AG fears NetOne might not be able to meet obligations and continue operations, let’s talk

We already talked about how NetOne has cost you and me hundreds of millions over the last few years. Government lost at least US $200 million through NetOne in just 2 years – AG’s Report.

NetOne is a state-owned enterprise, and you and I are the state. The government owns 100% of NetOne, and the government is simply a collection of people we have put in charge of our business as Zimbabweans.

So, it is a shame that, for the most part, those we have put in charge are not always forthcoming with details on how our businesses are doing.

I was especially disappointed when 21 such public entities, including NetOne, were exempted from complying with the law that exists to ensure transparency, fairness, accountability, and efficiency in public procurement processes.

This is why we value the few times we get to peek behind the curtain at NetOne. There have been too many irregular dealings over the years, and we worry that should anything happen, we would be down to one mobile operator, and none of us wants that.

The AG on NetOne

Some question the value of the supposed insights in the Auditor General’s report. I think it would be unwise not to consider unpacking it. It might be of limited value, but there is still value in it.

I understand the frustration too, and I’ll take this opportunity to rant a little. Here we are talking about the AG’s examination of NetOne’s financial statements when we hardly get to see those financial statements.

In the private sector, for example, for NetOne’s competitor Econet, we get the financial statements and the auditor tells us if we can trust what we see in the statements. For NetOne, for the most part, we only get the auditor’s opinion without the financial statements in question. That is ridiculous.

Let us go through the NetOne section in the AG’s report.

The AG audited the financial statements of NetOne and gave a qualified opinion. This simply means the AG and the accountants under her examined the financial statements of NetOne for the year that ended in December 2022.

The AG gave a qualified opinion, which means the financial statements are mostly fair and accurate, except for certain areas. Let’s get into those areas that the AG considered to be irregular.

Exchange rates

You remember how fast the ZW$ was losing value before its eventual decommissioning? Well, that presented challenges for NetOne when they were trying to prepare their financial statements.

The financial statements were done in the local currency, but there were some transactions and balances that were in USD. The exchange rate that NetOne used to convert to the ZW$ was deemed inappropriate by the AG (they went against accounting principles).

Note that this happened in the year ended December 2021 and not 2022. It appears the 2022 balances and transactions were converted appropriately. The 2021 problem was only brought up because of the residual effects it had on the 2022 statements and the impact it may have in comparing the 2021 and 2022 statements.

Values of property and equipment

Companies have to report on the property and equipment they have. We need to know how much their buildings, cars, networking equipment, etc., are worth.

So, back in 2020, NetOne assessed the value of their property and equipment in USD, as most companies did during the hyperinflationary period we were in. Then NetOne converted those USD figures to ZW$ at the prevailing interbank rate and called it a day.

The government insisted that the interbank rate was the official rate, which is why NetOne used it. However, the interbank rate was significantly different from the market rate, which meant that the values placed on the assets were grossly inaccurate.

The relevant accounting standard is straightforward. It requires the method used to value property to be the same as the method most people in the market would use. The AG determined that the way NetOne valued its assets in ZW$ was not how the market would value them.

We mentioned that this valuation happened in 2020, but the values were carried forward to the 2022 financial statements. Hence, the AG stated that this valuation was responsible for the qualified opinion.

NetOne might not be viable

The AG has concerns about NetOne’s ability to continue as a going concern. This means the AG is worried about the company’s ability to keep operating in the foreseeable future, or in other words, whether the company can meet its obligations and continue its operations without significant restructuring or changes.

The AG points out that NetOne posted a loss of ZW$40 billion in 2022 and ZW$31 billion in 2021. Those figures might seem abstract, so converting them to USD helps provide context. However, as mentioned earlier, the conversion issues led to NetOne receiving a qualified opinion. To give you a clearer picture, here are the figures using both the interbank and market rates:

• The ZW$40 billion loss in 2022 was about US$60 million using the official rate or US$40 million using the market rate.
• The ZW$31 billion loss in 2021 was more substantial, at US$280 million using the official rate or US$160 million using the market rate.

