Ghana’s and Kenya’s contrasting fortunes

FROM THE ECONOMIST INTELLIGENCE UNIT

Ghana shows the way as Kenya's attempt to licence a second national operator comes off the rails again.

The growth of telephony in Africa may be among the highest in the world, but the regulatory environment surrounding the sector remains distinctly underdeveloped. Recent developments in Ghana and Kenya, where two of Africa's longest running telecom sagas have been running, illustrate this state of affairsall too well.

Taking Ghana first, the country is finally celebrating the licensing of a second national operator (SNO), won by consortium backed by major Middle Eastern operator Etisalat. This is a positive move, but still puts Ghana well behind most of the rest of the world, where liberalisation of the sector started years ago. In Kenya, however, the pace of liberalisation is even slower. Regulators are currently getting ready to start the process of finding a second operator all over again. That's because India's Reliance Communications became the latest bidder to fail to meet financial deadlines set by the Communications Commission of Kenya (CCK).

The tortuous attempts to establish SNOs by the governments of both countries reflect the regulatory inadequacies of governments seeking to extend telecoms reform beyond the relatively straight-forward task of issuing greenfield licences for new telecoms services. While each has achieved a degree of competition and strong growth in their mobile and internet markets, their efforts to establish SNOs to boost growth in their woefully under developed fixed line services have floundered amidst a litany of legislative delays, regulatory disputes and legal challenges.

Regulatory strife

Despite being lauded for being one of the first African countries to open up its telecoms sector to competition, Ghana's attempts to achieve genuine competition in telecoms services have been mired in regulatory and bureaucratic difficulties since it first licensed a SNO in 1997. Its problems have been in large part due to the inadequacies of its poorly resourced and structured regulator, the National Communications Authority (NCA). In particular, the country has suffered from the NCA's failure to establish a level playing field between the existing incumbent operator Ghana Telecom and the winner of the SNO licence, Westel, a joint venture between US-based Western Wireless International (WWI) and Ghana National Petroleum Company. A long running dispute over interconnection and spectrum allocation followed the licensing, which led to Westel freezing its investment in the sector and an attempt by the NCA to fine the company for installing just 3,000 of its minimum 50,000 fixed-line commitment by 2002.

The dispute festered until 2006 when Westel was renationalised to facilitate the sale of a 66.6% share in the company to new investors. In the subsequent auction a consortium headed by UAE-based Africa specialist Kinz Telecom and backed by UAE based telecom giant Etisalat, saw off competition from Celtel, the African subsidiary of Kuwait's MTC, and African Soft, a Ghanaian subsidiary of US company WCW International, Inc. The winning bid of US$95m bid was US$30 above the minimum asking price, and further sweetened by a pledge to invest US$500m in the sector and a commitment to pay Westel's US$38.5m in outstanding fines and licence fees.

Limits on foreign ownership

While Ghana's difficulties have been in seeing through a planned liberalisation of the sector, Kenya has yet to overcome the first hurdle by successfully auctioning licence in the first place. First attempted in 2003, the cancellation of the initial auction the following year was blamed on a lack of competition, and after frequent delays it was finally resurrected in May 2006, only to collapse again when the winning consortium, headed by Dubai's VTEL, was disqualified by the communications Commission of Kenya (CCK) in January for missing repeated financial deadlines. The second highest bidder, a consortium led by Reliance Communications, then accepted an invitation to try and match VTEL's bid, but it too failed to meet its March 15th deadline, after failing to get the government to agree to its demands for concessions on import duties, infrastructure sharing, and the easing of regulations regarding the listing of its subsidiaries on the Nairobi Stock Exchange.

The failure of the licensing process is expected to intensify pressure for the reform of rules governing foreign investment in Kenyan telecoms, which are widely blamed for the failure of the repeated attempts to award the licence. Limiting foreign ownership to 70% of any telecom venture, the rules mean that potential foreign investors in the sector are reliant on Kenyan partners that have frequently proved less than dependable when it comes to meeting their share of the investment. For example, VTEL's bid broke down when one of its three local partners, Unitel Kenya, Kirinyaga Construction and the Kenya Union of Savings and Credit Co-operatives (Kuscco), failed to pay its share of a 5% performance bond.

In response to the latest failure, the Ministry of Information and Communications has pledged to revise the rules surrounding the licence, before reopening it to tender. The foreign ownership law is expected to be revised as part of this relaunch, and Minister of Communications, Mutahi Kagwe, has proposed mitigating restrictions to a requirement that any new operator must bring in 30% domestic investment within the first five years of launching its services, via the sale of shares on the Nairobi Stock Exchange or alternatively to local private investors and employees.

Brighter prospects ahead

Despite another failure to license a SNO in Kenya, there are positive signs that the government is now committed to creating an environment favourable to foreign investment in the telecoms sector, and a regulatory regime capable of governing a competitive market. In addition to the proposed change in the foreign investment law, there has recently been action by the CCK to improve competition in the sector through a cap on interconnection rates, and an ongoing programme of restructuring to prepare the state-owned fixed-line monopoly, Telkom Kenya, for part-privatisation. Meanwhile, domestic pressure is also growing for a reduction in the high level of taxation on telecoms services. Should these reforms be followed through, a SNO is expected to be successfully licensed next time around, with investors continuing to be attracted by Kenya's high growth potential, given its extremely poor fixed-line penetration rate and low level of competition in mobile services.

By contrast, Ghana's reputation as a leading telecoms reformer has yet to be earned due to the series of recent government interventions in the telecoms sector, notably the renationalisation of both Ghana Telecom and Westel following disputes with their foreign owners. While the rapid reprivatisation of both operators will go some way to repairing the damage, the government needs to demonstrate a commitment to improving its regulatory regime, notably the NCA's ability to enforce interconnection payments rules, if its second SNO is to fair better than its first. Investors interested in bidding for the 51% stake in Ghana Telecom, scheduled to be auctioned later this year, will be watching the new SNO's relations with the telecom authorities with interest.

SOURCE: INDUSTRY BRIEFING