Trade Liberalization and Poverty in Kenya: A Case

Study of the Telecommunications Sub-sector

Prepared by Gloria Otieno and Eric M. AligulaKenya Institute for Public Policy Research and Analysis (KIPPRA)

Bishops Garden Towers, 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Draft not for citation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

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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.

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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.

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Table of Contents PageAbstract...............................................................................................................................iiAcknowledgements...........................................................................................................ivList of Tables, Boxes and Figures..................................................................................vii1.0 Introduction............................................................................................................1

1.1 Objectives and Scope..............................................................................................31.2 Methodology................................................................................................................4

2.0 The link between Trade Liberalization, Telecommunications and Poverty..........52.1 The link Between Trade liberalization and Poverty..........................................................52.2 Liberalization of Telecommunication Services.........................................................6

2.2.1 Privatization and Competition.............................................................................72.2.2 Domestic Regulation..........................................................................................92.2.3 Implications of Telecommunications Liberalization................................................10

3.0 Telecommunications and Poverty in Kenya............................................................133.1 Poverty Situation in Kenya..........................................................................................133.2 Background of Telecommunication Services in Kenya............................................153.2.1 Liberalization and Regulation of Telecommunication Services in Kenya.....................163.3 Implications of Liberalizing Telecommunication Services on Poverty in Kenya.......18

3.3.1. Expansion and growth of the sub sector services.............................................183.3.2 Access to Services and Information...................................................................243.3.3 Cost and Affordability......................................................................................253.3.4 Employment and Wages in the Sub sector..........................................................27

3.4 Telecommunications and Trade in Kenya...............................................................283.4.1 Trade in Telecommunications Equipment and Services.......................................283.4.2 Telecommunications as vehicle for Trade in Kenya............................................293.4.3 Kenya Commitments in Telecommunication services under GATS......................30

4.0 Stakeholder Perceptions on Liberalization and its Effects.............................335.0 Conclusions and Policy Implications.................................................................366.0 REFERENCES....................................................................................................38

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List of Tables, Boxes and Figures

List of Tables PageTable 1 Modes of Trade in Services as defined by the GATS……………………… .7Table 2 WTO Reference Paper on Telecommunications: Definitions and Principles…9Table 3 Poverty Trends in Kenya …………………………………………………….15Table 4 Licensed Telecommunication Operators in Kenya……………………………21Table 5 Telecom Kenya Subscriber Target/Performance (1999-2004)………………..22Table 6 Tele-density Vs Poverty Rates per province in Kenya ………………………..22Table 7 Data service Connections in Kenya (200/01-2007/08)………………………..25Table 8a Telephone Exchange Capacity in Kenya (1990-2004)………………………..25Table 8b Trends of Connectivity and Access in Kenya (1995-2004)…………………...25Table 9 Telephone Call charges in Kenya (2002-2005)……………………………….26

List of FiguresFigure 1 Comparative Growth of Fixed and Mobile Telephony in Kenya (1999-2004)..20Figure 2 Means of Communication used by Kenyans (2004)…………………………..27

List of BoxesBox1 Programs to Access Information through Telecommunications and ICTs in Kenya……………………………………………………………………………………………30

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AbbreviationsABT Agreement on Basic TelecommunicationsCCK Communications Commission of KenyaDEL Direct Exchange LineEAC East African CommunityEAP&TC East African Posts & TelecommunicationsETACS Extended Total Access Communications SystemsEPZ Export Processing ZonesFDI Foreign Direct InvestmentGATS General Agreement on Trade in ServicesGoK Government of KenyaGSM Global System for Mobile CommunicationsIBRD International Bank for Reconstruction and DevelopmentICT Information Communication TechnologyIDRC International Development research CenterISP Internet Service ProviderITC International Trade CenterITU International Telecommunication UnionKACE Kenya Agricultural Commodity ExchangeKENSAT Kenya Small Aperture Terminals KP&TC Kenya Posts & TelecommunicationsKPO Kenya Paraplegic OrganizationKRA Kenya Revenue AuthorityMFN Most Favored NationNT National TreatmentPCK Postal Corporation of KenyaRTA Regional Trade AgreementSAP Structural Adjustment ProgramsSME Small and Micro EnterpriseSMS Short Messaging ServiceSNO Second National OperatorTKL Telecom Kenya LimitedVoiP Voice over Internet ProtocolVSAT Very small Aperture TerminalsUNCTAD United Nations Conference on Trade and DevelopmentWTO World Trade Organization

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1.0 Introduction

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

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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

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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

1. 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.

2. 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.

3. 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.

4. 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.

1.1 Objectives 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

i. Domestic telecommunications sector growth and expansion after liberalization.

ii. Trends in employment and wages in the sub sector after liberalization.

iii. Access to goods and services including cost of communication and increased

affordability and availability of information and its impact on poverty

iv. FDI flows and technological capabilities within the sub sector

v. Telecommunication as a traded service especially in view of developments at the global

level.

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vi. 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:

i. The share of the sector in GDP before and after liberalization,

ii. 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.

iii. The importance of the sector in providing avenues for communication,

information access and links with the global community.

iv. The trends in employment in the sector in terms of opportunities for the poor

v. Huge potential for FDI generation in the sub-sector and subsequent employment

within the sub sector

vi. 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.

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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.

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2.2 Liberalization of Telecommunication Services

Efforts to liberalize the rapidly developing domestic and global telecommunications markets were

initially made within the International Telecommunications Union. However, governments soon

realized that the General Agreement on Trade in Services (GATS) within the newly established

World Trade Organization (WTO) with its principles of national treatment (NT) and

transparency, was a more appropriate framework for addressing the critical elements of trade in

telecommunications services, such as market access and regulatory reform through the

development of binding rules (Ulrich, 2003).

Negotiated as part of the Uruguay Round between 1986 and 1993 the GATS took effect in 1995

within the WTO. The GATS provides the definition of trade in services widely used in trade

agreements, general and specific obligations for Members of the WTO as well as provisions for

future liberalization in trade in services including telecommunications. Table 1 outlines the four

modes of trade in services as outlined in Art. I of the GATS (WTO, 1994). With regard to

telecommunication services, modes 1, 3 and 4 are widely applicable.

Table 1: Modes of Trade in Services as defined in the General Agreement on Trade in

Services

Mode Type of Service

Description

1 Cross-border Supply

The service is supplied from the territory of one Member to that of another member (ex. telecommunications, the post)

2 Consumption Abroad

The supply of the service in the territory of one Member to the consumer of another Member (ex. tourism, ship repair).

3 Commercial Presence

The supply of a service through the commercial presence of a foreign supplier such as a corporation, branch office or joint venture (Ex. Foreign firms operating in the country).

4 Presence of Natural Persons

Involves admitting a national of one Member into the territory of another Member on a temporary basis for the purpose of providing a service.

Source: WTO, 1994

The GATS principle is based on “Progressive Liberalization” of the sub sector coupled with

Domestic regulation in a manner that is transparent and fair.

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Worldwide, there is recognition of the benefits of "liberalizing" the telecommunications sector

through the introduction of competition and the privatization of telecommunications carriers.

The main objective for this reform is to increase accessibility, quality and affordability of

services. This immediate objective has broader societal benefits, because the availability and

affordability of modern, reliable communications services are crucial to the ability of all sectors

of an economy to attract foreign investment and compete in today's global markets and thus are

essential prerequisites to overall national economic development and poverty reduction

(Wellenius, 1997).

