Identifier
Created
Classification
Origin
06NAIROBI2075
2006-05-12 06:07:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Nairobi
Cable title:  

KENYA STRUGGLES TO GET WIRED - THE ONGOING SAGA

Tags:  ECON ECPS EFIN KE 
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RR RUEHDU RUEHGI RUEHJO RUEHMR RUEHPA
DE RUEHNR #2075/01 1320607
ZNR UUUUU ZZH
R 120607Z MAY 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 1632
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 0187
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 04 NAIROBI 002075 

SIPDIS

SENSITIVE

SIPDIS

STATE PASS USTR - BILL JACKSON AND JONATHAN MCHALE
STATE FOR AF/E, AF/EPS AND EB/CIP
TREASURY FOR LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON ECPS EFIN KE
SUBJECT: KENYA STRUGGLES TO GET WIRED - THE ONGOING SAGA
OF FIBER OPTIC CONNECTIVITY ON AFRICA'S EAST COAST

Sensitive-but-unclassified. Not for release outside USG
channels.

UNCLAS SECTION 01 OF 04 NAIROBI 002075

SIPDIS

SENSITIVE

SIPDIS

STATE PASS USTR - BILL JACKSON AND JONATHAN MCHALE
STATE FOR AF/E, AF/EPS AND EB/CIP
TREASURY FOR LUKAS KOHLER

E.O. 12958: N/A
TAGS: ECON ECPS EFIN KE
SUBJECT: KENYA STRUGGLES TO GET WIRED - THE ONGOING SAGA
OF FIBER OPTIC CONNECTIVITY ON AFRICA'S EAST COAST

Sensitive-but-unclassified. Not for release outside USG
channels.


1. (SBU) Summary: Regional efforts to at last bring
economically vital fiber optic connectivity to Africa's
East Coast are being stymied by South African efforts to
impose a monopolistic model on the planned East African
Submarine System (EASSy),a 5,500 mile undersea cable
that would link Durban in the south to Djibouti in the
north. In response, an increasingly impatient Kenya is
proposing an alternative "northern loop" linking Kenya,
and countries in-land, to Djibouti. Kenya's impatience
is driven by a desire to jumpstart growth and create jobs
by stimulating the ICT sector, where success depends
critically on obtaining international fiber optic
connectivity. Kenya's ambitions are being held in check,
however, by the reluctance of the World Bank, vendors,
and others to abandon or compete with the EASSy project,
which has become a symbol of African unity. Given the
critical need to connect Africa to the rest of the world
as soon as possible, the USG should offer support to
Kenya's efforts to build an undersea cable, even one
outside the EASSy framework. End summary.

-------------- --------------
Africa's Urgent Need for Fiber Optic Connectivity
-------------- --------------


2. (SBU) In an increasingly "flat" world linked by high
speed fiber optic connections criss-crossing the globe,
the East Coast of Africa stands alone as the only major
landmass lacking fiber optic connectivity to the rest of
the world. All international data and telecom exchanges
must therefore flow over slower and far more expensive
satellite links, a situation that has discouraged
investment and growth, and thereby contributed markedly
to the continent's continued economic marginalization.


3. (SBU) In an attempt to rectify this situation,
African telecom operators came together to launch the
East African Submarine System (EASSy) in 2003. A
consortium was formed, presently consisting of 27
members/investors, to finance and build a 5,500 mile

undersea fiber optic link stretching from Durban, South
Africa to Djibouti on the Red Sea at an estimated total
cost of $200 million. The EASSy timetable originally
called for the start of construction in 2006, and for the
cable to be operational by mid-2007.

