US embassy cable - 05NAIROBI1488

UNCLAS SECTION 01 OF 04 NAIROBI 001488 
 
SIPDIS 
 
DEPARTMENT FOR AF/E, AF/EPS, EB/CIP 
 
TREASURY FOR ANN ALIKONIS 
 
E.O. 12958:  N/A 
TAGS: ECPS, ECON, KCOR, KE, Telekom 
SUBJECT:  Kenya Telecom Reform:  A Good Story Gone Bad? 
 
(U) Sensitive-but-unclassified.  Not for release outside USG 
channels. 
 
1.  (SBU) Summary:  After years of stagnation under a 
government-mandated monopoly, Kenya's telecom and ICT 
sectors looked set to grow rapidly in 2005 following the 
adoption late in 2004 of bold reforms aimed at opening the 
market to all comers.  These prospects are now in doubt, 
however, following the surprise decision on March 7 by the 
government to dismiss the board and the director general of 
the Communications Commission of Kenya, the regulatory 
agency leading the reform effort.  The abrupt, arbitrary 
move has put licensing and policy decisions on hold, and 
generated unwanted uncertainty in a market craving greater 
predictability.  In the absence of more information and 
transparency from the government, it's hard not to conclude 
the dismissals were motivated by a desire to protect both 
former monopoly service provider Telkom Kenya from increased 
competition, and perhaps to also protect corrupt officials 
and businessmen who have long exploited Telkom's privileged 
status for personal gain.  End Summary. 
 
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The Sad State of Telephony and ICT in Kenya 
------------------------------------------- 
 
2.  (U) Until recently, Kenya has been in many respects a 
case study in how not to develop the telecom and information 
and communications technology (ICT) sectors, and this 
failure has been both a cause and effect of Kenya's more 
general economic stagnation over the past decade.  A few 
statistics speak volumes.  Despite its privileged position 
as a regional services hub, Kenya had only 327,000 landline 
phone connections in 2002 in a population of over 31 
million.  The number of landline connections actually 
decreased by mid-2004 to just under 300,000.  This equates 
to a teledensity rate of just over one percent - 23rd in 
Africa, and one tenth the rate in South Africa.  Kenya does 
relatively better in Africa in terms of internet penetration 
with 1.4 million reported users, but 95% of these are 
located in urban areas, leaving most of the country unwired 
in the information age. 
 
3.  (SBU) The stagnation of Kenya's telecom sector stems 
fundamentally from bad policies put in place and maintained 
by the Government of Kenya (GOK) over the years.  Telecom 
reform began too late, and until recently has been too 
incremental.  In 1997, the GOK adopted a plan to gradually 
liberalize the telecommunications sector. Under the Kenya 
Communications Act of 1998, the state-run Kenya Posts and 
Telecommunications Corporation was divided into three 
entities: the Postal Corporation of Kenya, monopoly phone 
service provider Telkom Kenya Limited (TKL), and a new 
independent regulator, the Communications Commission of 
Kenya (CCK).  The 1998 Act introduced very limited 
competition in the sector, and gave (TKL) a virtual monopoly 
in all key market segments until June, 2004, including land 
line services, international gateway services, and internet 
backbone. 
 
4.  (U) TKL was thus given five years of monopoly status to 
reorganize itself, pay off large debts, and prepare itself 
for eventual privatization.  As part of this, and as a stand- 
alone policy goal, it was also tasked by government to 
expand the country's phone network, to include especially 
extending network infrastructure into Kenya's vastly 
underserved rural areas.  To no one's surprise, CCK's latest 
annual report notes TKL's utter failure to translate its 
monopoly status into improved services and infrastructure. 
TKL's switching capacity has grown only incrementally since 
the late 1990s, and as noted above, the number of landline 
connections actually decreased in 2004.  Every year since 
1999, the number of Kenyans waiting for fixed line phone 
connections has hovered around 100,000.  Nearly all Kenyans 
can recount anecdotes which together paint a picture of an 
inefficient, badly managed company widely seen as more a 
platform for political patronage and corruption than a 
genuine service provider. 
 
