1. Growing a business from 2 to 200 in 8 years

Let’s talk about Telstra and the Australian government teaming up to purchase Digicel Pacific. This story got my attention because we have a telco that doesn’t operate in Australia being bought by Telstra with government money at a time when Telstra has been working very hard to streamline operations.

And all of that was done with the clear or well, at least the purchase has been constructed under the clear understanding that is being done in the national interest based on fears of Chinese Communist Party control of private enterprise and specifically one enterprise. Huawei.

The news broke on the 25th of October that Telstra, with the help of the Australian government, was set to buy Digicel Pacific. So to me, this was new information. But I actually found in researching this piece that reports have been around in various publications that this has been on the cards for at least a year. So being honest, I also know bugger all about Digicel Pacific. I get that it’s a mobile player and I’m pretty sure that I’ve seen it in games of rugby involving Fiji. It’s often in banners, in the background, but other than that, really knew nothing until a few days ago.

Now, however, I know that it actually has a remarkable shear across the Pacific. So PNG is by far Digicel Pacific’s biggest market, where it enjoys 91% market share, which is incredible. But the company also holds a dominant market share in Samoa.

With 71%, Vanuatu, 65%, Tonga 58% and Nauru 52%, it turns out it’s only in Fiji where it holds 32% that Digicel is the second ranked network with Vodafone Fiji being the dominant player there. Now, I’m not a counterintelligence expert, believe it or not.

I don’t even know if I’ve used that term correctly, but I have got out the red string, stuck some newspaper clippings to a corkboard and have got to work on trying to make some sense out of all of this.

And there are a number of questions and what-ifs to explore here, so let’s get stuck in. So how real is the threat? Well, the Australian government has been worried for some time about the risk presented by Huawei’s involvement in telecommunications infrastructure inside and in the vicinity of Australia.

And this concern has resulted in Huawei being banned from involvement in 5G builds. And also, there have been interjections and cable projects and now the funding of acquisitions. So given those actions, is it reasonable for us to assume that there is a credible threat to address?

In 2018, the Solomon Islands government was pressured into excluding Huawei from Project Honiara, which was a planned undersea cable, and that was after an MRU was signed by the Solomons government, in which Huawei would have been given the job of providing some key hardware elements.

So the Australian government at the time threatened to remove rights to land that cable in Sydney and the Solomon Islands government backed out of its plans with Huawei and Vocus, was ultimately awarded the contract, with the government paying the vast majority of the cost, which was somewhere around $200 million.

That same year, Huawei was banned from involvement in the NBN rollout and 5G builds a move that really pissed off China, led to a dozen or so countries following suit and drove divisions inside the federal government. Now, in terms of what was happening inside the government in that period, Scott Morrison had actually backed Peter Dutton on the hard line he took against Huawei 5G involvement and the pressure he placed on then Prime Minister Malcolm Turnbull. Prime ministers were coming and going at a rapid rate back then, but that was all done to ensure that the end result was a ban on Huawei.

And given that Scott Morrison now runs the show, the acquisition of Digicel Pacific really does look to be on trend. The concerns around Huawei are driven by the ability for the Chinese government to control the actions of its businesses and the critical part they play in.

5G will play a massive part in the delivery of critical infrastructure. So, my first reaction is generally to think that espionage and spying exists in films only. I’m just so far removed from that world that it seems hard to believe it’s even a thing.

But when looking at the detail, you can see how there is a cause for concern. These snippets that I’m about to read were reported in The Sydney Morning Herald in an article entitled “Huawei No Way Why Australia banned the world’s largest telecoms firm”, and it was written by a guy called Peter Hartcher.

He said the Chinese Communist Party enacted the National Intelligence Law of 2017. This law unequivocally requires that any organisation or citizen shall support, assist and cooperate with state intelligence work and aid the national intelligence agencies to quote carry out intelligence work at home and abroad.

By the end of 2018, more than 90% of private businesses in China had established internal Chinese Communist Party cells to guide and monitor them and enforce the party’s well, according to Beijing’s official tally. And in 2020, Xi Jinping announced a policy that obligated private businesses to work with the Parties United Front Work Department, which is an organisation responsible for mobilising Chinese populations abroad to serve Beijing’s interests.

Private companies are required to “unswervingly, listen to and follow the steps of the party”. Now, to be fair, I think the Australian government has introduced some pretty incredible laws relating to surveillance that I should probably cover off in some future post.

And if we read those in the same fashion, they would sound pretty damn ominous, too. But looking at why 5G is such a flashpoint, we need to really look at how it will form part of our national infrastructure going forward.

Telecommunications risks no longer relate to the interception of telephone calls. That’s really old school thinking. 5G is about machines talking to machines in real time because of the tiny latency or the massively reduced latency that is on offer through 5G.

If that process is interrupted by the actions of a foreign power, we could have chaos. Sewage pumps would stop working. Clean water wouldn’t come to traffic lights. Failed train stop electric cars is self-driving. Wouldn’t work. Imagine a company or foreign government having that sort of ace up their sleeve, right?

There are the risk factors, right? So, let’s check out the structure of the deal for Digicel Pacific that you know, the acquisition that those risk factors drove. As reported by the ABC, the $2.1 billion deal to acquire and run Digicel Pacific is being funded largely by the government, which will provide 1.9 billion towards the acquisition. Telstra said it would contribute 360 million and own 100% of the company’s ordinary equity. But to be clear, this isn’t a charitable donation by the government, they expect it to be repaid and hold subordinated equity in the interim, which basically.

Not that I’m an accountant, but I believe it means unsecured or less secured debt when the terms are obviously extremely favourable. Though almost as if the acquisition made so little sense in relation to Telstra’s strategic priorities that the government had no option but to make it too good to refuse.

The risk for the government is really just that the debt won’t be repaid due to poor performance by Digicel Pacific, which is running with earnings of 300 million, but really isn’t without its challenges. Digicel, according to the Financial Review’s piece from July this year, says Digicel relies on Huawei tech to run its network.

Telstra, however, uses Ericsson for its 5G rollout, and the Australian government has, of course, banned Huawei. So, what gives? If the aim of all of this was to remove Chinese influence in the Pacific, does the network not need to be overhauled in July?

An IT Wire Article stated “If the Australian government is expecting Telstra to not only buy these digital assets, but also replace the gear they use with either Ericsson rackets, which Telstra uses close brackets or not your equipment, then the cost would rise to multiples of the initial purchase figure of 2 billion”.

Adding that “as with all telecommunications gear, upgrading to 5G equipment would not be possible unless the 4G gear was first replaced.”. Now, I’m not anywhere near technical enough to fact check that but would love to hear from anyone that is, because I think it’s an important distinction.

Telstra has been working hard to simplify its business by clearly defining and splitting up business units, so I think this has been potentially done in the aim of setting them up to sell off infrastructure focussed units.

This whole Digicel vibe seems to go against the grain. From where I sit and just to put one more boot in, operating in countries where graft is rampant, and democracy often struggles just makes this all that much more difficult.

I get why this has been done. It’s not the first such move, but when it’s going to make things way more awkward between Australia and China, or certainly no smoother between Australia and China, it’s going to be really interesting to see what Telstra does from here in relation to network investment and, of course, the performance of Digicel Pacific.

We will keep an eye on it, and perhaps we’ll do another piece in a future episode.