Parliament needs to be careful of industry biases

A fortnight ago, the National Assembly’s Departmental Committee on Communication, Innovation and Innovation hosted hearings to examine regulatory gaps affecting competition in Kenya’s telecommunications industry.

The committee made the decision to only admit submissions from the main market contestants and selected regulatory bodies. This representation is troublesome because it reflects the consistent error that affects regulatory policy and law setting in Kenya.

That error is that state institutions place undue weight on the testimony of direct market players in the belief that they are most affected by its outcomes and therefore understand market performance better than most.

This approach ensures that the biased interest of incumbent firms is protected with consumers considered irrelevant in setting policy connected to economic policy.

And proceedings before the parliamentary committee exhibited the same problem of biased firms in the telecommunications sector together with the regulator presenting preposterous claims about the state of competition in telecommunications.

The main claims were based on perfectly rehearsed findings of a market study commissioned about three years ago by the Communications Authority of Kenya.

It contains high-level econometric calculations around an assumption that the market for telecommunications services is static with the largest player Safaricom Limited having an unassailable lead in most market segments.  

GRAVE CLAIM

I was most surprised to read the submission by the Communications Authority stating that Safaricom’s lead in key market segments is unassailable and therefore a danger to the sector’s growth.

This grave claim was made by a regulator that publishes quarterly data, showing the very opposite of this assertion.

What this demonstrates is that the Communications Authority was prosecuting its policy preference regardless of what the evidence in its own possession would show.

The National Assembly’s Committee on Communication and Information was right in requesting for representation from the competing firms.

The representations by these firms were predictable and most except Safaricom were aligned to the regulator’s preference.

Except that when the Institute of Economic Affairs reviewed most of the submissions, the impression created in our minds is that they understood that the purpose of market competition is to ensure that every firm in a market should make a return and policy should be adjusted at any cost to achieve that objective.

EX ANTE REGULATION

These contestants were eager to get Parliament to accept what is known as “Ex Ante” regulation to allow the Communications Authority to reset the market to support their business models.

The preference for “Ex ante” regulation is so that competition regulation would be undertaken by the sector regulator and not the competition commission.

It is not difficult to guess right that this preference is based on the fact that the “smaller firms” seek a sector regulator to determine market conduct as opposed to the Competition Authority that has statutory power to regulate competition.

While it is true that some creative reading of amendments to sector laws would allow this, it is not in the interest of the consumers at all especially because a sector regulator may have an interest in securing the survival of all firms from whom fees are collected. 

Ceding competition regulation to the Communications Authority of Kenya would lead to some very odd reasoning and preposterous policy.

For instance, all sector firms are determined to get a toehold in the mobile money transfer segment and have correctly agreed to interoperability. Contention moved to treatment of the cash reserves from every player as if it belonged to all players. 

This means that while agents of any dominant subscriber would be compelled to subsidize competitors by offering its receipts to credit the accounts of another subscriber from a different service. This requirement would punish firms that have built reserves from subscribers by lending their depositor’s cash to competing services at no cost.

There is no policy justification for this and would have the unintended effect of reducing the incentive to build deep subscriber base just to subsidize operations of competitors.

MARKET PROCESS

Even financial service institutions have a mechanism for paying a steep interest for borrowing from counterparts because there is a real cost to mobilization of funds. It shouldn’t be different for mobile money transfer services. 

This specific set of hearing was at risk of being another one-sided and opaque sessions that parliamentary committees frequently host.

The appearance and submission by the director general of the Competition Authority of Kenya saved the proceedings from being a farce and ill-disguised hatchet job.

The Competition Authority referred to trends in market power and reminded the committee that the telecommunications sector remains contestable and that the purpose of competition is to defend the market process and not competitors. 

On this set of hearings, the Competition Authority strongly echoed the consumer’s interest. I wait for the committee’s findings.