5.  (SBU) Kenya's political leadership has compounded the 
problem by refusing to privatize TKL.  In 2000, the GOK 
offered 49% of the company for sale and received several 
offers.  But it rejected the highest bid of $305 million on 
the grounds that it was too low.  It was subsequently unable 
to attract a higher price and terminated the process without 
results in 2001.  This decision takes on a tragic dimension 
given TKL's current state.  Minister of Finance David 
Mwiraria told the Ambassador in December that TKL has 18,000 
employees when it only needs 8,000.  (Note: Private sector 
analysts say an efficiently run TKL would only need 2-3,000 
employees.  End note).  The GOK needs $100 million to pay 
severance and retirement benefits to the 10,000 workers who 
would need to be dismissed to make the company attractive 
enough to sell.  For the moment, according to Mwiraria, 
there is currently little of value in TKL beyond its office 
building. 
 
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Enter the Wonders of Mobile Telephony 
------------------------------------- 
 
6.  (SBU) TKL's failure as a fixed line service provider 
stands in stark contrast to the roaring growth of Kenya's 
mobile phone industry - one of the country's rare economic 
success stories.  Mobile services were commercially launched 
in 1993, but the market didn't start to take off until 1997, 
when SafariCom, a wholly-owned subsidiary of TKL, was 
established. In May 2000, TKL sold 40% of Safaricom to 
Vodafone UK, which assumed management of the company. 
Limited but genuine competition was introduced into the 
market when a second service provider, KenCell (since 
renamed Celtel) was licensed in 1999, prompting a drastic 
reduction in connection charges and handset prices. 
 
7.  (U) With just this little bit of competition, the market 
took off.  Mobile network connections surpassed the number 
of fixed lines in 2001 and by 2004, total subscribers 
exceeded 2.8 million.  Networks have been rolled out 
quickly, and close to 60% of the population now has cellular 
signal coverage.  This rapid growth in mobile is both a 
cause and a consequence of TKL's failure in the fixed line 
market.  Fixed line services as offered by TKL have simply 
been outcompeted by mobile services, and the vast majority 
of Kenyans now use mobile phones for all their basic phone 
needs. 
 
8.  (U) Competition has also stimulated growth in internet 
services.  Fully liberalized only in 2004, internet services 
have witnessed substantial growth.  Currently there are 78 
licensed Internet Service Providers (ISPs) in Kenya, 
although fewer than half are operating.  Until only very 
recently, however, the market remained shackled by the high 
costs associated with the fact that the country had only one 
internet backbone, owned and operated as a monopoly by none 
other than TKL. 
 
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Monopoly Ends, CCK Moves to Fully Liberalize 
-------------------------------------------- 
 
9.  (SBU) By the time TKL's monopoly status ended on June 
30, 2004, Kenya had a new government elected in large part 
on a platform of market-based economic reforms, including 
privatization.  However, the GOK's initial plans for post- 
monopoly telecom/ICT liberalization appeared half-baked, 
restricted to the licensing of a second national landline 
operator (SNO), a third mobile provider, and four additional 
internet backbone providers, all through competitive 
auctioning.  Action on licensing an SNO ground to a halt in 
July when Minister of Information and Communications Raphael 
Tuju intervened at the 11th hour by canceling the tender 
just as it was about to be awarded, without subsequent 
explanation.   The case remains in court. Similarly, the 
licensing of a third mobile operator has been mired in 
controversy.  CCK awarded the license to Econet Wireless in 
September, 2004, only to have Minister Tuju revoke it on the 
grounds the company had not met the minimal capital 
requirements.  Econet challenged the action in court, won,and is in the process 
now of rolling out its network. 
 
10.  (SBU) In light of these uncertainties, market actors 
were pleasantly surprised when CCK announced in September 
2004 a "Post-Exclusivity Regulatory Strategy" which provides 
for a technology-neutral licensing regime which abolishes 
auctioning in favor of a first-come first-served system 
requiring applicants to merely demonstrate adequate 
technical capabilities and pay a reasonable licensing fee. 
In recognition of technological convergence, the strategy 
consolidates previously segmented licensing categories, 
allowing operators to provide a broader range of services. 
For example, the new regime allows for: 
 
-- Mobile operators to construct their own international 
gateways.  Previously, TKL controlled the country's only 
gateway.  In January, two companies were issued gateway 
licenses. 
 
-- Additional licensing of internet backbone and gateway 
operators, broadcast signal distributors, and commercial 
VSAT operators. 
-- Operators to carry all forms of multimedia traffic over 
their networks, including voice over internet protocol 
(VoIP). 
 