There are three key elements of regulatory reform of telecommunications services (WTO, 2004):

Establishment of an effective independent regulator-domestic regulation

Introduction of competition

Privatization of state-owned monopolies

2.2.1 Privatization and Competition

Worldwide, the telecommunications sector is being opened to competition, in response to both

technological developments and the failure of state-owned telecom monopolies to satisfy the

growing telecommunications needs of users and economies. The introduction of competition in

telecommunications has brought measurable benefits to both consumers and operators; (i)

Competition provides consumers with greater choice of service operators, wider variety of

services, significantly improved service quality, and lower tariffs; (ii) Competition prods

incumbents to improve their efficiency and to invest in growth and innovation. (iii) For

developing countries, added benefits include the attraction of badly needed investment, faster

network deployment, and wider consumer access (Gillwald, 2003).

“Liberalization” does not mean de-regulation. The introduction of competition must be

accompanied – indeed, should be preceded -- by the creation of National Regulatory Agencies,

charged with the responsibility of facilitating market entry by new players, guarding against

anticompetitive practices of incumbent operators and ensuring that the benefits of competition are

passed on to consumers (WTDR, 2003).

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The 1997 WTO Reference Paper on telecommunications sets out basic rules for ensuring

competition in the telecommunications sector, focusing on the competitive practices of "major

suppliers"1 of telecommunications services. The major points of the WTO Reference Paper are

outlined in Table 2 below:

Table 2: WTO Reference Paper on Telecommunications: Definitions and Principles

Definition/Principles

Description

Definitions The Reference Paper applies rules to ‘major suppliers’ of telecommunications services who have ‘control over essential facilities’ or uses its position to ‘materially affect the terms of participation’.

Competitive Safeguards

Governments must take appropriate measures to prevent suppliers of telecommunications services from using anti-competitive practices such as cross-subsidization, apply information obtained from competitors in an un-competitive manner, or denying competitors access to relevant technical information.

Interconnection Governments must ensure that major suppliers provide interconnection of their networks to other service suppliers at ‘any technically feasible point in the network’. Major suppliers will offer interconnection that is non-discriminatory, timely, and at a rate and quality ‘no less favorable’ than that provided for its own subsidiaries or affiliates.

Universal Service Governments may set universal service obligations, as long as they are administered in a transparent, non-discriminatory, competitively neutral manner and are not more burdensome as necessary in reaching their policy objectives.

Transparency Under circumstances where licenses are required, the licensing criteria, timeframe, and terms and conditions are to be made publicly available. Upon the request of the applicant, the reasons for denial of a license will be made known.

Independent Regulators

The regulatory body must be separate and not accountable to any supplier of basic telecommunications services and that its procedures be impartial.

Allocation and Use of Scare Resources

Government procedures for the allocation and use of scare resources, such as frequencies and numbers, must be objective, timely, transparent and non-discriminatory.

Source: WTO, 1999

1 A "major supplier" is an entity that controls essential facilities for the public network that cannot reasonably be duplicated for economic reasons, technical reasons, or both.

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The Reference Paper has been described as the ‘bible’ for telecommunications services, and

credited with bringing about a ‘change in the international telecommunications regime’ the

implications of this include facilitating the growth of new global communications carriers since

the rules cover both developed and developing country markets regime’ and enhancing Universal

Access (Cowhey and Klemenko, 2001).

The process of privatization and the introduction of competition must be reconciled with the

enduring goal of promoting universal availability of telecommunications services as stipulated in

the Millennium Development Goals (MDGs). Universal access goals are most often aimed at

increasing access to the rural areas, at low costs that can be affordable to poor people

Telecommunication investments in rural areas can yield, on average, an adequate and even high

rate of return. Servicing the remotest areas, however, represents higher costs per line and greater

risk, and therefore may require a subsidy (Gillwald, 2003).

2.2.2 Domestic Regulation

The last decade saw unprecedented changes in the global telecommunications industry.

Numerous state-owned telecommunications operators were privatized, and a wave of pro-

competitive and deregulatory telecommunications policies swept the world. New market-based

approaches of the supply of telecommunications services were introduced throughout the world

(ITU, 2006).

According to Intven and Tetrault (2000) the liberalization of telecommunications was motivated

by various factors including:

i. The need to attract private sector capital and FDI to expand and upgrade

telecommunications networks and introduce new services.

ii. Growth of the internet which led to the introduction of many new service providers.

iii. Growth of mobile and other wireless service providers, which also led to introduction of

new service providers.

iv. Developments of international trade in telecommunications services, which are

increasingly provided by transnational and global service providers.

Regulation intervention is required for a number of reasons. Typically, regulators must authorize

or license new operators. They must often remove barriers to market entry by new operators.

They must oversee interconnection of new entrants with incumbent operators and ensure that

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competitive markets do not fail to serve high cost areas or low-income subscribers (Intven and

Terault, 2000). However, the trend today is toward deregulation as some traditional forms of

telecommunications regulation are seen as more damaging to the development of national

telecommunications infrastructure and services. Hence governments and regulators must

generally ensure that there is a demonstrated need to regulate and that the most efficient measure

is selected to meet the specific regulatory objective without creating unnecessary conflicts with

international Trade rules –GATS (ITU, 2006).

Hence with regard to the Telecommunications sub-sector, especially in the case of developing

countries domestic regulation is an important factor in trade in telecommunication services

because the sub-sector is important for attracting FDI and subsequent creation of employment

and poverty reduction. Therefore if domestic regulation is prohibitive to new market entrants this

could hinder FDI inflows and encourage monopolistic behavior which in detrimental to

consumers and may impact negatively on and services affordability of services.

2.2.3 Implications of Telecommunications Liberalization

1. Growth of Telecommunications Sub sector

Following global liberalization of Telecommunications access to information and communication

technologies continues to grow at high speed and the digital divide – in terms of mobile

subscribers, fixed telephone lines and Internet users - keeps getting smaller. ITU statistics show

that by the end of 2004, the telecommunication industry had experienced continuous growth, as

well as rapid progress in policy and technology development, resulting in an increasingly

competitive and networked world. There are more ICT users worldwide and more people

communicating than at any other time in history (ITU, 2006).

Globally, access to telephone networks (fixed and mobile) tripled in the ten-year period 1993-

2002 from 11.6 subscribers per 100 inhabitants to 36.4. The most rapid growth occurred in the

use of mobile phones due to the evolution towards second-generation wireless systems,

liberalization of mobile telecommunication markets and introduction of prepaid cards. By the end

of 2002, there were more mobile cellular subscribers than fixed telephone lines in the world.

Growth has been particularly strong in Africa, the first region where mobile phones overtook

fixed lines and where almost all countries now have more mobile phones than fixed telephones.

Mobile phones seem to grow faster in countries where incomes are declining than where they are

growing. Although this seems counter-intuitive, it indicates the high and often inelastic demand

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for mobile communications. Developing countries now account for almost half of total telephone

subscribers in the world, up from just 19 per cent in 1990 (ITU, 2003).

By the end of 2004, the world counted a total of three billion telephone subscribers, 1.8 billion

mobile subscribers and 1.2 billion fixed lines. Both, the number of mobile subscribers and the

number of Internet users more than doubled in just four years. By end 2004, the world had over

840 million Internet users, which means that on average 13 percent of the world’s population was

online (ITU, 2006).

Until recently, opportunities for telecommunication services trade had been more limited than for equipment. Telecommunication service trade includes transactions that cross national borders, such as telephone calls or electronic mail sent from one country to another. It also covers foreign investment, such as the purchase of telephone companies by foreign investors or joint ventures between local and foreign partners to establish new telecommunication service companies (WTO, 2004).

In the last two decades, the improvement in communications technology has been explosive.