--------------
The Bad Guys: South African Monopolists
--------------


4. (SBU) The EASSy project is running well behind
schedule, however, due to fundamental unresolved
questions over ownership structure, the role of
governments in the project, and how non-members of the
consortium will gain access to the system. All of these
questions, in turn, will directly affect the crucial
determination of bandwidth pricing once the cable is
completed. The most important debate pits South African
interests against Kenya and other consortium members over
EASSy's business model. In the simplest terms, South
African investors want a "closed access" model based on
the model currently used to run the SAT3 fiber optic
cable, which runs along Africa's West Coast, and which
has become a poster child for poor policy implementation.
SAT3's ownership is dominated by incumbent monopoly
telecom companies who are allowed under the terms of the
deal to impose discriminatory and non-transparent pricing
to extract monopoly rents on traffic flowing in and out
of their countries over the cable. Thus, while the cable
itself is proving lucrative for consortium members, the
benefits of cheaper, faster global connectivity for the
broader national economies are not being realized.
Pricing remains as high or higher than existing satellite
links, completely negating the development potetial
inherent in fiber connectivity.

-------------- --------------
The Good Guys Want "Open Access" and Lower Prices
-------------- --------------


NAIROBI 00002075 002 OF 004



5. (SBU) On the other side of this divide are the World
Bank, Kenya, and reportedly other consortium members.
The World Bank, which is committed to helping bring fiber
connectivity to Africa through its Regional
Communications Infrastructure Program, has offered to
finance a significant portion of the total cost of EASSy
on highly concessional terms. But it is wisely insisting
that the project learn the lessons of the SAT3 fiasco by
adopting "Open Access" principles. These call for equal
and open access to fiber capacity, and transparent, non-
discriminatory, and competitive pricing for bandwidth.
Only in this way, believes the World Bank and others, can
EASSy "help everyone to make money at the country level,
and not be highly profitable in itself." The World Bank
believes successful implementation of EASSy along Open
Access principles will lower bandwidth prices for end
users by a factor of 10 in countries not just in those
coastal nations with a direct connection, but also those
in-land, which would link up to the undersea cable via
inter-connected domestic "backhaul" fiber networks.

--------------
Kenya Plots a Course to an ICT-Based Future
--------------


6. (SBU) Into this fray has stepped Kenya, impatient
with both the slow pace and monopolistic direction of the
EASSy project. Under dynamic new leadership at the
Ministry of Information and Communication, the country
recently adopted a new information and communication
technologies (ICT) strategy. Spearheaded by Minister
Mutahi Kagwe and endorsed publicly by President Mwai
Kibaki in February, the strategy calls for the long-
overdue (and politically painful) privatization of
Kenya's monopoly landline provider, Telkom Kenya.
Looking ahead, it calls for the issuance of new
international gateway licenses for mobile operators, the
issuance of additional national licenses, the
establishment of broadband wireless services, the
expansion through the private sector of domestic fiber
optic networks, and eventually a unified licensing
regime. Longer term, the strategy plans to "re-skill"
Kenyans through "Centers of Excellence" with the aim of
making Kenya a regional ICT hub, to include a thriving
call center and outsourcing services sector.


7. (SBU) Already, according to Bitange Ndemo, Permanent
Secretary at the Ministry, big Indian firms are looking

SIPDIS
to outsource lower value-added call center functions to
Kenya given the latter's apparent comparative advantage
in the form of a well-educated workforce with strong
English language skills. Under Kagwe and Ndemo's
strategy, a rejuvenated ICT sector can and should be the
catalyst in achieving the elusive holy grails of job
creation, faster economic growth, and poverty reduction
in Kenya. And all of this would be driven by technology
in the hands of private sector forces.

-------------- --------------
Impatient with EASSy, Kenya Threatens to Go it Alone
-------------- --------------


8. (SBU) The success of this audaciously ambitious
strategy hinges on a number of policy outcomes in Kenya,
but also crucially on the availability as soon as
possible of reasonably-priced international fiber optic
connectivity. Kagwe and Ndemo have therefore made
connecting Kenya to an undersea cable their highest
priority since coming to office late in 2005. In a late-
February video conference with the World Bank in
Washington witnessed by Econ/C and EB/CIP's visiting
Director of IT Policy for Africa, Kagwe made it clear
that while Kenya wished to support and continue to
participate in EASSy, it would also not hesitate to look
at other options if the disagreements surrounding the
structure and orientation of EASSy were not resolved
soon.


