Phone giants call up political favours as price war rages

The explosive price wars in Kenya that have seen consumer prices of mobile phone talk-time tumbling by more than 40 per cent are grabbing the headlines.
But the real issues causing uncertainty in the fastest growing sector in the economy are politics and unpredictable regulation.

Political lobbying has been intense as the big players engage in a vicious battle to influence the competition policy and tariff regulations.

Away from the limelight, there has been pushing and shoving within the board of the Communications Commission of Kenya over whether it should agree to lease prime land situated next to its headquarters to Bharti Airtel — the new Indian owners of Zain Kenya.

Sources said the CCK board had faced immense pressure from the Ministry of Information and Communications to lease the property to Zain on the grounds that the government had made a commitment to provide land to the Indian investors on which they plan to construct their Africa headquarters.

Apparently, President Mwai Kibaki had during a visit to State House by top Bharti Airtel executives responded to a request by the Indian investors by directing the ministry to help Bharti acquire a suitable piece of land.

But in a remarkable display of independence, the CCK board reportedly rejected the proposal on the grounds that allowing one player to erect its headquarters on its own land, and on a location next to its headquarters, would send the wrong signals to Zain’s competitors.

According to our sources, an alternative piece of land belonging to a government parastatal is now being considered and may be leased to the Indian investors.

Although provision of free land to investors is not uncommon in incentive packages, the issue, coming against the backdrop of intense jostling in the industry, is bound to provoke murmurs and claims of preferential treatment.

Perhaps what captures the state of regulatory flux currently prevailing in the mobile phone industry even more clearly is the recent deal between the government and its joint partner in Telkom Kenya, Orange Telecom of France.

In a classic example of a situation where deals are signed with foreign investors without regard to even-handedness to all players, the government in April this year doled out liberal concessions to the French investors that were bound to drastically tilt the competitive playing field in favour of Telkom Kenya.

The upshot is that the CCK has been left in an awkward situation — on the one hand trying to assert its independence as an autonomous regulator, and on the other facing pressure to implement decisions and commitments the government made to the French investors under totally different circumstances.

Under the confidential shareholders deal, a copy of which has been seen by The EastAfrican, the government has, for instance, promised to give Telkom Kenya exclusive government contracts.

Specifically, the agreement stipulates that the government will endeavour to ensure that various government ministries and departments grant rights to Telkom Kenya for the government’s private telephony networks and IP-based telecommunications services.

The government has also committed to exclusively grant Telkom contracts for data and mobile services.

France Telecom was also promised a contract to manage the government interest in the fibre optic cable company, Teams, the government-owned national fibre optic backbone NofBi, and a contract to operate and maintain the GCCN (Government Common Core Network) for two years.

Some aspects of the confidential agreement directly touch on CCK’s functions.
For instance, the agreement includes provisions where the government commits to give France Telecom what is described as “licensing support.”

Specifically, the government has in the agreement committed to the French investors that it will cause the CCK to give Telkom Kenya a letter confirming that telecommunications services supported by TKL’s CDMA network may be treated as mobile services for regulatory purposes.

The agreement commits the government to procure a clear government policy on frequency spectrum management and allocation based on international best practice.

It also commits the government to introduce regulation in respect of termination and interconnection rates.

Finally, the agreement commits the government not only to issue France Telecom a 3G technology telecommunications licence but also to fund the cost of the fee.

The most explosive issue in this intriguing study in the politics of utility regulation is the battle over tariff regulations.

Powers to control tariffs

In May, the Ministry of Information published new regulations, the centrepiece of which was a raft of laws giving the CCK wide powers to control tariffs.

The regulations gave CCK unilateral powers to declare and designate a company as a dominant player in the market, including powers to approve increases in tariffs and to regulate promotions.

As it turned out, the battle over the regulations ended up pitting market leader Safaricom against other players.

Our sources said Safaricom CEO Michael Joseph went on a high level lobbying offensive that saw him making representations to President Mwai Kibaki at State House.

The details of what transpired at that meeting are scanty but our sources say President Kibaki directed that the regulations be amended to address the concerns raised.

Although they would not admit it, this turn of events rubbed sections of the CCK the wrong way, with the board grumbling about Safaricom’s lobbying tactics.

In June, the ministry engaged Messrs Frontiers Economic of London to look at the regulations and suggest amendments.

There were murmurs within the CCK that the regulator was left out of the hiring of the consultants from London.

Last month, the consultants came up with a report titled “Regulatory Framework Governing Kenya’s Telecommunications Industry.”

Its findings basically supported Safaricom’s case. For instance, Frontier recommended a stricter definition of the term “market dominance” and longer procedures for declaring a player as dominant.

The consultants also put emphasis on abuse of market dominance and introduced a 40 per cent threshold for dominance.

They said market dominance ought to be designated by sector and argued that by setting the market dominance threshold at 25 per cent, the regulations had only targeted one player, Safaricom.

But even as the parties were negotiating how to incorporate amendments into the regulations, the CCK also published findings of a separate study conducted on its behalf by PricewaterhouseCoopers.

Titled “Competitive Assessment of the Telecommunications Sector and its Contribution to GDP,” the study accused Safaricom of engaging in on net/off net tariff differentiation to entrench its market share and dominance.

It recommended that interconnection tariffs be lowered to lessen incentives and the ability of Safaricom to set uncompetitive pricing structures.

CCK insists that it did not publish the PricewaterhouseCoopers study to counter the government-sponsored study by Frontier Economics.

As we went to press, the amended regulations had not been published. Once they are, the likelihood is that they will provoke an uproar even louder than the price wars.