Absurdity of bartering frequency for tender

To issue the 4G spectrum at a price to be retrospectively determined in the future is a sham and would defraud public

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George Kegoro

Since 2011, the government has been contemplating the modalities for issuing the fourth generation (4G) spectrum licence for mobile telephony and data, so called long term evolution (LTE), one that would be an improvement on the current third generation (3G) licensing regime. Unlike the 3G regime, which was issued to individual service providers, the government has been considering issuing the 4G spectrum to a consortium of service providers under a private-public-partnership (PPP) arrangement. The argument is that this will save cost to the public, as has been done in other countries. In addition, the cost of construction would be shared amongst all licensed telecommunications operators who would then pay only for usage. In this way such operators would compete on the basis of quality of service provision, which would enhance competition to the benefit of the general public.

Because this PPP arrangement would have equalised all the telecommunication service providers and eroded Safaricom’s stranglehold over the telecommunication sector, Safaricom vehemently opposed this suggestion and indicated that it preferred to roll out its own 4G infrastructure. Clearly Safaricom was keen to maintain its monopoly and dominant position.

The PPP proposal was an open tender in which anyone could apply to join.

During the parliamentary inquiry triggered by the Safaricom/Huawei security contract, the Director-General of the Communications Authority (CA), Francis Wangusi, disclosed that part of the deal with the government is that Safaricom will also be issued with a 4G licence of its own, whose price will be offset by the costs that the government would have paid for the security contract. Initially, Safaricom will pay a provisional price of Sh6.45 billion and then pay, or be refunded, the difference when the actual price is determined.

The Public Procurement and Disposal Act is the law governing the procurement of public services and goods; it requires competitive bidding for goods and services that fall under that law. The rolling out of the 4G spectrum falls under the Act. There has been no contrary assertion on the part of the government. At the same time, there has been no attempt to rationalise the award of the 4G licence to Safaricom/Huawei in terms of the Act.

In its dealings with the government, Safaricom has triggered three major decisions: first, the manner in which the outstanding 4G spectrum issue will be addressed by government; secondly, a decision to issue a licence to itself; and thirdly, a decision on the price of that licence.

Replicate cost

The dealings between Safaricom/Huawei and the government leave many questions unanswered. First, as originally conceived in 2002, there was to be an integrated network for all the emergency service providers, and not just to the police. The most problematic outcome of this contract is the suggestion that the police can have an upgraded system which is not accessible to other emergency service providers. It would mean that in the event of an emergency the police will not be able to communicate with the army or hospitals or with the fire department.

The Safaricom/Huawei deal means that the other emergency security organisations have to build their own networks, duplicating the network of the police and at great public cost. Of course, this will also provide opportunities for replicating the controversies of the current contract.

Mr Wangusi, under questioning in Parliament, admitted that Safaricom was legally forbidden from rolling out the contested system to any other organisation except for the police. This is because the law forbids any person to provide telecommunication services to another organisation without a licence. The essence of the Tetra licence was to enable all emergency service providers to be on the same network.

Secondly, to issue 4G spectrum now at a price to be retrospectively determined in the future is a sham and would defraud public. Issuing Safaricom with 4G spectrum now and allowing it a head-start in the rollout means that the future auction of such spectrum would receive little or no interest from other operators who might otherwise have participated in a spectrum auction. Why would operators agree to pay a high price in a future 4G spectrum auction when Safaricom would have already rolled out its 4G spectrum and captured all the market? Such prospective auction will certainly result in a low price with few or no takers at all. The result will be Safaricom will have received 4G spectrum at its own discounted price without a market determination of spectrum value. The only open market determination of spectrum price is to ask for an auction now before any operator is in possession of 4G spectrum.  That is the only objective process that is consistent with the law.

Given blank cheque

As an indication of the problems of cost, barely a year ago, Huawei were willing to roll out the same system countrywide for Sh14 billion. The Safaricom/Huawei contract will cost the taxpayer the same amount for only two towns, Nairobi and Mombasa, and Sh45 billion shillings for a countrywide rollout.

In Parliament, Safaricom admitted that the previously announced provision of the infrastructure at cost turned out to contain an unspecified “finance” charge that only Safaricom would determine. In the end, Safaricom has received a carte blanche to price and offset its costs against the 4G frequency spectrum. This amounts to being allocated the spectrum for free by inflating the price of the police network and offsetting this against the price of the spectrum.

Thirdly, having been awarded without competitive bidding, the Safaricom/Huawei contract is not different from Anglo Leasing. The rationale for awarding this contract is based on security arguments, the same justification previously used in awarding Anglo-Leasing contracts. The futility of Anglo Leasing-type contracts is that the country may be in this same spot in future, issuing a contract for work that, it is assumed, has been given to Safaricom, but which may not be done.

The President personally opposed Anglo Leasing type contracts and recently regretted that his government was manoeuvred into paying a contract of this nature which he previously opposed. The only difference between the contract to Safaricom and the Anglo Leasing contracts is the name. How can his government then be creating its own Anglo Leasing type contracts?

The M-Shwari-CBA connection

Fourthly, there is a business connection between Safaricom and the Commercial Bank of Africa, controlled by the President’s family. The relationship, through M-Shwari, has turned CBA into the largest commercial bank in Kenya, overtaking Equity Bank. There is an inherent conflict in the President placing himself in a position where his government is conferring such a large benefit to a commercial company with which he has a relationship.

Fifthly, the record of Safaricom comes into question. Safaricom was set up by Vodafone and a little-known company, Mobitelea, the identities of whose owners remains a mystery. The best endeavours to get answers as to who was behind this company failed and the public simply accepted and moved on.

In 2006, lawyer Ahmednasir Abdullahi wrote in one of the local dailies that “the owners of Mobitelea are well-known to the Government despite the meek pretences to the contrary”, adding that “the fundamental issue raised by this saga is the consideration Mobitelea provided to Vodafone that entitled it to shares worth Sh7 billion at current prices.”

Ahmednasir concluded that “there is no evidence in public domain that payments were made by Mobitelea for shares in Safaricom.”

In India, the politics of issuing a next generation of mobile telephony licensing, which the ruling Congress Party handled with the same opacity as Jubilee is handling the 4G issue, led to a major political scandal and several players, including the communications minister at the time, and mobile telephone companies, together with their executives, are facing criminal charges in the country’s courts. The minister, A. Raja, spent 15 months in custody and the scandal led to the slaughter of the Congress Party at the last polls.

In the end, the dealings between Safaricom/Huawei and the government is typical of what happens in Kenya with big-ticket items. Notwithstanding the unresolved questions, this contract is likely to go ahead because the players have sufficient political power to ensure the questions do not have to be addressed. In different circumstances, these questions may be raised again, and the risk is that, like happened in India, government officials and corporate executives may find themselves having to answer difficult questions.

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