Fiber optics cables have replaced microwave circuits in long distance transmission; telephone-

switching systems are more sophisticated, allowing a wider variety of call transfer, message

storing, and control functions. Cellular and mobile telephony have expanded at accelerating rates

in recent years, and the development of Internet services has also been remarkable. Parallel to

these new developments, there has been a pattern of increasing competition in the provision of

valued-added services, long distance telecommunications, and, more recently, in local telephony

(Hudson 1997). The dynamism of global telecommunications markets is widely attributed to

rapid technological development and an increasingly liberal policy environment. Over the past

decade, a large number of world economies have also embarked on reform paths, and witnessed

significant expansion of their telecommunication networks and striking improvements in quality

(Gillwald, 2003).

2. Implications on Poverty

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Liberalization of telecommunications sub sector worldwide has led to improved access to

services especially in the rural areas where majority of poor people live. For many rural dwellers,

information transfer requires geographical proximity and access to means of communication.

Information on market price, access to credit and financing opportunities can make a significant

difference in providing income-generating activities for the poor (Kane, 2003). Universal access

obligations have also improved telecommunications access to the rural areas.

Mobile Technology has also led to expansion of communication access in the rural areas. In rural

Thailand, the introduction of mobile phones have helped farmers to regularly check prices and

access to markets for their produce hence significantly improving their opportunities for income

generation (Kenney, et al., 2001). Besides market information mobile technology significantly

improves access to other services in the rural areas such as medical and fire emergencies this has

specifically been observed to improve in Thailand and Bangkok (Ibid). Other income generating

activities provided by improvement of access to mobile technologies have included, the

community pay phones which are a source of income for thousands of micro entrepreneurs, this

has been a successful venture in Kenya through the “Simu ya Jamii” aka community phones

especially to the urban poor and the rural areas (Adeya, 2005).

On the other hand telecommunication liberalization had generally led to increase of foreign

investments and provision of employment for thousands of people employed in these firms.

Diffusion of technology and improvement of skills and training are also seen as major benefits of

liberalizing telecommunications services, as skills improvement improves capacity to obtain

higher cadre jobs subsequently leading to improvement of incomes (DAC, 2004).

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3.0 Telecommunications and Poverty in Kenya

3.1 Poverty Situation in Kenya

The poor are defined as those members of society who are unable to afford minimum human

basic needs, comprised of food and non-food items. From a wider perspective poverty

encompasses inadequacy of income and deprivation of basic needs and rights, and lack of access

to productive assets as well as access to social infrastructure and markets (Krieger, 2001).

Available statistics in Kenya shows that the level of poverty has been on the increase. It is

currently estimated that 56% of Kenyan population live below the poverty line, up from 48% in

1992 and 52% in 1997. The increase in poverty has resulted in decreased food security,

inadequate access to basic social amenities such as health and education, unemployment,

escalating insecurity, lawlessness and general economic decay (GoK, 2002b). Currently, it is

estimated that 56% of Kenyans are living below the poverty line.

According to the Poverty Reduction Strategy Paper (PRSP) for Kenya, the poor tend to be

clustered into certain social categories such as: the landless; people with disabilities; female

headed households; households headed with people without formal education; pastoralists in

drought prone districts; unskilled and semi-skilled casual laborers; AIDS orphans; street children

and beggars; unpaid family workers; large households; single mothers and fathers; subsistence

farmers; urban slum dwellers; and unemployed youth (GoK 2002b). An examination of these

social profiles indicates that gender, education and occupation are important proximate

determinants of poverty. Gender-related poverty varies by marital status, but women in general

are more likely to be poor than men. This is largely due to their lack of rights and control over

productive resources and their lack of legal protection. Low levels of asset ownership, poor

access to credit and the limiting social norms mean that women are highly concentrated in

agriculture. The majority of subsistence farmers are women (69%), and this is the livelihood

group whose members are most likely to be poor in Kenya (Omiti et al, 2002).

Poverty in Kenya has been associated with a number of factors. These, according to the PRSP,

include: lack of or slow economic growth; income inequality and unequal access to productive

resources; natural shocks such as drought, floods and fire; inadequate spread and access to basic

social services especially education and health; poor implementation of development

13

programmes; lack of effective social policies and mechanics; and diseases such as TB and

HIV/AIDS (GoK 2002b).

Poverty in Kenya is largely rural, with rural households being twice as likely as the urban

population to be poor or very poor. But urban poverty is increasing alarmingly in terms of both

incidence and severity. Aggregate figures broken down only into rural and urban categories

conceal the sharp regional disparities in poverty incidence that exist in Kenya. These are closely

associated with rainfall and agro-ecological potential, and poverty is higher in arid and semi-arid

parts the country.

Table 3: Poverty Trends in Kenya.

  Percentage of poor Percentage of extreme poorRural Areas 1992 1994 1997 1992 1994 1997Central 35.89 31.93 31.39 67.83 32.95 29.73Coast 43.50 55.63 62.10 63.00 50.95 59.46Eastern 42.16 57.75 58.56 62.31 59.50 56.82Nyanza 47.41 42.21 63.05 70.72 41.31 58.16Rift Valley 51.51 42.87 50.10 81.02 45.75 48.02Western 54.81 53.83 58.75 78.41 52.25 58.58North Eastern - 58.00 - - 56.55 -Total Rural 47.89 46.75 52.93 71.78 47.19 50.65

 Urban Areas  Nairobi 26.45 25.90 50.24 41.92 27.26 38.38Mombasa 39.17 33.14 38.32 44.84 33.12 38.57Kisumu - 47.75 63.73 - 44.09 53.39Nakuru - 30.01 40.58 - 37.18 26.81Other towns - 28.73 43.53 - 27.07 37.91Total Urban 29.29 28.95 49.20 42.58 29.23 38.29Total Kenya 44.78 40.25 52.32    

Source: Ministry of Finance and Planning,( 2000a). (Welfare Monitoring Surveys - 1992, 1994 and 1997.

The provinces with the highest incidence of poverty in 1997 were Nyanza (63%) and Coast

(62%). Central Province had the lowest incidence at 31% (Ministry of Finance and Planning,

2000a). Coast province has seen the most significant rise in poverty (44% in 1992, 56% in 1994

and 62% in 1997).

Poverty alleviation interventions have tended to focus exclusively on empowering disadvantaged

individuals through creation of employment, provision of opportunities for income generation

and through provision of services to improve lives of poor and disadvantaged groups. Access to

communications services has been seen as a major move in improving lives of poor

disadvantaged groups all over the world. Access to information is the heart of all human activity,

14

and as previously discussed, telecommunication services can help in poverty alleviation through

provision of information for markets, provision of income generating opportunities and provision

of employment. These issues will be discussed within the Kenyan context in a later sub section of

this study.

3.2 Background of Telecommunication Services in Kenya

Kenya's earliest telecommunications connections to the outside world were the submarine cables

linking Zanzibar, Mombasa, and Dar es Salaam laid by the Eastern & South African Telegraph

Company in 1888. Internally, the construction of a telegraph network began with a 200-mile

coastal line linking the port city of Mombasa with Lamu. Extension into the interior of the

country began in 1896 in conjunction with the building of the railway system, forming a dual

"backbone" for Kenya's communications infrastructure. The extension of the telegraph line even

overtook railway construction, reaching Nairobi in 1898 and Kampala and Entebbe in Uganda in

1900. Telephone service soon followed. In 1908, the public telephone network began service in

Nairobi, the capital, and in Mombasa. In Nairobi that year, 18 telephone subscribers were

connected (Tyler et al, 1994).

