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How Kenya can breathe life into its dull telecoms sector

ELGONPLACe

Telecoms mast in Upper Hill, Nairobi: There is a risk that uncompetitiveness in this sector may prove ruinous for the economy in the long-term. FILE PHOTO | NMG

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Summary

  • Essentially, there is a risk that this uncompetitiveness may prove ruinous for the economy in the long-term.
  • The sector also continues to grapple with other problems.
  • Switching costs remain high.

Kenya’s telecoms sector is in a bad shape. And it is courtesy of a lack of regulatory decisiveness. First, the sector has become uncompetitive and this lack of rivalry has created a disincentive for new investments into the sector.

Data from the Kenyan National Bureau of Statistics has shown that investment in Kenya’s telecommunications sector (by network operators), as a share of economic output (gross domestic product-GDP), has largely been on a downward trend since 2013, which could be a reflection of either maturity or sheer lack of competition in the sector (the latter being the case).

As a result, the share of telecommunications contribution to GDP has stagnated since 2015.

This is in contrast to sub-Saharan Africa as a whole, where network operators’ investments, as a share of GDP, has remained strong and stable over the past five years, largely driven by a competitive landscape.

Stakeholders should be worried that the sector is not attracting new foreign capital as investors are now seeking other African economies with ‘better bets’ for profitability -most notably South Africa, Nigeria, Angola, Egypt, Rwanda, Namibia, Botswana etc.

Such a trend will continue to disadvantage Kenya from competitive perspective.

Essentially, there is a risk that this uncompetitiveness may prove ruinous for the economy in the long-term. The sector also continues to grapple with other problems.

Switching costs remain high. Have you tried accessing mobile services across another network? Broadly speaking, switching costs refer to the difficulties of accessing the services of another carrier.

They encompass the time, money and psychological costs in seeking cross-network services.

The costs can also be categorised as psychological, physical, and economic in nature.

NUMBER PORTABILITY

Basically, the time it takes as well as the psychological efforts involved in trying to access another service provider can act as a deterrence.

Do you remember the mobile number portability (MNP) programme that was launched in 2011? Beyond switching costs, the issue of significant market power, which has already been empirically designated across three markets, namely towers, mobile communications and mobile money markets, is still up for regulatory resolution.

But even most importantly, the elevated concentration risks in the sector has already erected entry barrier(s) and can be ruinous.

In fact, the National Treasury keeps citing M-Pesa, albeit implicitly, as a major fiscal event. While noting the success of mobile money and the fact that various financial products have been leveraged on the platform thereby increasing the inter linkages between this technology and the banking sector, the Treasury says its disruption would lead to substantial loss of potential government revenue, customers deposits and market confidence.

The government might, therefore, be under pressure to compensate losses and hence should be considered as a plausible fiscal risk.

PUNISHING SUCCESS

Essentially, a slight failure in its infrastructure presents a systemic risk on the entire economy by virtue of being the dominant payment platform for government to citizen services.

The sector needs regulatory decisiveness. To give you an example, in June 2020, Ghana’s National Communications Authority, the country’s telecoms sector regulator, declared MTN, the leading operator, a Significant Market Power.

At the time of the decision, MTN controlled 57 percent share of the voice market and 67.78 percent share of the data market. In Kenya, the communications authority appears held hostage.

In summary, while there are compelling arguments against punishing an operator for its success (by virtue of a declaration of dominance), I think there are genuine concerns about negative market dynamics that call for serious stakeholder considerations.

The author is a thought leader Twitter @GeorgeBodo