Kenya’s digital migration policy fails the competition test

Thursday February 19 2015

By KWAME OWINO
More by this Author

There is no greater demonstration of poor performance by a regulatory institution than when it oversees an unprecedented shutdown of a large portion of its industry.

This state of affairs, which is demonstrated by the leading media houses ceasing broadcasting, is an indictment of the Communications Authority of Kenya (CA) and no amount of press releases and appearances changes that.

Some commentators have pitched in on one side or the other of this issue. My assessment is that a substantial number are making broad claims on the economic effects of the digital migration policy without careful examination of the facts, or good command of the intersection between competition economics and regulatory policy.

One view that has been forcefully made by the spokespersons of the CA is that the licensed corporations that ceased broadcasting did so in fear of the competition that is heralded by the digital migration policy.

Any dispassionate viewer of the state of affairs, and with more than basic knowledge of the economics of two-sided markets, would conclude that this claim is preposterous.

This claim is worth examining closely, not only because it was a major issue for the courts to consider but also because the greater share of Kenyans seem to be persuaded by it.

Regulation and assignment of telecommunications spectrum is based on established economic principles. There is broad recognition of the fact that telecommunications spectrum is a limited resource and therefore assignment ought to ensure the most efficient use of available frequencies.

While I accept this argument, I must assert that the mere statement of it does not imply that spectrum should be arbitrarily assigned.

ONLY TWO CARRIERS

Telecommunications frequencies are not a special public resource. Most resources with economic value are, by nature, limited.

However, emphasis of the limited nature of spectrum has been laid as if new technology has not been developed to ensure more efficient use of it. Indeed, digital migration is one way of ensuring that the resource finds more efficient use.

Yet while the CA has continuously cited the scarcity issue, the methods it used for assignment are inconsistent with providing incentives for its users.

Higher-order economic reasoning dictates that where scarcity is recognised, and the value of the resource confirmed, the best method for granting property rights should involve competition.

If the regulatory body had backed its rhetoric of scarcity with consummate analysis, then the assignment of licenses for spectrum would have involved an open auction that would have led to an understanding of their real value and created incentives for the recipients to use spectrum most efficiently.

Yet the CA curiously determined that only two content carriers would be registered, before winded litigation led to the decision to add a third content carrier.

In spite of all the technical knowledge for which the CAK is accorded credit, it appears that nobody in there appreciates the economic value of the property that they are assigning to licence holders.

This is evident in the fact that existing licences were accorded an arbitrary monetary value.

The best method of sale, to ensure discovery of the value of spectrum, and for fair assignment, would have been an auction.

This auction would ensure wide participation in bidding, in addition to a design that precludes collusion by bidders to reduce prices paid.

LIMITING LICENSEES

One reason why the innuendo about a possibly manipulated process will not be extinguished is that a transparent method that would ensure real discovery of prices for spectrum was never considered. The regulator must be called into question here, because the chosen method is demonstrably inferior and has led to suboptimal pricing of spectrum.

Yet the CA appears to be preoccupied with limiting the number of licensees, and many Kenyans and technically minded professionals have supported the regulator in the standoff with its licensees.

Most of this support merely reflects people’s personal politics, and the view that dominant media houses are receiving their just deserts from an Executive which they have been unthinking cheerleaders.

There’s too much at stake, with the possibility that digital broadcasting could be locked into an environment where too much economic power will rest with untrusted carriers.

Those loudly supporting the regulator should note that it does not suffice to just argue that digital migration should come in yesterday, when the competition economics behind the decision shows that an inefficient market beckons.

Digital migration policy should rest on sound reasoning. Here the Communications Authority of Kenya seems to have erred, with C-grade economics analysis.

Kwame Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame