Dis­sect­ing Sa­fari­com: Ethics, dom­i­nance and mo­nop­oly

Nairobi Law Monthly - - Cover Story - PETER WANY­ONYI

Sa­fari­com has got choke-hold on a large sec­tion of the Kenyan econ­omy, and rep­re­sents a dan­ger­ous sin­gle point of fail­ure on the part of govern­ment and reg­u­la­tory agen­cies

Is Sa­fari­com a dom­i­nant player in the tele­com mar­ket in Kenya? If so, what should be done about it; what can be done about it? Look­ing at the rel­e­vant laws and in­dus­try reg­u­la­tions, what must be done about it? Has Sa­fari­com abused its po­si­tion if it is a dom­i­nant player in the tele­com mar­ket in Kenya? Where does that leave con­sumer choice for ser­vices such as money trans­fer and voice call ser­vices? And what do the laws gov­ern­ing com­pe­ti­tion in Kenya say about the mat­ter, any­way?

The last sev­eral years have seen var­i­ous man­i­fes­ta­tions of th­ese and re­lated ques­tions. What started as a faint rum­ble within the money trans­fer ser­vice sec­tor has grown and turned into a burn­ing is­sue in tech­nol­ogy and tele­com ser­vices. At the very core of th­ese ques­tions and any pos­si­ble an­swers is the con­cept of fair com­pe­ti­tion, and the rel­e­vant com­pe­ti­tion law that reg­u­lates the con­duct and or­gan­i­sa­tion of busi­ness cor­po­ra­tions in the in­ter­ests of pro­mot­ing fair com­pe­ti­tion to guar­an­tee ben­e­fit for con­sumers. In the United States, such laws be­came fa­mous in the late 1880s when large cor­po­ra­tions called “trusts” ac­quired ex­ces­sive eco­nomic power and were then the tar­gets of laws and reg­u­la­tions aimed at free­ing up com­pe­ti­tion and al­low­ing small in­dus­try play­ers to also set up their own busi­ness in sec­tors dom­i­nated by the large trusts – as a re­sult, fair com­pe­ti­tion law came to be known as “anti-trust law”, a name that is still in use to­day.

Un­til the 1980s, Kenya’s econ­omy was dom­i­nated by an over­ar­ch­ing price con­trol regime. How­ever, this be­came un­wieldy and dif­fi­cult to main­tain, and Kenya was at any rate com­ing un­der pres­sure to fa­cil­i­tate free trade and open up into a mar­ket econ­omy. As the govern­ment of the day moved to­wards end­ing the price con­trol regime, it was re­alised that com­pe­ti­tion law was re­quired. The Re­stric­tive Trade Prac­tices, Mo­nop­o­lies and Prince con­trol Act was en­acted and came into force in 1989, pro­vid­ing for the con­trol of re­stric­tive trade prac­tices, as well as for con­trol of col­lu­sive ten­der­ing, of mo­nop­o­lies and con­cen­tra­tions of eco­nomic power, and of merg­ers and takeovers. This Act had its roots in pre­vi­ous laws, start­ing with the Price Con­trol Or­di­nance of 1956, which was re­vised in 1972 af­ter it had be­come the Price Con­trol Act. Its cen­tral ob­jec­tive was to

pro­tect con­sumers against price hikes. This Act per­sisted in var­i­ous forms and re­vi­sions un­til, as The Re­stric­tive Trade Prac­tices, Mo­nop­o­lies and Prince Con­trol Act (No. 14 of 1988), it was re­pealed by The Com­pe­ti­tion Act, No. 12 of 2010.

The Com­pe­ti­tion Act es­tab­lished the Com­pe­ti­tion Au­thor­ity of Kenya (CAK), whose job is to en­force com­pli­ance with the Act by re­ceiv­ing and in­ves­ti­gat­ing in­for­ma­tion re­lat­ing to com­pe­ti­tion in mar­ket seg­ments in Kenya, and us­ing its con­sid­er­able pow­ers to en­force fair and com­pet­i­tive mar­ket prac­tices by the re­spec­tive play­ers in those mar­ket seg­ments. The Act ex­plic­itly de­fines what a dom­i­nant mar­ket player is. In 4(3) (b), it de­fines a dom­i­nant po­si­tion in ser­vice pro­vi­sion as be­ing the case if a per­son (or en­tity) “…pro­vides or oth­er­wise con­trols not less than one-half of the ser­vices that are ren­dered in Kenya or any sub­stan­tial part thereof ”.