9. (SBU) Since then, with none of these disagreements
any closer to resolution, Ndemo has begun talking to
consortium members separately, and also to potential
investors, about shelving EASSy for now and building a
separate "northern loop" which would connect by sea

NAIROBI 00002075 003 OF 004


Djibouti to Kenya's port of Mombasa. He has also spoken
with Indian firms about building an undersea cable
linking the subcontinent to Mombasa, but it is not clear
where these talks stand. In any event, in conversations
with Econ/C and EB/CIP, Ndemo has expressed confidence
that there are enough EASSy members who side with Kenya's
position on open access to raise the necessary money to
launch a new northern cable project and move quickly to
construction and roll-out.

--------------
Political Correctness a Stumbling Block
--------------


10. (SBU) The hitch, as always, is political. Ndemo
realizes that going against the grain on EASSy is
politically incorrect in that it appears to undermine a
symbol of African unity. The EASSy consortium consists
almost completely of African telecom firms, and enjoys
the strong political backing of the pan-African New
Economic Partnership for African Development, or NEPAD,
headquartered in South Africa. Even the World Bank,
according to Ndemo, seems leery of offering support to a
Kenya-led northern loop project because of fears it would
offend NEPAD and undermine an ostensibly African
initiative. Privately, Ndemo is disdainful of NEPAD's
meddlesome involvement in EASSy, and also of the idea of
using EASSy as a symbol of "black empowerment." In his
view, the cable should be as open to multinational
operators and investors as to African ones. The bottom
line for him is harnessing as much competition as
possible in order to ensure the maximum use of fiber
capacity at the lowest possible cost.

--------------
The U.S. Commercial Angle
--------------


11. (SBU) The story would not be complete without an
American angle, and in this case, it is through U.S. firm
Tyco, one of only a handful of companies worldwide
capable of laying an undersea cable of EASSy's magnitude.
In fact, Tyco and French firm Alcatel are alone in the
running for the tender phase of EASSy, now underway and
reported to be close to decision. Tyco therefore appears
reluctant to be seen as aggressively courting Kenya out
of fear that it will offend the EASSy consortium and
thereby jeopardize its bid. Ndemo told Econ/C May 10,
however, that Alcatel is playing both sides of the fence,
staying in regular contact with him and monitoring the
seriousness of Kenya's intention to lead a separate
effort to build a northern loop.

--------------
Comment
--------------


12. (SBU) Our view, admittedly a parochial one from our
narrow perch in Nairobi, is that both the USG and the
World Bank should look seriously and offer whatever
support possible to Kenya's bid to develop an alternative
to EASSy. In time, there is probably room in the market
for two cables; indeed a northern loop and some version
of EASSy could be complementary in meeting Africa's
growing demand for telecom, internet, and related
services. Moreover, supporting Kenya's efforts to build
a northern loop might be just the dose of real-world
competition EASSy needs to get its act together, move to
an Open Access model, and begin to roll out.


13. (SBU) Fiber optic connectivity may sound too
technical for some, but the economic future of Kenya and
her neighbors depend on it. If it doesn't get it soon,
Kenya's new ICT strategy may be dead on arrival. It is
an ambitious strategy indeed. But it differs from other
grandiose Kenyan government strategies of the past in
that there is actually leadership in place working
feverishly and against great odds to make it a reality.
That leadership will not be in place forever, so time is
of the essence. Success, we believe, would be worth far
more than all the donor assistance given to Kenya each
year in terms of spurring growth, reducing poverty, and
facilitating the necessary longer-term shift to a

NAIROBI 00002075 004 OF 004


globally competitive, urban, services-based economy in
East Africa's pillar country.
BELLAMY