Australia should step up ahead of Pacific telco’s possible sale

A telecommunications company that operates in six Pacific island nations has reportedly received approaches from prospective buyers. This news has attracted considerable interest among security experts in Australia.

Digicel was established by Irish businessman Denis O’Brien and commenced operations in Jamaica in 2001 before expanding throughout the Caribbean and to numerous countries in Central America. It now operates in 32 countries, six of which are in the Pacific. Digicel’s first Pacific market was Samoa in 2006, followed by Papua New Guinea in 2007. It also operates in Fiji, Tonga, Vanuatu and Nauru.

Within Pacific markets, its dominance varies: it is the only mobile network operator in Nauru and it has a 92% market share in PNG but only a third of the market in Fiji. In addition to providing telecommunications services in PNG, the company also has a philanthropic foundation and offers online news and pay television services.

A weighty concern regarding the sustainability of Digicel’s operations in the Pacific is the substantial burden of debt held by the parent company, Digicel Group. O’Brien owns 99.9% of Digicel Group, which reportedly had a debt of US$7 billion in June 2020. In May, Reuters reported that Digicel Group had offered its Pacific business as security to its creditors in a restructure that reduced its debt by US$1.6 billion. Credit ratings agency Moody’s has suggested that the company is effectively defaulting on its loans. It seems likely that the Covid-19 pandemic has further dented the company’s balance sheet.

In December, it was revealed that Digicel Group had asked Citigroup for advice about a possible sale of its Pacific arm. It seems that the company’s motivation would be to use the cash generated from the sale to help to address its debt. If a sale were to go ahead, it’s unclear what might happen with the reported offer of the company’s Pacific operations as security in the most recent debt restructure.

Within the Digicel Pacific portfolio, the PNG operations are the largest in terms of number of subscribers (about 2.5 million users) and number of towers (about 1,000). Potential buyers would be eyeing the PNG part of the company with interest. When Digicel began to spread network coverage to rural areas that had never had any telephone services, people were delighted to hear the voices of their loved ones in other parts of the country. Despite substantial challenges with erecting towers in rugged areas with traditional land ownership structures, the network generated a lively small business ecosystem of telephone credit sellers and handset repairers. Over time, though, people started to express dissatisfaction with customer service, pricing and other issues. Today, some questions remain about Digicel PNG’s reputation, as well as the quality of its infrastructure network.

Recent rumours that the Australian government might step in to support, finance or guarantee an Australian bid for the Pacific arm of Digicel have raised a number of questions. Are there Australian companies that are interested in such a purchase? Would a consortium of businesses join forces to take advantage of this opportunity? Do they have sufficient Pacific expertise and experience to pull it off? If there’s insufficient Australian interest, would Australia underwrite a regional bid, possibly involving superannuation funds based in Pacific nations? Could the latter option present competition risks in places where such funds are already major investors?

A solution may be for the Australian government, under its Pacific step-up initiative, to discuss with Pacific governments an Australian-led program of support in the telecommunications sector. Depending on the wishes of Pacific governments, this could be aimed at buttressing regulatory regimes, enhancing regional coordination, strengthening cybersecurity and addressing other forms of security related to communications throughout the region. The program could include offering expertise, providing training and facilitating targeted financial grants.

But this should not be the responsibility of Australia alone. Other countries with a strategic interest in the region should be urged to participate—notably New Zealand, the United States and Japan (with which Australia is already partnering to extend electrification in PNG).

An Australian acquisition of Digicel won’t prevent Huawei from expanding its presence in the Pacific. Nor will it prevent other potential operators, such as China Mobile, from selling mobile and other communications services in any country in the region.

As Australia and New Zealand enhance the quality of their domestic communications through 5G and other technological advances, their capacity to assist the region to improve its communications ought to be considerable.

Huawei has a substantial foothold in PNG through its provision of internet and related online services via the new undersea cable network that connects major centres such as Port Moresby and Lae.

In the nations where Digicel operates, mobile services are generally the main form of communications. In PNG, the use of landlines is diminishing even for major companies. Mobile use dominates, and internet access and use are growing.

The Australian government, supported by interested allies, could productively discuss opportunities for modern communications (ideally developed with local business and industry partners) with the region’s governments and regulatory authorities. Such a strategy will not prevent Chinese state-owned entities from entering or expanding their operations, but it will offer the governments an opportunity to seek expert advice, enhance local capacity and develop modern, affordable communications—especially for the rural majority, which in the case of PNG makes up 80% of the total population.

But time is of the essence—especially if the sale of Digicel is pursued in the coming months. The Australian approach should be comprehensive and it must be undertaken with urgency.