These are significant losses, though the 2022 losses were not as severe as those in 2021.

The AG also noted that NetOne had more liabilities than assets. This means that if we add up everything NetOne has in money, property, equipment, etc., it is less than what NetOne owes its suppliers, lenders, employees, etc. In other words, they owe more than they have.

Total liabilities exceeded total assets by ZW$32 billion (US$48 million or US$32 million) at the end of 2022. However, not all of what was owed was due to be paid in the following year, so to get a clearer picture, we need to compare current assets to current liabilities.

NetOne’s short-term problem

The AG noted that current liabilities exceeded current assets by ZW$20.9 billion (US$31 million or US$20.9 million). This is a serious issue, which is why the AG has concerns about NetOne’s ability to meet its obligations.

If NetOne were in a better position regarding short-term obligations, you might think they could turn things around before the long-term obligations come due.

I fear some might not fully grasp why this issue with current liabilities is significant. Here’s an analogy:

If you owed a loan shark $1,000 that you needed to pay back in three months, you would be in a better position than someone who owed $400 that was payable in two weeks.

NetOne has to pay the metaphorical loan shark very soon and might not have enough time to turn things around.

That said, the AG’s report comes out quite late, and we are already in 2024. So, we know that NetOne managed to get through the whole of 2023 despite the concerning financial statements.

More NetOne issues

The other matters that the AG highlighted are straightforward.

Bank reconciliations

NetOne was not completing bank reconciliations on time. Bank reconciliation refers to comparing your records of transactions (like deposits and withdrawals) with the bank’s records to ensure they match. This process helps identify any discrepancies, such as unrecorded transactions, bank fees, or errors.

Infrequent bank reconciliations mean that fraud and errors may go undetected. This might explain why we see headlines like these: NetOne loses about ZWL $565 million to fraud.

NetOne says they have since sorted the bank reconciliation issue.

Contract customer lines

NetOne has post-paid customers who use their lines as they wish and then receive a bill at the end of the month. This is different from most of us with prepaid lines, who must purchase recharge cards before receiving service.

NetOne’s policy is to suspend the lines of post-paid customers who fail to pay their bills after 90 days. However, NetOne was not implementing this policy, and the AG noted that this increased potential financial losses. These defaulting customers continued to receive service, worsening their debt.

NetOne says the company transitioned to a new billing system and faced challenges during the migration, which resulted in lines not being suspended as they should have been. They claim the issue has been resolved.

Unidentified deposits

NetOne had a significant amount of money deposited into their bank account that was not accounted for. It had not been credited to anyone’s account and was just sitting in the bank.

Having worked for a government organisation myself, I am familiar with this problem. For various reasons, you often find numerous deposits with no identifiable information, such as names, reasons for payment, or any other useful details.

NetOne says they are working with banks to identify the depositors, but even then, I know they may not be able to figure out some of the deposits.

The AG recommends implementing an integrated payment gateway system.

That’s it

We only get a glimpse into NetOne’s state from reports like these. Unfortunately, the little we see is almost always worrying.

I’m curious to know how NetOne managed to address the issue of current liabilities exceeding current assets. Was the company extended loans by other state-owned enterprises? Are salaries in arrears? Were suppliers negotiated with, or did the government use its influence to force them to forgo pursuing payment?

We have no idea and likely never will. However, we will continue to investigate as best we can. I really hope this situation is resolved because Telecel is a non-factor in the market, and if NetOne were to fail, we would be down to just one operator. That simply cannot happen.

Also read:

• Econet, NetOne, Telecel still seeing operating costs outpace revenues, IAPs have solved the puzzle
• Are Econet and NetOne really saying US$7.50 or US$6.54 for 1GB is not economically sustainable?
• Should we give Econet, NetOne and Telecel a pass for shoddy service? Maybe