What you need to know:
It is possible that about half of the market entrants in Kenya’s telecoms industry may have faced difficulty in recruitment of subscribers because of late entry.
- This phased-in entry to liberalisation has harmed competition.
- It does not appear that this lesson has been heeded because the issuance of the 4G licences has also been done on the basis of a “beauty contest".
The formal liberalisation of Kenya’s telecommunications industry started in 1997 and has, therefore, entered its third decade now. At the start of liberalisation, the policy imperative was to ensure increased investment and extend telecommunications services beyond high income groups and selected urban areas. That 20-year journey which started in 1998 with an Act of Parliament has, to a large extent, determined the market outcomes that we see today. During that time, the major debate was that of freeing the industry from monopoly and allowing new investment into the sector.
The review of the public discourse and the debates in Parliament shows that at the time, the reforms were not implemented with assurance of their outcomes and, therefore, undertaken tentatively. So the entry of new firms into the sector was phased in gradually and so different firms faced different entry conditions over that time. Due to these decisions, we have a market structure with one dominant firm in selected market segments and competitors with varying levels of market share in the retail end of the communications market.
This concern about the possibility of domination is still with us and is now the key issue in Kenya’s telecoms sector where Safaricom Kenya has a substantial lead and command of significant market areas. Based strictly on interpretation of Kenya’s Competition law, the study conducted by the Communications Authority has found that Safaricom bears substantial market leadership in the wholesale segment of transmission infrastructure, text services and mobile money transfer in the retail side. These findings were reached by the examination of the overall revenues, individual subscriber share and share of all transactions. These are facts and are not debatable.
What is debatable is the conclusion reached that this situation of dominance warrants ex ante asymmetric regulation. This implies that the dominant firm would be required by the regulator to adhere to strict reporting and conduct within the market in the quest to preserve competition. This approach is unprecedented in Kenya’s telecoms market but is also questionable because it appears to make assumptions that market dominance will be abused even where that evidence has not been empirically established. It is a serious abrogation of the tenet of competition policy that market dominance alone is not a violation except where specific conduct is intended and leads to harm to consumers and other competitors.
It is possible that about half of the market entrants in Kenya’s telecoms industry may have faced difficulty in recruitment of subscribers because of late entry. This phased-in entry to liberalisation has harmed competition because it means that firms that entered the markets after Safaricom Kenya’s licence was issued had significant competition pressure that they did not have to face. And it appears that the dominance factor may have been influenced by the regulatory decisions that were made at that time. It cannot then be the failure of one market competitor if the regulatory policy leads to a market situation that has asymmetric effects.
It is better for consumers when entry into sectors is as open as possible from the first instance. The appropriate analogy is that a race ought to start with all competitors on the starting line and ready to start at the same time.
The dominance picture that has been demonstrated by the Communications Authority’s study, therefore, reflects legacy decisions of its predecessor which should have persuaded the ministry to allow for all licenses to start operations two decades ago. That failure meant that some latter entrants were bound to struggle. In addition, the existing structure has harmed consumers who should have had a suite of telecommunications providers to begin with.
And the reason that this tentative approach has created a market situation that worries the regulator is because of failure to trust competition at the beginning. It helps to trust the market from the word go rather than have runners start at different times and then try to adjust the course in order to steer the race towards ideal competition conditions.
It does not appear that this lesson has been heeded because the issuance of the 4G licences has also been done on the basis of a “beauty contest’ as opposed to open competition in an auction.
Entrants in the telecoms 4G market have paid different licence fees and started their race at different times. That’s bound to lead to very bad outcomes that have denied the consumer the opportunity to benefit from competition right away.
The main lesson is that the market is smarter than a system designed administratively and warns us not to repeat an error that is 20 years old. If we adhered to this, in five years we would find no need to conduct another market study with foregone conclusions and which tries to reinstate competition when a market is nearing maturity.
Mr Owino is the chief executive Officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank