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Rural plank of Kenya's telecoms liberalisation falls apart

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afrol News, 28 October - Kenya's telecomms liberalisation programme is in a mess. It has been caught between the downturn in the telecoms market and the timidity of the government's sell-off policy. One plank of this policy was to open up its rural areas to new operators. 

Muriuki Mureithi describes how this laudable initiative has all-but collapsed, overtaken by mobile operators and uncertainties about the future plans of the incumbent. He also explains why things could have been very different.

As Kenya government made the first steps towards telecommunications liberalisation in 1997, one issue that was significant in the policy reform was to ensure that the rural population who are a majority are served. At the time, the teledensity was anywhere to the range of 0.16% and the dream over a fifteen year period was to raise this teledensity to 1%. At the centre of the strategy to achieve the dream were two instruments

- Universal access to involve all operators in telecommunications sector to contribute towards the programme. All voice-based operators have a commitment to provide universe service. At present this is defined by access to a payphone within a defined administrative area.

- The other instrument focusing onn the rural areas was the Regional Telecommunications Operators (RTOs). The intention was to establish operators who would be given specific rural areas outside of Nairobi.

This rural focus is laudable but the flip side was of course that the incumbent (which was involved in drafting the policy) would have minimal competition in the rural areas. More importantly, the pressure for these services from those living in rural areas would be deflected to the new operators. 

Tenders for eight licences based on administrative boundaries were launched in February 2000 with each licence covering a specified region in the country with the only other fixed line competitor being the incumbent Telkom Kenya. The licences have a universal service obligation to provide at least two payphones in the smallest administrative unit (sub location) in five years. The winners and rollout commitments were as follows:

- Telair Telecommunications (K) Ltd (Central Coast, Nyanza, South Rift and Western.

- Safitel Ltd (Eastern and North-Rift)

- Bell-Western Ltd (North-Eastern)

No licence was to be issued for the Nairobi city. Despite the exclusion of Nairobi city, the numbers appeared impressive. There are over 5.2 million households barely served with only 120,000 lines to go round and a 15 year licence and renewable for a further 10 years. 

Sixty-four (64) prospective bidders bought the bidding document. Many despaired and fell on way on the way side, in the end six consortia made formal bids, out of which three consortia were selected who committed to invest upto US$ 350 million to provide 299,000 lines or build a fixed line/wireless network the size of incumbent Telkom Kenya outside Nairobi in under three years. Additionally, the consortia committed to pay the government a licence fee of US$ 37 million upfront. 

That was too good to be true. Eleven months since they were selected and invited to take up the licence, none of the RTOs has paid its licence fee and taken up the licence by end July 2001. The promise of the rural telephones is still way off. What happened?

At the time of the tendering, the international telecommunications market was very upbeat with dot.com promises of profits in the new economy. Anything remotely smelling telecommunications was sought after and money from investors, financial markets and vendor financing was not a problem. The dot.com meltdown concided with time the RTOs were to take up the licence and hit any investor hard. Today, a telecom licence even in the cities does not make much impact.

Early 2000, the Kenya was a virgin market; only one monopoly fixed line operator who had over 120,000 registered "waiters", and another monopoly cellular operator with hardly 12 000 lines and of course lethargic customer services, low coverage limited to the Nairobi city environs. Six months before, Vivendi Telecom International and a local conglomerate Sameer Group had committed to pay US$55 million for a national cellular licence and had projected to build 49,000 lines by end of year one. 

Against this parameters, the market for RTOs looked promising. By the end of the 2000, the scenario had changed dramatically with two cellular operators mounting a huge rollout and explosive marketing that changed the market dynamics. 

The barriers to mobile services came down by a combination of government action (reduced tax on terminals), regulator action (suspended type approval of handsets), and operator action (market intervention to reduce cost of handsets). This is changing by the day and with the preferred changeover to mobile, the RTOs have to go back to the drawing board to find their ground and market positioning in the rapidly changing scenario. This is now unstoppable and cellular has overtaken fixed line services in under one year of competitive service.

Just as important, the RTOs were wrongly positioned to make an impact apart from being resellers for the incumbent Telkom Kenya. In the bidding process, the regulator had to wriggle through the restrictive policy framework to make the process move forward. Initially, the government policy framework intended to have each operator to a licence and therefore 8 operators, this was changed at the bidding time to allow a bidder to take two licences and finally the conditions were changed midstream to allow a bidder to bid for all the eight licences. This was the nearest to a second national operator.

At the same time the telecommunications law through the telecommunications regulations was clarified to authorise the RTOs to interconnect across the regions and not necessary rely on incumbent Telkom Kenya. They could however not terminate their own traffic to the capital city, could not carry international traffic and could not use VSAT.

None of the overtures could cure the fundamental issue in the fast paced tendering process. Eventually the rural market consumers with a far lower disposal incomes, restricted technologies, explosive rollout by cellular and cherry picking and no clear path into the national and international market segment after end of exclusivity in 2004 has weighed down on the RTO process. Just as significant is the poorly performing economy with negative growth for the last 34 years hitting the rural areas hard.

Finally, the government was simultaneously privatising the incumbent Telkom Kenya that added another variable in the market. The ten consortia that indicated initial interest in Telkom Kenya talked of almost rebuilding the network. This would make the RTOs irrelevant in the market. 

Unfortunately, the dot.com meltdown has affected Telkom Kenya also, the interest waned almost immediately, and a number of consortia did not bid.

RTOs have lobbied hard to place this reality to the government to change the licence conditions. This could for example include a consideration to stagger the upfront licences fee over a long period, reduce the rollout commitments etc. 

This however is not possible because the tendering process was clear on the process and the exclusion of other bidders was because they offered less in terms of rollout and licences. No fundamental changes in the process can change now.

This predicament follows closely the experience in neighbouring Tanzania and it is surprising that the Tanzania experience did not inform the Kenya process. A similar venture for rural licence in Tanzania in 1995/1996 despite donor support was just as unsuccessful, regional cellular licences and paging licences initiatives in by Tanzania Communications Commission had to be abandoned. Rural incomes, poor infrastructure and cherry picking makes the concept non viable for now.

With the contracting international telecommunications market, this concept as designed is a hard sell. European operators who are the traditional strategic partners in Africa are shunning recent privatisations in Africa including the sale of lucrative cellular licences. 

The way out for the government is to declare the process unsuccessful and start the process again. This time the focus should be on a second national operator and revert to the well tried approach which the government had put out in the policy and force all players to contribute to universal access - at the same empower all operators to provide the same by removing restrictions on national and international traffic.

Finally, the days of money minting from telecommunications licences is long gone.. It time to re-strategise and invite long term investors to build telecommunications infrastructure and not short term investors to trade on licences.

The concept and philosophy of focusing on the rural population is however laudable but for it to be realised it is important that government reach out to support the rural ventures with accommodating regulation. The successful rural strategy in Chile required the government to bend technology rules and VSAT in particular to accommodate rural operators. Instead of requiring a licence fee, the government instead offered support despite a higher per capita income than Kenya, allowed higher tariff for terminating traffic reflecting the higher cost in the rural areas and access to radio resources at no additional cost. 

Last month the government of South Africa announced new policy directions in telecommunications sectors. Areas with teledensity below 5% can use VoIP - Not so for the rest. This is the way to go by first recognising the special problems in the rural areas. That is what the incumbent telecommunications operators recognised long time ago and refused to go to rural areas until forced by universal access obligations.


Source: This article is reproduced with special permission from Balancing Act


Balancing Act. This text may not be reproduced without the authorization from Balancing Act. 

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