KENYA: DELVING INTO TELECOMMUNICATIONS – CHALLENGES FACED BY SERVICE PROVIDERS IN KENYA
Welcome to our fourth issue of the Delving into Telecommunications TMT Tidbits series. Our aim with this series is to enable you address the question “what should I consider when investing in the technology, media and telecoms sectors”?
In this issue, we examine the challenges that telecommunications service providers encounter when operating in the sector.
Before delving into this topic, we recommend listening to our podcast on the necessity of ensuring compliance with all the conditions attached to a licence issued by the Communications Authority (CA) as well as the relevant laws and regulations.
So, what are the challenges?
In this context, resources refer to personnel, infrastructure, equipment, frequency spectrum, and network or transmission capacity necessary to provide telecommunications services.
The more resource-intensive a telecommunication activity is, the fewer the licenses issued with respect to that activity. For example, the least issued licences in Kenya are international gateway systems and services licences, submarine cable landing rights licenses, and network facilities service providers (Tier 1) licences. Check out the full list of licences issued by the CA on their website here.
The low uptake of resource-intensive licences is in part because installing the relevant infrastructure requires extensive financial resources. For instance, the cost of laying a submarine cable is dependent on the length of the cable. Dgtl Infra estimates that “a new trans-Atlantic subsea cable currently costs $200m to $250m to build. As a rough approximation, a typical submarine cable can be built at a cost of ~$40k per mile, which is equivalent to ~$25k per kilometer”. This is why submarine cables are often owned by consortiums, though there are private cables such as those being laid by Meta and Google.
It is similarly expensive for terrestrial installations. Infrastructure owners must purchase the equipment, engage technical personnel for the installation, and obtain the relevant permits for the construction, among other requirements. This is not only costly but time-consuming. This is further impacted by challenging terrain, which makes the deployment of infrastructure in some parts of Kenya difficult and the rolling out of any country-wide networks arduous.
Another challenge is the scarcity of frequency spectrum, a resource necessary for the operationalization of some of the infrastructure. Frequency spectrum is licensed and monitored by the CA, which is guided by the national table of frequency allocations. The high demand for the scarce resource coupled with high fees makes access difficult for prospective service providers.
Consequently, most players elect to engage in less resource intensive aspects, such as offering content services and/or getting licensed as application service providers.
While the telecommunications sector is predominantly regulated by the CA, other government authorities are also involved in the set-up and regulation of a business in the sector. They include the Companies Registry (for incorporation and ongoing corporate disclosures), the Kenya Revenue Authority (for tax compliance), the Ministry of Lands and Physical Planning and other county government bodies and national authorities (for land acquisition and wayleaves etc.), and the Ministry of Information Communications and Technology (ICT) of Kenya (for compliance with local equity participation requirements), among others.
Understanding the interplay between these regulators may be difficult, and some regulatory requirements may be inadvertently overlooked. An operator has to expend time and money on outlining the approvals and permits required, applying for and obtaining them, and paying the requisite fees. Some of the permits are very short lived, necessitating renewal every three months for instance, which carries an obligation to pay additional fees.
Companies that venture into this sector must meet the 30% local equity participation requirement outlined in the ICT sector policy. This requirement at times results in companies deciding not to engage in the sector. Having to issue such a high stake in the company to local persons may negatively impact investment in the company, or the policies binding on the parent entity may preclude the company from issuing equity to such persons. This may inevitably lead to non-compliance with the sector policy, resulting in licence revocation.
Please read our article on Kenya’s data infrastructure for an overview of other challenges in the sector.
The next feature on the ‘Delving into the Telecommunications’ series will be an article on dealing with subscribers/clients in the sector. Please, look out for this feature!
For any queries or assistance, please contact John Syekei (Partner), and Rose Njeru (Associate) or your relationship partner at Bowmans Kenya. Special thanks to Stephanie Mulului (Associate) for her contribution to this issue.