Resisting political corruption- the story of Econet- Part Nine-Conclusion


Given the fast deteriorating economic environment, the Econet management took in February 2000 perhaps its most significant strategic decision: to reduce the exposure to Zimbabwe by developing other markets in Africa and beyond. The vision of the company, which had been “To provide telecommunications to all the peoples of Zimbabwe” (IPO prospectus August, 1998), was now reformulated “To provide telecommunications to all the peoples of Africa.”

 “We did a strategic review and we basically concluded that one of the biggest risks we had is single country exposure. Okay. Although at the time we had two exposures, we had Botswana and Zimbabwe, we realized that single country exposure was one of the risks we had to mitigate. There was an absolute howl amongst shareholders, because shareholders, particular market analysts, they can’t see beyond this afternoon.

“They said: How can Strive get up, abandon a company two years into operation? If you guys want to expand, why don’t you send a marketing department to be based in South Africa. You don’t have to leave Zimbabwe.

“I said: Listen, the biggest risk this company has is single country exposure. They couldn’t see it. I packed my bags – basically we sent Nic (Rudnick) forward together with another of our guys who’s now based in London, called Marco Signorini, and told him to come and set up this office. So they came from scratch, they looked around. Finally they got this building where we are here, and I came in and lived in a hotel just down the road here, and we began to build.

“Now you’ve got to realize that we’re coming from a country where there’s a foreign currency control regime. So we could not transfer capital. So coming here was a massive challenge. That’s why a lot of Zimbabwean business wouldn’t do what we did, but we said: Look, we will find a way to build the relationships and access the capital, but we wanted to be in South Africa for basically five reasons”

The five reasons cited by Masiyiwa for being in Johannesburg, South Africa were:

  • 1) Access to capital;
  • 2) Access to international skills;
  • 3) A banking system that was accustomed to supporting international companies;
  • 4) Networks of senior managers;
  • 5) Logistics – Johannesburg was the city with the largest number of international airlines in Africa.

The macro-economic environment in Zimbabwe continued to deteriorate during the financial year 1999-2000, with high inflation, shortages of essential commodities such as food and fuel, and a falling currency. In his statement to the shareholders in the Annual Report for 200, Chairman of the Board Prof. Norman Nyazema wrote,

“The crisis experienced by the country during the 6 months to June 2000 worsened the already deteriorating macro-economic environment. The economy was characterized by severe shortages of foreign currency, high interest rates of over 70%, inflation of approximately 60% and a serious decline in business confidence which resulted in the withdrawal of international credit cover to Zimbabwe by financiers and the suspension of bilateral and multilateral aid by the donor community. Furthermore, the exchange rate although officially pegged at Zim$ 38 to the US dollar was trading at an unofficial rate of around Zim$ 63 to the US dollar, which further increased operating costs”

In spite of these difficulties, the company performed impressively, increasing its subscriber base from 63,000 in 1999 to 94,000 in 2000, revenues from Zim$ 434 million to 1.279 billion, and profits after tax from Zim$ 8.4 million to 78 million.

At the end of June, the company’s shares were quoting at approximately Zim$ 17, which gave Econet a market capitalization of Zim$ 14.67 billion (US$ 386 million at the official exchange rate of 38; US$ 233 million at the parallel rate of 63). Less than two years after start-up, Econet was the second largest company on the Zimbabwe Stock Exchange in terms of market capitalization.

Since its shares started trading in September 1998, it had outperformed NASDAQ’s telecommunications sector. Salomon Smith Barney rated Econet one of the most exciting shares in Africa for international investors. In spite of the economic problems in Zimbabwe, HSBC recommended the Econet stock as a “buy.”

