Category: Regulation and Law

Regulation and Law

Kenya Needs a Well Coordinated Data Centers Investment Policy and Strategy

Posted on by Tom Makau

The growth of online content consumption fueled by the trinity of cheaper smart phones, social media and 4G is evident everywhere you look. Your average mama mboga, office workmate, spouse is today a regular consumer and producer of content such as video clips, photos (mostly memes) and posts to social media more often. The popularity of Facebook, Instagram, TikTok, WhatsApp, YouTube, video and audio streaming such as Netflix, Showmax and Viusasa says it all.

This therefore means that content providers need to ensure higher levels of service quality by improving their systems to cope with the demand and deliver the expected experience. One example is that these days YouTube Videos rarely buffer like they did 6 years ago because YouTube is storing those popular videos in Nairobi and not in a data center in Europe or the US.

This drive to deliver a good user experience by the providers means that they have to depend more and more on the public cloud infrastructure. This infrastructure is run by cloud providers such as Google, Amazon Web services (AWS), Microsoft, Alibaba, and many more. These cloud providers on the other hand, lease data centers (DCs) from private investors such as the Africa Data Centers and iColo.
The reason why these content providers use the public cloud is because of how it is designed to be fault tolerant and always avail services at the expected quality.

Cloud Infrastructure 101

The public cloud is designed in such a way that cloud services are provided as close to the consumers as possible without compromising service levels and availability. To do this, cloud providers have points of presence where they avail cloud services from. These points of presence are region based, so there would be Asia North region, Asia South, Africa North, Africa South, Europe East etc. Within these regions, they have city regions or zones. For example Africa South region can have Capetown, Durban and Johannesburg zones.
Within these zones they have data centers that are at least 60miles apart from each other and interconnected with high speed cables. To ensure high availability, many cloud providers usually have at least data centers in a zone. so using the example above, there would be three data centers in Durban area separated by at least 60 miles, same for Capetown and Johannesburg

Is Kenya ready?

With the example above, it means that for Kenya to be attractive to cloud operators, we must invest in DCs in a way that will make it attractive for providers seeking reliable infrastructure to provide content from. At the moment, when I take stock of our status, I believe there is room for improvement in as far as preparing the country to being a destination to cloud providers. The location of current DCs and future planned ones doesn’t inspire confidence on the service reliability from these DCs by would be customers.

The Africa Data Center- ADC at Nairobi (Mombasa road) is by far the best run and largest data center in East Africa, closely followed by the iColo data centers in Mombasa and Nairobi (Karen). Safaricom also runs a Data center in Thika town. There is ongoing investment by Huawei and a local partner in a Data center in Mombasa and also the government DC in Konza that is currently in makeshift modular structures as a proper one is being set up.
All these are investments in the right direction, but I think we are dragging our feet as far as investing in world class data center services is concerned. I sometimes imagine what the situation would be if all the Kenya’s empty malls investors had put money into DCs instead? We would become the regional cloud hub for East and Central Africa by virtue of having a more stable economy and political climate and better infrastructure and power supply by far.

Kenya needs to coordinate and catalyze the investment into data centers by private investors for example by giving tax concessions and incentives to anyone investing in a DC at a predetermined location or region. By this I mean that government policy makers can map out how Kenya can coordinate the investment into DCs to ensure that we become attractive to the large cloud players.

This year, Microsoft and Google announced that they intend to be carbon free by the year 2030. By this they mean that their services will run off offices, data centers and networks that rely 100% on renewable energy sources. This of course means that will stop using coal power and opt for greener sources such as solar, wind and geothermal. With Kenya sitting in a region where all these are abundant, there is no reason why Naivasha should not turn from a flower town on the decline into the DC capital of Kenya. Its closer to EA regions than Mombasa, has abundant geothermal and a lake to cool the DCs. Instead, Djibouti is eating Naivasha’s lunch as it’s fast becoming the regional DC go-to city.

The reason I am calling for central coordination on this is because so far, the investments have been driven by other factors other than suitability of the DC locations in relation to other nearby DCs and the investment levels have also been very low. For example, the iColo DC in Karen is too close to the Africa DC on Mombasa road, this doesn’t meet the minimum distance DCs should be separated from each other. A natural disaster or major power outage on Mombasa road would likely affect Karen but not Thika town or Mai Mahiu town where I think the next DC in ‘Nairobi’ zone should be.

