Monopoly firms making Kenya unattractive, blocking investors

Business
By Macharia Kamau | Mar 04, 2024
An illustration of business monopoly. [Getty Images]

Away from the cocktail of high and unpredictable tax regimes, regulatory hurdles and poor infrastructure blamed for making Kenya bad for business, a few private sector players have had a hand in making the country uncompetitive and unattractive to more investors.

Analysts say that some companies have grown too big and in turn abused their dominance by preventing entry of new players in their respective sectors. The consumer pays the ultimate price as in the absence of formidable competition, the dominant players can “charge what they want”.

There have also been instances where a few large players in a sector have formed cartel-like coalitions that collude to keep retail prices high and lock out other players from getting into the sector.

Denis Kabaara, a management consultant, says the failure of Kenya to attract investors has partly been due to the structure of the economy that has supported few firms that have grown to be monopolies or duopolies in their respective sectors. In trying to protect their turf, the large firms have over time used their muscle to frustrate new entrants into the market.

“Kenya has a few big companies – one or two in every sector, particularly the most profitable sectors – and new players getting into these businesses is so difficult. They are so big that no one can compete with them and they have become barriers to entry for new investors that may be looking to get into these sectors.

“It is the case in banking, telcos, the alcoholic industry... It means that they can charge us what they want. There is an urgent need to break up the current industry structure,” he says.

He adds that due to the big returns that some of the big players are making, they have resisted the attempts to restructure the economy by lobbying and mostly getting their way when it comes to policymaking.  

An article in the UK publication, The Economist, examines the matter in Kenya noting that in certain instances, businesses have also tended to impede rather than encourage growth. It looks at the cases of Safaricom and the East Africa Breweries Limited (EABL), noting that their being giants relative to Kenya’s economy has guaranteed them handsome returns.

EABL produces 90 per cent of the brewed alcoholic beverages produced locally, while Safaricom commands 66 per cent of the market. In certain market segments, Safaricom’s command of the market is much higher as is the case in mobile money, where M-Pesa has a 97 per cent market share, according to reports by the Communications Authority of Kenya.

“This dominance may explain why it (Safaricom) is so profitable. Over the past five years, its average return on equity (RoE) was a mouthwatering 47 percent. That compares with an average RoE of about 10 per cent on mobile-phone operators in America, according to Aswath Damodaran, a finance professor at New York University,” reads the article by The Economist.

Less dynamic

“EABL has also done well, with an average RoE of 49 per cent over the past two years, far above the returns earned by global peers.”

“Yet its high margin is not a sign of a healthy market. Dominant companies protected by barriers tend to be less dynamic, efficient and competitive. Ripped-off consumers pay the price.”

Safaricom has for years fought the dominance tag. A report on the telecommunication competition market in Kenya commissioned by CA and done by UK consultancy firm Analysys Mason found the firm to be too strong in certain segments of the market. The firm had in an initial draft proposed the splitting up of M-Pesa from Safaricom.

The report, referred to as the dominance report, has repeatedly come up with some of the sector players appearing emotional when stating their case for or against the implementation of the recommendations by Analysys Mason.

The report tried to define what a dominant player looks like and how the regulators should handle them to ensure they do not abuse their dominance. Some of the recommendations including infrastructure sharing and mobile money users being able to send money directly to wallets of users in competitor networks are already being implemented.

Safaricom has in the past noted that while it could be viewed as dominant from certain angles, it has never abused its dominance and hence should not be subjected to punitive measures such as price controls that would be specifically tailored for it.

There have also been concerns as to whether some of the measures that have in the past been proposed would benefit consumers or the shareholders of rival telcos.

There have been recent attempts to protect both consumers and other industry players from some of the actions of strong players that the Competition Authority of Kenya has deemed could be to the detriment of industry and consumers.

Consumer watchdog

This authority, which has a duo role as a competition and consumer watchdog, in December, fined the French retailer Carrefour Sh1.1 billion for abuse of buyer power over suppliers.

The authority said that Carrefour had abused its  ability to set terms for two of its suppliers, Pwani Oil Products Limited and Woodlands Company Limited. It noted that in investigations, it had found that the retailer changed its suppliers at least three types of non-negotiable rebates that are as high as 12 per cent.

CAK also fined nine steel manufacturers Sh338.8 million last August for what it said was cartel conduct. The firms, CAK said, had colluded to increase the prices of their products and in turn, raise the cost of construction of homes and infrastructure.

The authority said the cost of steel products like bars, pipes, and sheets increased by 20 per cent as a result of “artificial inflation.” The affected manufacturers are Nail and Steel Products Ltd, Brollo Kenya Ltd, Blue Nile Wire Products Ltd, Tononoka Rolling Mills Ltd, Devki Steel Mills, Doshi & Hardware Ltd, Corrugated Steel Ltd, Jumbo Steel Mills and Accurate Steel Mills Ltd.

The firm had also agreed to limit imports of certain steel components that had the effect of causing an artificial shortage and raising consumer prices.

CAK has been investigating the industry players since August 2020 and over time gathered evidence that it pointed to coordinated conduct by the manufacturers on how to price their products and control production.

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