U.S. FIRMS IN THE RACE TO BUILD A FIBER OPTIC CABLE IN EAST

UNCLAS SECTION 01 OF 04 NAIROBI 005265 SIPDIS SENSITIVE SIPDIS STATE PASS USTR - BILL JACKSON AND JONATHAN MCHALE STATE FOR AF/E, AF/EPS AND EB/CIP E.O. 12958: N/A TAGS: ECON ECPS EFIN KE IN AE SUBJECT: U.S. FIRMS IN THE RACE TO BUILD A FIBER OPTIC CABLE IN EAST AFRICA REF: NAIROBI 2075 NAIROBI 00005265 001.2 OF 004 Sensitive-but-unclassified. This cable contains business proprietary information and is not for release outside USG channels. ¶1. (SBU) Summary: Kenya and the rest of the East Coast of Africa are on the cusp of achieving interconnection to the worldwide web via undersea fiber optic cable. Two projects are racing to begin construction, and the leading contender, Seith East Africa, is 100% U.S.-owned. Moreover, Seith has already negotiated a $330 million construction contract for its project with another U.S. firm, Tyco. The Government of Kenya, meanwhile, is pushing a less ambitious, subsidized cable to spur job creation and development in East Africa. It's possible the two efforts will merge in the coming weeks, or that Kenya will drop its plan altogether. But under any likely scenario, the outcome should be a stunning victory for U.S. commercial diplomacy in Africa. End summary. -------------- Background: East Coast Struggles to Get Fiber -------------- ¶2. (SBU) Econ/C met December 7 with Brian Herlihy, Vice President of the Seith Group, a U.S. company focused on power and telecom opportunities in the developing world. He followed up by meeting December 14 with Bitange Ndemo, Permanent Secretary in the Kenyan Ministry of Information and Communication. ¶3. (SBU) Seith has in recent months been seriously exploring construction of an undersea fiber optic cable along Africa's East Coast - the planet's last major landmass without fiber optic connectivity to the worldwide web. As the rest of the globe zooms towards an ever-flatter world linked by high speed digital technologies, economic development in the eastern half of Africa has been hobbled by considerably higher telecom and internet costs. As things stand now, all voice and data transmissions to and from the eastern half of Africa ultimately must utilize satellite technology, with is both less appropriate and far more expensive than high-speed broadband connectivity using undersea fiber optic technology. The digital boom of the past decade in the rest of world was based in part on prices for access to undersea fiber optic cables falling drastically in the 1990s, a benefit East Africa has not yet been able to share. ¶4. (SBU) East African countries have long recognized the need to construct an undersea cable along the East Coast, but have thus far been unable to get the job done. The longest-running current effort, the East African Submarine System (EASSy),continues to be bogged down in fundamental debates over its structure, pricing, and purpose (see reftel for more on the EASSy saga). In response to the failure to get EASSy up and running, other governments in the region, led notably by Kenya, have struck off in their own direction. In November, Kenya signed an MOU with Etilisat of the United Arab Emirates (UAE) to build The East Africa Marine System (TEAMS),which would cover only half of Africa's east coast, from Mombasa in Kenya north to Fujaira in the UAE, where it would plug into other cable systems and thus to the rest of the worldwide web. -------------- The Seith East Africa Cable Project -------------- ¶5. (SBU) Enter the Seith Group, which is 80% owned by the Blackstone Group, a New York-based private equity and corporate advisory firm. In early 2006, as it became more clear that internal debates within the EASSy consortium might prove fatal, and as a fed-up Kenya began organizing the breakaway group of governments and companies that plan to construct TEAMS, Seith began discussions with Kenya and others in the region on an even more ambitious project that would supplant both EASSy and TEAMS. In his meeting with Econ/C on December 7, Seith's Herlihy outlined the current parameters of the newly dubbed Seith East Africa (SEA) cable project: -- Total cost: $330 million. -- Length: From Durban, South Africa, to the United Arab Emirates and Bombay. Other landing points include Mozambique, Madagascar, Tanzania, and Kenya. NAIROBI 00005265 002.2 OF 004 -- Construction: Seith has successfully concluded the terms of a construction contract with U.S.