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CAK denies cowing to political influence

Sunday September 15 2019

Competition Authority of Kenya

An image of the Commercial Bank of Africa taken on April 30, 2019 in Nairobi. The merger between NIC and CBA banks has been approved. PHOTO | FILE | NATION MEDIA GROUP 

NATION REPORTER
By NATION REPORTER
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This week, Competition Authority of Kenya (CAK) Director General Wang'ombe Kariuki responds to your questions:

1. In many of the mergers and acquisitions, there are many other regulatory agencies that also have to give their approval. For instance, in the proposed merger between Airtel and Telkom Kenya, the Communication Authority of Kenya certainly has a say among other regulatory bodies. At what point does your agency become involved? What is so difficult in establishing a one-stop shop so that all these regulatory bodies can be found at the same place to quicken transactions? Julius N. Maema, Nairobi

The CAK commences its assessment of a proposed merger once the parties to a merger have formally notified the authority, attaching the required documents, as provided for in the Competition Act No. 12 of 2010.

The Authority, when analysing the merger, focuses on competition and public interest issues (ex-post regulation) while sector regulators', like the Communications Authority of Kenya, mandates are premised on ex-ante regulation.

Current international best practice, which Kenya has adopted, provides for concurrent jurisdictions, but within different statutes and leadership, between the competition agencies and specific-sector regulators.

This is informed by the fact that the mandate of the sector agencies and the Competition Authority have an important nexus in the developing of markets.

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However, there seems to be a shift in this kind of arrangement where we are seeing sector regulators being collapsed under one leadership of the Competition Agency, although under different statutes, for example in The Netherlands.

Perhaps this is something that policymakers can consider locally since it would reduce transactional costs for firms and overhead costs for agencies.

2. By the acts and omissions of the Competition Authority, you have nearly succeeded in creating a monopoly in the dairy processing industry, namely Brookside, which is buying out almost all rivals and the authority is cheering them on. The authority has also recently sanctioned the merger between NIC and CBA banks. The common thread in both cases is the association with the First Family. This begs the question, how free is the Competition Authority in its decision-making from the influence of powerful political figures? Bruce Wabomba, Nairobi

When analysing mergers, the CAK is guided by the Competition Act No. 12 0f 2010.

Specifically, merger applications are determined based on their impact on competition and public interest concerns.

On the Brookside matter, I wish to highlight the following facts: Kenya produces approximately five billion litres of milk annually.

Out of this amount, about 2.3 billion litres is marketed through milk bars and direct sales of raw milk while another 500 million litres is sold as processed milk and products.

According to data available, processed milk and raw milk are credible substitutes.

Brookside handles approximately 14 per cent of the total milk marketed in Kenya.

It is important also to highlight that around 40 per cent of milk produced does not reach formal markets.

Therefore, there is need to create policies that will encourage investments and consequently increase uptake in this sector while improving sanitary conditions of the marketed raw milk.

Regarding the CBA-NIC matter, the market shares of the merged entity will be 10.67 per cent. This will make it the second largest bank.

However, it is anticipated that the merged entity will continue facing competition from Tier 1 banks who, together, control 55.32 per cent of the market.

When approving this transaction, the CAK prevented the merged entity from declaring any of its staff redundant for a period of 12 months upon closing of the merger.

This shows that the authority’s decisions are only informed by research and data provided by relevant sector regulators.

3. In the proposed merger of Telkom Kenya and Airtel Kenya, Telkom’s CEO Mugo Kibati has been quoted saying the deal will help to liberate the mobile sector from, among others, domination and uneven competition. This is hard to believe given that the sector was fully liberalised for all players to strive to remain relevant and competitive. How is your authority approaching this matter in consultation with the Communication Authority? Dan Murugu, Nakuru

We wish to indicate that CAK has not finalised the analysis of this merger application.

However, our analysis is guided by the criteria provided for under the Competition Act that is substantial lessening of competition (SLC) and public interest concerns.

The SLC criteria will focus on whether the merger may lead to increased barriers to entry in the market based on the resultant spectrum ownership realignment and its effect on the relevant products market.

4. In 2015, the authority sent a team of four officers to Nakuru Town to carry out investigations after I and another friend had complained in the media about exploitation of poor parents by school uniform cartels comprising uniform dealers and school heads who coerced parents to buy uniforms only in selected shops. The same problems persist to date. Why is this so and for how long will poor parents suffer? Dan Murugu, Nakuru

This was a complaint concerning public schools. The CAK’s investigations determined that this matter was not within its jurisdiction as per the provisions of the Competition Act No.12 of 2010 since the schools are not deemed to be in trade.

However, it was determined that the practice had the potential of distorting forces of supply and demand from signalling the market price.

Pursuant to this, the authority engaged and advised the Ministry of Education to issue guidelines/policy directive to schools across the country regarding procurement of school uniform without compromising quality.