Kenya’s telecommunications sector has undergone tremendous transformation especially since

the 1990s. During pre-independence and the period when the East African Community (EAC)

had its first stint (1966-1977), telecommunication services in East Africa (Kenya, Uganda and

Tanzania) were delivered jointly. A regional public body, the East Africa Posts and

Telecommunications Corporation (EAP&TC), which was established in 1967, played a major

role in this service delivery. When the EAC collapsed in 1977, the Kenya Posts and

Telecommunications Corporation (KP&TC) was established to continue offering the same

services in Kenya. The corporation monopolized the sector and combined both regulatory and

operational responsibilities. It continued to deliver services on this basis, and with increasing

inefficiency and with little trade or value addition, until 1998 when considerable reforms were

introduced. Since then, the sector has been gradually liberalized with enormous impact

(UNCTAD, 2005).

15

3.2.1 Liberalization and Regulation of Telecommunication Services in Kenya

1. Policy, Legal and Regulatory Frameworks

The history of the legal framework for the Kenyan telecommunications sector started with the

East Africa Posts and Telecommunications Corporation (EAP&TC) Act of 1967, which

mandated a regional public body (EAP&TC) to deliver postal and telecommunication services in

East Africa. There was very limited trade in and value addition of telecommunications then. With

the breakup of the East African Community in 1977, the Kenya Posts and Telecommunications

Corporation (KP&TC) Act Cap 411 of 1977 was enacted so that a new corporation (KP&TC)

could continue offering the same services in Kenya. The services were thus delivered within a

monopolistic public sector structure, which combined regulatory and operational responsibilities

in the same institution (UCTAD 2005).

Kenya’s telecommunication sector has only recently begun the process of liberalization,

privatization and regulation. Reforms in the sector were introduced in a small way in 1990 when

the government relaxed the control of non-strategic functions in the telecommunication sector, in

particular the liberalization of vending of customer terminal equipment. In 1991, market access

and ownership requirements were relaxed, as was the liberalization of supply, installation and

maintenance of internal telephone wiring and customer premises. Then, in 1992 KP&TC

introduced cellular services (Kane, 2003).

In the year 1998 the Kenya communications Act split the former KP&TC into 3 bodies: The

Postal Corporation of Kenya; Telkom Kenya and the Communications Commission of Kenya

(CCK). Under the Act, CCK discharges functions in the area of licensing, price regulation, type

of approval equipment, interconnection between operators and fulfillment of universal obligations

for instance at the WTO level.

Telkom Kenya on the other hand took over all telecommunications functions of the former

KP&TC. Telkoms was given a monopoly till June 2004. It holds and operates licenses for local

telephone services, international gateway services, global mobile communication by satellite,

VSAT services, internet Node and Backbone services, Value added services, customer premises

equipment vending and internal & external wiring services. With regard to local telephone, long

distance and international telephone service and the country’s internet backbone, Telkom Kenya

16

was given monopoly until June 2004 (Kane, 2003). Up to date there is no second landline

operator and thus Telkom Kenya still enjoys the Monopoly.

Further reforms in the sub sector have led to the development of the ICT Policy, which entails

reviewing the policy framework for investment, competition and growth of the industry in order

to facilitate commercial decision-making. In addition, the draft policy encourages all investors to

participate in the provision of universal service/access; attract more private sector resources and

develop public/private sector partnerships; develop a sector with efficiency, credibility,

commercial integrity and good corporate governance; provide quality and sustainable service

with pluralism of choice to consumers; and keep abreast with and participate in ICTs both

regionally and internationally.

2. Privatization of Telkom Kenya

Another major policy reform was the decision to privatize Telkom Kenya through sale of 49% of

its equity to a strategic investor, who was expected to invest in the modernization of the network,

in 2003. However, the price offered by the highest bidder was so low that the government held

back. Deeper reforms have to be undertaken to rationalize the bloated work force; restructure the

company’s balance sheet to make it profitable; form a subsidiary to run the Internet business; and

roll out a fixed wireless service due to rampant vandalism of cables. The privatization of Telkom

Kenya was to be guided by the Privatization Bill of 2003, which has adequate safeguard

provisions to ensure orderly privatization of strategic parastatals. As indicated earlier,

privatization is among the best practices in the provision of telecommunications services, and it

should be addressed expeditiously (UNCTAD, 2005).

3. Competition

Competition is another best practice in telecommunications service provision. In 1991

telecommunications was de-monopolized when KPTC allowed private firms to sell

telecommunication equipment. It has been suggested that the impetus for de-monopolization was

due to the recognition by KPTC that they could not supply these goods. Two important

concomitant policies facilitated the entry of private firms into the telecommunications equipment

sector. One was the reduction in tariffs on equipment. The second was the relaxation of foreign

currency exchange regulations (CIDCM, 1999). Both these change were critical for the entry of

private actors. Since most telecommunications equipment is imported.

17

The Kenyan government has however fallen behind schedule on a number of commitments

intended to liberalize the telecommunications sector further, these include licensing of a second

national fixed telephony operator by the end of fiscal year 2004/2005 and a third mobile operator

by December 2003. In addition, the four Internet gateway service providers that were to be

licensed during the same period and the VSAT services that were to be completely liberalized

were not (CCK, 2006). CCK has, however, tendered a SNO and retains the right to issue more

licenses and/or regulate price and other conditions for fixed telephony services until competition

in the sub-sector is adequate.

Liberalization of the international Internet highway has already facilitated licensing of additional

service providers. By February 2005, four more companies (Kenya Data Network, Jamii

Telcoms, Harum International and Alldean Satellite Networks) had been licensed for provision of

Internet backbone and VSAT services (UNCTAD, 2005). Further, as reported in the Business

Week magazine of Daily Nation of 1st February 2005, there is a concerted effort in “…Making

Universal Telecommunications Access a reality” with regard to availability and accessibility

either through Multilateral Corporations, Small and Micro Enterprises, and Government in under-

serviced areas.

These developments are expected to introduce competition in the local bandwidth market and

create opportunities for cheaper connectivity, which is essential for rapid development of

electronic commerce and other data communications. Additional competition in the

telecommunication sector will be created through further commitments within the GATS

multilateral trade framework (UNCTAD, 2005).

3.3 Implications of Liberalizing Telecommunication Services on Poverty in Kenya

3.3.1. Expansion and growth of the sub sector servicesDue to liberalization of the sub-sector, Kenya’s telecommunication services have experienced

tremendous growth over the past few years. The development of the telecommunications sector,

since around year 2000, has been marked by a dramatic increase in the subscriber base of the

mobile services and a stagnation of the subscriber base of fixed line services (Fig. 1).

The mobile network is now over ten times that of the fixed network. This can be explained by the

large capital investment, estimated at US$500 million, undertaken by the two mobile services

providers in the country.

18

Figure 1: Comparative growth of fixed and mobile telephony networks in Kenya, 1999-2004

Source: UNCTAD (2005).

Furthermore, the country has experienced tremendous growth in local investments in the sub

sector as is evidenced by the number of licensed operators (Table 4). By 2001, for instance, CCK

and Telkom Kenya records show that there were 235 registered equipment companies, 72 ISPs,

1000 Cybercafes, and a sizeable number of professionals providing consultancy and support

services. By 2004, moreover, many more operators had been licensed in different market

segments. The liberalization of the sub sector has led to major investments in the mobile phone

service providers. Safaricom is owned by Telkom Kenya (60 percent) and Vodafone UK (40

percent) while Celtel is owned by local Sameer Investments Group and Vivendi International.

These two companies have in turn provided employment direct employment to about 2000 people

and indirectly to millions of Kenyans.