With content consumption expected to grow even faster with the adoption of 5G, cloud computing as we know it will also slowly morph into a hybrid of true cloud and edge computing. In the later, the content is hosted very close to the user than before. In the Nairobi case, instead of the content being hosted in a DC on Mombasa road, it would also be hosted in multiple locations near consumers such as at mobile base stations or nearest malls that will offer DC space for Edge computing services.

Please don’t get me wrong, I am not calling for regulation of the DC space in Kenya per-se. I am calling for government incentives akin to the Export Processing Zones (EPZ) concept but on DCs. So as an investor, I stand to gain tax breaks for example if I build my DC at Makindu town to supplement the DCs at Konza. I am however free to chose where I also think I should set it up as long as I am compliant to the existing laws and makes business sense. Saying that Konza Technopolis will answer my call above is missing the point as we cannot have all DCs located in one place. They will not be attractive to customers seeking high reliability and availability of services.

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Regulation and Law

Timely Policies and Laws Needed in the Kenyan ICT Space

Posted on by Tom Makau

For sometime now, Kenya has continued to enjoy pole position as far as innovation and application of ICT’s is concerned. We have been hailed as an example of how, if applied correctly, ICT’s can be a catalyst for development. Kenya found itself here not by chance, but thanks to the forward-thinking leadership that put in place progressive policies, guidelines and regulations to spur the growth of ICT’s.

At around the turn of the century, Kenya formulated progressive policies, laws, regulations and guidelines that guided the growth and direction of the then nascent ICT sector. This was through the Kenya Communication Act (Cap 411A) of 1998 which underwent subsequent amendments thus: Kenya Communications (Amendment) Act of 2009, and the Kenya Information and Communications (Amendment) Act , 2013. These laws were informed by government policy towards ICT. To simplify the relationship between all these documents, Policy documents influence or result in laws (acts of parliament) which in turn result in sector guidelines and regulations (handled by the regulator). This therefore means that if we get the policy wrong on the onset, then all subsequent action plans and sector laws will be off target or with undesired outcomes.

With the rapid changing ICT sector, the task of a country keeping itself current to these changes can be daunting. I would say we did very well at the onset despite several challenges that arose. One of the most common example of where policy/laws/regulations lagged behind and failed the citizens was in the area of data protection which led to a lot of mobile phone fraud (ala Kamiti/’mtoto ameumwa na nyoka‘ SMSs) which has led to rampant identify theft and mobile money fraud. Another area that is facing challenges due to poor or delayed policy, laws and guidelines is on the infrastructure front on matters to do with protection of ICT infrastructure from accidental damage, vandalism and sabotage. Cybersecurity too is becoming a big problem especially now that many offline business transactions are going online and social media.

The above examples show that it is very risky for any country to have lagging policies/laws/regulations on matters ICT. It becomes very difficult to reverse any established ICT related vice using laws once technology gives laws a wide leading gap. To correct this often involves not just new laws, but adoption of newer technologies, whose cost is often passed on to the end users. In summary, lagging laws end up eroding any financial or technical margins we have. This is already happening on the e-commerce space where the lack of proper national physical addressing system, delayed data protection and cyber security laws led to the loss of trust in online transactions and higher operating costs by the vendors due to a poor national addressing system.

There is a saying that often, innovation leads regulation. This is true, the question however is by what margin or gap should regulation lag behind the innovation curve? Due to accelerating pace of technology advancement, this lag needs to be smaller and smaller. This is however not happening in Kenya. The Kenya Information and Communication policy guidelines were recently gazetted after nearly 4 years of review and deliberations. This is too long. The period of time it took to make these amendments is very long in the ICT universe and a lot has changed, making some of the documents content obsolete or near obsolete. Several examples below.