5. In June 2017, the High Court held that the Communications Authority does not have to answer to your authority or the Cabinet Secretary of Information, Communications and Technology when punishing an abuse of dominance in the communications industry. In light of this ruling, first, has there been an appeal? Secondly, how do you go around this to ensure that the authority executes its mandate without depending on the goodwill of Communications Authority and other such agencies? Clarice A. Ogutu, Naivasha

The CAK and CA do not engage and have never engaged on the basis of subservience.

However, the engagement is symbiotic for effective and optimal regulation of the relevant sector.

The engagement framework is clearly provided under Section 5 of the Competition Act.

To operationalise this engagement ,the two agencies have developed, as mentioned earlier, an MoU.

From CAK’s point of view, the engagement with all relevant government agencies, including sector regulators, when analysing competition issues is not only a constitutional requirement but also ensures that the decisions made are optimal for our economy.

6. Regarding the proposed Airtel-Telkom merger, it is on record that CAK has announced that no merger considerations will be made until the Ethics and Anti-Corruption Commission (EACC) gives the green light. Yet we also know that the two entities have been going through turbulent financial times and they were hoping the merger could stabilise their joint ship. According to you, which should take precedence, the ongoing EACC investigations or saving the two entities from possible collapse? Annette Bulimo, Nairobi

After our engagements with the EACC, it is our position that EACC’s investigations are focusing on areas/information which are critical to the authority’s decision-making process.

Therefore, our continued analysis of the merger without considering the findings of the EACC investigations would lead to a sub-optimal decision.

Nonetheless, the EACC is privy to the Authority’s statutory timelines regarding merger analysis under the Competition Act.

7. This may be one of those very rare forums where your authority gets to be known by many ordinary citizens. Indeed, government is dotted with lots of obscure institutions which continue to draw lots of budgets yet common citizens do not understand their mandates. Do you think your institution is worthy of the allocations it gets from Kenyans? Komen Moris, Eldoret

The CAK is a relatively young institution and therefore awareness creation regarding its mandate is of paramount importance.

The deepening of awareness has been undertaken through, among others, publicising our decisions which include ordering expunging of exclusivity clauses in contract agreements between Safaricom PLC and its M-Pesa agents.

This allowed 86,000 mobile money agents to be at the disposal of other mobile network operators (MNOs).

Also, to encourage mobile banking, the Authority ordered revision of USSD charges from Sh10 to Sh1.

In addition, to deepen transparency in pricing of mobile money transfer and payment markets, the Authority ordered all participants in these markets, including commercial banks, to publicise the costs prior to the completion of a transaction.

To date, 98 per cent of all the firms have complied with the order.

The Authority also ordered the licensing of growers and processors of specialty tea, which has resulted to increased investment in the sector, leading to employment of Kenyans and enhanced producer incomes.

Based on the aforementioned decisions, it is evident that the budget allocation to the Authority has resulted in positive impact, especially to vulnerable members of our society.

To complement the Authority’s enforcement activities, we regularly hold sensitisation forums across the country.

This has led to the awareness of the Authority’s mandate increasing from 65 per cent in 2016 to 74 per cent in 2018.

8. Over the years, alcohol manufacturers have complained against unfair business practices by a multinational that ring-fences distributors and retailers so that they do not stock rivals’ products, among other tactics. What is your authority doing about this? Oliver Macharia, Upper Savanna

The CAK conducted various investigations into the formal alcoholic beverages sector and ordered the dominant firm to review its then-existing distributorship agreement and expunge the territorial and brand exclusivity clauses.

In addition, the firm was ordered to implement an internal competition compliance programme to educate its staff and suppliers about the provisions of the Competition Act. The CAK regularly monitors this sector to ensure compliance.

9. Suppose a majority of the shareholders in a company are in favour of selling off their stakes to a rival firm, how would your authority deal with such a scenario so that the majority’s wish is not unnecessarily frustrated while also protecting the minority’s wish? Alfred Muteti, Nairobi

One of the critical documents the authority demands when a merger application is lodged is a Board Resolution from each party.

These resolutions are evidence that the transaction has the consent of the shareholders who control the businesses.

10. On average, how many applications for mergers and acquisitions does the Competition Authority handle every year and what do numbers tell you about the business environment in the country? Stephen Abuor, Kisumu

On average, the CAK handles between 140 and 150 transactions in a financial year.

In the 2018/2019 financial year, the authority handled 141 merger applications.

Out of these transactions, 61 per cent had an international dimension while 39 per cent had a local dimension. In 2017/18, the Authority determined 148 merger applications.

Out of these 55 per cent had an international dimension. From the foregoing, we can infer that the country remains an attractive destination for investors and that the government’s initiatives to improve the investment climate are bearing fruit.

It is worth highlighting that the merger notifications handled were from manufacturing, real estate, financial and insurance services, energy, distribution and ICT sectors. These are key drivers of economic growth.