Liberalization of the sector since 1997 has seen over 12 foreign firms authorized to invest in the

telecommunications and ICT related areas. 2 firms have been authorized to invest in computer

related services, 5 firms authorized to provide telecommunication services, 2 firms to supply

telecommunications equipment and the rest in the sale of mobile phones and accessories.

Table 4: Licensed telecommunications operators in Kenya.

19

Type of Operator/Service Licensed OperatorsFixed line operators Telkom Kenya Limited, a national operator

Bell Western Limited, a regional operatorMobile operators Safaricom Limited

Kencell Communications Limited Licensing of 3rd mobile operator not yet completed

Internet backbone operators Telkom Kenya Limited 10 were gazetted on September 3, 2004, for

licensing Public data network operators 6 operators, including Telkom Kenya LimitedInternet service providers (ISPs) 78 licensed, but less than half are operational Internet exchange point providers 2Local loop operators 4 licensed

2 were gazetted on September 3, 2004, for licensingGMPCS service providers 1 was gazetted on September 3, 2004, for licensingVAS-premium service providers 17

1 were gazetted on September 3, 2004, for licensingNational commercial VSAT operators Telkom Kenya Limited

Alidean Satellite Network (Kenya) Limited. 2 were gazetted on September 3, 2004, for licensing

Postal operators Postal Corporation of Kenya (PCK)Private courier operators 74Broadcasting 12 TV broadcastersSource: CCK, 2006

Fixed Telephony Services

Telkom Kenya is still the only provider of fixed telephony services in the country to date,

although the 5-year exclusivity period granted to the company ended in June 2004 and a second

national operator (SNO) has been tendered. Not surprising therefore, there has been very poor

growth in fixed line connectivity and access despite liberalization this is mainly due to monopoly

of the service provider (UNCTAD, 2005). Thus, the number of subscribers to the fixed telephony

network grew from 291,706 in June 1999 to 328,356 in June 2003, but this had dropped to

290,000 by June 2004 (Table 5). By June 2004, the number of fixed telephony subscribers

amounted to only about 48% of the target set by CCK. The demand for fixed telephone lines

remains high, however, with the number of people on the waiting list standing at 116,544 in 1999

and 107,266 in June 2004. The most outstanding achievement in the area of fixed telephony since

the early 1980s has been the expansion of public telephone service, with the number of public

telephone booths increasing from 588 in 1981 to about 10,000 in 2004 (Economic surveys-

various).

Table 5: Telkom Kenya Subscriber Targets/Performance, 1999-2004

20

Year June 1999 June 2000 June 2001 June 2002 June 2003 June 2004

License Target 291,706 316,706 376,706 451,706 526,706 601,706

Total Subscribers 291,706 309,379 321,482 328,104 328,356 290,000

Source: Telkom Kenya, 2006

Expansion of fixed telephone services has also been remarkable especially in the rural areas

where accessibility has improved. Comparing tele-density per province vis à vis the poverty

situations in each region, it is evident that the provinces with the highest poverty have the lowest

tele-density, (Table 6). Coast, Nyanza, North Eastern, and Western have the highest poverty rates

and the lowest tele-density, the value is higher for Coast province because of Mombasa town

which is considered an urban area hence it has more line connections. North Eastern province has

the lowest number of line connections; this could be in part due to poor infrastructure in the

region. It is hence noticeable that main line connections have not been able to adequately serve

the poor in rural Kenya.

Table 6: Tele-density Vs Poverty rates per Province in Kenya

Province Line Connections Tele-density Poverty rates (%)2

Nairobi 168,823 5.73 50.24

Coast 36,858 1.22 62.10

Eastern 14,016 0.27 57.56

North Eastern 2,556 0.22 63.09

Central 19,738 0.47 29.73

Rift Valley 34,124 0.39 50.10

Western 5,031 0.13 58.75

Nyanza 11,914 0.24 63.05

National 293,064 0.86 56.00

Source: TKL (2006) Welfare Monitoring Survey (1997)

2 Poverty rates are given as per the 1997 Welfare Monitoring Survey.

21

Cellular Telephony Services

The Kenya Posts and Telecommunications Corporation (KP&TC) introduced cellular or mobile

telephone services into the country in 1992, through the analogue system known as the Extended

Total Access Communication System (ETACS) that was commercially launched in 1993. At this

time, the services were so expensive that it was only a few rich people who could afford them.

The cost of owning a mobile handset was as high as Kshs 250,000. Not surprisingly, therefore,

only 20,000 lines were developed over the 1993-1999 period. With the restructuring of the sector

in 1998-1999 that allowed competition and private sector participation in the sub-sector, thus the

mobile services sector is now a duopoly with two service providers - Safaricom and Celtel. The

two companies were licensed in 1999, the new ICT policy aims to obligate service providers to

universal service (CCK, 2006).

Both Safaricom and Celtel Kenya have realized tremendous growth in subscriber rollout over the

last five years (Figure 1), which saw their combined subscriber base reach about 3.4 million by

December 2004 and according to the Economic Survey of 2006 last year subscribers mobile

service subscribers are now 5.6 million up from the previous year’s 4.3 million registering a

growth rate of 56.1 percent.

Internet Services

An NGO, the African Regional Center for Computing, and a small private company, Africa

Online, introduced Internet services in Kenya in 1993. Africa Online has since grown into one of

the largest corporate entities in Sub-Saharan Africa. The business environment for non-public

sector providers was very hostile then. The size of the Internet services market in the country,

which amounted to only 250,000 users a few years ago, had grown to 500,000 by 2001 and 1.3

million by December 2003 currently it is estimated to be over 2 million users (ITC, 2006).

Despite increasing liberalization, ISPs still face considerable problems including high tariffs and

poor service reliability, as they are dependent on Telkom Kenya for the Internet backbone

services. Not surprisingly, therefore, less than half of the 78 ISPs that had been licensed in 2004

are operational. Besides the ISPs, there are over 1000 Cyber cafés countrywide providing Internet

services to many people, at increasingly affordable rates, in both rural and urban areas. This has

been facilitated by the Post Office Protocols (POPs) established by JAMBONET in several parts

of the county. JAMBONET has also pioneered provision of Free net service connections to

people with PCs and modems, the major beneficiaries being households and SMEs required to

pay only for phone time. However, CCK discontinued this service in 2004 when ISPs complained

22

that JAMBONET, the only supplier of Internet backbone services at the time, was giving them

unfair competition in retail Internet services (CCK, 2005).

The scope of Internet connectivity may be constrained by inadequate infrastructure and the lags

involved in setting up of fixed line infrastructure. Similarly, connectivity within the region is poor

because of lack of high capacity optic fiber on the East African Coast.

Satellite Communications

Satellite communication technology has been in use in East Africa for international gateway

links. This is likely to increase with domestic link Very Small Aperture Terminals (VSAT)

stations, as the technologies offer quick and cost effective solutions for establishing links to and

from remote areas where the provision of terrestrial infrastructure would be cumbersome, costly

and time consuming. In the case of Kenya, VSAT facilities have been employed to establish

external gateways even in urban areas because of the poor quality of services provided by Telkom

and JamboNet. However, the licensing procedures have been very restrictive, requiring approval

of CCK in consultation with Telkom/JamboNet (UNCTAD, 2005).

The majority of those benefiting from VSAT connectivity have been commercial entities and

embassies transacting businesses internationally. Several applications for authority to offer direct

connection via VSAT have not been approved yet. Indeed, while a liberal and pro-competitive

stance has been taken with respect to Internet and other telecommunication services, independent

international gateway operators are permitted on a case-by-case basis (UNCTAD, 2005).

