President Cyril Ramaphosa has issued a proclamation directing the Special Investing Unit (SIU) to probe various dealings that took place at Telkom going as far back as June 2006, among them an aborted foray into Nigeria that is estimated to have cost the company more than R10-billion.
The president has directed the SIU to investigate “serious maladministration in connection with the affairs of Telkom” as well as improper or unlawful conduct by employees or agents of the company. Among other things, the SIU must investigate the unlawful appropriation of expenditure of public money. Read the president’s proclamation (PDF).
The president said the SIU must investigate:
- Maladministration in the affairs of Telkom in relation to the sale or disposal of Multi-Links; Telecommunications, a company it acquired in Nigeria in 2006 that subsequently failed, and iWayAfrica and Africa Online Mauritius;
- The procurement of telegraph services (telex and telegrams); and
- Advisory services in respect of the broadband and mobile strategy of Telkom and payment made in a manner that was not fair, equitable, transparent or cost-effective, or contrary to applicable legislation or national treasury or Telkom rules.
It’s not clear what prompted the president to order the investigation now, many years after the fact. However, it comes as tensions mount between government and Telkom over the licensing of radio frequency spectrum.
Telkom’s Nigerian foray proved to be a disastrous attempt by the company to enter the lucrative West African market at a time when it was seen as the next big opportunity in telecommunications on the continent.
It was widely reported at the time that the company erred in buying a CDMA operator in a market dominated by GSM technology. The decision to acquire Multi-Links was made by former Telkom CEO Papi Molotsane, who was later axed by the board..
Former Telkom CEO Nombulelo Moholi admitted in June 2012 that the telecoms group had made a hash of its investments elsewhere in Africa. “A lot of the investments we made we shouldn’t have made,” she said then.
The group’s investment in Multi-Links turned into a financial disaster. It has been estimated that the telecoms operator lost at least R10-billion through that investment, before being forced to cut its losses and run.
“Wrong decisions were taken. But Telkom continued to pump money into an area it shouldn’t have. It has happened and we have taken the beating from it,” she said, referring to Telkom’s share price at the time, which had collapsed.
Former communications minister Roy Padayachie told parliament a year earlier, in July 2011, that the the rapid expansion of the Multi-Links network that had to be implemented could not be supported by the underdeveloped distribution channels, thus affecting sales revenue.
Sapa quoted Padayachie at the time as saying that some contracts were entered into that did not deliver the anticipated benefits and incurred significant operating expenses.
Multi-Links did not have sufficient market share, pricing power or strategic and operational advantages to be successful in a tight economic environment, Padayachie told parliament.
Multi-Links reported an operating loss of R522-million for the financial year ended 31 March 2009 and R1-billion for the year ended 31 March 2010. Telkom wrote down goodwill and assets of R5.8-billion.
“Telkom underestimated the highly competitive nature of the Nigerian telecoms market and also failed to build and manage appropriate distribution channels,” the former minister added.
Former Telkom CEO Jeffrey Hedberg took the decision in 2010 to pull the plug on Multi-Links, a decision taken forward by Moholi, who succeeded him.
Meanwhile, Ramaphosa’s instruction to the SIU to probe tenders related to telegraph services likely relates to a disputed tender first issued in 2007.
Phuthuma Networks, led by businessman Ed Scott, took Telkom to court and various regulatory bodies over the disputed tender, published in November 2007, for the outsourcing of Telkom’s telex services, including support for ship-to-shore telex. This tender was cancelled in June 2009, Telkom claimed at the time, after it discovered the tendering process was a “mess”.
But Scott claimed that another company that bid for the tender, Network Telex, had begun providing telex services for Telkom without the tender having been awarded. Scott claimed this was in breach of the law, as the service had to be provided by Telkom or outsourced to a third-party provider through a formal tender process.
Finally, the president’s instruction to the SIU regarding the advisory services in respect of the broadband and mobile strategy of Telkom appears to relate to a contract signed with management consultancy Bain and Company in 2013.
Bloomberg News reported in July 2014 (paywall), citing a document in its possession, that Telkom awarded the R91.1-million advisory contract to Bain without following an open bidding process. Bain was contracted on the watch of former Telkom CEO Sipho Maseko, who stepped down at the end of last year.
The 24 March 2014 letter cited by Bloomberg, which was a response by Telkom executive Anton Klopper to a request under South Africa’s Promotion of Access to Information Act, showed that there was no record of a published or archived competitive process that led to the selection of Bain, the Boston-based management consulting firm, the news wire reported at the time.
Telkom rubbished the claims at the time, saying the Bloomberg report was based on the incorrect premise that an open tender process was the only one available to Telkom when procuring products and services. It explained that it had exemptions from various aspects of the Public Finance Management Act due to its being a public company listed on the JSE.
Telkom issued a brief statement on Tuesday afternoon, responding to Ramaphosa’s proclamation. It said:
“Telkom notes the Government Gazette no 11385, published today, giving the SIU authority to investigate possible maladministration in the sale or disposal of iWayAfrica, Africa Online Mauritius and Multi-Links Telecommunications Limited.
“Telkom follows robust corporate governance principles.
“All matters relating to these transactions are on the public record. Telkom’s own investigation flagged possible cases of wrongdoing by two employees in one of these transactions and declared this in terms of the Prevention and Combatting of Corrupt Activities Act. Telkom issued civil summons against an employee with an eye to recovering losses amounting to US$5-million relating to activities incidental to the transaction.
“As the matter is the subject of a criminal and civil nature, Telkom will deal with the case on its merits in the appropriate forum, in the appropriate manner, at the appropriate time.”