Kenyan government relaxes telecoms rule

"Any firm licensed to provide telecommunication services shall have at least 20% Kenya equity ownership," said a notice in the official Kenya Gazette.

Industry analysts, who see the 30% rule as the reason behind the faltering start of the Second National Operator (SNO) and the third mobile operator, were quick to point out that the rule should have been abolished altogether. Still, the move contradicts the government's earlier indication that it would scrap the controversial rule.

"The idea is to have the foreign investor who wins the SNO tender operate for one more year during which period the government will hold the 30% equity ownership in trust," said Information and Communications Permanent Secretary Dr Ndemo during the 15th Congress of the East African Regulatory Postal and Telecommunications Organisations (EARPTO), held in Nairobi in April.

The current change of heart comes in the wake of the government's frustrations at having a Second National Operator as well as a third GSM mobile operator. Recently, the government has been under pressure to abolish this rule, seen by industry analysts as draconian and a disincentive to direct foreign investment.

Equally frustrated have been foreign investors, who are often caught up in last minute disagreements with local partners, after winning the lucrative telecommunications tenders.

Observers argue that the tendering process does not favour foreign investors, as it does not give them enough time to establish the credibility of local partners.

But the government maintains that the rule has never been a disincentive to investment, as foreign firms have continued to show interest in Kenya's fledgling telecommunications industry.

However, it cannot be gainsaid that the liberalisation of the telecommunications industry in Kenya has suffered a setback as successive foreign investors get entangled in rows with their local partners.

The history of Kenya's SNO

The first attempt by the government to have a Second National Operator came in 2003, when it invited tenders with a view to ending state-owned Telkom Kenya's monopoly by June 2004. Even though Telenor of Norway won the bid, it disagreed with its local partner, Triple A Capital, forcing the then Minister for Information and Communications Raphael Tuju, to cancel its license. The matter ended up in court but nothing was heard from Telenor again.

Then in 2003, the Communications Commission of Kenya (CCK), the industry regulator, invited interested parties to participate in the bid for a third mobile GSM licence. Among the bidders were MSI Cellular (now Celtel Kenya), Detecon Germany with Kenya Telecommunications Investment Group (KTIG) as the local partners and Econet Wireless with the Kenya National Federation of Co-operatives (KNFC) as the main local partners.

In February 2004, Econet Wireless won the tender. But in a surprising turn of events, KNFC caused ripples in the Econet consortium when it wrote to CCK saying it had pulled out of the consortium. It said it was not party to a number of deals that were entered into by a former CEO Apollo Kariuki. As the lead investor, KNFC's letter of objection meant that the company had actually lost the license.

But in a last minute deal between KNFC and Econet, the letter of objection was withdrawn in May 2004, giving Econet some breathing space. Despite KNFC losing its controlling share in the consortium, CCK went ahead and awarded a licence to Econet Wireless, thus sparking court battles. Later in the year, Econet suffered yet another blow when minister Tuju purportedly cancelled the company's license, citing irregularities in the tendering process and lack of local representation in the company.

At the time of the purported cancellation, the company had paid $15 million of the $27 million licence fee. In a fit of rage, Tuju dissolved the entire CCK board and suspended its then Director General Sammy Kirui, who maintained that Econet's licence was awarded lawfully. Recently, the government allowed Econet to roll out its network on condition that it pays the balance of the licence fee and secures local partners within five weeks.

In October 2006, a consortium led by Dubai-based VTEL Holdings with Palestine's PalTel as its technical partner won the highly competitive tender for the SNO licence after submitting a bid of KES 12 billion (US$169.7 million). The licence would have allowed the consortium to provide national mobile and fixed telephony, Internet backbone, international voice gateway, long distance voice data services and commercial Very Small Aperture Terminal (VSAT).

Following VTEL's successful bid, the government invited it to formally apply for the licence by 8 December 2006 and roll out the network by January 2008. But apparently VTEL's victory was shortlived, as it was to later run into problems with its local partners, mainly Unitel, which could not raise the required fee. In January 2007, the government cancelled VTEL's licence and invited India's Reliance, which was the second highest bidder to apply for the same.

But Reliance, besides disagreeing with its local partners, also bombarded the CCK with demands that could not be met. Among these were zero-rating of its imports, including new and used mobile handsets, relaxation of the listing rules at the Nairobi Stock Exchange for its local partners and a commitment to share infrastructure from existing mobile operators.

Consequently, the government had no choice but to cancel the tender altogether. The government now says it will have to wait for another year before inviting bids for the SNO, as it focuses its attention on finding a strategic investor to take over a majority stake in the monolithic and loss making Telkom Kenya.

Whether a 10% reduction in local stake will clear the way for a Second National Operator remains to be seen.

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