What the sta­tis­tics say

Sa­fari­com is a player in sev­eral sec­tors within the tele­com mar­ket in Kenya: in voice traf­fic, in data, in mes­sag­ing, and in mo­bile money trans­fer. The Com­mu­ni­ca­tions Au­thor­ity of Kenya (CA) keeps and up­dates sec­tor sta­tis­tics about the tele­com sec­tor in the coun­try. The lat­est pub­lished CA sta­tis­tics re­port con­tains the sec­tor sta­tis­tics as at the pe­riod of July – Septem­ber 2015. Ac­cord­ing to the CA re­port for that quar­ter, Sa­fari­com has a 66.3 per cent mar­ket share in mo­bile sub­scrip­tions in the coun­try. This, the re­port con­tin­ues, has en­abled Sa­fari­com to

own a 75.6pc mar­ket share of lo­cal mo­bile voice traf­fic. There­fore, as far as mo­bile sub­scrip­tions and mo­bile voice traf­fic are con­cerned, as per The Com­pe­ti­tion Act, No. 12 of 2010, Sa­fari­com is a dom­i­nant player.

The mo­bile money trans­fer mar­ket in Kenya had, over the July – Septem­ber 2015 pe­riod, a to­tal of 28,777,420 sub­scribers spread across the var­i­ous providers in the coun­try. Of th­ese, Sa­fari­com has 22,127,622 sub­scribers – a mar­ket share of 76.9pc. Ap­ply­ing the cri­te­ria of The Com­pe­ti­tion Act, No. 12 of 2010, Sa­fari­com is a dom­i­nant player in the mo­bile money trans­fer mar­ket.

The Short Mes­sag­ing Ser­vice sec­tor rides on the mo­bile sub­scrip­tions sec­tor in Kenya. Of the over 7 bil­lion short mes­sag­ing ser­vice (SMS) mes­sages sent in the pe­riod July – Septem­ber 2015 in Kenya, 89.6pc were sent us­ing the Sa­fari­com net­work, with the rest of the oper­a­tors split­ting the rest. Sa­fari­com is, there­fore, eas­ily the dom­i­nant player in the SMS sec­tor in the coun­try – un­der the terms of The Com­pe­ti­tion Act, No. 12 of 2010.

This pic­ture ex­tends to the In­ter­net and data mar­ket. This sec­tor has more play­ers, in­clud­ing fixed line and ter­res­trial wire­less data oper­a­tors, as well as mo­bile data and satel­lite data providers. In the mo­bile In­ter­net/data mar­ket, Sa­fari­com has a mar­ket share of 64.1pc.

To an­swer our first ques­tion, the sta­tis­tics pre­sented by CA make it clear that Sa­fari­com is a dom­i­nant player, be­cause in each of the var­i­ous tele­com mar­ket seg­ments, it has a mar­ket share that far ex­ceeds the thresh­old of 50pc that is set by The Com­pe­ti­tion Act, No. 12 of 2010.

Late last year, the CA re­leased a set of Pub­lic Con­sul­ta­tion doc­u­ments propos­ing new reg­u­la­tions to guide var­i­ous sec­tors of the tele­com mar­ket. Among th­ese was the “Fair Com­pe­ti­tion and Equal­ity of Treat­ment Reg­u­la­tions 2015”, re­leased un­der the Kenya In­for­ma­tion and Com­mu­ni­ca­tions Act No. 2 of 1988. Th­ese reg­u­la­tions sought to give the CA some teeth to act upon what it per­ceives as un­fair prac­tices within the tele­com mar­ket in Kenya, and they in­cluded some ex­ten­sions and clarifications of terms used in The Com­pe­ti­tion Act, No. 12 of 2010.

In Sec­tion 7 of the Fair Com­pe­ti­tion and Equal­ity of Treat­ment Reg­u­la­tions 2015, the CA de­fines what it in­ter­prets as a “dom­i­nant mar­ket po­si­tion”, with the defin­ing fac­tors in­clud­ing the mar­ket share of the op­er­a­tor in ques­tion – us­ing sales vol­umes, rev­enues and num­ber of sub­scribers as a ba­sis – as well as an op­er­a­tor’s vari­a­tions in ser­vice prices over time, an op­er­a­tor’s abil­ity to block other oper­a­tors from en­try into the tele­coms mar­ket us­ing var­i­ous means – among them buy­ing power, su­pe­rior ac­cess to cap­i­tal mar­kets, and a su­pe­rior ne­go­ti­at­ing po­si­tion – and, per­haps most con­tro­ver­sially, what the CA terms “the abil­ity of the li­censee to earn su­per­nor­mal prof­its”. In ad­di­tion to th­ese fac­tors, the CA also in­cludes an op­er­a­tor’s abil­ity to make in­de­pen­dent rate-set­ting de­ci­sions and its abil­ity to raise prices with­out suf­fer­ing a com­men­su­rate loss in ser­vice de­mand rel­a­tive to oper­a­tors.

