With Kenya faced with new demands for money to fund the implementation of the new Constitution and to keep up expenditure on infrastructure, Telkom Kenya’s request for billions of shillings is bound to face political opposition.

In terms of priority, pumping more billions in shareholder loans into an entity effectively under the ownership of the private sector in the context of more pressing demands may not be an option.

But the Telkom case is clearly going to re-ignite debate about the benefits of privatisation to society.

Indeed, Telkom Kenya’s is a textbook case of a privatisation gone awry.

When the government put the company on sale, the main objective was to stop the perpetual pumping of taxpayers’ money into what had evolved into an inefficient monolith.

Telecom was privatised because it didn’t have the resources to invest in new technology.

France Telecom was touted because it had solid capital resources to invest and to turn Telkom Kenya into a company capable of competing with nimbler, modern players.

Six years down the line, none of the objectives for which Telkom Kenya was sold has been met.

The company is permanently knocking on the door of the government for massive shareholder loans.

In March 2008, barely a year after France Telecom had taken over as majority shareholder, the foreign investor handed the government a request for massive short term shareholder loan of Ksh6.3 billion ($76 million).

(Read: Telkom Kenya still needs $92m from shareholders to stem cashflow problems)

The French investors requested that the loan be released in three tranches — Ksh4.5 billion ($54 million) in March, Ksh1.3 billion ($16 million) in May and Ksh0.5 billion ($6 million) in July 2008.

In February, France Telecom came up with a completely new tactic for getting favours out of the government. The French investor ambushed the government with a massive $385 million demand, this time claiming that the fixed assets register it had inherited when it took over been tampered with.

(Read: French demand for $385m compensation over Telkom Kenya’s ‘vanished’ assets)

It was unable to trace some of the assets that were on the books of the company at the time the transaction was being signed off. France Telecom insisted that Kenya was therefore in breach of warranties under the shareholder and purchase agreement that the parties had signed in December 2007.

France Telecom also accused the government of not having disclosed several long-term and poorly negotiated supply contracts that Telkom Kenya had signed before taking over the management of the company.

For instance, the company claimed that the outgoing management of Telkom Kenya had dumped on it an expensive $40 million contract, committing them to purchase CDMA terminal equipment from a local company by the name Rapid Communications Ltd.

France Telecom said that some of the equipment it was forced to buy was obsolete technology and could not be sold.

Initially, the government held its ground, arguing that all companies that bid for Telkom Kenya had been given ample time and opportunity to conduct due diligence on the company before bidding for the 51 per cent stake.

Weeks later, the parties agreed to enter into negotiations. The upshot of the negotiations was an agreement committing the government to grant France Telecom myriad privileges, including new shareholder loans and improving and extending the terms of a Ksh2.5 billion ($30 million) shareholder loan that had been granted to the company earlier.

Arrears owed to Telkom Kenya by government ministries amounting to Ksh1.1 billion ($13 million) would be cleared immediately, money given to the company to pay for a 3G licence, and monies owed by Kenya Broadcasting Corporation cleared immediately.(Read: Telkom Kenya seeking extra funds to boost data market)

The government also agreed to dole out new contracts to Telkom Kenya, including the contract to manage the Teams fibre optic cable, the contract to manage the state-owned national fibre optic network, and a deal to run the government’s private telephony network.

Telkom Kenya was privatised at a huge social and economic cost. When the privatisation process started in 2005, the company had a total of 17,480 employees. In 2006, it implemented the biggest retrenchment programme in Kenya when the company sent a total of 7,307 workers home at one go.

Several more have been sent home since. The upshot is that an organisation that used to employ thousands of citizens now has a workforce of a mere 1,649.

Billions were spent on the process of privatising Telkom Kenya. The process of restructuring the company and unbundling it from Safaricom cost Ksh84 billion.

The government had to pay Ksh8 billion ($96 million) towards offsetting the liabilities of the pension scheme. It also undertook to pay a Ksh5.8 billion ($69 million) loan advanced to Telkom by a consortium of local banks to meet retrenchment costs. In all, the government had to pay Ksh13.8 billion ($166 million) in retrenchment costs.

Furthermore, the government undertook to pay Ksh15 billion ($180 million) in tax arrears to the Kenya Revenue Authority.

All this was done in the name of cleaning up Telkom Kenya’s balance sheet to prepare it for privatisation. Clearly, the experiment has not worked.

The political support the company continues to enjoy despite the fact that the privatisation project has not met its objective will no doubt fuel suspicions about the ownership of the company and its links to the political elite

On paper, the Kenya government with a 49 per cent in the company, is technically a minority owner. Yet this is not the picture you find when you examine closely disclosures in the accounts of France Telecom.

For instance, in its own accounts for the year 2010, France Telecom discloses that it owns only 40.3 per cent of Telkom Kenya, implying that its stake is, in reality, smaller than the government’s shareholding in then company.

It is clearly a very convoluted if not complex shareholding structure. Technically, the majority 51 per cent stake is in the hands of one entity known as Orange East Africa, a special purpose vehicle created by France Telecom and a Dubai-based private equity firm, Alcazar Capital.

France Telecom declares in its accounts that it owns only 78.5 per cent of Orange East Africa. Alcazar Capital says it invested $59 million in the deal, putting its stake at 15 per cent.

Clearly, the mathematics just doesn’t add up. Which is why the ownership of Orange East Africa continues to be the subject of debate and speculation.

A special audit by the Kenya National Audit Office on the privatisation transaction raised many queries.

For instance, the circumstances under which the two parties combined forces in one consortium intrigued the auditors.

Apparently, France Telecom and Alcazar originally applied to buy Telkom Kenya separately. And, according to the findings by the auditors, France Telecom had expressed interest in purchasing a 51 per cent share in Telkom Kenya in its name on July 20, 2007, and paid $20,000 for date room access.

Alcazar Capital originally came in under the name of a company called Public Warehousing Company.

When the auditors visited Dubai to determine the true ownership of the company, they found that the Alcazar that signed the consortium agreement with France Telecom was incorporated as a company limited by shares under the company law of Dubai under a certificate issued on October 29, 2007.

The auditors did not think that it was just a coincidence that Alcazar Capital had been incorporated long after the transaction had started. The report took issue with the fact that the consortium agreement was signed just one day before the deadline for returning bid documents.

“The bid date was extended to accommodate the formation of the consortium,” said the special audit.

(Read: Paris in new diplomatic offensive over Telkom)

(More: Plotting a second act at Telkom Kenya)