Data Services

Data service connectivity has also improved markedly and is forecasted to expand considerably in

the next few years (Table 7). High-speed digital data circuit’s service, KENSTREAM, was

launched in 1996, while other data communication services operated by KENSAT and

SAFARISAT have also been launched.

23

Table 7: Data service connections in Kenya, 2000/01–2007/08

Actual Forecast

2000/1 2001/2 2002/3 2003/4 2004/5 2005/

6

2006/

7

2007/

8

Kenpac 525 530 540 550 570 580 600 620

Analogue circuits 2147 2600 3100 3800 4600 5600 6900 8400

Kenstream 454 660 990 1400 2000 2800 4000 6000

Telex 651 650 650 650 650 650 650 650

JamboNet & I-Xpress 30 50 70 90 120 150 200 280

Source: Draft 9th National Development Plan.

3.3.2 Access to Services and Information.

Accessibility seeks to measure physical access to services; the urban areas have access to all

types of services with highest rates of penetration. Infrastructure, connectivity and access in

Kenya, as measured by the fixed telephone exchange capacity and the number of connections;

tele-density; the numbers of Internet hosts and users, and personal computers (PCs); and the

number of cellular telephony providers, have improved significantly over the years in response to

the changing policy and regulatory environment (Tables 8 a and b).

Table 8a: Telephone exchange capacity in Kenya, 1990-2004

1990 1992 1994 1996 1998 2000 2002 2004

Exchange capacity, thousands 228 324 346 380 390 405 466 627

Exchange connections, thousands 175 205 222 256 272 301 373 502

Tele-density (Fixed telephone

lines per 100 people)

0.738 0.813 0.828 0.905 0.912 0.997 1.17 1.49

Source: GoK Economic surveys, Various

Table 8b: Trend of Connectivity and Access in Kenya, 1995-2004

Connectivity measure 1995 1998 1999 2000 2001 2002 2003 2004Internet hosts per 10,000 people 0.0 0.2 0.2 0.3 0.93 0.83Internet users @ 1000 people … … …. 19.87 16.83 22.96 32.60 46.61PCs per 1,000 people 0.6 3.4 4.2 1.71 2.55 6.95 7.95 9.84Telephone main lines per 1,000 people

8.4 9.9 9.9 10.24 10.4 10.32 10.04 8.63

Cellular service providers 0 0 1 2 2 2 2 2Source: UNCTAD, 2006

24

Tele-density stands at about 0.16 fixed lines per 100 people in the rural areas and about 4 lines

per 100 people in the urban areas (Table 8b). The national telephone penetration factor, that is the

percentage of households/offices with a telephone, stands at about 4.2% but varies widely from

0.1% in the very remote districts to 27.7% in Nairobi. However, most of the telephones in the

urban areas are located in offices rather than in households (UNCTAD, 2006). Thus, in spite of

the adoption of Universal Access/Service policies and explosion of telephony services occasioned

by the advent of liberalization, privatization and introduction of the mobile/cellular services, the

rural sector coverage still remains deficient.

Recent developments in improving telecommunications infrastructure have seen Telkom Kenya

introduce a fiber optics cable running from Nairobi to Mombasa. The program is worth US$ 200

million (Kshs. 14.7 Billion) and scheduled to run from Mombasa to Nairobi covering 500

kilometres and Nairobi to the northern corridor. This program is to ensure expansion of Internet

bandwidth, teledensity and implement rural telecommunications program covering all districts

(Daily Nation, June 12th 2006). The long distance optic cable has capacity of STM 16 operating at

2.5 gigabytes per second, this will see an improvement of efficiency reliability and speed of both

voice and data services.

3.3.3 Cost and Affordability

1. Telephony

The increase in mobile telephony services in the country has been accompanied by a decline in

the cost of connection and handsets. The connection fees for Celtel, for example, have declined

by 44%, from Kshs 1,490 to 990 currently. The price of calls has remained more or less constant

(Table 9), however, partly because of introduction of an excise tax of 10 percent on airtime in

2002, the cost of local fixed telephony services has gone up significantly while those of distance

calls have fallen. The cost of international calls dropped much more especially due to the

introduction of VoiP. Thus, depending on the destination of the calls, data from Telkom Kenya

shows that prices fell by 55-73% from $ 2.00-3.30 per minute in 2000 to 0.90 in 2005.

25

Table 9: Telephone Call Charges in Kenya (Kshs per minute peak hours), 2002-2005

Year Local Calls Distance Calls 60-230Km, TKL

Distance Calls >230 Km, TKL

Calls to Mobile, TKL

Calls to East Africa, TKL

TKL Safaricom Celtel

2002 5.60 28.50 28.20 20.00 25.00 27.00 44.002003 6.50 28.50 28.20 17.80 22.30 27.00 39.002004 7.40 28.50 28.20 17.40 17.40 27.00 46.002005 8.00 27.00 28.50 12.00 12.00 27.00 40.00Source: Telkom Kenya and CCK, 2006

Affordability of fixed telephony services in Kenya has, moreover, improved from 12.1% in 2000

to 7.6% by 2003 due to increasing competition (UNCTAD, 2005).

Close to 80% of telephony use among Kenyans is now mobile, and less than 10% is fixed

telephony (Fig. 2). On average, moreover, Kenyans spend Kshs 600 per month on mobile

telephony compared with only 110 on fixed telephony, 419 on email, 362 on Internet, and 55 on

post mail (CCK/IDRC, 2004).

Fig. 2: Means of communication used by Kenyans

Source: CCK/IDRC (2004).

2. Internet Services

The tariffs for Internet connectivity, even the backbone services that have so far been supplied by

Telkom Kenya alone, have also fallen drastically following reforms which subsequently led to

competition thereby improving affordability. The international connectivity charges have not

changed much in the last five years, however, because of Telkom Kenya monopoly. This

situation is likely to change, with considerable benefits to consumers in the form of reduced cost

and improved quality, should there be a second service supplier.

26

The rapid growth in the number of ISPs has improved the quality of service and reduced its cost

tremendously. While the cost of Internet services was as high as Kshs 5.00-10.00 per minute in

1998/2000, for instance, this has fallen to Kshs 0.50-1.00 currently, which has improved access to

many low income earners.

3.3.4 Employment and Wages in the Sub sector

The Liberalization of the sub sector and subsequent entry of new players in the market have led to

major benefits in terms of employment. Records of the two mobile companies (Safaricom and

Celtel) show that they have directly created a little over 1000 new jobs. The figures for indirect

employment are difficult to calculate but are evidently substantial. These jobs are in dealership

distributions and agency business; the many outlets that retail telecommunication products and

services like telephone handsets and related accessories, and airtime; support services; computer

assembly; and repair/maintenance services for hardware and software.

The overall net employment impact of reforms in the telecommunications sector is not easy to

judge, however, as Telkom Kenya is expected to retrench 11,000-14,000 employees. It is almost

certain that the net impact will be positive, however, as the potential for more jobs in the sector is

greater especially with opportunities arising for participation of micro-entrepreneurs.

Participation of Micro and Small Enterprises and the Community Phones3 program

The participation of small and medium enterprises (SMEs) in the non-Telkom exclusive services

increased substantially after liberalization. This has specifically occurred in the area of cyber

cafes and Community phones. It is estimated that there are over 1000 cyber cafes in Kenya today

all run by Small and Medium Entrepreneurs; this provides both incomes and employment for a

considerably large number of Kenyans working in these cafes. There are also a number of other

traders engaging in sale of mobile phone handsets, mobile phone accessories and airtime who

have gained meaningful employment and incomes through liberalization and subsequent growth

of the telecommunications sub-sector.