Su­per dom­i­nant player

The CA stopped short of us­ing any sci­en­tific for­mula to cal­cu­late dom­i­nance in a mar­ket, but the sta­tis­tics pre­sented eas­ily con­firm that, within the in­di­vid­ual mar­ket seg­ments, Sa­fari­com is eas­ily the dom­i­nant player. Within math­e­mat­i­cal mar­ket anal­y­sis, one of the mea­sures used to de­ter­mine the com­pet­i­tive­ness of a mar­ket seg­ment is the Herfind­ahl Hirschman In­dex (HHI). The HHI helps one un­der­stand the level of com­pe­ti­tion within a mar­ket or in­dus­try, and it achieves this by squar­ing the dec­i­mal value of the mar­ket share of each player and sum­ming the re­sult, us­ing the ba­sic for­mula:

This means, “take the square of the per­cent­age mar­ket share of the first player, add it to the square of the per­cent­age mar­ket share of the se­cond player, add that to the square of the per­cent­age mar­ket share of the third player, and con­tinue un­til you have cov­ered all the play­ers.

The in­ter­pre­ta­tion of the HHI in­dex is fairly straight­for­ward: if the HHI value is less than 100, the mar­ket is highly com­pet­i­tive. If it is be­tween 100 and 1000, the

mar­ket is not con­cen­trated. If it is be­tween 1000 and 1800, the mar­ket is mod­er­ately con­cen­trated. If it is over 1800, the mar­ket is highly con­cen­trated, and the mar­ket has a su­per-dom­i­nant player.

In the Kenyan tele­coms mar­ket, the rel­a­tive HHI val­ues can be cal­cu­lated as fol­lows, us­ing the CA July – Septem­ber 2015 sec­tor sta­tis­tics:

The cal­cu­la­tions above show the ob­vi­ous: Sa­fari­com is a su­per-dom­i­nant player in vir­tu­ally ev­ery tele­com sec­tor in Kenya, save for the fixed-line sec­tor. With such a dom­i­nant player in the mar­ket, the ques­tion then turns to the ef­fects of that dom­i­nance. Is mar­ket dom­i­nance good, or is it bad, for the con­sumer of tele­com ser­vices in Kenya?

A su­per-dom­i­nant player in any mar­ket in­ad­ver­tently be­haves like a mo­nop­oly. In 2012, Air­tel filed a com­plaint with the CA against Sa­fari­com, al­leg­ing that Sa­fari­com was abus­ing its po­si­tion as a dom­i­nant player in the mo­bile money trans­fer sec­tor. The mat­ter was ter­mi­nated by the CA af­ter Sa­fari­com of­fered to ne­go­ti­ate and set­tle the is­sue di­rectly with Air­tel, but the mat­ter ended up in court a year later, with Air­tel say­ing it was never set­tled. Air­tel claimed Sa­fari­com was favoured by the CA in the mat­ter.

Mo­nop­o­lis­tic ten­den­cies

In 2015, Air­tel once again filed a pe­ti­tion with the CA, this time al­leg­ing that Sa­fari­com was charg­ing lower tar­iffs for calls within its net­work, com­pared to calls to the sub­scribers of other oper­a­tors in the mar­ket. It al­leged that the dif­fer­ence in voice tar­iffs locked cus­tomers into Sa­fari­com and was there­fore an anti-com­pet­i­tive move that dis­torted the mar­ket in favour of Sa­fari­com it­self. Var­i­ous other oper­a­tors have at one time or the other ac­cused Sa­fari­com of un­fair or even mo­nop­o­lis­tic prac­tices: Equi­tel ac­cused Sa­fari­com of ar­bi­trar­ily in­creas­ing the fees charged to Equi­tel cus­tomers trans­fer­ring money to Sa­fari­com’s M-PESA mo­bile money ser­vice. This was af­ter Sa­fari­com dou­bled the fees with­out no­tice.

Do th­ese prac­tices jus­tify a tougher line be­ing taken against Sa­fari­com by the CA? Un­likely. The CA has been a lag­gard in en­forc­ing in­dus­try reg­u­la­tions, and mo­bile oper­a­tors in Kenya have taken ad­van­tage of this to of­fer shoddy ser­vices to their sub­scribers. In or­der to en­sure pro­vi­sion of good qual­ity mo­bile ser­vices in the coun­try, the CA came up with Qual­ity of Ser­vice (QOS) Key Per­for­mance In­di­ca­tors (KPIS) that all mo­bile oper­a­tors were re­quired to com­ply with. In 2012-2013, Sa­fari­com failed to meet any of the QOS KPIS. In 2013-2014, Sa­fari­com, Air­tel and Or­ange all failed to meet the re­quired QOS KPIS. When the CA re­port was is­sued, Sa­fari­com sim­ply dis­missed it. In 2015, the CA pro­posed new mea­sures to force oper­a­tors to com­ply with QOS KPIS: non­com­pli­ant oper­a­tors would be fined 0.2pc of their rev­enues if they fail to com­ply with

the KPIS. In the year ended March 31 2015, Sa­fari­com had gross rev­enue of Sh163.4 bil­lion, and a profit af­ter tax of Sh31.9 bil­lion. If the CA were to carry out its threat, Sa­fari­com would be fined a mere Sh326 mil­lion – a fine that Sa­fari­com can pay with­out bat­ting an eye­lid.