The company entered into new battles with the Ministry, with PTC, and with the Post and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ), which was set up in October 2000. Rudnick was quick to point out that these battles were not unique to Econet, or even to Zimbabwe – “in the whole of Africa – Zimbabwe is no exception to that – the idea of having a Regulator is something new.” …

“but the attitude of the Regulator which comes from the Government and is the same people who opposed us years before, is significantly influenced by what happened during the court case. Their attitude to us, the manner in which they treat us, how they respond to requests from us, is directly influenced by the history. But they haven’t continued to fight us anywhere near on the same scale that they did in the early days, and I wouldn’t say that it’s a continuation”

One contentious issue was the earth station that Econet had set up in Harare to carry international telecommunications traffic to and from Zimbabwe. PTC objected that Econet’s license was only for domestic traffic and wanted to close it down. Another was the new fee structure that POTRAZ had introduced, which was considered unviable by the cellular operators. A third was the tariffs that Econet and other cellular operators could charge to their customers – these had to be authorized by POTRAZ.

For example, the highest tariff Econet was allowed as of July 2002 was Zim$ 26 per minute. An internationally accepted benchmark in cellular telecommunications was an average tariff of 25 US cents per minute. Based on the official exchange rate of Zim$ 55 per US$, the highest tariff worked out to an attractive 47 US cents. If the more realistic parallel market rate of Zim$ 700 per US$ were used, the average tariff of Econet would have to be roughly Zim$ 175 per minute, nearly seven times its current maximum.

Econet and the other cellular operators were having great difficulty in getting POTRAZ to agree to use the parallel market rate of exchange as a reference point for determining the tariffs. The macro-economic situation deteriorated further in the year 2000-2001. US dollars were not available at the official rate of Zim$ 55. By April 2001, the Zim$ was being traded in the parallel market at 200 to the US$. Inflation continued to be high: 70%.

In January 2001, a consortium of which Econet was a member was awarded one of the three cellular licenses in Nigeria, a huge market with a population of 120 million. The license fee was US$ 285 million. Econet was originally allocated 40% of the equity in the Nigerian company, which was called Econet Wireless Nigeria, but could not put together the resources to pay for

this equity share. Consequently, an agreement was reached whereby it was given a 5% share and the responsibility of managing the business: it would provide the CEO and other senior officers, and would receive a management fee in compensation. Zachary Wazara, who had been the CEO of the Zimbabwean company after Masiyiwa’s move to Johannesburg, was sent to head the Nigerian operations.

During 2000-2001, Econet lost roughly 30% of its skilled workforce of technicians and IT specialists. On the one hand, the company was unable to sufficiently compensate its employees for the inflation in Zimbabwe; on the other, new cellular networks that had come up in other African countries and beyond prized the experience of the Econet employees, and offered them salaries denominated in hard currencies.

“So from a morale point of view, when you’re going to face the trauma in the country, you’re going to face a morale problem anyway, okay. I discussed this with so many of my industrialist colleagues. It’s a massive problem, because how do you sufficiently remunerate an employee who faces inflation of 250%? How do you remunerate such a guy? It’s impossible. So you’ve got to face the fact that your employee cannot be satisfied with his situation. That’s just a fact”

To stem the tide of departing skilled workers, the management devised a strategy of deploying its trained Zimbabwean workforce on short and long term contracts in its international operations. By this time, the company was also present in Lesotho and Morocco. These international operations served as attractive postings for employees who were frustrated with their remuneration in Zimbabwe.

“Zimbabwe traditionally, after South Africa, is the greatest skills pool in Africa. It’s got a very well structured training, educational infrastructure. I mean, I’ll give you an example. We have 66 ex-patriots in Nigeria, 40 of them are Zimbabwean (as of July 2002). They came out of that (Zimbabwean) operation. If you go to Lesotho, most of the technicians are Zimbabweans. We literally use Zimbabwe as a training pool for taking people to move on.” …

“Now, it does two things for us. Firstly, the trauma of the political problems of Zimbabwe has seen a massive exodus of trained Zimbabweans. It is on a major scale. Over 100,000 in the United Kingdom, all who have left in the last two years. Had we not opened a valve to take people out of that system, we would have lost half of them. Your accountants, your engineers, they’d be out of the country, because the biggest tragedy of the Zimbabwean situation is that although Mugabe’s policies from a public perspective appear to be directed at the white farmers, the white farmers are not leaving the country, they’ve nowhere to go, it’s the black professionals who are hurt by the fall in the currency. So you’ve got a massive exodus of young black professionals. So for us, our key people are part of Econet Wireless International, and basically we’re able to move technicians, engineers, accountants, around inside our global operation”