When the gazetting took place, many media pieces focused on the policy proposing that ICT companies can only be considered as Kenyan or local if the shareholding includes 30% local ownership. There is hue and cry over this as many seem to misinterpret the law to say that foreign owned ICT companies will not be allowed to operate in Kenya without 30% local ownership. This is far from the truth. What this says is that the government will give preference to Kenyan ICT companies when awarding govt tenders and then goes ahead to define what a local company is. This therefore means a foreign company can still operate in Kenya and still get government ICT tenders but can drastically increase it’s chances of being awarded the tenders if they meet the 30% local ownership. This is different from saying that only locally owned companies can operate in the Kenya ICT space.

The focus of the policy’s critics should however been on the fact that its taking very long to enact or gazette policies and laws on matters ICT in the country leading to a lag that is costing us our competitive advantage as a country. We stand to lose the gains made so far if we are not nimble enough to change with the times by ensuring that our legal, institutional and regulatory framework development curve closely follows the innovation curve.

As a country, we also can claim leadership in the region and Africa on our institutional framework setup. We have an extremely vibrant for forward-looking ICT regulator and bodies that are tasked with directing and spur uptake and use of ICT in our socioeconomic activities. We must however take care to avoid the pitfalls that seem to befall these institutions that are sometimes come across as being more interested in revenue generation than carrying out their mandate.The focus on levies by both parastatal/national and county governments for wayleaves means that governments will tend to take the approach which maximizes their revenues as opposed to an approach that is geared towards successful rollout of ICT services. A few months ago, the ICT Authority issued a notice that would have made all fiber plant operators to pay a levy to them in addition to seeking approval for cable laying on top of the already existing levies by local governments and roads authorities where these cables pass. I say this because great initiatives such as the National Broadband Strategy (2018-2023) might not yield much if the implementation of this strategy will be met with hurdles in the name of county levies such as the case when Turkana county government demanded KES 93 million in levies from Geonet Technologies for laying fiber in the county. See story here.

Considering the National ICT policy document has been in the works since 2016, the gazetting of the same close to 4 years later is a mistake we could only afford to make once. In the next few years, if we remain rigid in the quick implementation of these very good policies, laws and strategy documents, we risk losing our leadership in matters ICT in the continent. The rapid adoption of existing and emerging technologies that require trust to shift from offline to the online space for them to succeed (e.g e-commerce) means that legal and regulatory tools and frameworks need to be properly established. A good example is the hue and cry from citizens during the very noble Huduma number registration process. The process failed because of lack of trust that was caused by lack of requisite legislation on data protection being in place due to the nature of data that this registration process was collecting. The rise in cybercrime and mobile money fraud too is as a result of failure to be quick in enacting laws and regulations around online transaction authentication and trust management. For example, there is a disconnect in Identify verification for mobile money transfer as the form of identification is offline while the transaction takes place online, this makes authentication of transacting parties a subjective matter left to the vendor/agent serving you and not tied to a fool proof and objective approach such as online digital ID verification.

AI: A spanner in the works

The nearly four-year delay in the adoption of the new policy coincided with a period of rapid development and maturity of Machine Learning, Cloud hyper-scale computing and data analytics. These three have led to the increasing adoption of Narrow AI systems in many areas of life. The application of AI to algorithms that impact peoples very lives and health. The use and application of ICT’s such as AI now cuts across moral and philosophical areas, opening a Pandora’s box on how this can actually be regulated with the existing policy framework. Forward looking regulators and governments are now re-looking at the ICT regulatory space with AI lens. This is where we should be as a country as far as our national ICT policy is concerned. There is a drive in South Africa by industry leaders to have the local regulator be reconstituted into a more forward looking body that will help the citizens enjoy digital dividends.

Other than AI, the advent of e and m-commerce apps and online shopping brings in new regulatory challenges too. For example what can the regulator do to ensure high levels of trust by the public of online service rating systems and that they are not abused or gamed? Is the 5 star rating on your Uber driver’s profile genuine? are the number of followers for that Instagram shop and it’s reviews genuine? The ICT policy or resultant laws and guidelines in the current market conditions should already be addressing that.

It is my hope that the pending legal, institutional and regulatory framework and tools at our disposal will be implemented with the desired timelines. These include the National ICT Infrastructure Masterplan- NIIM (2019-2029) which is a very key document for the future of ICT services roll-out in this country.