Mere fines will, there­fore, not make Sa­fari­com turn to com­pli­ant sta­tus – the com­pany makes way too much money to be both­ered by the pin­pricks that cur­rent fines amount to. The dam­age that a player as dom­i­nant as Sa­fari­com in­flicts on a mar­ket is not just in the way it treats ri­vals, but more in the re­sul­tant death of in­no­va­tion. It is im­pos­si­ble to in­vent any­thing in the mo­bile sec­tor in Kenya with­out tak­ing Sa­fari­com into ac­count. The most in­no­va­tive work in Kenyan tech­nol­ogy to­day is hap­pen­ing around mo­bile money and bank­ing, but any­one seek­ing to en­ter the sec­tor must en­sure that their in­ven­tion is Sa­fari­com-com­pat­i­ble. This sit­u­a­tion is al­most unique in the world to­day, but a pre­vi­ous ex­am­ple ex­isted in the United States be­fore 1982: the AT&T Cor­po­ra­tion con­trolled the Bell Op­er­at­ing Com­pa­nies, which com­pletely dom­i­nated tele­phone ser­vices in the USA and Canada. The dom­i­nance was so com­plete that even the tele­phone equip­ment used in the USA and Canada was made by a sub­sidiary of AT&T. The de­ci­sion was ar­rived at to break up the Bell sys­tem into seven in­de­pen­dent com­pa­nies, and com­peti­tors and other in­vestors were al­lowed to ac­quire con­trol­ling stakes in th­ese new com­pa­nies. The re­sult was a surge of com­pe­ti­tion in the telecom­mu­ni­ca­tions mar­ket in the USA and Canada, a dras­tic drop in long-dis­tance call costs, an in­crease in in­no­va­tion in how TV con­tent was dis­trib­uted in the USA and Canada, and an ex­plo­sion in con­nec­tiv­ity of ca­ble and satel­lite tele­phone and TV con­nec­tions.

Eco­nomic choke-hold

It is clear that Sa­fari­com’s main lock-in at­trac­tion is its money trans­fer ser­vice, Mpesa. Most ac­cu­sa­tions of mo­nop­o­lis­tic or un­fair prac­tices from its ri­vals are around M-pesa. The money trans­fer ser­vice is so dom­i­nant that it is es­ti­mated nearly 50pc of Kenya’s GDP flowed through it in 2015 alone. This is im­pres­sive, but it also gives Sa­fari­com a choke-hold on a large sec­tion of the Kenyan econ­omy, and rep­re­sents a dan­ger­ous sin­gle point of fail­ure in the flow of money in Kenya – be­cause of its dom­i­nance, other money trans­fer meth­ods like money or­ders and postal or­ders have ef­fec­tively died. That one com­pany should so heav­ily dom­i­nate the coun­try is not just bad, it is also in­cred­i­bly risky – Sa­fari­com is con­trolled by Voda­fone, a Bri­tish com­pany whose main in­cen­tive is prof­its. If a sit­u­a­tion arose in which Voda­fone had to choose be­tween Kenya’s econ­omy and its prof­its, it’s quite ob­vi­ous what its choice would be.

And so the CA must avoid the temp­ta­tion to once again slap Sa­fari­com on the wrist, and in­stead set in mo­tion a se­ri­ous ini­tia­tive aimed at repli­cat­ing what the US au­thor­i­ties did to AT&T: be­cause M-pesa is so dom­i­nant and is ef­fec­tively a mo­nop­oly, and be­cause it is so vi­tal to the econ­omy of Kenya, the ser­vice must be hived off from Sa­fari­com, into a new com­pany. This new com­pany would of course be part-owned by Sa­fari­com, but the ma­jor­ity stake must be owned by the pub­lic. The new M-pesa com­pany would be a mo­bile money in­fra­struc­ture cor­po­ra­tion, one that would al­low any­one to lease its ser­vices for money trans­fer. This would force Sa­fari­com to fo­cus on the ser­vices that its li­cense was granted for: tele­com ser­vices of good qual­ity, by re­mov­ing the one bar­gain­ing chip that al­lows the com­pany to ig­nore CA and look askance at con­sumers’ de­mands for qual­ity voice and data ser­vices. The writer is an In­for­ma­tion Sys­tems

Pro­fes­sional based in New Zealand

Var­i­ous oper­a­tors have at one time or the other ac­cused Sa­fari­com of un­fair or mo­nop­o­lis­tic prac­tices.

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