Trade Liberalization and Poverty in Kenya: A Case Study of the Telecommunications Sub-sector
Prepared by Gloria Otieno and Eric M. Aligula
Kenya Institute for Public Policy Research and Analysis (KIPPRA)
BishopsGardenTowers, Bishops Road
P .O Box 56445, Nairobi, Kenya
June , 2006
Draft not for citation
Paper prepared for the project “Linkages between Trade Development and Poverty Reduction”, implemented by CUTS International.
Abstract
Trade liberalization in the Kenyan Telecommunications sub sector began earnestly in 1997 when the government embarked on progressive liberalization and privatization within the sub-sector. Before liberalization of the sub-sector, services were delivered within a monopolistic public sector structure- the Kenya Posts and Telecommunications Corporation (KP&TC); which combined regulatory and operational responsibilities (UNCATD, 2005), the sector was at the time plagued by inefficiencies poor coverage and low network coverage. The liberalization of the sub sector through the 1997 Communications Act led to splitting of the KP&TC into Postal Corporation of Kenya, Telkom Kenya and the Communications Commission of Kenya, which is the regulating agency. Further reforms in the sub sector were as a result of Kenya fulfilling its obligations under the WTO framework. These have led to the development of the ICT policy, which entails reviewing of the policy framework for investment, competition and growth including obligation of investors to universal access as stipulated in the WTO reference paper on Basic Telecommunications.
This study is intended to discuss the effects of Telecommunication liberalization on poverty in terms of employment generation, increase of Foreign Direct Investments, Access to services; and increase of opportunities due to access to information. The study involved desktop research combined with one on one interviews with key stakeholders in the sub sector including service providers and consumers.
Findings from the study indicate that due to liberalization of the sector, there has been tremendous growth especially in the mobile telecommunications industry, which currently stands at 6 million subscribers. Furthermore access to services has improved both in the urban and rural areas. The introduction of mobile technology and Internet services has also created an impact in terms of access to information; employment creation –both directly and indirectly through participation of micro and small enterprises benefiting from community phones, sale of mobile phones and accessories which has an impact on incomes and poverty; the real impact still needs to be determined empirically. Even though the operating environment is competitive and both foreign and private sector investment have increased; landline services are still provided under monopoly of Telkom Kenya and attempts to license a Second National Operator are still underway.
Most stakeholders in the industry perceive the costs of services to be high especially mobile telecommunication services. Unreliable and slow Internet connections also impacts negatively on the sub-sector. Operating costs of mobile service providers are also high due to poor infrastructure and high cost of electricity and related taxes. The implications and real impact of telecommunications sub-sector liberalization still needs to be quantified. Finally, the sub sector stakeholders feel that more reforms need to be undertaken such as: introduction of a Second National Operator ( SNO), reduction of costs of communication, speeding up of unified licenses and improvement of infrastructure and services access in the rural areas among others.
Acknowledgements
We would like to thank many institutions and individuals for their contribution to this research, more specifically the Communications Commission of Kenya (CCK), Mobile service providers- Safaricom, Celtel and Telkom Kenya for their useful insights into this study. We would also like to acknowledge the contribution from all the other stakeholders including Internet Service providers (ISPs), cyber café owners and consumers. We also acknowledge financial support from CUTS (Consumer Unity & Trust Society International) who funded the study. All errors and omissions are the sole responsibility of the authors.
Table of ContentsPage
Abstract
Acknowledgements
List of Tables, Boxes and Figures
1.0Introduction
1.1Objectives and Scope
1.2 Methodology
2.0 The link between Trade Liberalization, Telecommunications and Poverty
2.1 The link Between Trade liberalization and Poverty
2.2Liberalization of Telecommunication Services
2.2.1Privatization and Competition
2.2.2Domestic Regulation
2.2.3 Implications of Telecommunications Liberalization
3.0 Telecommunications and Poverty in Kenya
3.1 Poverty Situation in Kenya
3.2Background of Telecommunication Services in Kenya
3.2.1 Liberalization and Regulation of Telecommunication Services in Kenya
3.3Implications of Liberalizing Telecommunication Services on Poverty in Kenya
3.3.1.Expansion and growth of the sub sector services
3.3.2Access to Services and Information.
