TELKOM: the new pyramid scheme?

Soon after the Cosatu anti-privatisation strike on October 1-2, government announced that it had set aside R43 million to “sell the virtues of privatisation and shareholding to the public”. It plans to put Telkom shares on the market early next year. The South African Communist Party (SACP) spells out its reasons why it thinks the sale of shares should not go ahead and warns potential shareholders that they could be “seriously burnt” if they take up the offer.

TELKOM: the new pyramid scheme?

In the immediate aftermath of the two day national protest actions against privatisation led by COSATU (October 1-2), government responded with a high-profile, public commitment to pushing ahead with Telkom’s ongoing privatisation. Government has now set a firm deadline for a massive Telkom share offering on the JSE before the end of next February. There is also the possibility of a secondary listing on the New York Stock Exchange.

Government’s announcement of its intention to press ahead with this Telkom initial public offering (IPO) was elaborately stage-managed. Clearly a signal was being sent.

Underlining that this was theatre, as much as anything else, government IPO head, Eugene Mokeyane, boasted: “We have a production which literally has a cast of hundreds”. He was referring to his budget of R43 million that will be used to deploy more than 400 people to schools and communities in a massive “education campaign” to sell the virtues of privatisation and share-holding. The “production” also involves publicity on the public broadcaster, community radio stations, post offices and in Standard Bank branches. There is a heavy sell.

The leading business and financial media are delighted. According to the Financial Mail (October 11, 2002): “Public enterprises minister Jeff Radebe has made it clear to investors and the labour movement that government is determined to go ahead with Telkom’s listing. The way he has couched the initial public offering (IPO) is also a rebuttal of labour’s anti-privatisation stance and an attempt to create a new class of black shareholders.”

The Business Day (October 8, 2002) has a similar analysis: “The recent flurry of activity on Telkom’s listing may have been motivated in part by government’s wish to send a clear signal in the face of the Congress of SA Trade Union’s anti-privatisation strike that it will not be moved.”

In the coming months the South African public is going to be treated to R43 million worth (tax-payers’ money) of hard-sell, under the catchy slogan: “Our strength is our sharing”. Plenty of theatre. Plenty of spin. But, economically and socially, is the Telkom IPO a well-considered move?

The Telkom restructuring track-record

The forthcoming IPO is, in fact, the second major step, in the privatisation of Telkom. Government currently owns 65% of Telkom. 30% was sold in 1997 to Telekom Malaysia and US-company SBC; 3% went to “empowerment” group Ucingo; and 2% was earmarked for purchase by 58,000 current and former employees. The 1997 partial privatisation was largely justified on the grounds of the need for strategic investment and, especially, on the need to acquire new technologies that would not otherwise be available.

Not only was there partial privatisation, but the fixed-line phone market has been ear-marked for liberalisation. However, Telkom was given a “grace period”, a fixed-line monopoly to prepare for liberalisation and, more importantly, to ensure that the developmental objective of rolling out phone connections to under-serviced areas could be achieved. Government set a target of 2,8 million new connections for the 5-year period of Telkom’s fixed-line exclusivity.

What is the record so far?

More than 20,000 workers have lost their jobs since 1997.
As Telkom has geared up for further privatisation and for competition, the price of profitable international calls has come down, but domestic call charges have escalated.
Telkom has rolled out an impressive 2.67 million new lines, many to poor communities. But, sadly, as Telkom’s own 2001-2 financial statement was forced to concede, only 667,039 of the 2.67 million lines delivered were still in service. Over two million lines delivered have been cut-off because the poor communities to which they had been delivered could not pay for the service. The privatisation objective of making Telkom more sellable (hence the increase in the price of local calls), and the developmental objective of sustainable services to the millions of poor in our country have simply collided head-on. The privatistion agenda has won against the developmental agenda.

In the view of the SACP, a track-record of re-structuring like the above should be grounds for a sober and thoughtful policy review. Instead, we are now on a path of accelerated privatisation and liberalisation.

Creating a “new class of black share-holders”?

Although the IPO will only ear-mark a small percentage of shares for “historically disadvantaged” individuals and community savings clubs like stokvels and burial societies, it is this aspect of the IPO that is receiving particular attention and media acclaim.

As part of the R43 million promotion of the IPO, a pamphlet (“Your Guide to Shares”) is being distributed free to the public in post offices and banks. “The Government hopes”, we are told, “that you will participate and share in South Africa and Telkom’s future.” While painting a generally rosy picture of the IPO, the pamphlet does warn potential share-holders that their shares can go up AND down. It asserts that “one of the most important shareholder rights is the right to information – so be sure to keep yourself informed.”

But there is plenty of important information that the pamphlet does NOT provide.

It does not tell us that we are selling Telkom at the worst possible time in the world telecoms market. According to Business Day: “In the wake of the recent carnage of telecommunications and technology stocks across the globe, analysts now put Telkom’s valuation at about a third of the R100bn to R120bn estimate of two years ago.” The proposed Telkom IPO before March 2003 will, therefore, be a knock-down bargain-basement fire-sale. Nevertheless, Business Day urges government to “go the whole hog” for what are entirely ideological and symbolical reasons – “key among these”, in the editorial’s words, “is widening share ownership in SA by offering as large a portion as possible to non-traditional investors.”
The pamphlet does not tell us that the MSCI World Telecommunication Services Index has shed 78% of its value since reaching a high of 161,11 points on March 6, 2000 .
The pamphlet does not tell us that we are doing something entirely unprecedented – we are trying, simultaneously, to take Telkom’s privatisation further at the very time that we are also introducing a fixed-line competitor.
The pamphlet doesn’t tell us that there is a dispute between Telkom and US systems company Telcordia, which could see Telkom pay out up to R1,5bn in damages.
The pamphlet doesn’t tell us that Chunghwa Telecom, Taiwan ‘s biggest phone company, last week cancelled a $1,6bn share sale because of the depressed global market.
The pamphlet doesn’t tell us that Eutelsat, Europe ‘s number two satellite operator, has just postponed plans to sell shares.
The pamphlet doesn’t tell us that Mike Schussler, Tradek economist, has just affirmed (while hypocritically supporting government’s IPO process) that “the global telecom sector will give us the biggest blowout since the railroads”.

Perhaps bargain-basement prices will provide many small potential share-holders with a windfall. But equally possible is that many will be seriously burnt in the process. Analysts are guessing that it will take five years and more for there to be some recovery in the market. Whether small-scale savings societies can weather five years without serious returns is a highly uncertain matter.

Public ownership

Behind this heavy sell is a serious ideological sleight of hand. Before the 1997 partial privatisation Telkom belonged to the South African public, one hundred percent. It was government’s responsibility to manage this asset in ways that benefited all of us, especially those most impoverished.

With the 30 percent sale in 1997, Telkom became 30 percent “proudly” Malaysian and American.

The further privatisation process now proposed will dilute South Africa public ownership and effective participation still more. The special share-offering to historically disadvantaged individuals and communities is designed to sow further confusion. Stokvel members with shares in Telkom will be confused in the future. If a further 20,000 workers are retrenched in the name of improved dividends to share-holders, will stokvel investors applaud or be concerned? If more lines to poor communities are cut off in the name of profitability, will Telkom share-holders in those very communities celebrate or mourn?

Telkom is a critical public asset. It is a strategic resource required for the ongoing growth and development of our society and economy. It is a grave error to put its fate into the short-term, individual profit-seeking logic of the market.