KENYA STRUGGLES TO GET WIRED - THE ONGOING SAGA

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