Kenya’s leading mobile money transfer service, M-Pesa, is the top source of revenue for Vodafone in its investment in Safaricom.
Safaricom’s latest annual report reveals that Vodafone, the UK-based company, earned $21 million in the current financial year trading with its Kenyan subsidiary.

The figure has been converted at an exchange rate of Ksh90, which prevailed in March this year.

These transfer pricing payments account for 2 per cent of Safaricom’s revenues of $1 billion. Transfer payments typically are not subjected to income tax but they attract withholding tax.

While Safaricom earned $130 million in revenues from M-Pesa, Vodafone took $15.6 million as the M-Pesa licence fee.

These payments were made to Vodafone Sales and Services Ltd (VSSL), which owns the M-Pesa Solution.

The roaming service that Safaricom offers Kenyans travelling throughout East Africa, also known as Kama Kawaida, earned Vodacom Tanzania, a firm indirectly owned by Vodafone, some $873,088.

Other sources of revenue for Vodafone in trading with Safaricom were: Marketing and roaming using the Vodafone brand accounted for $1.6 million; payments made to Vodafone UK Ltd came to $2.2 million and trading with other Vodacom affiliates brought in $854, 450.

As more Kenyans rely on M-Pesa to transfer money, Vodafone, which owns the M-Pesa Solution, is earning more from licensing the innovation to Safaricom.

The deal gives insights into the transactions carried out between Safaricom and Vodafone. For instance, Safaricom pays an affiliate of Vodafone six per cent commission to participate in a Vodafone equipment purchase scheme, which negotiates global discounts. “The licence fee is a fruit of an innovation that has turned out well,” says Eric Musau, an analyst with Standard Investment Bank, adding that in Kenya, mobile phone money transfer services have been quite profitable compared with other markets.

Vodafone’s licence fee is based on the number of active subscribers multiplied by a service fee that reduces with an increase in number of active subscribers. But the agreement also includes a clause that, should the number of subscribers decline, Vodafone will be paid a fee not less than 10 per cent of the revenue M-Pesa services generate every three months. Safaricom has successfully grown M-Pesa since the service was launched in March 2007 to 13 million subscribers.

Revenues have grown from $4 million to $130 million as individuals and businesses have turned to mobile money transfer services, which are more convenient. The strong growth in M-Pesa subscriber numbers has helped Safaricom hold onto some of its subscribers at a time when mobile phone services providers have been slashing calling rates to grow their subscriber base.

For Vodafone, the pilot in Kenya has allowed it to test the product and roll it out in other markets such as Tanzania. But to earn from the innovation, Vodafone had to license it to Safaricom and changed the agreement from a profit share to one based on revenues and subscriber numbers in 2009. The profit share agreement posed a challenge because analysts say that profits are easier to manipulate compared with revenues.

The related party transactions, as captured in the annual report, include roaming agreements with other service providers from which Vodafone earns a management fee. Safaricom has for example entered into an agreement with Vodafone Marketing SARL with a view to increasing international roaming revenue by marketing and advertising products and service under the Vodafone Brand. Vodafone usually receives 0.5 per cent of Safaricom’s qualifying revenues. But it is in the procurement of phones, sim cards and other hardware from across the globe that Vodafone earns a handsome 6 per cent commission if Safaricom procures through it.