By Kenneth Kwama
The mobile phone sector is on the cross. In as many attempts, Communications Commission of Kenya (CCK) has yet again failed to cut termination rates — the amount of money mobile firms pay each other for calls that terminate in a rival’s network.
CCK, the industry regulator, has uncharacteristically been slow to approve the decision to lower Mobile Termination Rates (MTR) from the current Sh2.21 per minute to Sh1.60.
Fears are now rife that Treasury could secretly be pushing to scuttle the agreement to stem potential loss of revenue from the telecom sector.
In May 29, operators agreed to a deal to cut the mobile termination rate to Sh1.60 a minute as from July 1 from the current Sh2.21.
This, however, never came to pass because the CCK board did not meet to ratify the decision.
If implemented, it could have seen to an end of the executive one-year freeze and cut the cost burden on smaller operators and by extension, subscribers.
The rate fell from Sh4.42 in June 2009 to Sh2.21 in July 2010 and was to drop to Sh1.44 last June before President Mwai Kibaki froze it for one year following intense lobbying from Safaricom and Telkom Kenya’s Orange.
Sources privy to the issue, say that operators are divided on the way forward. Airtel Kenya, second largest mobile phone operators by subscriber numbers is said to demand a lower rate of Sh1.44 while Telkom Kenya is comfortable with the Sh1.60 but on condition that regulator caps minimum calling rate at Sh4 a minute.
Status quo
This is said to be among the reasons that have made it difficult for CCK to effect the new rates. Essar Telecom Kenya Ltd, which trades as yuMobile, holds the view that the status quo will benefit Safaricom and hurt its meagre earnings.
The Consumer Federation of Kenya (Cofek) and ICT Consumers Association of Kenya have waded into the controversy saying non-implementation is against the interests of investors and consumers.
“This phenomenon is a common practice in telecommunications markets where operators with large subscriber base price their off-network services onerously to discourage their subscribers from calling other networks,” says Alex Gakuru, Chairman of ICT Consumers Association of Kenya.
Lower MTR will give mobile companies the option to further cut calling rates, which might be disastrous to government’s tax collection efforts as it seeks to collect more revenue to finance the new governance model.
This is because cheaper call rates will give subscribers opportunity to move to the cheapest network, thus lower the Value Added Tax (VAT) they pay on airtime. Mobile consumers in Kenya pay specific tax on airtime. The tax is levied at 10 per cent in addition to VAT.
According to a report titled Mobile Telephony and Taxation in Kenya 2011 by Deloitte, this is among the highest in the sector in Africa and raises consumer tax as a proportion of the total cost of mobile ownership in Kenya to 21 per cent.
Last year, mobile operators paid about Sh41 billion in taxes to the government. This also included regulatory and spectrum fees and represents an increase of 33 per cent over the 2008 figures. A reduction of MTR could shave off close to Sh5 billion from last year’s figures.
There have been allegations that the State, through the PS in the Ministry of Information and Communications, Bitange Ndemo, has been trying to scuttle implementation of MTR because of fear it could reduce revenue collection from the sector. But Ndemo refuted this in a recent interview with Business Weekly.
Failed meeting
At the time, Ndemo promised that CCK would convene a meeting before end of July to approve the new termination rates. To date, no such meeting has been held.
But CCK acting Director General Francis Wangusi says the commission’s board will soon sit and approve the new rates.
“An agreement is being reached to bring the rates down. It would be prejudicial to talk about the deal until the board meets to approve the new rates,” says Wangusi.
Wangusi told Business Weekly that the board ought to have met during the last week of July, but the meeting did not take place and was instead pushed to mid August.
Efforts to reach Finance PS Joseph Kinyua for comments about Treasury’s alleged role in the stalemate were futile. He neither picked his calls nor responded to messages left on his phone.
Safaricom and Orange — in which the Government has stake and in whose boards Ndemo sits — have been lukewarm about the implementation of the new rates, while Indian-owned Airtel and yumobile, have been pushing for call rate reduction.
Safaricom’s Director of Regulatory Affairs Nzioka Waita was guarded in his response to our questions about the same.
“As you correctly state, the matter is in the hands of the CCK who have our representations and those of other industry players,” Waita said in an email response to our queries.
“It is only fair that we await the outcome of those deliberations which must ultimately take a holistic view of the industry’s future,” said Waita.
Generally, Airtel, yu and Orange feel they are paying too much to Safaricom in call termination charges.
Cumulatively, the three companies have paid Safaricom over Sh10 billion in the past five years as inter-connection fees.
Airtel gains the most if the interconnection rates are lowered. Latest statistics from CCK show that Safaricom accounted for nearly 80 per cent of most calls by Airtel subscribers to other networks.
In total, Airtel subscribers spent 429 million minutes calling other networks in the three months to December last year, compared to 427 million minutes within Airtel. Airtel paid out Sh948 million to rivals as interconnection fees.
According to yuMobile country manager, Madhur Taneja, the firm supports a level playing field that will benefit consumers in the long term.
“It has been demonstrated by CCK statistics that whenever there is a reduction in MTR and subsequently cheaper calling rates, the subscriber base grows faster than usual,” says Taneja.
He says that a reduction of termination rates will allow consumers to enjoy more affordable calling rates.
The downward review in 2010 gave the operators room to cut their tariffs by more than half, but the telecommunication firms have ruled out lower call rates following the reviewed termination rates and will instead absorb the cost savings.
“The implementation will have a positive impact on our customers as they will enjoy even greater reduction in their calling and larger communication rates,” says Taneja.
The review by CCK was based on a study by an international firm Analysis Mason that compared Kenya’s interconnection charges with other countries and concluded they were too high, a position rubbished by Safaricom and Orange.
Under the proposed rates, the current Sh2.21 termination fees would have reduced to Sh1.44 per minute, hence translating to Airtel saving about Sh331 million.
Sector report
In contrast, Safaricom is estimated to have generated about Sh19.6 billion from the 4.9 million calls that its subscribers made within its network in the quarter to December. It paid about Sh501 million to its rivals as interconnection charges.
The Analysis Mason report — released in 2010 and subsequent implementation of the first phase of its recommendations saw termination rates tumble from Sh4.41 to Sh2.21.
The execution was to follow a glide path that would have seen MTR rates settle at 86 cents per minute by July 2013, before the intervention by Kibaki threw a spanner into the works.
