TH E I M PACT OF COM PETI TI ON I N TH E M OBI LE VOI CE M ARKET ON TELECOM M UNI CATI ONS SECTOR AND M ACRO ECONOM Y I N KENYA Presented to Communications Commission of Kenya (CCK) By Prof Kieyah JD., PhD Kenya I nstitute for Public Policy Research and Analysis November 19, 2012
Overview • Terms of Reference • Interpretation of TOR • Economic of Competition policy • Role of MTR • Effect of Competition on Tax Revenue • Effect of competition on Profits • Effect of competition on Macroeconomy • Effect of competition on Safaricom Stock • Proposed Retail price floor
Objectives of the Study • Evaluate the impacts of competition in the mobile voice telephony market on exchequer revenues and recommend appropriate fiscal remedies to address volatility in tax revenues; • Evaluate the impact of competition in the mobile voice market on profitability and financial performance of the sector; • Evaluate the effects of competition for telecommunications services on Government Macro Economic agenda such as investments, employment creation, inflation, business process outsourcing, access and affordability of telecommunication service; • Using accurate data and plausible modeling approach, isolate the effects of the ongoing competition in the mobile voice market on the performance of Safaricom Stock in the Nairobi Stock exchange and any threats to the stability of the stock market; and • Based on sound micro economic judgment and best practices from progressive telecommunications jurisdictions, evaluate the economic soundness of introducing retail price floor for mobile voice services pegged at 50% above the prevailing wholesale prices.
Interpretation of TORs • Objective 1 ▫ Effect of competition on exchequer revenue ▫ Effect of competition on tax instability • Objective 2 ▫ Effect of competition on profitability • Objective 3 ▫ Effect of Competition on Macroeconomy AD = C + I + G + (X-M) • Objective 4 ▫ Competition effect on Safaricom stock price ▫ Effect of Safaricom on NSE • Objective 5 ▫ Economics of price floor
Economics of Competition Price • Policy goal ▫ Promote and protection effective Supply competition to enhance Welfare of Kenya Economic Efficiency highest output at lowest price • Firm Problem ▫ Max profit P E • Competitive market ▫ Assumption Firm as price takes No information asymmetry ▫ Innovation Demand ▫ Reduction of production cost 0 Q E Quantity
Role of MTR 0.80 12.0 • Comparative analysis 0.70 • Role MTR 10.0 Interconnection rate (KES) ▫ Firm problem 0.60 8.0 Limit access 0.50 • Solution HH I 0.40 6.0 ▫ Regulate access price 0.30 4.0 ▫ Internalize positive 0.20 externalities 2.0 0.10 • Analogous problem ▫ Mandatory vaccination 0.00 0.0 Q4-June11 Q1-Sep11 Q2-Dec11 Q3-Mar07 Q4-June07 Q1-Sep07 Q2- Dec07 Q3-Mar11 Q4-June12 Q1-Sep06 Q2-Dec06 Q3-Mar08 Q4-June08 Q1-Sep08 Q2-Dec08 Q3-Mar09 Q4-June09 Q1-Sep09 Q2-Dec09 Q3-Mar10 Q4-June10 Q1-Sep10 Q2-Dec10 Q3-Mar12 ▫ Creation of easement to public facilities HHI Interconnection rate
Competition effect on Tax Revenue • Issue ▫ Competition on Tax Revenue • Methodology ▫ Trend Analysis HHI v Total Tax revenue HHI v forms of taxes Revenue • Findings HHI ↓ v Total Tax revenue ↑ HHI ↓ v forms of taxes Revenue • Interpretation ▫ Competition enhances consumption and thus consumption taxes
Competition effect on tax Revenue 35,000 0.8 Annual tax revenue from mobile operators, 2006/ 7 to 2011/ 12 35,000 0.8 0.7 30,000 0.7 30,000 0.6 KES millions 25,000 Ksh. M illions 0.6 25,000 0.5 20,000 0.5 20,000 H H I 0.4 0.4 15,000 15,000 0.3 0.3 10,000 10,000 0.2 0.2 5,000 0.1 5,000 0.1 - 0 2006/ 7 2007/ 082008/ 092009/ 10 2010/ 11 2011/ 12 0 0 Corporate Withholding PAYE TOTAL HHI VAT Airtime HHI
Competition Effect on Tax Revenue instability Variable A B • Issue: Tax inst(- 0.56 0.56 ▫ effect on tax instability 1) (14.29) (14.12) • Methodology Income 0.01 0.01 • ln( σ t )= α 0 + α i ln (x it ) + β i ln (z it ) + (0.36) (0.37) ε t Excise 1.30 1.30 • Findings (10.93) (10.77) ▫ Lag tax instability has an impact VAT -0.29 -0.29 ▫ Airtime increases instability (-3.65) (-1.25) ▫ VAT reduces instability Openness -0.21 -0.21 ▫ GDP increase instability (-1.25) (-1.25) ▫ HHI has no impact GDP 7.57 (7.57) 7.62 (7.62) • Interpretation Constant 3.11 (16.18) 3.00 (5.81) ▫ Competition promote efficiency Adj. R 2 0.95 0.95 F-stat 155.98 130.57 (0.00) (0.00)
