Cablegate: Kenya and East Africa: A Step Closer to Fiber Optic

DE RUEHNR #3262/01 2251429
R 131429Z AUG 07






E.O. 12958: N/A

REF: A. NAIROBI 1770, B. NAIROBI 565, C. 06 NAIROBI 5265, D. 06

NAIROBI 00003262 001.2 OF 003

Sensitive-but-unclassified. This cable contains business
proprietary information and is not for release outside USG

1. (SBU) Summary: Fiber optic connectivity in East Africa may be
only a little more than 18 months away. The U.S-owned and managed
SEACOM submarine fiber optic cable is at the starting line, ready to
begin system construction in September under a contract with another
U.S. firm, fiber maker Tyco Telecommunications. Meanwhile, rival
projects dither. Kenya may build its own TEAMS cable independently,
or co-build with SEACOM, depending on the results of a pending
tender for system construction. Kenya is also moving to expand its
national fiber infrastructure to reap the full benefits of
international connectivity after a submarine cable is built.
Similarly, the private sector, sensing an impending explosion of
pent-up demand once fiber is in place, is looking to bridge "the
last mile" by connecting households, schools, and small businesses
to the internet using wireless and related technologies. End

--------------------------------------------- ------
Background: The Race to Build a Fiber Optic Highway
--------------------------------------------- ------

2. (SBU) Reftels chronicle the efforts of three different projects
trying to be the "first mover" in the construction of the region's
first-ever submarine fiber optic cable. The impetus for all three
(and a rumored fourth) springs from wide recognition that there is
money to be made and that without affordable, high-speed broadband
connectivity to the rest of the world, East African countries will
continue to miss out on a major opportunity to grow their economies,
attract investment, generate jobs, and generally plug into an
increasingly "flat", globalized marketplace.

3. (SBU) The American-driven SEACOM undersea cable project
continues to lead the field to be first in the water and first to
start operations. SEACOM, though legally a Mauritian entity, is
being built and financed by the Sithe Group, a New York-based
turnkey infrastructure provider 100%-owned by the Blackstone Group,
also of New York, and the world's largest venture capital firm. Ref
A reported that unlike its rival projects, SEACOM has lined up and
finalized funding for its cable, using its own funds and by
attracting money from three other private sector partners, two of
which are based in Africa.

SEACOM: Key Recent Developments

4. (SBU) In late July and early August, Econ/C met with SEACOM
President (and Sithe Vice President) Brian Herlihy, two
representatives from fiber maker Tyco Telecommunications, also of
the U.S., and Bitange Ndemo, the Permanent Secretary in Kenya's
Ministry of Information and Communications. The news was almost all
good. Key recent developments:

-- Survey: The SEACOM marine survey being performed by Tyco for the
cable's route began in South Africa in June, has reached Kenya, and
is on schedule.

-- Construction Contract: Tyco and SEACOM moved from engagement to
marriage by signing a contract for full system construction on July
26. Herlihy says that the undersea portion is worth $310 million.
If all other construction options are exercised, the contract could
come to around $500 million.

-- Backhaul Included: SEACOM will build backhaul in several of the
countries where it will land to ensure a link between the SEACOM
cable and major inland cities. In Kenya, for example, it will build
a backhaul fiber link from the landing point in Mombasa to Nairobi.

-- Timing: The contract signing and SEACOM's $10 million down
payment to Tyco has bought SEACOM a place in line in an increasingly
tight global supplier market for fiber and fiber laying services.
It expects to instruct Tyco to begin manufacturing fiber at
factories in New Hampshire and Japan on September 1. Fiber will
actually be installed from ships on the ocean floor beginning in

NAIROBI 00003262 002.2 OF 003

approximately one year. SEACOM expects the system to be operational
by March, 2009.

-- Regulatory Issues: Herlihy has spent much of the last 18 months
working with lawyers in all of the countries in which SEACOM will
land, painstakingly lining up the necessary partnerships and
approvals to operate. He foresees no significant hurdles at this
point. On the day he met Econ/C, he was dropping off SEACOM's
application at the Communications Commission of Kenya (CCK) for an
international data carrier (or "gateway") license. Approvals for
gateway licenses have become routinized at CCK, and he expects the
application to be approved in 30-60 days.

-- Who's Buying?: On August 13, SEACOM had its "coming out party" at
an event at a Nairobi hotel attended by approximately 25 local and
regional representatives of ISPs, cell phone companies, local loop
operators, and TV companies. Herlihy provided an in-depth briefing
on the origins, structure, pricing, and operations of the SEACOM
cable. He is aiming to pre-sell $100 million in capacity, and his
presentation was well-received.

TEAMS: Still on the Fence

5. (SBU) Meanwhile, the shorter Government of Kenya-led TEAMS
submarine cable linking Mombasa to Fujaira in the UAE, is also
making progress. The tender for system construction was published
on July 23, with bidding restricted to five companies: Alcatel of
France, Tyco, Fujitsu and NEC of Japan, and China's Huawei. Bids
are due August 25. As TEAMS moves ahead independently, however, it
still has an offer on the table from SEACOM to co-build the two
cables in order to save both projects millions of dollars in
up-front capital costs.

