Top 500 Companies: Safaricom calling Ethiopia

The jewel in Safaricom’s crown is its mobile-money service, M-Pesa. The payments that flow through it each year are worth 50% of Kenya’s gross domestic product, and it recently overtook voice calls and SMS messaging as Safaricom’s biggest earner.

Now Safaricom is expanding its operations into Ethiopia, where the 110-­million-strong population is currently served by a single state-owned provider, Ethio Telecom (#109). In May 2021, a consortium led by Safaricom won the first-ever private licence to provide telecoms services in Ethiopia, beating competition from South Africa’s MTN (#4) with a bid of $850m. Its consortium partners include South Africa’s Vodacom (#12) and British development finance agency CDC Group (now called British International Investment).

A huge opportunity

Safaricom has already invested $200m into Ethiopia as it prepares to launch commercial operations in April. That includes a $100m data centre built by Huawei and Nokia, the first of 11 it plans to install across Ethiopia, and a lease agreement with the state energy provider that grants access to the country’s fibre-optic cable network for five years.

In total, Safaricom is expected to plough $8bn into Ethiopia over the next decade, in the country’s largest-ever foreign direct investment. Its operations will create 1.5m of direct and indirect jobs, according to Tewedaj Eshetu, a Safaricom spokesperson.

Renaldo D’Souza, head of research at Sterling Capital in Nairobi, says Safaricom has “reached a point of market saturation” at home in Kenya, where it controls over 95% of the mobile-­money market.

“Safaricom is looking beyond the Kenyan market to others that are less competitive and that offer high growth potential,” D’Souza tells The Africa Report. “That’s the appeal Ethiopia holds – it has just one service provider and it is a significantly larger country than Kenya in terms of population. Over the past 10 years – before the current conflict – Ethiopia has also been one of the fastest-growing African countries in terms of GDP growth, so it is a huge opportunity for Safaricom.”

M-Pesa stuck in the starting blocks

Safaricom plans to construct 7,000 mobile towers across Ethiopia in partnership with Nokia and Huawei. Initially, however, it will have to share Ethio Telecom’s towers in order to roll out its network and start generating revenue. An industry insider who requests anonymity says Ethio Telecom has sought to restrict Safaricom’s access to its infrastructure, prompting complaints from Safaricom that it is not competing on a level playing field.

Significantly, Safaricom’s Ethiopian licence does not include permission to launch M-Pesa in the country. Balcha Reba, head of the Ethiopian Communications Authority, said Safaricom must make a separate application to the National Bank of Ethiopia for permission to run mobile-money services.

That permission is expected to be granted in the next couple of months. In the meantime, however, Ethio Telecom has been busy building up its own mobile-money operation, Telebirr. Launched in May 2021, it has already attracted 13.1 million users.

“Mobile money is where the profit is,” says Ayobami Omole, a telecoms analyst at Tellimer. “Safaricom is definitely going to be trying to gain a share of the voice and SMS market, but mobile money is the major appeal for telecom providers in Africa.”

Investing in Ethiopia poses risks for Safaricom. The country is in the grip of a grinding civil war with the northern Tigray region which has been characterised by widespread human rights abuses. In November, as the Tigray rebels advanced towards the capital, Addis Ababa, Safaricom evacuated some of its staff to Nairobi. Meanwhile, the government has restricted phone and internet services to areas occupied by the rebels – a strategy that means Tigray remains under a communications blackout.

The economic turbulence arising from the conflict, combined with the restrictions on mobile money, has so far put off other operators. As a result, plans to auction a second licence and to sell off a 40% stake in Ethio Telecom has been put on hold.

Security threats

“National security concerns have played a big role in the government’s approach to the telecoms liberalisation process,” says Alexander Demissie, director of The China Africa Advisory, a consulting firm. “If more security concerns arise, they could force Safaricom to shut down. I don’t see it as a likely scenario, but a plan needs to be put in place in case it happens. This has not been discussed, and we don’t know what will happen if that situation arrives.”

Last year, when the fighting was at its height, Safaricom CEO Peter Ndegwa said: “The opportunities outweigh the risks”. He cited hurdles not only the conflict but also taxation and red tape, currency volatility and the availability of foreign exchange. “From our experience in Kenya, we know that the liberalisation of Ethiopia’s telecommunication market will be of value, increasing connectivity, creating new digital services and businesses, and generating new jobs across the country,” Ndegwa said.

Safaricom has rebounded after a small dip in revenues in 2020-2021 owing to the pandemic and a crackdown on mobile-based betting in Kenya. In the six months to September, its net income rose by 12% to $332m. Sales on M-Pesa grew by nearly 50% over the same period.

With the popularity of voice calls and SMS messages declining, the company’s long-term focus is on mobile data and bundling new services with M-Pesa, such as its Fuliza overdraft facility.

“Obviously, the roll-out of Safaricom’s services has been slowed down by the conflict in northern Ethiopia, and also now by the impact of the Russia-Ukraine crisis,” says Sterling Capital’s D’Souza. “But the prospects are good. I estimate we will see positive growth in the next five to seven years.”