The Econet share also fell to Zim$ 14 by April 2001, in part affected by the sharp fall in the stock indices and in telecommunications indices worldwide. Econet’s operational performance in Zimbabwe in 2000-2001 continued to be impressive: 43% growth in subscribers to 133,979; 123% growth in revenue to Zim$ 2.86 billion; and 230% growth in EPS to 32.20 cents.

All three cellular companies had stopped investing in their network infrastructures because of the exorbitant cost of buying US dollars. This had led to very high congestion in the network, and a drop in the quality of service. No new subscribers were being accepted, which meant that there was a black market for telephone lines. Several employees and outsiders admitted that the immense reserve of goodwill that Econet had with customers when it started operations in July 1998 had now eroded considerably.

“I think they have lost their goodwill with the clientele. People have forgotten. And, I mean, let’s face it, customers and the public are fickle. They had enormous goodwill. I’ve never known a company that had the goodwill that Econet had when they listed. A lot of people I know refused to have any cellphone until the Econet network came on line”

In spite of this erosion in popularity, Econet still fared better than its two competitors on indicators such as brand awareness, purchase intention, breadth of product and services offered, etc. The two areas in which it was not considered the best were geographical coverage (Net One was the best) and tariffs (Telecel was the lowest).

In addition to the congestion problems faced by the cellular operators, all Zimbabwean companies were faced with the problem of recruiting skilled employees and retaining them. Young, educated Zimbabweans were leaving the country in huge numbers due to the grave economic and political environment. Perhaps the biggest and most dramatic problem faced by Zimbabwe was a social one: roughly 25% of the adult population was HIV positive, and the life expectancy at birth of Zimbabweans had gone down to under 40 years. The incidence of AIDs was particularly high in the most productive segment of the population, i.e., between the ages of 19 and 55.

Masiyiwa explained the strategy in Zimbabwe, “So our whole approach to Zimbabwe is basically, it’s like a ship. Take down the sails, put it into a safe harbour, because it’s in the middle of a storm. Now, my customer on the ground is saying: You know, I’m suffering from congestion, I want more coverage. I have to listen to him with half an ear, my deaf one. My management is feeling pressure, they say: Look at the competition and they’re doing all that. And I say: But they don’t have to publish accounts, we do. So even the way we look now at how they do their expansion, it’s a completely different approach.

“So that is why we have, for instance, developed things like Your Fone, the pay phone business. I’m sure you saw that. All that was to how do we maximize return in terms of network capacity? The public pay phone generates more revenue than a normal cellphone. Prepaid, although Buddie is extremely popular, does not generate as much air time as a contract, so we deliberately make decisions here to say: limit the delivery of prepaid, so it’s not available, so it becomes a black market product. But all those are really strategies to carry the business through the storm”

There was a steep fall in the Econet share price during April 2002, when the stock fell to Zim$ 4, as a result of the panic selling by foreign investors withdrawing en masse from Zimbabwe. The financial year ended June 30, 2002 was another outstanding year for Econet Zimbabwe, with the subscriber base increasing by 4% to 139,402, sales by 112% to Zim$6.06 billion, average revenue per user (ARPU) by 77% to Zim$ 3,708, and net profit by 267% to Zim$ 1.02 billion.

The Zim$ had fallen to 700 per US$ in the parallel market, and Zimbabwe was now considered one of the fastest shrinking economies in the world. In spite of performing excellently, the market capitalization of the company had fallen to under US$ 5 million (at Zim$ 4 a share, and at the parallel rate of 700). As of June 30, 2002, less than a year after Econet Wireless Nigeria (EWN) was launched, it had achieved a subscriber base of 415,000 for a market share of 50%, after a marketing campaign that industry experts characterized as outstanding. EWN employed 500 people, and had already provided coverage to 12 Nigerian cities.

