Regulators’ dilemma over businesses that don’t fit into any licence

Managed marketplaces are different from pure marketplaces such as online classified OLX. Photo: Wilberforce Okwiri, Standard

When Alloys Meshack, conceived a ‘courier’ firm Sendy in 2015, he simply wanted to build a platform that connects customers in need of delivery services, with drivers who were ready to offer such services.

To date, Meshack is still racking his brains on how to find the right license to do his business. This license, unfortunately, does not exist.

This is because neither the boda-boda operators he started with nor the vans and trucks that he later on brought on board were licensed to transport goods or documents. And Sendy did not own a motorbike, van or truck with which they could transport small packages or consignments.

Of course, at some point, Meshack says that he inadvertently applied for an international courier service license.

However, Sendy itself did not provide courier services. Sendy was nowhere being like G4S, WellsFargo, Roy Parcels and National Courier.

Sendy is one of the dozens of innovative business ideas that have mushroomed under the auspices of what has come to be known as the sharing or collaborative economy.

Others include ridesharing apps such as Silicon Valley’s Uber which connects drivers and riders using its taxi-hailing app.  Other taxi-hailing apps operating in the country include Safaricom’s Little Ride, Mondo, Taxify and the latest entrant ShareCab.

Sharing economy

Jumia, which describes itself as an online marketplace and Airbnb- a marketplace and hospitality service which enables people to lease or rent short-term lodging- are other players in the sharing economy. Sharing economy has been dramatically disruptive. It has been hard to pin them down, as has been the case with conventional businesses. 

And Governments attempts to regulate them have been akin to putting themselves between a hard place and a rock. Regulation and innovation has been a tricky balancing act.

In the case of Sendy, Meshack came to the painful position that theirs was neither a courier service provider nor a logistics company, though their application enabled people to do both.

Defeated, Meshack officially requested CA to begin the process of withdrawing the international courier licence as “it affected their business operations.”

Sendy is neither a courier service provider nor a logistics firm. They are, according to its founder, a technology company.

Yet, in a letter that Meshack wrote to the regulator, Sendy politely turned down CA’s suggestion that they either seek an “Application Service Provider Licence (ASP Licence)” and/or a “Content Service Provider Licence (CPS Licence).” In the letter, Meshack noted that Sendy was neither “an application service provider” nor a “content service provider,” to which the former and latter licenses respectively applied.

In the end, CA was forced to accede, agreeing that Sendy did not have “contractual agreement with consumers on courier services.”

Sendy, though registered as a company, might now be operating without a license - an illegality for a country that once required even private citizens to get permission before playing music in their own homes or even owning a bicycle. “There is just no license that captures the kind of business that we do,” says a fearful Meshack.

And like any other economic activity, and as popular as the app has been to customers for itse efficiency, Sendy too has its own risks.

Sam, a senior official at one of the insurance providers in the country, remembers being told by the representative of Sendy when he was signing up with the company for delivery of packages, that his contract was with the motorbike owner, and not Sendy.

“I told them: ‘But I do not know the motorbike owner, I only know you!” Who bears the responsibility when something wrong happens with a delivery package?

Sendy says it is the motorbike owner, yet the Government does not recognise the rider as a courier service provider.

Courier services

It is not only motorbike owners that are reaping big by offering their idle motorbikes for courier services. Hundreds of people have also offered their cars as taxis through online hailing apps such as Uber, Little Ride, Taxify.

In some instances, these drivers are not really licensed or regulated as the traditional taxi driver.

Sharing economy also involves innovative ideas around crowd-funding, peer to peer lending, book-sharing, video-sharing, house-sharing, office space sharing as well as domestic services such as cleaning and laundry.

There is no limit to the list of things that can be shared, creating new labour frontiers for the thousands of desperate jobless youths and making life easier for the hapless Kenyan consumer struggling with high cost of living.

Dr XN Iraki, a lecturer at the University of Nairobi Business School contends that the sharing economy is not as novel as it has been touted. “If we can share roads, water pipes and so forth, why not share more? The sharing economy was always part of us. We are just formalising it,” says Iraki. Unfortunately, notes the don, regulation has been left to play catch-up.

“The sharing economy exploits slacks or inefficiencies which one identifies through common sense not algorithms,” observes Iraki.

“No wonder regulator is left catching-up. A good example: Why do you leave the biggest room in your house empty at night? You get AirnB. Why do we park our cars all day long? We get Uber,” says Iraki. Airbnb is marketplace and hospitality service which enables people to lease or rent short-term lodging.

And there is no doubt sharing economy will have far-reaching benefits. Take for example car-pooling, or the use of private cars for public good. Uber East Africa spokesperson Janet Kemboi says the taxi-hailing firm did a spending job on car-pooling in San Fransisco says it has done a lot in its birthplace. San Fransisco.

“Passengers would benefit from carpooling because they would split the fare. That would mean more people could afford to travel together, rather than covering the cost alone and drivers would have less down time between trips. And for cities, carpooling would mean less traffic, less congestion and less pollution over time,” explained Ms Kemboi.

Meshack’s app helped a physician to easily and quickly deliver prescribed medicine to a patient.’

Any employee who needed lunch at the workstation would use Meshak’s app to order for food. The motorbike rider would then deliver the lunch from a particular restaurant. It was a transformative local application.

The disruptive nature of these businesses has thrown regulators into a tailspin. In Kenya, regulators just can’t fit most of these businesses into a license.

With the growing popularity of sharing economy among consumers, Governments have been left struggling with how best to ensure consumer interests are protected; allowing healthy competition - between those in sharing and traditional economic setup; and taxes are paid.

Even a bigger challenge for the regulators is ensuring such regulatory measures are implemented without necessarily stifling innovation.