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ICT and Telecoms, Mobile Telephony, Regulation and Law

The Dominance Debate Should Be About The Consumer’s Welfare, Not Operators

Posted on by Tom Makau

Communication TowerDuring the last Safaricom AGM, the dominance debate came up and all contributors to the discussion at the meeting seemed to agree on one  thing: That the regulator is punishing Safaricom for being successful and that it was not their fault that their competitors have refused to invest and innovate. The recent calls by their competitors to the regulator to have them declared dominant and abusing their dominance are based on a market study report released last year by a consultant. This report found Safaricom to be dominant in both the mobile communication and mobile money markets. The report went further to suggest remedies that include infrastructure sharing, retail tariff controls and the splitting of the company into several independently run companies for mobile money and mobile communications.

In July this year, the parliamentary committee on ICT’s met sector players on the issue of dominance and what came out was other operators still strongly feel that they cannot be able to compete with Safaricom on equal footing. On the other hand the committee members felt that the operators are not doing enough to pry off Safaricom’s grip on the sector. Recent reports also indicate that the regulator is also under pressure to declare Safaricom dominant and in abuse of its dominance. By going ahead and doing so, the operator will not have a free hand in the determination and introduction of new products and services in the market without the regulators direct approval. Another recommendation that is being pushed is the sharing of both active and passive infrastructure by Safaricom with its direct competitors.

A point to note on the above is in all this discussion, no one is looking at the possible effects the implementation of these recommendations will have on the most important person in this debate; the consumer. The focus is mostly on the operators commercial welfare. Also, should the regulator decide to go ahead and implement the recommendations, what laws or framework will be applied? Are the laws also relevant to the current technological and market realities?

The Kenya Communication Act of 1998 and its subsequent amendments (Kenya Information and Communication amendment act of 2013) specify that the regulator shall from time to time develop and publish, in the Kenya Gazette, guidelines to be followed when determining whether a licensee in a dominant market position in a specific communications market. The Act also specifies that for the regulator to determine if a player is dominant, it shall prepare a dominant market power report to determine whether a licensee is dominant in a service or geographic communications markets. This is the report that was released in February this year. Based on the reports findings, the Act specifies that the regulator can declare a licensee dominant by considering the gazetted criteria, One of the critical criteria is if the operator possesses Significant Market Power (SMP).

Upon declaring an operator as dominant, the regulator will also need to show that the dominance is being abused to edge out competition from the market or to generate more profits or even offer inferior quality of service with no consequences. The criteria that can be used to check if there is abuse of dominance are as below. It’s worth noting that Safaricom meets none of the criteria below for abuse of dominance.

  1. Refusal to deal with competitors on the essential facilities doctrine: essential facility is facility supplied on a monopoly basis but is required by competitors but they cannot be reasonable duplicated by competitors for either economic or technical reasons. With new approaches or alternatives to essential facilities sharing such as VNOs and national roaming, and the fact that all mobile networks now have  a packet switched core as opposed to circuit switched, this doctrine cannot be used as a measure of dominance abuse because already Safaricom is sharing and leasing out unbundled services.
  2. Cross subsidization: This is where the dominant firm uses revenues from a market in which it is dominant to cross-subsidize the price of a service or product it provides in other markets. For example, there would be suspicion of cross-subsidization if Safaricom, when recently entering the home internet market (which Zuku was the de-facto player), offered much lower pricing than them by subsidizing home internet user pricing with revenues from their voice business. Entry prices for most markets Safaricom ventures into are often higher than competitors.
  3. Predatory pricing: This is where the dominant operator charges prices below a normal cost standard. At the moment, Safaricom prices are not the cheapest in the market so this also does not apply too. This debate would have made more sense if Safaricom was dominant through the offering of prices well below their competitors price points.
  4. Bundling of services: This is where the operator sells a product at a fairer price on condition that you also buy other services from them. For example, a user who simply wants airtime should be able to buy only airtime and not be forced to buy airtime and data though an offer despite them not having an immediate or future need for the data. If anything, its Safaricom’s competitors who are bundling services leading to wasteful accumulation of unnecessary services such as hundreds of unused SMS’s and talk time minutes that accumulate as subscribers purchase bundled data for internet access.