On the other hand the community-based mobile telecommunication services are provided by both

Celtel and Safaricom Service providers locally known as “Simu yetu” and “Simu ya Jamii”.

These initiatives have provided easy access to cheap and affordable communication to the lower

income bracket who do not own mobile phones. Furthermore, the initiatives have provided 3 The Community Phone is locally known as “Simu ya Jamii” and “Simu Yetu”

27

incomes to many poor Micro-entrepreneurs who have benefited from programs such as K-Rep’s

and Safaricom’s “Micro-lend” initiative targeting credit to Micro entrepreneurs who wish to

operate community phones. Estimates from the Nairobi City Council indicate that there are about

10,000 such operators in the city alone. Others are also spread in the rural areas and other towns

such as Kisumu, Mombasa and Nakuru.

Community phones have also helped to achieve some of the universal access goals through

improved accessibility of communication and information services in rural areas that do not have

infrastructure to support expansion of fixed line telephony. Cases have also emerged where the

disabled who would otherwise be destitute have benefited from specially designed community

mobile phones through a pilot project entitled “Community Telephone Business for paraplegics

for the Kenyan Paraplegic Organization (KPO) sponsored by the Safaricom foundation.

3.4 Telecommunications and Trade in Kenya

3.4.1 Trade in Telecommunications Equipment and Services

Growth of the telecommunications sub-sector has created demand for telecommunications

infrastructure, machinery and mobile handsets. This has led to increased imports especially of

mobile phone handsets and related accessories especially from countries such as Dubai, Finland,

UK and China, though the value is not documented, this has led to increased trade in the sub-

sector. Kenya is therefore a net importer of telecommunications equipment, apparatus and

accessories. In 2002, for instance, the country’s imports of these equipments was valued at Kshs

9.63 billion as compared to exports valued at only Kshs 27 million (KRA, 2003). The main

imports were:

Automatic data processing machines (Kshs 2.89 billion);

Assembled or partly assembled mobile phones (Kshs 1.87 billion);

Digital line apparatus (Kshs 1.73 billion); and

Parts and accessories for use in telecommunication and sound reproducing apparatus

(Kshs 0.90 billion).

In the case of telecommunication services, Kenya’s exports are very small. In 2000, for example,

the country exported communication services worth US $ 22 million or 2.2% of the total services

exports that year. The main reason for that are the many years under which the sector was

constrained by restrictive regulatory environment. This environment hampered the sector’s ability

28

to develop its export potential. Even though recent episodes of liberalization and privatization

have made significant improvement in telecommunications capacity, there is still weak domestic

supply capacity especially due to underdeveloped basic infrastructure. Lack of an optic fiber

network infrastructure in the East African coast also continues to hamper the Kenya’s ability to

exploit its export potential (UNCTAD, 2006).

3.4.2 Telecommunications as vehicle for Trade in Kenya

On the other hand improved Telecommunications services have also led to increased information

access for traders-both Importers and exporters of goods. The internet has also allowed some

firms to market their products and even buy and sell through the internet, such has been seen in

the textile industries operating in the EPZ who are listed on the internet and have their products

listed for potential buyers to contact them. Other initiatives involve programs that help farmers in

getting information for markets and prices of produce illustrated in Box 1. Telecommunications

has therefore proved as a vital tool for traders and producers to access vital information, which

has subsequently led to increased trade, this is specifically important for Micro and small

enterprises and poor farmers.

29

Box 1: Programs to Access to Market Information through Telecommunications and ICTs

in Kenya

A notable project on the relationship between wireless technologies and agriculture is DrumNet,

the Pride Africa project. It offers support services to smallholder farmers who too often operate

their businesses without access to information, financial services or markets. Launched in 2002,

the project has been designed to bridge this gap through ICTs, efficient business processes and

economies of scale. For a small fee, DrumNet provides marketing and financial services for

agricultural entrepreneurs. The pilot phase is currently operating in Kirinyaga and Nairobi in

Kenya, but it is envisaged that DrumNet will grow to become a broad network of information

access points for agricultural producers throughout East Africa. DrumNet's information access

points or 'info-kiosks' are equipped with a computer with a dial-up connection to the Internet and

a mobile phone (GSM) to link up with the central hub in Nairobi. This acts as the main

server/database for storage and retrieval of information. Each is managed by an info-broker

preferably from the local area. The individual info-kiosks have been designed to keep start-up and

operating costs low and allow the info-brokers to reach rural areas typically untouched by such

services.

A similar initiative to that of DrumNet is run by the Kenya Agricultural Commodity Exchange

(KACE), which links sellers and buyers of agricultural commodities. KACE launched an SMS-

based information service, SokoniSMS21, for farmers to receive market prices from markets in

Kenya. This has enabled the farmers to bypass the middlemen who usually buy their products at

very low prices. KACE has several market information points around the country from which

they send price information to its headquarters in Nairobi. On its part, the team at the KACE

headquarters uses a simple application that offers a web-based interface to update market prices

onto the servers at the mobile phone network operated by Safaricom. The farmers are

automatically charged Ksh. 7 (US$ 0.09) for each message delivered to their phones, but surfing

the menu is free.

Source: Adeya, 2005

3.4.3 Kenya Commitments in Telecommunication services under GATS

According to Kenya’s Schedule of Commitments under the GATS framework, Kenya has since

1998 made commitments in all five areas of telecommunication services:

Fixed telephony;

Mobile telephony;

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Value added services;

Internet; and

Audiovisual services.

The specific services committed include telecommunication services except video and audio

broadcast, voice telephony services, facsimile services, packet swift data transmission services,

telegraph services, electronic mail, and electronic data interchange.

With these commitments, however, there are limitations especially on market access. These

limitations include foreign equity limits; public monopoly over basic telecommunications (often

for specified periods); prohibition of international call back services; movement of natural

persons is unbound except for managers and other expert staff; commercial presence in

audiovisual services, motion picture and videotape production (except distribution services) is

unbound; and cross-border trade for motion picture projection is unbound (WTO, 2006).

The country has implemented all the tenets of the telecommunication reference paper to

varying degrees as dictated by its capacity and competence. First, immediately KP&TC was

restructured in 1999, CCK was established as the independent regulator. It has since performed

its services impartially in spite of TKL’s dominance and monopoly status in fixed line telephony

and Internet backbone service.

In addition, CCK has published on its website the licensing criteria, terms and conditions of

accessing services including reasons for denial, transparency in interconnection arrangements and

modalities of dispute settlement. In the licensing of operators in both mobile and fixed line

telephony services, Kenya obligates them to universal service access, an objective that is

enhanced further in the ICT Policy Paper of 2006.

The bold policy reforms embraced in the Kenyan telecommunications sector since 1998/99

largely coincided with the country’s commitments in telecommunications under the GATS

framework. These reforms have brought considerable benefits to the economy by way of

improved service availability, accessibility, affordability and efficiency as earlier discussed.

Requests for further commitments

Besides the commitments Kenya has already made within GATS, the country has received a

number of requests for further commitments on market access and clarifications. The requests

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were received as part of the ongoing GATS 2000 negotiations that are yet to be concluded. The

US, EC and Norway have made requests for commitments in communication express delivery;

commitments that reflect market opening in audio-visual; explanation and/or removal of

restrictions on international callbacks, Telkom monopoly, satellite based services, mobile

services, and the limitation of foreign equity participation to a maximum of 30%; and full

commitments in basic telecommunications and value added services.

The deepening of liberalization in the telecommunication sector undertaken in September 2004.