6. (SBU) Permanent Secretary Ndemo favors the "cable within a
cable" co-build proposal, but explained to Econ/C that the Ministry
cannot evaluate and then publicly defend the economic merit of the
SEACOM offer until it has the bidding data for the TEAMS project.
If comparing the bidding data for TEAMS to the co-build proposal
shows the latter is clearly a better deal for Kenya, then Kenya
might opt to co-build under SEACOM's contract with Tyco and the
TEAMS tender process would go away, with Tyco winning all the
business outright.

TEAMS Likely to Face Delays Due to Financing

6. (SBU) Even if the co-build offer is a better deal in terms of
cost, however, Kenya may still choose to build TEAMS independently
if Ndemo and others believe that it can be built faster than SEACOM.
Tyco reps told Econ/C August 2 that because TEAMS is a much shorter
cable, they think Tyco can complete construction by the end of CY
2008 - a few months before SEACOM is due for completion. But this
assumes the Government of Kenya (GOK) and its partner in the UAE,
Etisalat, are ready to move to construction as soon as the tender is
awarded (in September, according to Ndemo).

7. (SBU) This is a dubious assumption, according to Herlihy, who
says TEAMS simply doesn't have its financing lined up yet. The GOK
has $16 million set aside for the project, but little else is firm.
A long-awaited briefing for prospective local and regional investors
in TEAMS, held in early July and organized by Standard Chartered
Bank on behalf of the GOK, was a disaster according to Ndemo
himself, as well to a local ISP owner, who wrote later in the press
that the meeting yield "very little real information" about the
project and its financial viability. Herlihy points out that it took
Sithe many months to identify and then come to agreement with its
partners, who number only three. He believes the GOK (and others
around Africa announcing plans to build new cables) seriously
underestimate the time it takes to line up funding and nail down the
many cross-border legal and regulatory details involved in such
major projects. TEAMS and the EASSy project (below) aren't even at
the starting line, in his view.

But Other Pieces Falling Into Place

NAIROBI 00003262 003.2 OF 003

8. (SBU) While the GOK continues to dither on financing and on the
SEACOM co-build offer, it appears to be moving to put in place the
domestic infrastructure that will be needed if Kenya and the region
are to reap the full benefits of submarine connectivity. Already, at
least two privately operated fiber networks link a handful of major
cities in Kenya. To complement this, the GOK in February announced
an ambitious plan to build a national fiber network linking all of
the country's major towns and cities. To manage the network, it
formed a special purpose vehicle, the Fiber Optic National Network
(FONN), owned by the Kenyan Ministry of Finance, and put out a $50
million tender in March. In June, the GOK awarded the tender to
three different companies, Sagem of France and Huawai and ZTE of
China. Three companies were chosen instead of one in order to
finish the project more quickly, perhaps in as few as 6-7 months,
according to PS Ndemo.

9. (SBU) Even closer to the consumer, a number of initiatives seek
to bridge the so-called "last mile" by bringing genuine high speed
broadband from the fiber networks into homes and small businesses in
Kenya and the wider region. One, recently launched by a group of
experienced local and international telecom executives and backed by
U.S. investors, has put in an application for $50 million in OPIC
funding and hopes to raise a total of $100 million. It recently
bought a number of existing ICT companies in the region, including
one of Kenya's largest ISPs, It aims to use these
acquisitions and the money it raises from OPIC and others to launch
converged broadband services to households, schools and small
businesses at affordable prices through the use of WiMax and other

What About EASSy?

10. (SBU) Embassy Nairobi welcomes additional information from
other posts in the region on the status of the longest-running
submarine cable project, the East Africa Submarine System (EASSy).
On the one hand, sketchy press reports indicate there is progress in
the form of financing being provided by the International Finance
Corporation. On the other hand, a recent somewhat confusing
Economist report indicates that the project continues to be mired in
disagreements over its structure and ownership, and that some
governments in the region have vowed to withhold landing rights
until the problems are fixed. In Kenya, neither Ndemo nor Herlihy
of SEACOM believe EASSy is viable as it was originally structured -
indeed the murky structure and resulting delays in the EASSy project
provided the very impetus for the GOK and Sithe to strike out and
build cables on their own. Both appear to have written EASSy off
and are unsure about its current status. Herlihy, however, has
found the perception of progress on EASSy an annoying distraction
that has led some potential customers to delay in committing to


11. (SBU) The upshot of all this is that East Africa should have
fiber optic connectivity in a little over 18 months by way of
SEACOM, a cable planned, financed, and built by one U.S. company,
with construction provided by another. Whether Kenya opts to build
its own cable, or co-build with SEACOM, is almost a sideshow for
now. Kenya would probably be wise to join up with SEACOM, but in
any case, the latter will soon be under construction with the TEAMS
cable on board or not. As the other parts of the ICT sector, such
as terrestrial networks and "last mile" connectivity, also fall into
place, large swathes of Africa could soon see an explosion of
pent-up demand for affordable internet-based products and services.
As this happens, there should be nearly unlimited upside potential
in terms of new investment, new jobs, and new industries across the
economies of the region. For this to work in Kenya, however, the
country will also need to invest in the new roads and power
generating capacity (septel) that will be needed to handle the
higher growth.

© Scoop Media

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