The Strange Case of the Dog that didn’t bark – Communications Authority of Kenya, Safaricom and the fall of Francis Wangusi
23 February 2018
One of Africa’s most interesting regulatory cases is the dominant market power study being conducted by Kenya’s regulator, CAK. This week Russell Southwood looks at the detailed findings of the report commissioned by CAK and what it might do about them.
Let’s start at the beginning for those less familiar with the Kenyan telecoms market. Safaricom is the biggest player in the Kenyan market by revenues and is owned by the following shareholders and shareholder categories: Vodacom: 35%; Kenyan Government: 35%; Vodafone: 5%; and retail investors (largely locals through the Nairobi Stock Exchange): 25%.
As the largest player in the market, Safaricom has generated a high level of rewarding dividends for its shareholders. Indeed when any move is made to curtail the power it has in the market, a coalition of Government and local shareholders often speaks out against change. But there is also considerable Kenyan pride at a citizen level for what is seen as a local company and the success it has had. Therefore there is also wider public support for maintaining the status quo.
In 2016 the Communications Authority of Kenya (CAK) commissioned telecoms consultancy company Analysys Mason to carry out a Telecommunication Competition Market Study in Kenya and the work was completed in 2017.
Analysys Mason describes its approach to regulation as follows:” Regulation is seen as temporary, needed only until normal market conditions develop, and is applied regardless of the technology, stimulating innovation, protecting the consumer, driving choice, improving quality of service, and ensuring that prices are reasonable.”
The study addresses dominant market power and the market failures that might result from it. In terms of remedies it talks about:
“- Remedies can be applied at the wholesale or retail level to address market failures in either market.
- Remedies are more common at the wholesale level but services such as national roaming and mobile money are retail services by definition
-The likely short-term impact of remedies needs to be weighed against the likely-long term impact of fewer MNOs in Kenya, and returning the producer surplus to the consumer where possible (our italics)
- The remedies proposed were considered to be the least intrusive”.
The phrase producer surplus above is a polite way of saying profits and that the implication is that these might be lowered and some of this “producer surplus” returned to Kenyan consumers through lower prices.
As is often the case with major reviews of this kind, the consultants have changed their initial recommendations in response to arguments put to them:”…some amendments to remedies to ensure that they are appropriate and proportionate in the circumstances described by the respondents, and the CA, on the basis of the facts established by the market review.”
In order to make market comparisons, it uses a basked of countries: Nigeria, Tanzania, Burundi, Rwanda, Uganda, Ghana and South Africa. It concludes that mobile and fixed penetration are broadly in line with these countries.
On the nub of the matter, it concludes that Safaricom has an over 70% share of subscribers, minutes and revenue. Those with long memories will remember Airtel’s attempts to wrest away some part of this through lower pricing and how the dial barely shifted. Airtel has also announced that it will be leaving the continent at a time of its choosing. There are now only two other major mobile players – Airtel and Telkom (formerly owned by Orange) – and one smaller one owned by Equity Bank. With one leaving in future, there will then be a cosy duopoly.
A key financial advantage for Safaricom of its market dominance is that it pays considerable less interconnect charges as most of its traffic is carried on its own network. One result of this is that:” Mobile ARPU (Average Revenue Per User) has increased by 40% in the last 6 years and is at the high end of our benchmarks (the countries referred to above).” In other words, Safaricom has bucked a wider African trend of falling ARPUs.
Furthermore, Safaricom has an 80% market share of the mobile money market in Kenya. However, in the broadband market it has until recently had almost no presence (and Wananchi is the key player) and likewise in the now much less important fixed line market.
The report identifies five retail markets in Kenya: mobile money; mobile communications; fixed broadband for consumers; retail fixed broadband for enterprises and leased liners; and retail fixed narrowband. Underneath these retail market segments, it identifies 8 key wholesale markets. It looks at these eight wholesale markets and asks whether and any changes can be made through “ex-ante regulation”.
On towers, it proposes a range of remedies including: access on a regulated site sharing basis to the seven most rural basis; tariff control; non-discrimination (internally and externally); and the requirement for a reference access offer. It laid out similar obligations for fixed and mobile voice termination but observed that these conditions already apply. On USSD and STK access, it should provide access to all service providers again at a fixed rate and with a reference interconnect offer.
It identified that Safaricom was dominant in the retail mobile communications and mobile money markets. On mobile communications, it suggested mandating access to the seven most rural counties on a cost basis with replicability of tariffs and on-net discounts. Again also with a non-discrimination framework and a reference offer.
On mobile money, it suggested that the fee for a transaction should not contain a surcharge for non-Safaricom registered users.
The original report had suggested that regulated tower sharing cover 14 counties (67% of territory / 30% of population). This was “reduced to 7 northern counties (50% of territory / 10% of population) based on principle of proportionality and in recognition of investment made by Safaricom in rural infrastructure.” In other words, Safaricom bought its way out this wider obligation by promising to make further rural investment.
On mobile money:”An earlier draft of the report proposed implementation by end of 2017 with functional separation of Safaricom and M-Pesa if this was delayed by factors within Safaricom’s control. This remedy could be seen as (a) disproportionate, and (b) constraining the CA’s discretion to act as it saw fit at the time. (The) Final report is therefore silent on what further remedies the CA might consider.”
Although there is a clearly articulated methodology and analysis, the final recommendations somehow seem to fall well short of the problem being addressed. Indeed it seems unlikely that Safaricom’s dominant market position will be affected in any other than marginal ways.
Meanwhile, the Director General has been effectively sacked or if you prefer, sent on leave until his term has finished. It was reported that this was for gross misconduct over malpractice in staff training and promotions at the regulator. The information that has come out around this event clearly illustrates the dynamic of the relationship between the Communications Ministry and the regulator.
A series of articles appeared that give an account of what happened from Wangusi’s viewpoint. He describes how Government has repeatedly asked him to dip into CAK funds to cover things needed by Government: things like covering travel for ministerial delegations to international events.
But the most striking of these requests (according to a report in Kenya Today) was to provide Sh25 million to go towards the swearing in ceremony of President Uhuru Kenyatta, despite the function being fully budgeted for. Wangusi did not immediately act on the request as was required, in what put him in the line of fire. The request was later cancelled and he was asked to ‘ignore and cancel the letter’. Sunday Standard contacted the ICT Ministry regarding the letters. ICT Principal Secretary Sammy Itemere, who authored most of the letters, said the specific request for the swearing in was later cancelled. “We cancelled that request because it was a state function that had a budget,” Mr Itemere said. There are also reports that the Ministry wanted CAK to cover the expenses of setting up a cyber security agency.
Because of market changes, African regulation is now at a crossroads. Major parts of the market will increasingly be reduced to effective duopolies. No-one is talking about how Africa can regulate for the future and how they will maintain competition in the interests of their consumers.
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