U.S. COMPANIES IN LEAD TO BRING FIBER OPTIC CONNECTIVITY TO

UNCLAS SECTION 01 OF 02 NAIROBI 001770 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 SUBJECT: U.S. COMPANIES IN LEAD TO BRING FIBER OPTIC CONNECTIVITY TO EAST AND SOUTHERN AFRICA REF: A. NAIROBI 565, B. 06 NAIROBI 5265, C. 06 NAIROBI 2075 NAIROBI 00001770 001.2 OF 002 Sensitive-but-unclassified. This cable contains business proprietary information and is not for release outside USG channels. ¶1. (SBU) Summary: The pace is picking up in the race to build a submarine fiber optic cable that would give East and Southern Africa broadband connectivity to the rest of the world, and U.S. firms are playing pivotal roles. SEACOM, a private sector project designed, owned, and operated by a U.S. venture capital firm, has taken the lead by signing a $300 million contract with another U.S. firm, Tyco Telecommunications, to construct its $300 million cable connecting Africa with India and Europe. Kenya now needs to decide if it will build its own smaller rival cable to the Middle East, or get the same or better results for less money by merging with SEACOM. The longer-running EASSy project is dead last in the submarine cable sweepstakes, and may never be built, given the inherent flaws in its ownership structure. End summary. -------------- Here Comes SEACOM -------------- ¶2. (SBU) Reftels chronicle the travails of three different initiatives vying to bring low-cost, high-speed connectivity to the East Coast of Africa through construction of a submarine fiber optic cable. The Sithe Group, a global turnkey infrastructure provider and venture capital group (it is 100%-owned by the Blackstone Group of the United States, the world's largest venture capital firm) now appears to have taken a commanding lead. An April 13 Sithe Group press release reported that it has awarded the marine survey for its submarine cable, dubbed SEACOM, to New Jersey-based Tyco Telecommunications. Tyco's press release notes that the 8,600 mile SEACOM cable is a privately-funded venture that will "provide African retail carriers with equal and open access to inexpensive bandwidth, removing the international infrastructure bottleneck and supporting East and South African economic growth." SEACOM, it notQ, will connect South Africa, Madagascar, Mozambique, Tanzania, and Kenya "eastward to India" and "westward to the Mediterranean." ¶3. (SBU) Rapid progress is being made on all fronts to bring SEACOM to fruition, according to Sithe Group Vice President Brian HerlQy, who met with the Ambassador, Econ/C, and Commercial Specialist on April 18. An upbeat Herlihy said the marine survey for SEACOM will be underway shortly, that system construction would begin by June 30, and that the system would be operational by the first quarter of ¶2009. Sithe is negotiating the final details of a construction contract with Tyco, and has already paid for and issued Instructions to Proceed to Tyco, thus locking in the price and duration of construction. This effectively reserves for SEACOM a place in the global queue for what is shaping up to be a tight market for fiber as a number of new cable systems coming on line are stretching worldwide production capacity to the limit. ¶4. (SBU) Sithe has already spent or committed $8 million of venture capital to the project and will be left with a 25% share of a cable that will cost, depending upon how it is measured and defined in its various components, around $300 million. Herlihy is lining up three other investor groups that will each put up $75 million for a 25% share, but that have not yet formally committed funds. These are two venture capital funds, one Swiss and one in South Africa owned by Cyril Ramaphosa, and Industrial Promotion Services (IPS),an arm of the Nairobi-based Aga Khan Development Fund. Thus, in the end, SEACOM will be 50% internationally-owned, and 50% African-owned. Herlihy said the licensing and landing permit applications have all either been obtained or are in process in the countries where the cable will land, and he foresees no major regulatory obstacles to roll-out. Sithe is also finalizing a contract with VSNL of India, which will manage SEACOM on Sithe's behalf. ¶5. (SBU) SEACOM is in reality part of larger network being rolled out to connect India, the Middle East, Africa, Europe and North America, Herlihy later told Econ/C. Although the details are sketchy, it appears from Herlihy's comments that SEACOM will somehow intersect and merge underwater in the Red Sea with another cable either built or being built between India and Italy in a complex deal between SEACOM, Egyptian telecom firm Orascom, and VSNL. From Italy, data from Africa running through SEACOM can connect cheaply NAIROBI 00001770 002.2 OF 002 into the European fiber optic network, and from there, to cables connecting Europe and North America. -------------- What About TEAMS? -------------- ¶6. (SBU) Sithe still has an offer on the table to merge with the Government of Kenya (GOK)-led TEAMS submarine cable, which has already completed its marine survey using Tyco (ref A). TEAMS, however, has yet to tender for system construction. Herlihy argued that TEAMS does not have a good business model in large part because it misses out on the high volume of traffic (and thus revenues) being generated by the burgeoning South African market, and because it links to more expensive cables in Fujaira, UAE. Since most of the data flow to and from Africa will be to Europe and North America, Herlihy says Kenya would be better served routing data cheaply through SEACOM in the Red Sea directly to Europe and the U.S. instead of through Fujaira, where carriers would have to pay higher interconnect fees to other cables. To sweeten the deal, SEACOM is offering the TEAMS project 100 gigabytes of free bandwidth westward to Europe, and 50 gigabytes eastward to India. TEAMS would also save hugely on upfront capital costs -- $77 million vs. $150 million, according to Sithe's analysis -- by not having to build a separate cable. ¶7. (SBU) The driver of TEAMS, Kenyan Information and Communications PermSec Bitange Ndemo is enthusiastic about the "cable within a cable" concept, cognizant that it will save the GOK money both upfront and over the long haul, and also give Kenya its bottom line in terms of development: access to affordable bandwidth. It is unclear, however, whether his boss, Minister Mutahi Kagwe, will agree to the proposal since it may be seen politically as usurping a Kenyan initiative. Kagwe has also promised the public an operational system by 2008, and may believe, naively in Herlihy's view, that Kenya can build the shorter TEAMS cable more quickly than SEACOM. Herlihy thinks that supply constraints for fiber and other complications make it highly unlikely TEAMS could be completed before SEACOM, despite its shorter length. -------------- And EASSy? -------------- ¶8. (SBU) Despite recent press reports that the East Africa Submarine System (EASSy) is also moving towards construction, Herlihy and others remain highly skeptical it will ever materialize. He said Sithe originally looked at investing in EASSy in 2002. When due diligence revealed major structural flaws in the project's planned ownership and debt model, Sithe backed out. Later, as Sithe saw demand for bandwidth growing at the same time EASSy appeared stalled, Sithe decided to build its own cable. At a USTDA-sponsored Africa ICT Conference in San Francisco in mid-March, a panel discussion on the three submarine projects led to a lively debate in which a number of participants, including Kenya's Ndemo, essentially wrote off EASSy as unworkable because its monopolistic ownership structure will fail to deliver cheap bandwidth to consumers (see refs B and C). Others noted that it could also fail to even deliver profits to its investors if it faces any significant competition, such as SEACOM. -------------- Comment -------------- ¶9. (SBU) While Herlihy's optimism may reflect corporate partisanship, the pieces appear to be falling into place for Sithe's SEACOM. The main question now is whether Kenya will join forces with SEACOM, or try to build its own cable first at greater cost. In either event, SEACOM will move forward. The good news is twofold: first, that at least one of the three cables is moving towards fruition; and second, that the current frontrunner will be owned, managed, and built by U.S. companies. Ranneberger