The government has changed the telecommunication licensing rules in a way that promises to lower the cost of acquiring high-speed delivery platforms and give one operator control of the market.
The new rules that among other things requires those bidding for the 4G spectrum licence is hinged on the Public Private Partnerships (PPP) model and are aimed at avoiding the battle over the pricing that dogged the issuance of the 3G licences.
Tender rules that were published on Tuesday indicate that unlike in the past when the licence was awarded to each operator, the 4G will be controlled by a consortium of players who must have at least 20 per cent local ownership.
The requirement locks out Airtel and Essar's Yu, leaving Safaricom and Telkom Kenya in the race for the tender.
The two are the only holders of the Network Facilities Provider Tier 1 category (the technical reference to mobile phone operators' licence) and with a 20 per cent local shareholding.
The government, through Treasury, has 49 per cent stake in Telkom Kenya while Safaricom is owned 40 per cent by the UK's Vodafone, 35 per cent by the Government of Kenya and 25 per cent by the public through the Nairobi Stock Exchange.
Airtel Kenya has a five per cent local ownership, after businessman Naushad Merali - the sole local partner -- sold 15 per cent of his stake in the firm last year.
Essar's Yu is 100 per cent owned by India's Essar Communications, which bought the 20 per cent stake that local firms Capital Africa, CrossLink and Startnet held last year for an undisclosed sum.
Rene Meza, the Airtel managing director, questioned the transparency of the tendering process and promised that his firm will be seeking clarification, especially on the 20 per cent rule as Airtel intends to fully participate in the tendering process.
"We will seek clarification on the requirement of 20 per cent ownership. We believe it is sufficient that an operator is licensed," said Mr Meza. "Because there is no structure for the tender proposal, evaluation of the bids by the Ministry of Information may be subjective to the extent that undermines transparency and fairness."
4G refers to the fourth generation of wireless telecommunication technology with a larger capacity to deliver data and facilitate high end of market services such as video conferencing and gaming.
Kenya's telecom operators see ownership of the technology as critical to future revenue growth with the continued decline in earnings from the voice business.
Prospective bidders are also questioning the requirement that the government becomes part of the consortia that will be competing for the 4G licence while at the same time participate in evaluation of the tenders. [Read: State to withhold licence for 4G frequency rollout]
On Thursday, the government said it will not bend the 20 per cent local ownership rule, arguing that Yu and Airtel chose to sidestep the local shareholding requirement.
"The two don't meet the 20 per cent rule and do not have national infrastructure that can be upgraded to 4G," said Bitange Ndemo, the Information permanent secretary.
Dr Ndemo said the 20 per cent rule is a policy requirement that Airtel and Yu should make an effort to comply with.
People familiar with the policy position on the matter said the ultimate goal of the tendering is to open a window for the government to ride on operators with national coverage to reduce the cost and time of deploying the 4G network in readiness for use in e-voting in 2012.
"An individual firm will have to spend not less than $4 billion to roll out the infrastructure but the model we have proposed will cost an average of $100 million and take less time," said our source.
Telecoms sector ownership rules require foreign companies to have a 20 per cent local shareholding.
It, however, gives foreign investors three year grace period to look for suitable partners.
Econet Wirelesss International, which held the third mobile license was the first beneficiary of this rule that helped it survive a protracted court battle with its local partners, the Kenya National Federation of Farmers.
Econet ultimately sold its shares to Essar Communication, a subsidiary of India's Essar Global four years ago.
He acquired and immediately sold the Vivendi stake in 2004 at $250 million remaining with his 40 per cent.
Kuwait's MTC then bought Celtel out of 16 African countries in 2005 and three years later, Mr Merali sold half of his stake to Zain putting 80 per cent of the firm in foreign hands.
Last year, Mr Merali sought exemption and was allowed to sell an additional 15 per cent of his stake - a move that has now come back to Bharti Airtel, the current owners.
The tender specifications have also locked out infrastructure providers such as Kenya Data Networks, AccessKenya, Jamii and Wananchi Group who do not fall within the licence category specified on the tender notice.
Joshua Chepkwony, the chairman of the Telecommunication Network Operators said that while having an open access 4G network was positive, the manner in which the tender document has been structured shows that the government has a pre-determined candidate.
"There is need to call for a stakeholders meeting to explain the desired composition of the consortium because as it is the tender document locks out operators who are not in the tier 1 category but fall within the telecoms ecosystem," he said.
The LTE -- commonly known as 4G --offers subscribers access to mobile internet at much faster speeds, making it a cutting edge tool for companies offering their services on the medium.
The government says it will offer 4G license to a consortium of players that will implement and manage it to avert disputes encountered with the issuance of the 3G licences to the late entrants.
Safaricom paid $25 million for the 3G license fee, only for the government to lower the fee to $10 million for Airtel and Telkom Kenya or 60 per cent less than Safaricom.
Under the new model, the consortium members will be composed of government (the owner of the national spectrum), equipment suppliers such as Huawei, Nokia Siemens Networks, Alcatel Lucent and Ericsson who must team up with telecommunication firms such as Safaricom, Telkom Kenya for expertise and equipment needed for the rollout.
The move comes as mobile operators shift their focus to data, with competition in the voice segments getting stiff and revenue starting to decline with deep tariff cuts that have since August last year lowered the cost of voice calls by 50 per cent.
Tendering requirements for building, operating and managing 4G (LTE) national network
Rule 1: Must be a network infrastructure provider tier 1(Safaricom, Airtel, Yu and Orange).
Impact: Has locked out all other infrastructure providers such as Kenya Data Network, Jamii Telecoms and Access Kenya among others.
Rule 2: Must be at least 20 per cent Kenyan owned.
Impact: Locks of Airtel and Yu who at the moment don't meet this threshold leaving Safaricom and Telkom Kenya.
Rule 3: Must be able to deploy the network in all 47 counties within one year.
Impact: Locks out Telkom Kenya, leaving Safaricom which has almost a national 3G network that can be upgraded to 4G in a year.