How to stop predatory tendencies by internet service providers

Access Kenya is operating a double-bandwidth-for-free to corporate clients. Yet the overall wider benefits of the reductions for consumers of internet services remain trapped between the fibre optic cable offer prices and the ISPs who fight the expected price reductions to customers with false arguments in order to keep prices high and make windfall profits.

Under better competition, economists know that fixed costs should never affect the profit-maximising level of internet service provision, especially in the short run period of the transition from satellite to fibre optic cable internet provision. Between what is termed as variable costs and fixed costs that make up total costs of production, fixed costs are irrelevant to the planned profit maximising output of internet service provision in this context. The simple mathematical proposition would help the industry to expand output and long run profits by lowering prices, and focusing the new configuration of marginal costs and output expansion made possible by fibre-optic.

As for fears of lack of demand if prices fall, this is even more intriguing. For ordinary goods and services, economists expect a price reduction will always induce greater demand. The industry underestimates the enthusiasm of Kenyans to leap across the world’s digital divide between developed and developing countries. Already, Kenya leads the world in financial services transactions through the mobile phone money transfer and is among Africa’s leaders in network connectivity. It has expanded its consumption of mobile services rapidly. Little suggests lower prices would cut demand.
A key factor in the price shenanigans and curtailment of services is purely a trap of the government’s own making, missing the forest for the trees.

Its entry into the new area of e-taxation has reined in the beneficial economic uses and demand of ICT. In Africa, mobile phone operators are a rapidly growing sector as taxpayers, to the extent of being branded as the new “Treasury”. They average seven per cent of tax receipts. In some countries, they are the single largest taxpayer.

In Kenya, for example, as of December 2007 tax revenues from mobile phones grew by 30 per cent in the year compared to 2006. Kenyan authorities including CCK have so far been cautious on strategic regulation and taxation. They have smiled away the repeated begging of ISPs for tax reductions. They are right, but for the wrong reasons. Taxes and tax credits never work that directly. In the uncompetitive market of mobile telephony and internet provision, and going by the arguments that ISPs offer on the fibre optic cables, suppliers would easily corner a tax reduction to increase profits without a compensating expansion of supply or lower prices to customers. Hence, although the tax as such restricts supply of services, government should not be lured into accepting tax reductions as a vehicle for ISP super-profits.

Uncompetitive market

A better strategy would be to spur the suppliers to competition to increase ISP services. During a Roundtable that the ECA held in Kenya in February 2007 on the ICT study for Kenya, participants including CCK, Central Bank and industry players like Safaricom made specific recommendations on taxation on mobile telephony, currently at 16 per cent for VAT and 10 per cent excise tax on air time. First, reduce the excise tax by 5 per cent; second, increase the user base; third, use 10% of the remaining excise tax on airtime to pursue two objectives- the Universal Service Fund and rural ICT infrastructure.

Going by its comfort with breakfasts at the high tables of annual performance reviews of ISPs, the Kenya government seems over-impressed with the tax-cheques it receives from them today, perhaps missing its responsibilities to design a fiscal strategy for the future. As a starting point, evidence shows that the effects of mobile phone use on economic growth are twice as strong in developing countries as they are in developed countries.

An increase of 10 mobile phones per 100 people in developing countries propels GDP growth by 0.6 percent per year compared to 0.3 percent in developed economies.

In developing Africa, mobile phones are increasingly recognized as powerful tools in the fight against poverty, since they reduce transaction costs, disseminate information, facilitate entrepreneurship and substitute for slow, unreliable fixed line systems.

In Kenya, they have forever revolutionized the provision of financial services and exported the technology for good measure.

Regressive tax

Yet many economists would classify current mobile taxation as a regressive tax, not a progressive tax. For the same airtime, the poor spend a higher proportion of their income to pay the tax than the rich do. Taxes on mobile phones should be an integral tool of poverty reduction and growth strategy, from both the GDP impacts and potential to reduce inequality. In fact, the increasing share of telephony in household budgets suggests a future role in monetary policy.

Falling prices in the fibre-optic cable would work as follows, for example: in a falling price level, people become wealthier as the real value of the money they hold rises. Their spending of the excess liquidity lowers interest rates and helps growth.

The strategy should thus be to target the potential economic and productivity growth attributable to ICT services, which would earn both higher GDP and tax revenues in the future. The current tax regime is in the comfort zone of collecting licensing fees, and the regressive taxes on mobile telephony. The KRA probably has not even figured that some mobile phone revenues leak through the backdoors of corporate tax returns. Since cost deductions are allowed, companies that increasingly allocate mobiles and airtime to employees may deduct this expense as part of operating costs without this leakage being traced.