Innovation and Operations

There is this notion that the mobile sector is vendor driven, that the telecom equipment vendors often dictate the pace of innovation in the market. This is partly true and therefore also means that competitors in the sector have access to similar technology because the vendors in the sector supply all operators. Nokia, Huawei, Cisco, Ericsson all supply to the operators the same products. The difference however comes in on how these products are monetized. The dominance report recommends that Safaricom, upon being declared dominant should not sell services that are not replicable by the competition. This is to say, they cannot come up with a product that their competition, using their resources and infrastructure cannot come up with easily. The Kenyan ICT talent pool is very large and any operator worth their license can afford to hire the best brains in the country. The fact that all operators have equal access to technology and talent means that its not hard to replicate competitors products. But why then isn’t this happening? The answer lies in company culture. Safaricom cannot be punished for cultivating a culture of innovation as their competitors sit and wait for the regulator to give them a piece of the innovation pie. All operators have the necessary ingredients to succeed.

One business model that has been adopted by Safaricom’s competitors is outsourcing of functions. Ideally, firms are supposed to outsource their non-core functions so as to enable them focus on their core function. If its a hospital for example, it can outsource its transportation, cleaning, etc but isn’t expected to outsource core functions like diagnostics and patient care. However, many firms that adopt the outsourcing path end up over outsourcing even core functions. The reason is purely to make the financial statements look better because most of the costs will be classified as variable and not fixed costs. When a firm outsources both core and non-core functions to third parties, it loses control over quality of service and also fails to clearly see any inefficiencies in the operations.  The result is outsourcing will make the books look good but affect customer experience through inefficient service delivery.

What are the alternatives?

With telecommunication services now permeating all sectors of our lives, it has become a critical catalyst for socioeconomic development. drastic actions such as declaration of dominance and splitting up Safaricom will have far reaching effects on the Kenyan economy all in the name of giving it’s competitors an equal footing. So far, several regulatory actions aimed at leveling the playing field have not yielded much. First it was Mobile Number Portability (MNP) which according to analysts didn’t work well because subscribers were afraid to change operators due to M-pesa. For MNP to work, many felt that Mobile Money Interoperability (MMI) had to be in place. The regulator managed to bring all operators on the table and effect mobile money interoperability. So far since implementation, there has been no effect on the market dynamics. There are also a raft of measures put in place by the regulator to create a level playing field. Many of these measures have actually helped Safaricom’s competitors make slight gains in their market share. I believe these gains could have been more if these operators improved their operational efficiencies first.  Splitting Safaricom when the competitors operations are inefficient as they are will only do more harm to the sector as the supposed benefits will not be realized at that level of efficiency. The regulator in addition to playing its current role, should also demand accountability from operators on actions it takes to enable them gain market share but the operators fail to take up these opportunities. A good example is there was a very big push to effect mobile money interoperability, but when it was done, there was very little in terms of marketing this development bu those who were asking for it. At the very least there should have been a major marketing campaign that coupled MNP and MMI.

Another approach would be to offer tax breaks to Safaricom’s competitors on investment in network and services. This would lower their CAPEX on network roll out and services. Tax breaks can also be applied as a motivating factor when these operators reach certain predetermined targets. For example, if an operators revenues or market share hits a target, the government gives them a tax break. This will push them to be innovative in revenue generation and market share gaining activities.

The consumer

All the discussion around dominance has been mostly about operators gaining market share. There seems to be very little concern on the most important stakeholder: the consumer. At the end of the day the consumer should be able to make the decision on which provider to subscribe to based on the value they get. There is a general assumption that the consumer is always price driven. That all his decisions are based on price. This assumption is what has led to the many price wars we have witnessed in the market which have yielded little in terms of market share gains. Consumers buy convenience and experiences. operators who want to be successful must start looking at the consumer experience and convenience when they are on their network.

The focus of this debate should be the improvement of consumer welfare. All actions by the regulator should take into consideration the consumer, consumer welfare is the regulators biggest mandate. The best approach would be for the regulator to look at how best citizens will be served telecom services. The recommendation for Safaricom to share its infrastructure with competition can be shelved in favor of the Universal Service Fund. The USF can be used to lower the cost of rolling out services by operators in under served areas. This approach has worked very well in Latin America.