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Communications Minister Jolts the Market 
---------------------------------------- 
 
11.  (SBU) Kenya's telecom and ICT sectors, whose growth had 
been restricted largely to the mobile market in recent 
years, looked set to boom in 2005 under CCK's new licensing 
system.  CCK was reportedly reviewing a series of new 
license applications, some of which appeared on track for 
approval, when the market was jolted on March 7 by Minister 
Tuju's sudden and unexplained dissolution of the CCK board, 
and the suspension of Director General Sammy Kirui on 
compulsory leave.  Tuju's announcement provoked howls of 
protest from industry groups like the Telecommunications 
Service Providers Association of Kenya (Tespok), whose 
president said the move had "created a vacuum" in the 
sector. 
 
--------------------------------------------- ------ 
Motivations Behind Tuju's Actions Uncertain, But... 
--------------------------------------------- ------ 
 
12.  (SBU) The motivations for Minister Tuju's precipitous 
dissolution of the CCK board are, and probably will remain, 
unclear.  Speaking with Econ Counselor March 17, James Rege, 
the Permanent Secretary in Tuju's Information and 
Communications Industry, professed ignorance, saying only 
that he understood that Tuju had simply acted on orders from 
above in both firing the CCK board, and in earlier revoking 
the Econet Wireless license. 
 
13.  (SBU) While a small minority of contacts credit Tuju 
for taking bold action in dismissing a corrupt CCK board, 
many in the industry believe just the opposite, i.e. that 
Tuju's actions indicate an attempt by senior GOK insiders to 
halt or at least delay liberalization.  The motivations for 
doing so are to either protect TKL as greater competition 
starts to bite, to protect cabals in and out of government 
who continue to benefit illegally from the legacy of TKL's 
monopoly status, or both. 
 
14.  (SBU) Market players note in particular that the 
legalization of VoIP is already undermining one of TKL's 
cherished cash cows - its de facto monopoly in international 
gateway services.  As such, VoIP would also be eating away 
at the ill-gotten gains of illegal call termination 
operations, in which companies physically connect to TKL's 
international gateway and sell international call 
termination services at a fraction of the cost charged by 
TKL itself.  The profits are then shared by the operators, 
complicit TKL officials, and probably senior officials 
within the GOK itself.  While some of these activities are 
reportedly being investigated by the Kenya Anti-Corruption 
Commission, it is unclear in the absence of greater 
transparency where the investigations stand. 
 
-------------------------------------------- 
Licenses on Hold, Policy Direction Uncertain 
-------------------------------------------- 
 
15.  (SBU) GOK sources, including Permanent Secretary James 
Rege, have told the Embassy that the GOK will move quickly 
to name a new board at CCK, and that liberalization will 
stay on track.  Rege even told Econ Counselor that CCK 
Director General Sam Kirui will be reinstated shortly.  In 
the meantime, however, the industry is "a complete mess" 
according to an American ISP owner, with the licensing 
process having "ground to a standstill" as CCK staff await 
guidance and policy direction from above.  This has injected 
another poisonous dose of uncertainty into a market which 
badly needs greater regulatory stability if it is to 
continue to generate new investment, with all the positive 
multipliers this implies for the growth and development of 
the broader economy. 
 
16.  (SBU) Further, even after a new board is constituted, 
it remains to be seen whether new CCK leadership will 
continue to aggressively liberalize, or act on behalf of TKL 
and those profiting from it by trying to roll back recent 
reforms.  The good news is that the newly licensed internet 
backbone companies are up and running and already offering 
lower cost services to a number of economically important 
companies.  With these benefits already in place, many are 
counting on pressure from the business community to ensure 
against backsliding. 
 
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Comment 
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17.  (SBU) Along with the cancellation of the SNO tender and 
the attempted revocation of the Econet Wireless license last 
year, this marks the third time in less than a year that 
Minister Tuju has jolted the market by arbitrarily 
exercising self-proclaimed powers and interfering in what 
are in theory processes independent of his authority. 
Whatever his motivations, this highhandedness, and the lack 
of transparency involved in the decisions, have greatly 
undermined confidence in what was only weeks ago one of 
Kenya's rare economic success stories. 
 
BELLAMY