Kenya needs competition in professional services sector

The importance of professional service providers in the Kenyan economy cannot be overstated. For instance, to build a quality house, you will require to engage at least five different professionals. They include an advocate, an insurer, a valuer, an engineer, and an architect.

As a business person, you are statutorily required to make various filings, including tax and company returns. Tax experts, company secretaries and accountants facilitate compliance.

A closer look at a typical loan transaction relating to construction discloses the significance of the professional costs. For a prospective homeowner, the different fees add up to a tidy sum even before an ounce of soil has been excavated.

If sourcing your construction funds through a mortgage, the associated costs of between 5 and 7 percent of the loan amount are settled out of pocket prior to drawing the facility. This includes stamp duty, legal and valuation fees, and bank facilitation charges, among others.

Now, let us consider the Advocates Remuneration Order, which sets the minimum chargeable transaction fee for land valued up to Sh5 million at Sh35,000.

Similarly, as per the Valuers Forms & Fees Rules, the charges for land transactions of up to Sh2,500,000 is 2 percent of the consideration, or the value of the subject matter or Sh28,000, whichever is higher.

The minimum valuation fee for the first Sh2 million in value of the property is Sh15,000. These are minimum charges which may increase with the value of the transaction.

Professionals associations strictly ensure adherence to the minimum fee structures, oftentimes threatening non-compliant members with, among other sanctions, expulsions. The end result of this is that professional fees are a significant component of the overall total lending costs in Kenya and thereby prohibitive to millions of potential borrowers.

This reality raises poignant questions that all parties involved in the process should prosecute soberly for the overall benefit of both businesses and consumers.

Some of the questions we need to ask ourselves are; a) what is the level of competition in the professional services market in Kenya? b) Are some existing professional costs inhibiting growth of the market, especially smaller firms, and their ability to offer competitive rates to consumers?

Globally, countries regulate the activities of certain specialised occupations and professions directly or by delegating regulatory powers to, for instance, professional associations. Such regulations govern the admission as a member, conduct of members, and the organisational structure of professional firms, among others.

However, concerns have been raised that professional regulations directly or indirectly restrict competition in the sector, thereby exposing consumers to high prices, limiting variety and innovation, and occasioning the lowering the quality of services.

Regulation of professional services has two elements. The first is structural regulations which is concerned with, among others, entry restrictions and the granting of exclusive rights to perform certain services. The second is behavioural regulation.

This entails the rules touching on matters fees structures and limitations on advertising, as is the case in Kenya to varying degrees. Globally, structural and behavioral regulations have been shown to restrict competition more than is appropriate or necessary, raising prices and limiting innovation in the sector.

Protagonists of self-regulation argue that rules issued by professional associations can adequately attend to any perceived market failures, and that this is important in maintaining the quality of services rendered.

Professional members also contend that when markets are let to operate on their own, quacks heavily undercut the professional members to secure customers aided by the existing information asymmetries in these sectors.

In the long run, it is argued that due to lack of quality services, sectors will offer substandard services.

However, there exists alternative mechanisms outside of minimum price lists that can attend to these specific issues. These include quality guarantee contracts, performance bonds, third-party accreditation or rating on quality.

Further, client recommendation remains the golden goose for businesses, offering even better “returns” than costly advertisements.

Professional service providers should devise more effective and less restrictive means of ensuring that quality services are available, increasing transparency on service standards, customer care, among other non-price elements.

For instance, mandatory minimum prices could initially be replaced by non-binding (recommended) referential prices in a transition to full elimination of price controls.

The professional services market could also be spurred into vibrancy if existing constraints on advertising are eliminated. As long as the advertisements are factual, a lawyer, for instance, should be permitted to showcase his/her client portfolio and matters handled in the media.

A competitive professional sector will support the recovery and growth of SMEs that require such services more and enhance the government development agenda, as envisioned in Vision 2030.

The article is the opinion of the author and does not represent the position of the Competition Authority of Kenya