In Bharti’s credit strategy, Airtel leaves Kenya dry

Mugo Kibati, CEO of Telkom Kenya, and Prasanta Das Sarma, CEO of Airtel Kenya, when they appeared before the Senate ICT Committee at County Hall in Nairobi on October 22, 2021 to discuss the progress of their merger. [Boniface Okendo, Standard]

At the height of the heated debate over the proposal to make Safaricom a dominant player in the telecommunications sector, one of the company’s senior executives veiledly attacked one of its competitors.

He had been asked to comment on criticism from competitors that Safaricom’s market share made it impossible for other operators to compete effectively and expand their subscriber base.

“We have invested tens of billions of shillings to maximize our coverage in the Kenyan market and we have consistently made that investment, but some of our competitors are best known for switching colors,” he said.

The derogatory comment was directed against Airtel Kenya, which changed hands three times between 2004 and 2010 and was renamed four times.

More than 11 years since Bharti bought Airtel Zain and renamed Airtel Kenya, the dynamism of the country’s telecommunications market has changed significantly.

On the one hand, Safaricom’s critics say that the company has grown too big and that no competitor can gain significant market share along the main market segments to compete effectively.

On the flip side, analysts say the company is simply reaping the benefits of its investment, while others describe it as “curious” to see how other service providers can keep doing business despite nearly two decades of losing streaks.

According to the latest financial report from Airtel Kenya, the company made losses of Sh 5.9 billion for the year ended December 31, 2020, more than double the Sh 2.7 billion reported the previous year. This drove the company’s accumulated losses to Sh77.4 billion last December, bringing it to a net debt position of Sh43.7 billion.

Airtel Kenya also has Sh52.3 billion in shareholder loans that the company says will provide liquidity to operate.

A close analysis of Bharti Airtel’s latest annual report reveals a pattern where the parent company borrows billions of shillings to its subsidiaries each year, locking them into a cycle of debt and interest costs that may detract from any operating profits due. The loan to Airtel Kenya shot 12 percent to Sh 52.3 billion within a year. last December of 46.69 billion Shs. in December 2019.

The loan attracted an interest of $ 15.25 million (Sh 1.7 billion).

While the loan is ultimately owned by Bharti Airtel, it is stratified so that one subsidiary advances money to the next until it reaches Airtel Kenya.

Some of the subsidiaries have no other sources of income other than interest income on the loan.

Although Airtel Kenya posted a loss of Sh5.83 billion in the period through December 2020, it is noteworthy that it posted an operating profit of Sh1.7 billion.

Despite the impact of the pandemic that crippled many companies last year, the telecommunications company saw sales jump significantly from Sh21 billion last year to $ 26 billion.

However, financing costs of Sh3.12 billion, which included payments to service the Bharti Airtel loans and Sh4.5 billion in foreign exchange losses, plunged the telecommunications company into deep losses.

Airtel Africa has not commented on the affiliate lending pattern or the impact on operating costs.

According to the company’s annual report, Bharti Airtel loaned Indian rupees 61.3 billion (Sh92 billion) to its subsidiaries last year, up from Indian rupees 67.1 billion (Sh101 billion) the previous year.

In return, the subsidiaries made 81.5 billion Indian rupees (122.89 billion Sh.) In repayments to the parent company, more than double the 32.8 billion Indian rupees (49.46 billion Sh.) In loan repayments in 2019.

The report states: “Bharti Airtel provides financial support, in the form of investments, loans or guarantees, to its subsidiaries from time to time to meet their business needs.”

“The company accounts for its investments in subsidiaries, associated companies and joint ventures at cost less any impairment,” said the telecommunications company in the report.

“The investments mentioned are tested for impairment if the circumstances indicate that their book value could exceed the recoverable amount …”

Bharti Airtel has a total of 103 subsidiaries, consisting of associated and joint venture companies in Asia, Europe and Africa.

The company’s investments in its subsidiaries were Indian rupees 153.3 billion (Sh231 billion) as of December last year, compared to Indian rupees 285.5 billion (Sh 430.49 billion) in the previous year.

Airtel Networks Kenya is the best known subsidiary associated with its Kenyan operations.

