By Gideon Mokaya.
What is the level of competition in the professional services market in Kenya?
The centrality of professional service providers in the Kenyan economy cannot be overstated. For instance, to build a quality house, you will typically require to engage at least five different professionals. Theyinclude an advocate, an insurer, a valuer, an engineer, and an architect. As a businessperson, you are required to make various statutory filings, including tax and company returns, sometimes every month. Tax experts, company secretaries, and accountants are always at hand to facilitate your compliance with the law.
A closer look at a typical loan transaction discloses the significance of the professional costs.For prospective homeowner, the different fees add up to a tidy sum even before an ounce of soil has been excavated. And if one is sourcing the construction funds through a mortgage, these costs which typically range between 5% and 7% of the loan amount are typically settled out of pocket before drawing the facility. This includes stamp duty, legal and valuation fees, and bank facilitation charges, among others.
To exemplify just how this scenario arises, let us first consider the Advocates Remuneration Order. The Order sets the minimum chargeable transaction fee for land valued up to Ksh. 5Million as Ksh35, 000. Similarly, as per the Valuers Forms & Fees Rules, the charges for land transactions between Kshs.1 to Kshs. 2,500,000 is 2% of the consideration or the value of the subject matter or Kshs. 28,000 whichever is higher. The rules provide that the minimum valuation fee for the first Ksh. 2 Million in value of the property is Ksh. 15,000. And sometimes, you have to settle related “facilitation” expenses such as travelling.
The professional services market could also be spurred back into vibrancy if existing constraints on advertising were eliminated. As long as the advertisements are factual, a lawyer for instance should be permitted to showcase their client portfolio and matters handled. A competitive professional sector will support the recovery and growth of SMEs that require such services and enhance the government development agenda envisioned in Vision 2030.
Remember, these are minimum charges which may increase with the value of the transaction.Professionals associations are typically in charge of ensuring the strict adherence to the minimum fee structures, often times threatening noncompliant members with, among other sanctions, ejections. As a result, these professionals are required to adhere to a strict schedule of charges which increases the expense of the collateral process. The professional fee costs end up being a significant component of the overall total lending costs in Kenya and prohibitive to millions of potential borrowers.
These matters then raise poignant questions and one which all parties involved in the process should prosecute soberly and for the overall benefit of both businesses and consumers, and not from a selfish point of view. What is the level of competition in the professional services market in Kenya? Are existing anti-competitive prices in relation to professional costs inhibiting the growth of the market in terms of facilitating smaller firms to grow and offer consumer competitive rates?
These questions should be answered based on a good understanding of the potential benefits accruing from effective Competition in any market that generates substantial benefits. Where businesses compete fairly but aggressively, consumers benefit through getting access to a wider variety of innovative products and services that meet their changing needs/desires. More importantly, they are likely to be competitively priced meaning the cost charged is singularly signalled by the forces of supply and demand.
If markets are left to self-regulate, some competing businesses will likely opt out of vigorously competing and instead enter into collaborative agreements aimed at maximizing their commercial interests at the expense of consumers. After all, a situation where sales and profits are guaranteed is more cost efficient to the colluding parties.
Ultimately, competition enforcement spurs economic growth, by ensuring that there is a conducivebusiness environment that minimizes the barriers to entry for both local and international investors. Further, regulation of competition ensures that those entities already operating in a market stick to the rules. Back to the issue regarding professional bodies the question of whether there is adequate competition in these sectors and, if not, what should be done to protect the interest of the consumers while promoting business businesses growth and innovation.
Globally, states typically regulate the activities of certain specialized occupations and professions directly or by delegating regulatory powers to, for instance, professional associations. Typically, the scope of such regulation governs entry into the profession, the conduct of members, and the organizational structure of
professional firms, among others. However, concerns have been raised that professional regulations directly or indirectly restrict competition in the professional services sector, thereby exposing consumers to high prices, limiting variety and innovation, and lowering the quality of services.
The professional regulation has two elements with the first being structural regulations which concerned with, among others, entry restrictions and the granting of exclusive rights to perform certain services. On the other hand, behavioral regulation is concerned with rules touching on matters to do with feesstructures and limitations on advertising, as is the case locally to different degrees. Concerns have been raised globally that these structural and behavioral regulations restrict competition more than is appropriate or necessary, raising the price and limiting innovation in the sector.
Protagonists of self-Regulation argue that rules issued by professional associations can adequately attend
to any perceived market failures and that this is important to maintaining the quality of the services rendered. Professional members often argue that when markets are let to operate on their own, quacks heavily undercut them to secure customers who are easily captured,more so due to the existinginformation asymmetries. In the long run, it is argued, the overall sectors will suffer from substandard services.
competition between professional associations should always be encouraged as long as mechanisms exist to ensure the requirements for entry into the different professions should not fall below a certain competency threshold required to perform the service. Where two professional associations have similar entrance requirements, members should be allowed to perform the duties across both professions.
However,there exist ways outside of minimum prices lists that can attend to these specific issues. Mechanisms to address this, include quality guarantee contracts, performance bonds,third party accreditation, or rating on quality. Further, it is noteworthy that client recommendations are the golden goose for businesses, offering even better “returns” than costly advertisements.
Businesses should invest in their reputations by always providing high quality services and rational consumers will always gravitate towards them, albeit after a bad experience elsewhere. That is how markets should work. Regulation of professions should be focused on those markets in which undesirable effects remain and should address the perceived market failure using means that promote competition.The key principles on high-quality regulation of professional services can be summarized as follows.
First, restrictions on competition between members of a profession should be eliminated. This includes
agreements that fix fees, divide markets, raise entrance requirements or limit advertising. Recognition of
qualifications of professionals from other jurisdictions should be promoted. A good example of this is the recent legal amendments that could now permit Rwandese lawyers to practice in Kenya.
Secondly, professional associations should not be granted exclusive jurisdiction to make decisions about
member entry requirements, mutual recognition, or the boundary of their exclusive rights. These decisions should be subject to independent scrutiny. For instance, where admission to a profession is subject to an examination, the respective association should not have exclusive control over what constitutes “passing.” This should be handled by an independent body.
Thirdly, regulation should focus on the need to protect small consumers.Big commercial entities/purchases
of professional services such as corporations easily assess their own needs of the services they purchase and should not necessarily be required to use the selected services of a licensed professional as is common in Kenya. This inhibits the customer choices and impedes their freedom of choice.
Further,competition between professional associations should always be encouraged as longasmechanisms exist to ensure the requirements for entry into the different professions should not fall below a certain competency threshold required to perform the service. Where two professional associations have similar entrance requirements, members should be allowed to perform the duties across both professions.
Lastly, parties to a transaction should be free to elect when and whether to seek professional services or advice.The schedules of charges applicable to the different professions should establish a ceiling on charge- s,but not a floor, in effect allowing parties to freely negotiate terms of engagement.From the foregoing, we can conclude that the mandatory minimum prices for professional services in Kenya, which are still in place across many sectors, are impeding competition and consumer choice.Indeed, it has not been proven that setting minimum prices directly and automatically results in a higher quality of services.
Let professional service providers explore more effective and less restrictive means of ensuring that quality services are available, increasing transparency on service standards, customer care, among other non-price elements. For instance,mandatory minimum prices could initially be replaced by nonbinding recommended referential prices in a transition to full elimination of price controls.
The professional services market could also be spurred back into vibrancy if existing constraints on advertising were eliminated. As long as the advertisements are factual, a lawyer for instance should be permitted to showcase their client portfolio and matters handled. A competitive professional sector will
support the recovery and growth of SMEs that require such services and enhance the government development agenda envisioned in Vision 2030.