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Cablegate: U.S. Companies in Lead to Bring Fiber Optic Connectivity To

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RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHRN RUEHTRO
DE RUEHNR #1770/01 1100903
ZNR UUUUU ZZH
R 200903Z APR 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 9186
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEHAD/AMEMBASSY ABU DHABI 0143
RUEHDE/AMCONSUL DUBAI 0093
RUEHNE/AMEMBASSY NEW DELHI 0232
RUEHBI/AMCONSUL MUMBAI 0026
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

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

© Scoop Media

 
 
 
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