Commentary |
29 October 2021

Telstra’s Digicel Pacific challenge

The deal with the government insulates the telco from financial risk. But accepting the role of Australia’s lead business ambassador in the region makes it no set-and-forget investment. This article was first published in the Australian Financial Review on 29 October 2021.

Telstra’s purchase of Digicel Pacific, underwritten by $US1.33 billion ($1.77 billion) of taxpayer money firmly ties its business operations to Australian foreign policy in the region.

The terms of the deal are exceptionally favourable to Telstra, which will contribute just $US270 million to make up the total $US1.6 billion deal, in exchange for 100 per cent equity.

Telstra will own and operate Digicel Pacific. The Australian government will stump up the remainder in the form of loans and equity, which it expects to have paid back, while insuring Telstra for political and regulatory risk, foreign exchange risk and assisting with cash repatriation from the Pacific.

The deal has insulated Telstra and its shareholders tremendously from risk. At the same time the government is putting incredible faith in Telstra as a key pillar of its new foreign policy approach in the Pacific.

Telstra will join a small community of Australian businesses in the region, and by market size and customer numbers the company will become Australia’s lead business ambassador in the region.

Regional reactions to the deal have so far been neutral to positive.

While Australian businesses have been criticised for their operations on the ground, the Australian brand is generally well-liked in the Pacific. Telstra estimates it will take about three to six months to get regulatory approval from the Papua New Guinea government, where Digicel Pacific is headquartered.

But as any Australian company with interests in the region will tell you, doing business in the Pacific is not the same as back home.

While Telstra has flagged it has no plans to markedly change Digicel’s business model, this is not a “set-and-forget” investment. There are things that should be changed, and Telstra should use this time to think carefully about its first steps in the market. The honeymoon period will wear off quickly and expectations from Australian officials and Pacific customers will be high.

For example, Telstra should replace all Huawei equipment currently used in Digicel’s Pacific networks with technology that does not fall under the Chinese Communist Party’s jurisdiction. This is a must if the Australian government is to see any national security payoff from underwriting the deal.

And in taking on Australian government funding, Telstra is taking on a responsibility to deliver a social good to Pacific peoples, and expectations from Australian taxpayers that their money is not used to exploit already-vulnerable communities.

Founded by Irish billionaire Denis O’Brien, Digicel entered the Pacific market in 2006 and revolutionised telecommunications services, quickly cementing its role as a dominant telco in the six Pacific economies where it operates. The company has a near monopoly in its largest market, Papua New Guinea, with a 92 per cent market share in the country of about 9 million.

Digicel has been wildly successful in the Pacific and reported $US223 million in earnings last year, with a strong profit margin. Most of its revenue comes from its prepaid mobile phone business, with the balance from business solutions, television and broadband services.

Mobile phone penetration and digital connectivity ranges widely across Pacific countries. In Papua New Guinea, 3G/4G covers just 55 per cent of the population. Lack of telecommunications and broadcast infrastructure generally means that mobile phone connectivity serves a vital social purpose, linking communities with services, such as banking and public health advice, that would otherwise be out of reach.

This dependence on mobile phone connectivity can be seen as good for business. But Telstra should be sensitive to the fact that mobile phones are a lifeline for many communities and small businesses, and should not exploit this dependency to squeeze more profits from what is already a successful and sometimes-predatory business model.

Instead, Telstra’s first move should be to prioritise repairing ageing infrastructure and expanding network coverage, not just in Papua New Guinea, but in all the countries where Digicel currently operates. Limited mobile penetration has made it more difficult for Papua New Guinea to address the rapid spread of COVID-19 and to increase vaccine awareness. It will also make next year’s general elections that much harder to deliver.

The company should also take a look at Digicel’s phone credit loan scheme and ask if the juice is worth the squeeze – does Telstra really want to make its money from people struggling to meet exorbitant interest repayments on microloans they had to take out to access basic services?

Telstra’s scale should present economies in its Pacific operations that would mean it didn’t have to resort to predatory practices targeting its most vulnerable customer base.

Perceptions of Australia are irrevocably tied to the activities of Australian businesses overseas and nowhere is this more the case than in the Pacific. The scale of Australian operations has massive impacts on Pacific economies and communities, even if they barely register on the balance sheet back home.

Repercussions when things go wrong are long-lasting, can have destabilising effects on domestic politics in the Pacific and can cause immediate damage to bilateral relations between the Australian government and Pacific countries – just ask any Australian miner or bank that has operated in the region in the last few decades.