3.3.3Cost and Affordability
3.3.4Employment and Wages in the Sub sector
3.4Telecommunications and Trade in Kenya
3.4.1Trade in Telecommunications Equipment and Services
3.4.2Telecommunications as vehicle for Trade in Kenya
3.4.3Kenya Commitments in Telecommunication services under GATS
4.0 Stakeholder Perceptions on Liberalization and its Effects
5.0Conclusions and Policy Implications
6.0REFERENCES
List of Tables, Boxes and Figures
List of TablesPage
Table 1Modes of Trade in Services as defined by the GATS……………………… .7
Table 2WTO Reference Paper on Telecommunications: Definitions and Principles…9
Table 3Poverty Trends in Kenya …………………………………………………….15
Table 4Licensed Telecommunication Operators in Kenya……………………………21
Table 5Telecom Kenya Subscriber Target/Performance (1999-2004)………………..22
Table 6Tele-density Vs Poverty Rates per province in Kenya ………………………..22
Table 7Data service Connections in Kenya (200/01-2007/08)………………………..25
Table 8aTelephone Exchange Capacity in Kenya (1990-2004)………………………..25
Table 8bTrends of Connectivity and Access in Kenya (1995-2004)…………………...25
Table 9Telephone Call charges in Kenya (2002-2005)……………………………….26
List of Figures
Figure 1Comparative Growth of Fixed and Mobile Telephony in Kenya (1999-2004)..20
Figure 2 Means of Communication used by Kenyans (2004)…………………………..27
List of Boxes
Box1Programs to Access Information through Telecommunications and ICTs in Kenya……………………………………………………………………………………………30
Abbreviations
ABTAgreement on Basic Telecommunications
CCKCommunications Commission of Kenya
DELDirect Exchange Line
EACEast African Community
EAP&TCEast African Posts & Telecommunications
ETACSExtended Total Access Communications Systems
EPZExport Processing Zones
FDIForeign Direct Investment
GATSGeneral Agreement on Trade in Services
GoKGovernment of Kenya
GSMGlobal System for Mobile Communications
IBRDInternational Bank for Reconstruction and Development
ICTInformation Communication Technology
IDRCInternational Development research Center
ISPInternet Service Provider
ITCInternational Trade Center
ITUInternational Telecommunication Union
KACEKenya Agricultural Commodity Exchange
KENSATKenya Small Aperture Terminals
KP&TCKenya Posts & Telecommunications
KPOKenya Paraplegic Organization
KRAKenya Revenue Authority
MFNMost Favored Nation
NTNational Treatment
PCKPostal Corporation of Kenya
RTARegional Trade Agreement
SAPStructural Adjustment Programs
SMESmall and Micro Enterprise
SMSShort Messaging Service
SNOSecond National Operator
TKLTelecom Kenya Limited
VoiPVoice over Internet Protocol
VSATVery small Aperture Terminals
UNCTADUnited Nations Conference on Trade and Development
WTOWorld Trade Organization
1
1.0Introduction
Kenya’s current trade regime is fairly open and competitive due to the liberalization process initiated in the 1990s. During this period, the government came under intense pressure from the Bretton woods institutions to open up and liberalize trade. Further liberation was carried out as Kenya acceded to the General Agreement o Trade in Services (GATS) under the World Trade Organization (WTO) in 1995. The WTO under the General Agreement of Trade in Services (GATS) calls for progressive liberalization of services sector and hence Kenya had to undertake telecommunication sector reforms in accordance to GATS rules. This process of liberalization has different effects from one sector to another. While others have had serious negative impacts others have led to remarkable growth. The Telecommunication sector in Kenya is one of those that were liberalized in the 1990s and have subsequently registered growth.
Telecommunications is an important factor in the development process and an essential tool for addressing poverty reduction and economic growth. It has a dual role as a traded service and a vehicle for trade in other sectors. An efficient telecommunications sector facilitates transfer of information at the lowest possible cost, and boost trade, incomes, and national benefits including poverty reduction (WTO, 2004). Hardly, any business today can operate without effective telecommunications. For many industries, the telephone is the primary point of selling and the Internet is an increasingly important channel for marketing and for sales for some industries. Telecommunications networks provide the supporting infrastructure for such information flows and for Internet access (Verikos and Zhang, 2001).