“In the case of Sendy, the Communications Authority should really be dealing with the boda-boda drivers. But the problem is they (boda-boda drivers) are too many,” says the former Information and Communication Permanent Secretary and now senior lecturer at University of Nairobi’s School of Business Prof Bitange Ndemo.

But as a rule of thumb, Dr Ndemo, a firm believer in digital economy who played a critical role in the growth of M-Pesa, would rather see these innovative ideas not regulated in the initial stages.

“Until it is clear that the product is going to be harmful, I would not advise for regulations,” says Dr Bitange, noting that the harm can be to consumers or competitors if it morphs into a monopoly.

Uber, which connects drivers and riders through its taxi-hailing app, has faced rough terrains in Nairobi. In the start of 2016, its drivers were subjected to violent attacks from conventional taxi operators who accused it of unfair competition.

The conventional taxi operators reckoned that Uber drivers were not paying parking and other city fees, enabling the latter to charge less for the same service.

They also charged that Uber drivers were not licensed, an accusation that Uber denied noting that they only recruited drivers with a Public Service Vehicle (PSV) license with no criminal record.

Moreover, the taxi-hailing firm with over 4,000 drivers also found itself at a collision path with taxman who wanted the firm to pay value-added tax (VAT).

However, the company together with Safaricom-backed Little Ride, insisted that they could not pay VAT, or goods and services tax, as they were not the ones offering taxi services.

Software technology

In October 2016, the taxman shifted the tax burden to taxi operators, underscoring Uber’s insistence that they only offered software technology to drivers and riders.

But, early this year, KRA is reported to have said that they were not satisfied with the corporate taxes they were receiving from Uber.

Nikhil Hira, a tax Leader at Deloitte East Africa notes that in the operations of sharing economy, firms such as Uber have two types of supply in play.

“The first is the provision of the technology platform and the second is the provision of taxi services. Each has its own rules for taxation and effectively both parties will be paying their taxes,” says Hira.

Mr Hira’s presumption is that all taxi hailing apps are registered in Kenya and have their own PIN numbers. “As such, they would be subject to VAT and income taxes on their earnings and they would declare this to KRA. Whereas Uber’s income are distinct from the taxes that the taxi driver has to declare and pay,” explains the tax expert.

But besides such obligations as registering a company, paying taxes and complying with all the labour laws, Dr Bitange does not think the country should be obsessed with regulating players in the sharing economy.

“Most tech firms - Google, Snapchat, Facebook- are not regulated. Why do we go for small ones like Sendy that are just coming up?” wonders Bitange.

Some stakeholders, especially players in the sharing economy, have called for smart-regulation. Smart regulation basically appreciates that collaborative economy and traditional economy are distinct.

Licensing category

And smart-regulation is what Uber is advocating for. Ms Kemboi says Uber is pro-smart regulation and pro-consumer choice, noting that her company has been engaging Government since the outset in every country they have entered. And they seem to have made some progress.

“In South Africa, the introduction of a new licensing category in May 2016 - specifically for people using apps like Uber - was a huge step forward in supporting licensed, professional drivers,” says Kemboi.

“A month later, Nigeria’s House of Representatives became the first national government in Africa to unanimously vote in support of a resolution embracing ride-sharing.”

But, perhaps the most critical questions in the conundrum that is regulating sharing economy platforms is: “Who bears ultimate responsibility?”

Should a package being sent by Sam, having been connected to the motorbike owner via Sendy app, get lost, who bears the cost? Is it the motorbike operator that Otieno does not know or is it Sendy that did not even render him the services? Jumia is an online marketplace that has sought to answer this question. Although Jumia connects the vendors and sellers, they never meet. Moreover, Jumia takes responsibility for anything that happens in the transactions.

Jumia Services Managing Director Vishal Haria describes Jumia’s as “managed marketplace.” And so is Alibaba and Amazon- as they are go-between a seller and buyer.

“So, in case of anything, we take full responsibility,” says Vishal, noting that they are managing the entire flow so that all a customer cares about is getting the product they ordered.

Managed marketplaces are different from pure marketplaces such as online classified OLX. OLX offered buyers and sellers a platform to sell just anything without getting in between. But some products such as cars, they verify and sell them on behalf of the client.

This also seems to be case with Uber who, however, come in when things go awry. In case you are duped into buying a faulty product on OLX, the company does not come in.

Regulation does not pre-empt innovation. Iraki notes that when Safaricom’s mobile money transfer service, M-Pesa, was unveiled, it was difficult for the regulators to ‘define it as banking, money transfer or saving’ service.

Faced with such a riddle, the regulators would have dithered this innovation had it taken wrong decision on the matter.

Bitange Ndemo believes the Central Bank of Kenya decision block chain, the technology used for such digital crypto currencies as Bitcoin was ill advised. “If we had waited for M-Pesa, we could not have seen the transformation that you are seeing today,” says Bitange.

Perhaps, it is time for Africa to take the risk, where other developed countries are being cautious. And no one captured this better than Jack Ma, the Chinese billionaire and founder of online marketplace Alibaba.

“The whole world today is worried, I don’t know why,” said Jack Ma during a lecture at the University of Nairobi. “The whole world is puzzled, but Africa, I see people have a passion. People have ideas.

“People say this is the future because....I think we (Africans) have nothing to lose. Europe has a lot to lose. The US has a lot to lose. They have a lot of puzzle. But Africa, I don’t think we have anything to lose,” said Jack Ma.

Indeed, while the Kenyan taxman has categorised Uber as a technology company, a European Court Uber’s operations on the continent more difficult by ruling that they are a transport company.

But even if Kenya had a lot to lose, over-regulation of local start-ups participating in the sharing economy would be counter-productive.

Such companies as Sendy need to be handled with kids’ glove. “Sendy started here, let it grow to become a global giant,” notes Bitange.

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