zambia that is in trouble now because, in January 1996, the Congress voided a law waiving customs duties, tariffs of 40 to 50 percent.”

Most of Telecel’s systems are analog because, he said, “digital isn’t realistic until you have 2,500 subscribers; we’re on in these places with two to three cell sites.”

For $400,000 or less, Dudley said, lesser-known equipment vendors can provide analog switches and cell sites: Comsat RSI Plexsys Wireless Systems of Herndon, Va.; Celcore of Memphis, Tenn.; Phoenix Wireless Group of Maitland, Fla.; and Stanilite Electronics Corp. of Sydney, Australia.

Dudley anticipates that at least one of these infrastructure providers in 1997 will introduce commercially a Global System for Mobile communications system for less than $1 million. “This will revolutionize small cellular systems,” he said.

In early November, Telecel launched a GSM system in portions of the Ivory Coast. As much as currency, political and non-payment risks, Telecel is concerned about competition from personal communications services. “We are looking to upgrade to digital,” Dudley said. “Now we fear PCS, with (its) small cell sites that don’t require refrigeration and can handle more capacity.”

In 1997, Telecel plans to start construction of cellular networks in Niger, Nigeria and Zambia. Telecel also is in various stages of negotiations for procuring national or regional licenses for 20 other countries. “Zimbabwe has a tender coming out in the near future (for a national license), and we expect to bid. It is a more structured (bidding) environment than most,” Dudley said.

In most cases, he added, “the licensing process often consists of, `Hey, Mr. Minister, what do you think of cellular radio? We will add more traffic to your existing cable system and add jobs.’ ” For the most part, the licenses are free, although there have been a few instances where, for example, a fee of several hundred thousand dollars to the country’s communications ministry was required.

One of the key conditions for operating cellular systems also makes doing so quite profitable. “The reason for the high prices is that you have to go through a lot of hoops to get a license; you don’t want to undercut the local [public switched telephone network] or you’ll lose your license.”

With a 70 percent profit margin, Dudley termed the arrangement a “money machine” for Telecel. “The money comes from the $5 per minute you can charge for an international long-distance call that costs you 50 cents,” he said. “We get 60 cents a minute to terminate a call by long-distance carriers, pay that to the local PSTN and charge our customers 35 cents per minute. We have not had to subsidize handsets, and pretty much sell them at cost.”

Telecel’s goal is to become a national telephone network in the countries where it has local or regional systems. Toward that end, it is working on establishing a system for country-to-country calling within Africa that eliminates the current, costly routing system back to former colonial power owners in Europe.

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