During the past few decades, technological progress in the telecommunications sector has been remarkable and there has been a rapid diffusion of technology as well. It is now possible for countries that have lagged in economic and technological development to switch to the most recent technologies at relatively low costs of adoption. In Africa, for example, 95 per cent of mobile lines were GSM in 2001, well above the world average of 70 per cent (WTO, 2004).
Telecommunications consist of services that can be wire-based (e.g. fixed-line telephony), wireless (e.g. mobile and satellite services), resale-based (i.e. over leased transport capacity) and a myriad of combinations thereof. The Internet has come to embody a technology in its own right, providing low-cost access to data as well as voice communication. Telecommunications are a network industry and as such the value of the network for each customer increases with the size of the network. Because of this and because of economies of scale, the industry was considered a natural monopoly in the past. Recent technological developments have, however, reduced the importance of economies of scale and made vertical disintegration and competition possible (Verikos and Zhang, 2004). As a consequence, most countries, Kenya included have carried out regulatory reforms, often including privatization of state monopolies and the introduction of competition in some or all market segments. Regulatory reforms in the sector have contributed to further innovations, diffusion of technology and a substantial reduction in the cost of telecommunication services (Bressie et al., 2004).
Measures affecting telecommunications services may be divided into firstly, telecommunications services, consisting of basic telecommunications services such as voice telephone services and facsimile and value-added services such as data networking, and secondly, telecommunications infrastructure including local, long-distance, and international networks. Given the dual function that the telecommunications sector plays in economic growth in both developed and developing countries, further liberalization of telecommunications remains a key objective within negotiations under the GATS and an increasing number of RTAs (Ulrich, 2003).
Before liberalization, the telecommunications sub-sector in Kenya was dominated by a Government Monopoly and mainly characterized by inefficiency. At the same time the telecommunications sector was plagued by shortage of funds, increased demand from growing population, depressed state of economy from 1993, micro-economic difficulties and inflation and devaluation (Kane, 2003). Moreover the telecommunication infrastructure was not well developed and there was poor access to fixed telecommunication services, low capacity and high cost of telecommunication services and lack of a proper legal and regulatory framework. While the rest of the world was liberalizing their telecommunication sectors, Kenya and many other developing countries were lagging behind and this had negative implications (Kasuku and Mutua, 2002).
Due to liberalization in 1997, the Telecommunication/ICT sub sector has recorded a high growth rate over the years; last year the sub sector expanded tremendously with the mobile telephony experiencing a record 56.1 percent growth in 2005 (Economic Survey, 2006). The growth of this sub-sector has therefore meant that access to telecommunications has improved and employment generation has increased especially in the mobile phone industry which has a direct impact on poverty. Secondly the sub-sector has visualized an increase in technology and FDI and technological capabilities thus improving productivity in areas of Information Telecommunications and further lowering costs and increasing trade in other service sectors. In 2004, the government created the ministry of information and communication, to oversee the development of the ICT sector. This bore much fruit when in 2006 a new National ICT Policy was adopted by the cabinet to provide guidelines to improve the legal and regulatory framework of the sector. The telecommunications sub sector in Kenya has been seen as one of the few success stories of liberalization. It is therefore very important to study this sector as Kenya’s “success” story in terms of liberalization and poverty.
The terms of reference for the study were to
- Select a sub-sector using certain pre-identified criteria such as the sub-sectors link to poverty , trends in employment and growth and potential for impacting positively on livelihoods of poor people.
- determine how firms and workers in the identified sector are gaining (or otherwise) from a sector’s increasing exposure to international trade and subsequent liberalization.
- identify constraints and institutional weaknesses that a particular sector (including its workers) is facing in order to gain more (or to mitigate adverse effects) from increasing exposure to international trade and liberalization.
- conduct a perception survey of key stakeholders in the sub sector to understand the constraints they face, their perceptions on liberalization and its effects on poverty and ways in which they think the sub sector can be improved.
