Conflicting priorities

KEY READING FOR THE WEEK

The newsletter this week focuses on the incompatibility between the priorities of the National Treasury versus Ministry ICT in Kenya. On the ICT side, Kenya’s Digital Economy Blueprint recognizes the economic benefits of greater broadband penetration and that higher broadband penetration leads to increases in innovation, productivity and competitiveness. The Blueprint says that returns on investment in the ICT sector will be 6.7 times higher than returns in other sectors. 

The Blueprint sees one the major constraints to broadband as the high level of sector specific taxation. According to the Blueprint, high taxation leads to unaffordable broadband services. One of the targets for the Blueprint is to review taxation policy for the digital economy and specifically to “be neutral with regard to different sectors of the economy”. The National Broadband Strategy (2018-2023) also argues that taxation is too high. It sees the reduction of taxes as a priority. The Strategy points to the role of tax incentives to increase investment by the private sector. Projected investment requirements for the sector are Ksh 111 Billion (USD 1 billion) by 2023.

On the other side, The Finance Act of 2021 has doubled-down on high taxation for the ICT sector. The excise duty on telephone and data services was increased from 15% to 20%, effective July 1, 2021. Mobile money transaction fees remain in effect. A Digital Service Tax of 1.5% on gross revenues for non-resident companies is in effect. The GSMA estimates that Ksh 37 out of every Ksh 100 is paid in tax by mobile operators. 

At issue is the balance between national revenues and ICT sector growth. Even though the Blueprint is supported by the President of Kenya and has the support of the National Treasury, its recommendations are ignored in favour of short term revenue collection. Enormous amounts of money and time are wasted on initiatives like the Blueprint when its recommendations are ignored. From an investment perspective, the inability of government to coordinate its response increases the sector’s risk profile and means that investors require a higher return. More importantly, it is unlikely that Kenya will achieve its targets – and specifically its investment requirements – given its preference for short-term revenue collection at the expense of a medium to long term approach.

Other weekly news from around Africa

• South Africa: ICASA has finally realized that removing temporary spectrum was crazy and has given temporary licenses to all operators until June 2022. Hopefully, the spectrum auctions will be held as scheduled in March 2022, but the inability to do this after 16 years, means this has to be unlikely.
• Zanzibar: World Mobile has launched solar power aerostatics balloons as base stations over Zanzibar. After Google’s Project Loon’s demise because of an unsustainable business model, it will be fascinating to see if World Mobile has addressed these issues.
• EU: The European Union has scrapped its digital tax in favour of the OECD’s Inclusive Framework.
• Rwanda: The World Bank has loaned Rwanda USD 100 million to expand digital access and specifically providing 250,000 households with financing options to get lower cost devices and supporting a digital ID platform.
• Nigeria: Three telecom companies have qualified for the 3.5GHz spectrum auctions to be held on the 13th of December 2021. What a dramatic contrast between South Africa and Nigeria on spectrum.