Telecom Lesotho (TCL) launched both fixed and mobile services in May 2002, and had achieved a subscriber base of 12,400 for a market share of 20%. Econet Satellite Services (ESS), headquartered in London, had installed a US$ 1.2 million satellite port outside London, and two earth stations in Nigeria.

The Maori tribe had been given a license in New Zealand, and had chosen Econet as its partner. Econet had taken a 63% equity in the company, which was called Econet Wireless New Zealand (EWNZ).

In Botswana, Econet was in a consortium with Portugal Telecom called Mascom Wireless, which had a market share of 70%.

On the whole, it was clear the Econet share had lost its popularity with investors. On the one hand, the economic environment in Zimbabwe had deteriorated to such an extent that foreign investors were not interested in investing there.

Zimbabwean investors, who could not take their capital out of the country, had lost their appetite for Econet for several reasons: no dividends had been declared for a couple of years; many investors did not really understand why Masiyiwa had left the country; they were not very knowledgeable about the group’s international operations; and they saw frequent changes in the top management team in Zimbabwe, as managers were seconded to the newer international operations such as Nigeria and Lesotho.

“… they’re an unpopular share at the moment. They’re not a popular share. You know, within the investors, people are not very happy with Econet. I think they feel a bit let down mainly because Strive’s gone, and also all the senior management that were there are not here any more”

Econet Zimbabwe also had, by the end of June 2002, an unpaid US dollar denominated debt with Ericsson that was long overdue and that it was unable to repay because of the exorbitant cost at which the US$ was trading in the parallel market. Ericsson had threatened to cut off all support to Econet Zimbabwe until payments started flowing in.

Some interviewees felt that the company had had several windows of opportunity, especially in 1999 and 2000, for raising fresh equity capital to repay this foreign currency denominated debt. They felt that Masiyiwa had been slow to reduce this foreign exchange exposure, because he was hesitant to dilute his shareholding in the company.

By December 2002, the group had been restructured, such that Econet Zimbabwe had no foreign currency denominated debt. Its total debt in early June 2003 stood at Zim$ 1.4 billion. Network development had resumed in December 2002 and progress had been made in clearing up the congestion. New lines were being issued on a limited basis to corporate customers. All new equipment was being purchased on a cash basis. Masiyiwa also indicated that the first dividend would be declared in June 2003.

In accordance with the restructuring, the mobile telephony, fixed telephony, satellite communications, and Internet services activities in all countries, except Zimbabwe, came under the Econet Wireless Group (EWG), which was domiciled in Botswana. The Zimbabwean operations were left out because of the difficulties involved in getting approval from the Zimbabwean government. EWG therefore was the umbrella company for Nigeria, United Kingdom, New Zealand, Lesotho, South Africa, Morocco, and Botswana. By June 2003, Masiyiwa’s team had concluded discussions for raising US$ 255 million through a private placement (205 million in equity and 50 million in debt) to fund the group’s expansion plans.

The investors were in the process of conducting due diligence on the group’s operations before releasing the funds. Out of these additional funds, US$ 150 million would be invested in Econet Nigeria which would take EWG’s share in the Nigerian operations from 5% to 37%. Similarly, the share in the Botswana operations would be increased from 6% to 56% (not including 14% owned by Econet Zimbabwe). The remainder of the funds would be used to fund the development of the NewZealand network, and to expand the UK operations.

The consolidated turnover and EBITDA projections of the newly capitalized EWG were: 2004 2005 2006 2007 Turnover (in US$ millions) 648 850 987 1036 EBITDA (in US$ millions) 211 295 369 385 Masiyiwa was hopeful of listing EWG on the Johannesburg stock exchange by the end of 2003.

Editor’s note: This is the end of the study. We decided to publish this series in the public interest. This should not in any way be viewed as endorsing Econet or authenticating the veracity of the study.


Part One

Part Two

Part Three

Part Four

Part Five

Part Six

Part Seven

Part Eight


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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.


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