-based Tyco Telecommunications. -- Operator: Seith's strength is in developing and operating power systems. Thus, it will contract out the operation of the cable to VSNL of India. VSNL recently bought Teleglobe of Canada and owns 26% of Neotel, South Africa's second national operator. Its largest shareholder is the Tata Group, one of India's largest outsourcing companies. -- Capacity: 1.2 terrabits total, of which 40 gigabits will be lit up initially. -- Licensing: SEA's operating license in South Africa will piggyback on Neotel's. Seith has hired a Washington law firm that is ready to begin securing the necessary operating licenses and landing rights in the seven countries in which will SEA will connect. Seith does not anticipate major delays in this regard. -- Backhaul: In an unusual move, SEA will also construct the backhaul fiber networks from the coastal landing points to the major metropolitan centers. Thus, in Kenya, it will build backhaul from Mombasa to Nairobi. Seith realized that many nations were not prepared to take the cable from a landing point on a beach all the way into major city centers and therefore has included the construction of metropolitan interconnection centers as part of its project. -------------- Timing: Will Early Bird Will Get the Worm? -------------- ¶6. (SBU) Herlihy said Seith plans to get Board approval shortly to invest an initial $7 million for the marine survey required for the cable. This will begin in January, 2007 and by March Tyco will begin constructing the fiber optic cable. Herlihy said the northern leg of the cable, from the UAE to Mombasa, will be completed by mid-2008; the southern leg from South Africa to Mombasa, will be completed by the third quarter of 2008. If SEA follows this timetable, it will be finished before TEAMS, which is running into delays, according to Herlihy. This, he believes will render TEAMS redundant, leading Kenya and the UAE to cancel the project. The SEA project holds the advantage over other proposed efforts, including TEAMS, that its funding will come from a single, private source and will not need to attract investors before launching. ¶7. (SBU) TEAMS, according to Herlihy, was economically flawed from the start because it did not include connection to South Africa, a market he said is "ready to burst" from an ICT perspective. The South African market, said Herlihy, is really the key to the economics of the SEA project because it will generate much of the initial volume and therefore revenues. -------------- -- Open Access and Low Prices - Unbeatable if True -------------- -- ¶8. (SBU) Pricing for access to the cables, however, will hold the key to the relative fates of the SEA and TEAMS cable projects. The Government of Kenya (GOK) under the determined Minister of Information and Communications, Mutahi Kagwe, has until now rejected Seith's overtures in part due to fears that Seith's project, being on commercial terms, would not offer prices low enough to spur the desired development gains in Kenya and the region and would be held up by delays in South Africa. Herlihy, however, argued that the pricing planned for the SEA project is more than sufficiently low to generate economic benefits from the start. End-user costs, he claimed, will go down from the current $7,500 per month per megabyte in Kenya using satellite technology to around a tenth this amount. ¶9. (SBU) Seith will use a "one price fits all" structure in which any/all buyers can purchase "indefeasible rights of use," (IRUs) to connect to the cable. IRUs provide a specified quantity of bandwidth over a period of 20 years for a set price paid up-front. Seith's "pricing vision" calls for declining prices for IRUs over first five years of the project as a way to catalyze demand and encourage large capacity purchases, for which it will provide transparent volume discounts. Because any company can purchase IRUs, the model for the SEA cable is "true" open access and very transparent, according to Herlihy, thus ensuring competition and low prices to end-users. -------------- Kenya Not Ready to Abandon TEAMS Yet NAIROBI 00005265 003.2 OF 004 -------------- ¶10. (SBU) Speaking with Econ/C December 14, Permanent Secretary of Information and Communication Bitange Ndemo acknowledged that Seith had lowered its projected pricing over the course of recent weeks. But he is unsure SEA's pricing will be low enough to lead the GOK to abandon TEAMS. The latter, Ndemo explained, still has the strong support of his boss, Minister Kagwe. Kagwe is strongly in favor of subsidized pricing and cares little about maximizing traffic volume and revenues. Kagwe wants the cable as a magnet for investment in call centers and other ICT services as a way to generate growth, jobs, and development in Kenya and in the region. Kagwe, Ndemo explains, wants pricing as low as India's, which is currently about half what SEA would offer. Ndemo admitted "we still need to sort out some of the math," but he claimed that Seith's pricing was not a tenth the price of satellite links, but would generate prices just under two times cheaper than satellite. -------------- -------------- TEAMS Wants Deal with Tyco Too; French Playing Dirty -------------- -------------- ¶11. (SBU) As a