Telkom is facing a long and growing list of legal and regulatory challenges that could cost the JSE-listed telecommunications group billions of rand.

Chief financial officer Peter Nelson says Telkom wants to put the problems behind it, but has vowed, where necessary, to fight off legal threats against it in court.

The group’s 2010 financial results include a long list of contingencies related to legal and regulatory disputes, some of them dating back nearly a decade.

However, it’s raised a contingent liability in only one of these — a settlement it has agreed to make to US software company Telcordia, where it could have to fork out as much as US$82m (R615m at R7,50/$).

Telkom says it expects more clarity in August on the exact amount it will have to pay Telcordia.

The group is also facing a number of legal and arbitration proceedings involving SA’s competition authorities related to alleged abuse of its dominance in the telecommunications industry over a period of years.

It’s been accused of price discrimination and other prohibited practices by a range of competitors, with some objections being filed as recently as 2009.

Telkom could eventually face a fine of as much as 10% of its annual revenue related to any of these complaints. However, as the group points out, the Competition Tribunal, the final arbiter in competition matters, has never imposed a fine as high as 10% of revenue on any offender. Nevertheless, the fines could still prove to be painful if imposed.

Despite the growing list of complaints about anticompetitive behaviour, Telkom has elected not to provide for any of the potential fines in its financial results. It says it is unable to do so in the case of at least one of the competition complaints as “no reliable estimate of liability can be made”.

Other claims against Telkom flow from misgivings over tenders. A long-standing and well-documented dispute with Maredi Telecoms regarding a microwave telecoms tender continues to simmer, as does a spat with Phutuma Networks over a tender for the supply of telex services.

The Phutuma complaint is set to head to court in February 2011 and Nelson says Telkom’s legal team is ready to fight the case. According to Telkom, Phutuma’s claim for damages arises from an allegation that the group failed to adjudicate a tender in accordance with fair, transparent, competitive and cost-effective procurement policy.

Telkom says Phutuma is claiming as much as R4,2bn in damages for loss of revenue. But Phutuma director Ed Scott says this figure is not correct. The maximum claim is R5,5bn, he says. Scott says he has reported discrepancies in the reported numbers to the Johannesburg Stock Exchange and the Independent Regulatory Board for Auditors.

In addition to its high court application, Phutuma has filed a complaint with telecoms regulator, the Independent Communications Authority of SA, accusing Telkom of contravening the Preferential Procurement Framework Act and the Broad Based Black Economic Empowerment Act.

Scott says Telkom transgressed regulations that governed it under the monopoly licence it held at the time.

It has also lodged a complaint with the Competition Commission in which it has accused Telkom of an “exclusionary act” in contravention of the Competition Act.

And it has filed a complaint with the Johannesburg Stock Exchange for alleged non-disclosure to its shareholders for not raising Phutuma’s court application as a contingent liability in its interim 2010 financial results.

The disputed tender, published in November 2007 for the outsourcing of Telkom’s telex services, including support for ship-to-shore telex, was cancelled in June 2009, Telkom says, after it discovered the tendering process was a “mess”.

But Scott says another company that bid for the tender, Network Telex, had begun providing telex services for Telkom without the tender having been awarded. Scott claims this was in breach of the law, as the service had to be provided by Telkom or outsourced to a third-party provider through a formal tender process.

Nelson, however, has repeatedly denied that Telkom had any contract with Network Telex. However, this week, he conceded in an interview with TechCentral that Network Telex was providing ship-to-shore services on an “emergency” basis.

“Telkom made small payments for ship-to-shore services, which they [Network Telex] provided,” Nelson says. “It was a separate arrangement which was made.”

He says the value of Phutuma’s claim has “leapt in leaps and bounds”. “Every time we say something, he [Scott] adds another billion rand to the claim.”

Nelson says Telkom is “happy to meet Phutuma in court”. “We feel that our tender conditions are very clear and the basis for his claim is pretty limited,” he says.

“Whether we’re proved wrong in due course remains to be seen, but we don’t think that’s the case. We don’t believe any provisions are required in the Phutuma matter.”

Telkom’s tender woes don’t end there. It has also got itself into a pickle over the recent late awarding of a tender to six networking contractors.

It had sought to reduce the number of contractors working for it in order to improve efficiencies and reduce costs, but Nelson says it failed to make an award within the valid period of the tender. It awarded the tender after its expiry date, leading to challenges from unsuccessful bidders.

Telkom then asked the high court to review and set aside the tender, which prompted one of the winning bidders, Bihati Solutions, to serve an application on Telkom to reverse its decision to apply to the court. Effectively, Bihati wants to set aside the setting-aside of the contract.

Telkom is opposing Bihati’s application, but Nelson says the group doesn’t mind if Bihati is successful in its court bid. “If a court looks at it and says it’s fine, then we’d be delighted because we could move ahead with the six [winning bidders] and … [achieve] the cost savings we were expecting.”

Given the large number of legal challenges that Telkom is facing in relation to tenders, it’s worth asking whether the group has a problem in its procurement division.

“It’s not so much that there was a problem, but things were taking too long to get resolved, they were too bureaucratic,” Nelson says. “Even though you tick all of the check boxes, and everything is 100%, it may be the wrong commercial result.”

In some cases, Telkom was paying over the odds to successful bidders, he says. “We want to be more agile, we want to be more transparent, and I want price to be a bigger element of procurement.”

In future tenders, price will be the primary consideration when awarding tenders, he says.

Companies tendering for business will still have to meet basic conditions, including black economic empowerment criteria, but this will merely permit companies to bid, rather than forming part of the overall weighting.

“The only criteria left will be price and that will be a transparent process,” Nelson says. — Duncan McLeod, TechCentral