Unlike the company that offers mobile telephony; Data and mobile money services are another five companies affiliated with Bharti in Kenya. Almost everyone makes losses. Bharti Airtel Kenya BV is one of the company’s subsidiaries in the country but is registered in the Netherlands.

It made a loss of Sh2.48 billion ($ 22.37 million). The company, also described as an investment and holding company, had revenues of $ 15.25 million ($ 1.69 billion), which is in the form of interest income on a loan advanced to Airtel Networks Kenya.

However, the revenue was eroded by loan repayments in the form of interest expense to the sister company of $ 35.33 million (SH3.92 billion).

Bharti Airtel Kenya Holdings BV, also registered in the Netherlands and known as an investment and holding company, made a loss of US $ 1.29 million (US $ 143 million). The company’s main source of income was Bharti Airtel Kenya BV’s interest income of Sh3.92 billion. ($ 35.33 million).

However, it is servicing a loan from Bharti Airtel Africa BV and paid interest expenses of $ 36.62 million ($ 4.1 billion) to the company through March 2021, more than what it was during the course of the year Year had made.

Network I2I (Kenya) Ltd is another subsidiary of Bharti Airtel in the country which, despite being established in 2019, has not yet registered any trading activities.

Another subsidiary, Airtel Mobile Commerce Kenya BV, is registered in the Netherlands and is known as the “Investment and Holding Company”.

It made a loss of $ 252,000 (SH 27.7 million) in the year ended March 2021. Her main asset is a stake in Airtel Money Kenya, where she has subscribed to 5,000 shares of Airtel Money Kenya Ltd and paid $ 46,700 (Sh5.14 million), according to shareholders.

According to the report, the main job of Airtel Mobile Commerce (Kenya) Ltd is to hold the funds for Airtel Money’s e-value account. Airtel also said the company has no trading activities and therefore no profit or loss was recorded during the year.

As of December last year, the company held $ 1.13 billion in the Mobile Money Trust on behalf of Airtel’s mobile money customers and is not available for the company’s normal operations.

Earlier this year, the National Treasury proposed amendments to the country’s income tax law that would mandate multinational corporations operating in Kenya to submit income statements to the Kenya Revenue Authority (KRA) about their activities in the country and around the world.

“A top parent company of a multinational group of companies has to give the representative no later than the 12th month after the last day of the reporting year of the group”, it says in the change of § 18 EStG.

The changes aim to curb transfer pricing, the process by which multinational corporations impose high operating costs on subsidiaries in high-tax areas and report profits in low-tax areas to avoid high taxes.

While the practice is considered legal in many jurisdictions, tax justice activists in recent years have urged governments, especially in developing countries, to remove loopholes that ensure that multinational corporations have little or no in countries where they do big business Pay taxes.

Other proposed changes to Kenyan tax laws include expanding the definition of related parties in international transactions to include companies in low-tax areas or tax havens. The tax advisor would also like to carry out country-to-country reporting, in which the parent companies report on the profits of subsidiaries within the respective country of operation.

According to George Maina, tax law expert and associate partner at Rodl and Partner, loans, guarantee schemes, and high administrative costs billed to subsidiaries are some of the loopholes multinational corporations can exploit to pay less tax in different markets.

“Loans and guarantees between subsidiaries can be a means of avoiding tax burdens, especially since companies are not required to disclose the interest they charge on borrowed capital in their own company,” said Maina.

“However, that doesn’t always mean that it is a matter of transfer pricing. It could be that the parent company is building new activity in a new market and needs new capital investment that it can provide at a low cost, ”he added.

Maina noted, however, that companies are required to offer loans to subsidiaries on “arm’s length” terms.

“This means that the loan taken out by the subsidiary should be comparable in terms of interest cost to a similar facility that can be obtained, for example, from commercial lenders on the open market,” he said.

Airtel Kenya also has loans from other lenders and owed Sh 10.94 billion to various lenders last December.

However, this is nowhere near the loan owed Bharti Airtel Kenya BV of Sh52.36 billion. In the disclosures, Airtel said the loan bears an interest rate of three percent per annum.

The company said the higher internal credit will cushion the telecommunications company against the risk of fluctuating interest costs.

“The company’s only floating rate debt is its Sh10.9 billion external borrowings, which are fixed at floating rates and therefore exposed to cash flow interest rate risk,” the telecommunications company said.

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