Competition effect on Profitability Variable coefficient t • Issue: Profit Lag 1 -0.3045 -1.82 ▫ Competition effect on Profits • Methodology Profit Lag 2 -0.4303 -2.76 ▫ Granger causality test Revenue(profit proxy) was HHI Lag 1 1.80e^ 10 -2.57 regressed on past values of itself and HHI HHI Lag 2 -1.69e^ 8 -0.02 Used monthly data-Jan. 2009-June 2012 HHI Lag 3 -8.75e^ 9 -1.29 • Findings HHI Lag 4 1.06e^ 10 1.73 ▫ Coefficient on first lag of HHI significant (t=2.59) 3.56e^ 9 0.53 HHI LAG 5 • Interpretation ▫ Competition is useful for predicting profitability F-statistic(7,28) 3.25 (0.0119) Prob>F
Effect on Macroeconomy • Issue: Direct 120,000 0.8 ▫ Effect on Employment employm ent 110,000 • Methodology 0.7 100,000 ▫ Trend analysis of direct, Dealers/a indirect and HHI 90,000 0.6 gents • Findings 80,000 0.5 ▫ Total employment increased 70,000 Indirect with competition first tier 60,000 0.4 workers • Interpretation 50,000 ▫ In competitive environment the 0.3 40,000 Employm firm faces elastic demand thus ent in to increase revenue firm must 30,000 0.2 communi reduce variable cost cation 20,000 sector 0.1 HHI 10,000 0 0 2007 2008 2009 2010 2011 2012
Effect of Macroeconomy 45,000 0.8 • Issue: ▫ Effect on Investment 40,000 0.7 • Methodology 35,000 ▫ Trend analysis 0.6 • Findings 30,000 Investment has been increasing 0.5 Kshs M illions steadily over the years however in 25,000 2010, there was a slow down in H H I 0.4 investment in due to heavy 20,000 investment in prior years; 0.3 (upgrading & undersea cables), this 15,000 picked up in 2010 & is expected to 0.2 increase as MNOs continue 10,000 upgrading network to cater to 0.1 increased traffic 5,000 • Interpretation ▫ Outcome is consistent with - 0 2007 2008 2009 2010 2011 economic theory Direct Mobile Investment HHI
Effect on Macroeconomy Variable A C Lag CPI -0.2221 -0.319 • Issue (-1.548) (-2.093) ▫ Competition on Inflation Lag 4 CPI 0.675 0.605 (4.320) (3.826) • Methodology Lag 12 CPI 0.484 0.459 π t = λ 1 π t-1 λ 2 π t tel λ 2 D + ε t (3.226) (2.712) • Findings HHI -0.029 ▫ Past inflation has impact (-1.230) Airtime CPI 0.024 inflation (0.937) ▫ HHI & Airtime has no impact Airtime/ 0.007 • Interpretation HHI (0.540) ▫ Airtime contribute to 3% of Constant -0.003 0.001 CPI (-0.374) (0.187) R 2 0.764 0.725 F-state 6.463 6.405 (p value) (0.001) (0.001)
Effect on Macroeconomy Number of Licensed BPOS 39 32 • Issue: 25 20 18 ▫ Competition Effect on BPO • Methodology 2 1 1 ▫ Trend analysis ▫ Government policy Vision 2030, Interconnectivity networks ICT service exports (BoP, current US$) • Findings 500 450 ▫ Licensed BPO ↑ 400 US$ M illions 350 ▫ Impact (ICT) ↑ 300 250 • Interpretation 200 150 ▫ Potential outsourcing by the 100 50 providers 0
Effect on Macroeconomy • Issue: ▫ Effect on Accessibility • Methodology ▫ Trend analysis of BTS ▫ Product differentiation • Interpretation ▫ Distribution of BTS mirrors our population distribution ▫ Development corridors along the railway, high productive land
Effect on Macroeconomy 35.00 0.8 Average Tariffs 0.7 30.00 • Issue 0.6 ariff (Kshs per minute) 25.00 ▫ Effect on Affordability 0.5 • Methodology 20.00 ▫ Trend analysis on prices 0.4 15.00 • Findings 0.3 ▫ Inverse relationship between 10.00 T 0.2 HHI and average tariffs 5.00 0.1 • Interpretation 0.00 0 ▫ The finding is consistent with economic theory on net To another mobile network To a fixed network HHI
Effect on Macroeconomy Product Differentiation M NO Airtime Airtime M obile sharing credit money • Short messaging service (SMS) • Telephone Directory √ √ Okoa √ MPESA • Data/ internet (98.9% of total Safaricom sambaza Jahazi internet subscription) • Mobile tunes/ music √ Me2U √ Kopa √ Airtel • Mobile money (transactions of Airtel credo money up to USD 14 million daily) advance ▫ Facilitate trade ▫ Pay utility bills & school fees √ Share √ √Yu cash Essay (yu) ▫ Bank transactions airtime yuCredo ▫ top-up airtime ▫ Charity √ Credit √Orange Telkom pewa Orange transfer cash
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