Nairobi — Kenyan authorities moved last week to swiftly block investors eyeing a controlling stake in fixed line telephony provider, Telkom Kenya, from directly accessing government shares in the profitable mobile phone service firm, Safaricom.

Finance ministry technocrats moved last week on Monday to seal an accord with Telkom, effectively ending the firm's holding of 60% stake in Safaricom, its profit-making subsidiary and announced a detailed rescue package for the cash-strapped firm.

Esther Koimett, the finance ministry's investment secretary, said the government had set aside Ksh35 billion (US$52 million) in this year's budget to fund Telkom Kenya's debt restructuring, including an agreement for the re-purchase of its Safaricom shares.

The move was meant to prepare the previously loss-making fixed line telephone firm Telkom Kenya for sale while making it more attractive for at least four foreign firms that had shown strong interest in buying the controlling stake.

The debt-ridden firm has been financing a detailed financial restructuring bid aimed at reducing its bloated expenditure on staff salaries and other overheads. Reducing the firm's debt burden will pave way for the sale of the firm's 51% stake to foreign investors.

Koimett said the bailout package had been given a cabinet approval and factored in the 2007/08 budget. Ministry technocrats believe that with the firm's huge debts settled, the firm would be vibrant enough to tackle competition it lost to cellular networks.

The bailout package for the loss-making firm was announced on Monday last week as the process of selling the firm, whose annual sales volumes totaled about Ksh.20 billion in 2005, entered the final stage with the winning bidder expected to be unveiled by Friday.

Kenyan Finance Ministry officials said four foreign firms, among them French telecommunication giant, French Telkom leading a consortium of three firms, Alcazar Capital Partners, Agility of Kuwait and Dubai's CPS Partners were bidding for the stake.

The other three firms, Reliance of India, Telkom South Africa and Lap Fund of Libya, are in the race for the controlling stake in the giant Telkom firm which has been making losses despite enjoying a 40-year monopoly in the provision of fixed line and internet.

Telkom Kenya is 100% state-owned. The fixed-line telephony firm also owned controlling stakes in East Africa's most profitable mobile phone firm, Safaricom. Koimett said the government has taken over the majority stakes from Telkom Kenya.

"We do not want investors coming to buy Telkom Kenya to gain access to Safaricom. We want the investors to buy Telkom because it is a company that can compete in the market. We want to remove the other restrictions to allow it to compete," Koimett told journalists.

Telkom owes most of its debts to state institutions like the Kenya Revenue Authority (KRA), which collects corporate tax on behalf of the government.

It also owes 15 billion Shillings to its staff pensions fund and other debts accruing from interconnect agreements with its subsidiary, Safaricom. Telkom's liabilities have always exceeded its profits, throwing its balance sheet it chaos.

Telkom Kenya's debts and liabilities were to a bigger portion owed to the Staff pension scheme, the owners of its official headquarters, Telposta Towers, the 28-storey building in Nairobi's central district, which also hosts parts of the Postal Corporation of Kenya.

Last year, the Kenyan cabinet approved the sale of 9% stake of Safaricom to finance the restructuring of Telkom Kenya to make it a viable company to foreign investors.

Telkom Kenya's Managing Director Sammy Kirui said the restructuring process, which focused on staff reduction, was on course and was expected to be completed within weeks.

"The financial restructuring is on track. We expect 300 employees to leave by the end of the week. We are in phase three of the restructuring," Kirui said.

Koimett said the process of moving the Telkom shares from Safaricom books had started while the list of creditors had almost been cleared.

"The resources for paying Telkom Kenya for its Safaricom shares have started. We shave also signed with Safaricom parties' agreements on how the shares (60%) would be moved from the books," Koimett disclosed.

The government is taking up the pension's deficit while Telkom's has paid part of its liabilities to its soon-to-be former subsidiary, Safaricom, Koimett said.

The debts were incurred through inter-connection agreements signed between Telkom Kenya and Safaricom. The debts have been paid off from Telkom Kenya's dividends received in July this year.

Koimett said Ksh26 billion owed by Telkom Kenya in corporate tax liabilities and other debt penalties would also be settled within the coming days.

"We are in the process of paying some of these debts and working on debt swaps in other cases," Koimett said.

Meanwhile, the finance ministry has formed a committee to scrutinise the four bidding firms in the race for the 51% stake. Reliance of India has been singled out for criticism especially given that it won the bid to revival Telkom Kenya.

Analysts have raised concern over the presence of Reliance India, the firm that bid the highest for the coveted Second National fixed line operator (SNO) license but failed to pay for the license in time, forcing the regulator, the Communication Commission of Kenya to reposes the license.

"We are not going to hand over Telkom Kenya to a company that does not have money. We are satisfied with Reliance of India because believe it is a successful company in India and it has deep pockets," Koimett said.