In order to attract foreign investment and technology into the country’s telecommunication

services, there is need to deepen reforms by making further commitments within GATS

particularly for those services that Kenya does not have adequate and sufficient capacity to

undertake. These include basic telecommunications and satellite based services. For most of the

value added services, however, the country has or could quickly build supply capacity. Requests

for further commitments on these should therefore be considered case by case against the existing

or potential local supply capacity.

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4.0 Stakeholder Perceptions on Liberalization and its Effects

Major stakeholders interviewed included the Communications Commission of Kenya (CCK)

which is the National Regulatory Agency; major Service providers; Telkom Kenya, Safaricom

and Celtel. Other stakeholders included major Internet service providers (2), cyber cafes (3)

community mobile phones (3) and consumers of the services (9) drawn from lower middle and

upper income brackets.

The level of awareness of sub-sector reforms and further liberalization was quite high. All

respondents were aware of liberalization and reforms that took place in the telecommunications

sub sector especially liberalization of mobile services, liberalization of Internet services and

VoiP; establishment of a national regulating Agency (CCK) and privatization of Telkom Kenya.

However stakeholders were not consulted before liberalization and thus there are no safety nets

and complimentary policies set up for stakeholders to cope with effects of liberalization. For

instance Telkom Kenya as a result of liberalization and privatization had to restructure and

rationalize their number of employees through retrenchment, this saw roughly 11,000 employees

retrenched since this process began in 1999. Telkom Kenya has also lost revenue which has led to

reduced profitability since the liberalization of the mobile sub-sector, furthermore the demand for

fixed lines has also reduced.

Stakeholders felt that accessibility to services had improved tremendously especially with the

introduction of mobile phones; all respondents felt that the effect was positive with 60 percent

feeling that is was very positive. All firms interviewed except for Telkom Kenya had experienced

increased profitability as a result of liberalizing the sub-sector; 60 percent of respondents had

thought that liberalization had very positively impacted on their profitability, this was mainly

observed in the ISP providers and the Community phone operators. In terms of employment

creation 54.5 percent felt that liberalization had positively impacted on employment creation and

45.5 percent felt that the effect was very positive. Safaricom alone has created direct employment

to about 1000 Kenyans and indirectly to over 20,000 people through their retailer outlets and

community phones, this has a direct impact on poverty since community phones are mostly

operated by micro-entrepreneurs, majority of whom are poor.

Liberalization of the sector has led to increased investments especially foreign direct

Investments. Vodafone UK had to pay US $ 55 Million in order to obtain their license and made

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further investments in telecommunications infrastructure of high value. Further local investors

have also benefited in terms of rising investment opportunities in the cyber cafes, community

phones and provision of related services including trade in mobile handsets and computer related

accessories. Diffusion of skills and Technology within the sub-sector has also improved since

liberalization; this has been mainly in the area of computer technology, online courses and

telecommunications operations. Most firms therefore responded to effects of liberalization

through training of their employees to improve skills.

With regard to cost and affordability of services, at least seven out of 16 respondents felt that

that costs were very high, while another 9 felt that the costs were just high. Only two respondents

felt that telecommunication services were affordable. Consumers felt that the cost of mobile

airtime was too high even though the cost of acquiring a mobile hand set and a Sim card had gone

very low; this is in part due to 10 percent excise duty on airtime and 16 percent value added tax,

which makes 26 percent of airtime costs going to tax.

Constraints faced by players in the industry included high operating costs- electricity and fuel;

and poor infrastructure (both road and telecommunication infrastructure) impeding access to rural

areas. Unreliability and poor quality service was also cited as a major constraint especially in

Internet services, slow speed and constant interruptions related to network problems. Access to

services in rural areas is also a major concern among stakeholders. Telkom Kenya monopoly was

cited as one of the reasons for poor provision of landline services. Delay in service provision,

congestion of network inflated bills and delays in resolving billing questions were cited as some

of the major reasons for consumers’ preference of mobile services.

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Among key reforms that stakeholders would wish to be undertaken to improve the sub-sector are:

Introduction of a Second national Operator to provide landline services; improve access to

services in the rural areas; reduce costs of mobile phone communications, reduce taxes on airtime

and licensing of a third mobile operator. The fiber optic cable linking the mainland to the coast

areas was also seen as a major breakthrough that will result in reduce costs in provision of

internet relates services and reduce network problems associated with satellite communications.

Major service providers called on the government to improve infrastructure in order for them to

penetrate the rural areas and reduce their operating costs. Among other issues raised included,

speeding up of unified licenses to increase penetration and reduce costs of communication; and

implementation of the 2006 ICT policy.

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5.0 Conclusions and Policy Implications

Trade liberalization in Telecommunications sub-sector worldwide was initially done through the

ITU, however since the introduction of the WTO, further liberalization was done through the

Agreement on Basic Telecommunications (ABT) which calls for progressive liberalization of the

sector while encouraging competition, privatization, transparency formation of national

regulating agency and universal access obligations. Kenya has gone through a series of reforms in

the telecommunications sub-sector since the year 1997. What used to be a monopolistic public

sector driven service has been gradually transformed into a competitive and growth oriented

sector driven by private sector and foreign capital, this was mainly done through the splitting of

the once monopolized KP&TC into the Postal corporations, Telkom Kenya and creating of a

regulating agency – the Communications Commission of Kenya which has ensured competition

and fair play within the sub-sector. The introduction of the ICT policy if well implemented will

lead to further reforms in the Kenyan telecommunication service industry which will obligate

major suppliers with universal access, this will enhance further service provision in the rural areas

where the poor are mostly concentrated.

Liberalization of the sub-sector has had major implications on access to services, which has

improved especially with the introduction of Mobile telephony; rural areas and urban poor areas

which have no infrastructure for penetration of landline services can now access communication

services. Costs and affordability of services still remains a major challenge especially for the

poor. On the other hand, the liberalization of the sub-sector has led to employment generation

both directly and indirectly. Even though Telkom Kenya had to restructure and retrench most of

its staff, Safaricom and Celtel have both provided employment directly to about 2000 people and

indirectly to another 2 million Kenyans though community phones, sale of accessories, internet

and cyber cafes and ISPs. This has and will continue to impact positively on poverty. Though this

may be the case the real impact of liberalizing the telecommunications sub-sector still needs to be

quantified most probably through a larger study.

Kenya has fulfilled its obligations under the WTO, through competition privatization and

domestic regulation through establishment of CCK, this has led to attraction of foreign

investment. Kenya’s commitments under GATS also reflect that Kenya is actively taking part in

trade in telecommunication services, however requests for further commitments on market

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access-foreign equity limits and public monopoly clarifications are needed so as to enhance

foreign investments and increase competition.

From the foregoing; much progress has been made in terms of liberalizing the

telecommunications sub-sector including the enactment of ICT policy of 2006, which provides a

framework for further liberalization, and regulation of the sub-sector including universal access

obligations. What remains to be seen is the implementation of the policy to ensure tangible

benefits to the poor.

Key stakeholders in the sub-sector also view costs of communication as a major constraint, thus

efforts should be made into unified licensing which will reduce costs, and reduction of tax on

airtime should be made a major priority in order to increase economic access of services to the

poor. Licensing of the SNO should be speeded up because as it is Telkom Kenya cannot cope

with demand for landline and rural area coverage due associated costs. Infrastructure

improvement and costs of electricity and fuel should be reduced in order to reduce operating costs

of major service suppliers especially in the rural areas and ensure ease of penetration into these

areas.In order to make more specific policy implications, a study should be done in order to

establish the real economic impact of liberalizing the sub-sector and its effects on poverty.

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