Belouk is a small village deep in the interior of Papua New Guinea, 50 miles as the crow flies from the nearest road. It is in a part of the country with no electricity, postal service, sewerage or newspapers.

In rural parts of Papua New Guinea like Belouk, “most people live almost as they have for tens of thousands of years”, says Dr Amanda Watson, an expert on Papua New Guinea at the Australian National University.

Then in 2006 or so, engineers from Digicel, the telecoms giant controlled by the Irish millionaire Denis O’Brien, showed up. They were surveying locations for mobile phone towers. 

“There was a huge amount of cost for them when they initially set up this network,” says Dr Watson. “Because in many places, they had to construct a road to be able to put in a tower. Or they had to helicopter in the parts. Or pay local people to hand-carry the parts across footbridges.” 

In Papua New Guinea, a country where 80 per cent of the population live in rural areas, Digicel’s mobile network leapfrogged basic infrastructure like roads and electricity. It delivered what the government-owned telecoms company failed to do for decades. 

Mobile phones transformed how people lived. “People were delighted to be able to be able to hear the voice of an immediate family member who was working in another part of the country, whose voice they hadn’t heard for years,” said Dr Watson.

“I remember in about 2005 or 2006, before Digicel, seeing people queuing at public phones. People would sometimes spend all day, or longer, travelling from the village to go to town to make a phone call. So the significance of Digicel when it came in — it was almost like a saviour,” she added.

Digicel’s investment in Papua New Guinea has paid off. Because it’s difficult and expensive to build a tower network there, Digicel dominates the market. It has a 91 per cent market share. Papua New Guinea now accounts for 14 per cent of its earnings, making it the company’s biggest market alongside Haiti and Jamaica.

When Digicel built its tower network in the mid-2000s it wasn’t thinking about geopolitics. Fifteen years later Papua New Guinea, and its telecoms network, has been caught up in the great power rivalry between China and the West.

China is trying to build a sphere of influence in South East Asia. It’s throwing its weight around in the South China Sea, with a beefed-up navy and new bases built on artificial islands. It’s funding infrastructure in Vietnam, Cambodia, Indonesia and Malaysia. And now, there are reports it’s interested in buying Digicel’s Papua New Guinea and Pacific Island network, which also includes the Pacific island nations of Nauru, Vanuatu, Fiji, Tonga and Samoa. 

The Financial Review in Sydney has reported that China Mobile, the state-controlled Chinese telecoms company, could be willing to pay Digicel up to $900 million for its Pacific businesses. An American-backed Australian group are also said to be in the running. Officially, Digicel and China Mobile have both denied that a deal is on the cards. 

China understands the strategic importance of technology infrastructure. Its telecoms hardware business, ZTE – a supplier of Digicel’s, incidentally – has ties to the Chinese military. And Huawei, a mobile phone brand you’ll see on billboards all over Dublin, was reportedly set up by China’s state intelligence service. A report by the US Congress in 2018 said:

“Many industry analysts… believe, for example, that the founder of Huawei, Ren Zhengfei, was a director of the People’s Liberation Army (PLA) Information Engineering Academy, an organization that they believe is associated with 3PLA, China’s signals intelligence division, and that his connections to the military continue.”

Huawei kit has been banned by the US, Australia and New Zealand. And China Mobile, another state-backed technology company, was denied access to the US last year over “substantial” national security risks. 

“The security of our government and professional communications, as well as of our most private data, depends on our use of trusted partners from nations that share our values and our aspirations for humanity,” the US Department of Justice’s John Demers said in a statement.

In many places, they had to construct a road to be able to put in a tower. Or they had to helicopter in the parts. Or pay local people to hand-carry the parts across footbridges.

Dr Amanda Watson

Banning Huawei is a luxury that’s available to rich western bloc countries. Papua New Guinea, Vanuatu or Tonga don’t feel they have a choice. 

The Australian Department of Foreign Affairs and Trade has taken an interest in the China Mobile Papua New Guinea deal. “We will continue to monitor this issue, given the importance of high quality, secure telecommunication services for our Pacific partners,” it said in a statement.

Papua New Guinea has a complicated relationship with China. There are two kinds of Chinese people in Papua New Guinea, says Dr Watson. There is the long-established Chinese community, “there for generations, who speak the local languages, run businesses, employ lots of people, and can sit down and have a yarn with people.” Then there are the newly-arrived Chinese who have come to do business. They’re “often looked at with suspicion, or disdain, or fear.”

The Papua New Guinea government sees Chinese interest in the country as an opportunity. Last year, it asked Beijing to refinance its entire national debt. Asked whether it would block an acquisition by China Mobile, it said it would stay out of what is a “business decision”.

Digicel’s decision

Having hand-carted 1,000 masts into the Papua New Guinean jungle, Fitzcarraldo-style, why would Digicel consider selling?

One good reason would be to help cut its debts. Digicel has spent the last number of years in a showdown with its creditors. 

A deal was struck in April to forgive a quarter of its debts. That will go a long way towards keeping Denis O’Brien in control of the company. 

But even after the deal, Digicel is fairly heavily indebted. Its debts minus cash are 5.8 times earnings, compared to 4.2 for Liberty Global, its nearest competitor. 

Getting that debt ratio under control is critical for Digicel because, under the terms of its restructuring deal, the company has to refinance its debts within three years. If it fails to do so, the creditors automatically get 49 per cent ownership of the business. 

So Digicel needs its debts to be small enough relative to earnings (or more precisely, cash flows) that investors will be happy to refinance its existing debt. If not, bondholders get 49 per cent.

That’s the context for a Papua New Guinea and Pacific islands deal. Digicel might be tempted by an offer that takes a bigger bite out of its debt than it would lose in earnings.

In 2019 Papua New Guinea contributed $138 million in Ebitda. Digicel doesn’t break out figures for the Pacific Islands (Vanuatu, Tonga, Samoa, Fiji and Nauru). If their earnings are proportional to their revenue, and if they’re each assumed to be the size of the average market in the “other markets” category, they collectively chip in $65 million in Ebitda. The Pacific business, then, contributes around $203 million Ebitda. That’s 21 per cent of the total. 

For a deal to improve Digicel’s debt to income ratio, it would need to cut the debt by more than 21 per cent. By my numbers, an offer above $1,115 million would start to cut the debt ratio.

So in order to cut Digicel’s debt burden, China Mobile’s offer for the Pacific businesses would need to be well north of the $900 million that’s reputedly being offered. 

Why else might Digicel sell? The government of Papua New Guinea has been on its case lately. It’s demanding Digicel register all customers using official documentation, or else cancel the accounts. That’s a problem because many of Digicel’s customers don’t have any documentation. And operating in Papua New Guinea comes with other risks and headaches, like the Covid-19 induced shutdown of ports potentially cutting off fuel supplies for the generators at its towers. 

In any case, if China Mobile really is an instrument of the state, seeking to advance Chinese strategic interests rather than turn a buck, you’d imagine it could come up with a satisfactory offer.