According to an analysis by the Institute of Economic Affairs (IEA), should the regulator implement the dominance report  recommendations, consumer prices for services would actually rise and not fall. This will hurt the consumer despite the fact that the leveling of the playing field for all operators is supposed to lead to lower prices. The declaration will serve the operators but not the consumer. So in the interest of the consumer, I believe other approaches listed above can be implemented, splitting Safaricom is not one of them.

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Mobile Telephony, Regulation and Law

My Thoughts on the Proposed Retail Tariff Controls in Kenya

Posted on by Tom Makau

telecoms-13The Communication Authority of Kenya is mulling on introducing retail tariff controls in the Kenyan mobile telephony sector. As you would imagine, this has elicited mixed reactions depending on who you ask. This move it is said is part of a raft of recommendations by the recently released report that studied the Kenyan telecommunication competitive landscape. The introduction, according to the regulator is aimed at correcting market failures that are as a result of one operator being dominant over the rest. The proposed retail price controls aim at limiting Safaricom’s freehand in determination of loyalty schemes and promotions, prohibition of on-net discounts, mobile money fees charged to unregistered and cross-platform money transfers. Tariff  control is a regulatory mechanism that can be employed to correct market failures in a market. The main motivation for price control is to protect consumers’ rights and interests in circumstances where market forces alone have been unable to do so.

The competitive landscape report implies that Safaricom’s price differentiation between on-net and off-net calls leads to tariff-mediated network effects. By this I mean that subscribers on a network find it cheaper to call others who are on the same network than calling people on a different network, the effect of this the emergence of the ‘club’ effect where subscribers decide which network to join based on which network the people they call mostly are on. If most of my family and friends subscribe to a network X, I am more likely to subscribe to network X because by being on network X and not on network Y, my overall calling costs will be lower due to cheaper on-net pricing. This it is argued is abuse of its dominance. But this is only true if the interconnection rates are high between Y and X meaning it will cost me more if I chose network Y where none of my relatives and friends subscribe to. As we speak, interconnection rates are already regulated by CA. This fact alone means that the regulator found and enforced an interconnection rate that was cost based and reflected the market realities. The Safaricom on-net call rates are above the regulator-set interconnection rates  and are similar to the rates its competition provides its customers to call into the Safaricom network, in short, Safaricom’s subscribers pay the same rate as competitors subscribers when both call another Safaricom subscriber. CA would be justified in imposing tariff controls if indeed Safaricom’s subscribers paid less to call their counterpart than when competition subscriber calls. The fact that the report found that each operator was dominant on its own network also means that the club effect can easily be replicated by competition through aggressive marketing and innovation.

Individually tailored tariffs

Another proposal by the regulator is the prohibition of individually tailored loyalty schemes and promotions. The CA 2010 Tariff regulations specify that all promotions or loyalty schemes must be approved by the regulator prior to commencement. Any promotion, offer or scheme currently in operation has the direct approval of the regulator, the details of each promotion or loyalty scheme structure were available to CA before approval and these include individually tailored schemes and promotions. When an operators behaviour due to regulation causes it to become successful, it cannot be punished for successes it encountered while operating within the laid down regulatory framework. If there is any discriminatory behaviour, then CA failed in detecting and stopping this even with the existence of regulations. When that happens, it is clear that regulation is not the solution to the perceived market failures and the only remedy is let competitive forces determine customer choice.

What would happen if call tariffs are regulated?

Most people assume tariff regulation leads to the lowering of retail rates. This would only be true if CA had a way of accurately measuring the costs involved to provide service to additional customers on their network. At the moment, due to the fact that Safaricom has invested more in network infrastructures geographical and population reach, it costs them less to bring in a new customer and provide service to them than its competitors. The proposal to use Long Run Incremental Costs (LRIC) method would mean that because of the massive economies of scale enjoyed by Safaricom owning a large network and technology convergence, the cost of offering an extra minute of termination on the network is virtually zero in the short-term and LRIC is applied to give a realistic cost over the long term. How long is ‘long term’ will determine the price point.
A regulated tariff price should imitate the prices that would have arisen in a market with effective competition, both because this provides incentives to produce the requested service at the lowest possible cost and because the operators requesting the service have the incentive to optimize their own investment decisions. In this way price controls can contribute to efficient utilization of social resources. The problem however is that LRIC works very well in legacy circuit switched networks where it was easy to link network utilization with the provision of a service (if a switched circuit is in use, it is providing a directly attributable service), in a converged environment, the relationship between network resource utilization and provision of services is not that straightforward and an LRIC model applied to it would fail to efficiently allocate costs. As networks evolve into Next Generation Networks (NGNs), LRIC approach to service cost allocation becomes inefficient and LRIC starts to resemble the Full Allocated Costing (FAC) model. The result? higher prices to the consumer.