result, Kagwe and Ndemo are moving full steam ahead to begin construction of TEAMS on a timetable nearly identical to the plan for SEA. Like Herlihy and Seith, both are strongly in favor of using Tyco to lay the cable. Ndemo said he is regular contact with Tyco and would be asking Tyco officials to visit Kenya the week of December 18 to negotiate the final terms of a construction contract, and then sign it. Ndemo said Tyco was at a competitive disadvantage because its chief rival, Alcatel of France, has moles in the GOK who, to Ndemo's fury, had leaked the details of Tyco's bid to Alcatel. Ndemo, in turn, informed Tyco about the incident. Tyco's ace card, however, is that Alcatel is politically unacceptable to Kagwe and Ndemo because it had earlier won the contract to construct EASSy. If it switches over to TEAMS now, Kenya will be accused of purposely torpedoing EASSy, a political storm Kagwe wants to avoid. Ndemo noted that Alcatel won the EASSy tender earlier this year using similarly dirty tricks against Tyco. -------------- Can TEAMS and SEA Merge? -------------- ¶12. (SBU) Ndemo understands the advantages offered by the SEA project over TEAMS, and his bottom line is that he doesn't want to have to invest the $64 million required of the GOK for TEAMS if an adequate alternative is being built by the private sector. He is working to convince Kagwe to negotiate a compromise with Seith under which the two projects would merge into one, with Kenya providing 30% of the equity. The key to bringing all the parties together, he said, is Tyco, which has a hand in both projects. He is urging Tyco executives to stop in Dubai enroute to Kenya over the coming weekend to begin to broker such a compromise with Etilisat officials. -------------- Paradox: GOK Also Supporting SEA -------------- ¶13. (SBU) Ndemo, meanwhile, contends the SEA cable will be built no matter what. He agrees with Herlihy's analysis that the cable is made economically viable by the expected boom in internet traffic from South Africa, and that traffic from Kenya alone is not the dealmaker or a deal breaker for Seith. Moreover, he is not standing in the way. The previous day, he issued a letter to Seith granting SEA landing rights in Mombasa, and the GOK has also pledged to provide land to the company in a Nairobi-area media park for Seith's cable management center. He expects the company will have no problems obtaining a Data Center Network Operators license in Kenya, allowing it to establish a national data network and international gateway. -------------- Managing the Optics of Foreign Ownership -------------- ¶14. (SBU) Ndemo's support for SEA, despite the complications surrounding TEAMS, dovetails with Herlihy's confidence that the SEA project will win the hearts and minds of East African companies and governments. Aside from some tax issues related to SEA's backhaul investments, he foresees no major regulatory hurdles. He is NAIROBI 00005265 004.2 OF 004 concerned, however, about the optics of foreign ownership of such a large and important piece of infrastructure. Seith is starting to plan the public relations elements of the project, which it hopes to roll out in early 2007. Econ/C noted the USG will be as supportive as possible in dispelling misinformation and promoting the project, and he urged Herlihy to keep both Washington and Embassy Nairobi in the loop as rollout approaches. Comment: We note that Seith does not even have a public website. As such, we worry that SEA will be cast by its commercial opponents in Africa as a sinister ploy by a mysterious foreign firm to monopolize vital African infrastructure. Seith will thus need to market itself and the project carefully and aggressively as the project moves forward. End comment. -------------- Comment -------------- ¶15. (SBU) The SEA cable project is not out of the woods by any means yet. But Seith is confident it will be the first in the water, and thus quickly make all other competing projects redundant. And even if Kenya builds TEAMS, the news is still good. If and when SEA (or both cables) is built, the results will be stunning in two respects. First, the East Coast of Africa will finally be wired for the internet age - with huge development gains if the pricing is low enough. Second, the project would be one of the biggest wins for American commercial diplomacy in Africa in years, with Seith the financier and owner, and Tyco the builder. Tyco, in fact, could theoretically end up with two major construction contracts by next week worth nearly half a billion dollars. At a time when the French are still playing dirty and Chinese infrastructure providers appear invincible across the continent, an American owned and built fiber optic cable would be a sweet victory indeed for the American private sector. We plan to support it wholeheartedly. Ranneberger