1.1Objectives and Scope
The main objective of the study is to analyze the impact of trade liberalization of the telecommunications sub sector in Kenya and subsequent impact on growth of the Telecommunications sub-sector, trends in employment and wages, new developments and technological advancements, access and availability of services and affordability.
Specific objectives intended to study
- Domestic telecommunications sector growth and expansion after liberalization.
- Trends in employment and wages in the sub sector after liberalization.
- Access to goods and services including cost of communication and increased affordability and availability ofinformation and its impact on poverty
- FDI flows and technological capabilities within the sub sector
- Telecommunication as a traded service especially in view of developments at the global level.
- Stake holder’s perceptions on liberalization of sub sector and its effects on poverty.
1.2 Methodology
The Telecommunications Sub-sector was selected on the basis of pre-identified criteria such as:
- The share of the sector in GDP before and after liberalization,
- Trends in domestic growth of the sector (which were mostly positive after liberalization)- as indicated by growth of landline and expansion of mobile services, which currently stands at 6 million from only 2000 in 1997.
- The importance of the sector in providing avenues for communication, information access and links with the global community.
- The trends in employment in the sector in terms of opportunities for the poor
- Huge potential for FDI generation in the sub-sector and subsequent employment within the sub sector
- Potential of the sector to grow and impact positively on poverty
- In-depth reviews of secondary information including research publications and government statistics have been used in this study.
- Perceptions of some key stakeholders have been done in order to understand institutional issues within sector is facing, which are hindering the desired growth of the sector have been assessed. These include Service providers, the national regulating agency, Internet Service providers, cyber cafes, and consumers of the services. A total of 16 respondents were interviewed. The National regulating Agency – Communications Commission of Kenya, the landline operator -Telkom Kenya, the mobile service providers- Safaricom and Celtel, 3 ISP providers, 3 cyber cafes, 1 Civil society Organization and 6 consumers from lower, middle and upper income classes.
The report is organized as follows: the preceding section is the introduction and gives the background of the study, the scope and TORs; the second section gives an insight into some of the global aspects of linkages between trade liberalization, telecommunications and poverty and implications on global telecommunications sub sector. The third section gives an overview of the sub-sector within the Kenyan context and presents the liberalization of the sub sector and subsequent effects on growth, access to services and affordability. The fourth section presents perception of key stakeholders on sector liberalization and its effects. The last section gives the conclusions and policy implications of the study.
2.0 The link between Trade Liberalization, Telecommunications and Poverty
2.1 The link Between Trade liberalization and Poverty
Conventional wisdom holds that the link between trade, poverty reduction and human development is through economic growth. Trade flows can be a powerful source of economic growth and trade liberalization is the common policy prescription for increasing trade flows (McCulloch et al., 2001). Trade policy and trade rules affect the performance of a country’s trade, both internationally and domestically. McCulloch et al (2001) identified three channels by which trade policy change might affect poor individuals and households; enterprise (through profits, wages and employment), distribution (the transmission of changes in border prices to consumers), and government (in which trade reform affects government revenues and thus the scope for pro-poor expenditures).
Whether changes in trade can reduce poverty depends on the nature of the economy and its bottlenecks and transmission mechanisms. Firstly, trade liberalization can affect prices of goods and services consumed by the poor and in the process affect their real incomes. Second, trade liberalization can affect the performance of firms with implications for wages and employment. It is possible in the context of developing countries that trade liberalization may increase the availability of low skilled employment, tighten the labor market and increase the relative wages of low-income workers. Where this is the case, then liberalization can contribute to poverty reduction. In some cases liberalization may open up the market and ease entry of foreign firms hence generation Foreign Direct Investment (FDI) which may subsequently lead to employment creation and poverty reduction. If trade liberalization raises the price of an exportable output, then employment is likely to increase and poverty will be alleviated. On the other hand, trade reform will reduce the prices obtained by firms producing importable goods. This is likely to reduce employment with adverse consequences for poverty. Lastly, trade liberalization can enhance government revenues that in turn enable additional pro-poor spending (Bird et al., 2004). However government spending must also be structured in a way that equity issues are prioritized and poverty targeted.