Replicable retail tariffs

One of the recommendations by the study is that Safaricom’s Tariff must pass the ‘replicability test’.  In order for a product or service to be considered replicable, it must be commercially and technically capable of being replicated by Safaricom’s competitors. By this we mean that any new tariffs that Safaricom comes up with should take into consideration the capability or state of competitors infrastructure and services especially at the wholesale level. If for example, Safaricom comes up with a tariff that takes advantage of a new innovation they developed, then competition should have similar innovations on their networks or should be allowed by Safaricom to access this new innovation at wholesales prices to enable them offer similar tariffs. In order for competitors to be able to compete with Safaricom in retail markets, it is necessary for them to have access, either via their own networks or through access to Safaricom’s network, to the wholesale components that enable those retail prices to be offered. This as you can imagine will slow down the pace of innovation by Safaricom or change the main focus of innovation from the customer to competition, anytime Safaricom wants to innovate, they will think of ways through which competition will not benefit much from it as opposed to spending their time and knowledge on how the innovation will first benefit the customer.

Tower sharing

The report found that Safaricom is dominant in the tower market owning about 65% of telecommunication towers in Kenya and recommends that it shares it towers with competition. To do this effectively, Safaricom has to let a 3rd party manage the towers on its behalf. Safaricom owns its towers while competition has a mix of owned and outsourced/leased towers. With rapid advancement in technology, there is a saying in the industry that it is always cheaper to build a network tomorrow. Any new entrant or existing operator rolling out new retail services and infrastructure such as towers will do it cheaper today than those who did it in the past. See how easy it was for Finserve Africa (Equitel) to get market reach by the flick of a switch riding on an MVNO license? Older operators didn’t get to enjoy these benefits and had to put in sweat and blood to get where they are.
In the Safaricom 2017 sustainability report, the operator spent close to 10 million litres of fuel and about KES 48,000 per month per tower location on energy costs. The report also shows that fuel and power costs are coming down and that Safaricom has also embraced green energy initiatives to power the active components at the tower stations, it is becoming cheaper by the day to setup and manage tower locations but the increase in the number of towers makes the management of the same a challenge.  Outsourcing of tower management is used by some operators to shift a large element of their fixed costs to the variable costs column of their financial books, in doing so the operators financial health improves. Tower outsourcing has little to do with improved efficiency in actual operations and management of these towers but more to do with improving the books. Due to this, the global trend in the telecom sector is the outsourcing of tower management to independent 3rd parties, something Safaricom should consider for its own benefit and not due to regulatory requirement. Safaricom should then decide to lease its towers to competition on a purely commercial basis.

Conclusion

Although well meaning, the CA needs to explore non-tariff based remedies to the perceived dominance of Safaricom. Tariff control is a very intrusive approach to handling abuse of dominance whether real or perceived. As markets evolve to become competitive, ex ante regulation should reduce as the regulator forebears regulation in favour of competitive forces. The challenge however is that customer inertia can mask the existence of competition in the market leading to the regulator applying regulatory tools to correct this perceived market failure. Market forces should be let to dictate the market tariffs.
The tariff control ocean floor is littered with shipwrecks of tariff control attempts by various countries that  tried to correct market failures by  employing it. One of these countries is Mexico who in 2012 introduced tariff controls by baring America Movil from charging interconnection fees to its competitors. Movil controls 70% of Mexico mobile market. As of 2015, mobile call charges had dropped by about 17% but investment in the sector dropped 30% during the same period, for a developing country like Kenya, a drop in ICT investments will have far reaching effects across multiple sectors of the economy. Whereas the intended outcome of tariff control is to  protect the consumer from a dominant operators actions, the question that remains is whether tariff control is the only viable market correction tool available.

 

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