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.

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Background: East Coast Struggles to Get Fiber
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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.

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The Seith East Africa Cable Project
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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.

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-- 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.

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Timing: Will Early Bird Will Get the Worm?
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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.

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Kenya Not Ready to Abandon TEAMS Yet

NAIROBI 00005265 003.2 OF 004


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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.

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Can TEAMS and SEA Merge?
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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.

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Paradox: GOK Also Supporting SEA
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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.

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Managing the Optics of Foreign Ownership
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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.

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Comment
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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