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Cablegate: Kenya's Big Push for Ict Reform and Infrastructure

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R 250610Z OCT 07
FM AMEMBASSY NAIROBI
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RUEHDE/AMCONSUL DUBAI 0102
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UNCLAS SECTION 01 OF 05 NAIROBI 004202

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: KENYA'S BIG PUSH FOR ICT REFORM AND INFRASTRUCTURE

REF: A. NAIROBI 3262, B. NAIROBI 1770, C. NAIROBI 565

NAIROBI 00004202 001.2 OF 005


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

1. (SBU) Summary: With elections looming in December, Kenya's
private sector and reform-minded government officials are racing to
either complete or put in motion a series of intertwined reforms and
infrastructure projects aimed at generating growth across the entire
economy through greater competition, lower costs, and greater
investment in the cross-cutting sector known as information and
communication technologies (ICT). If all of the reform and
infrastructure initiatives now in play converge in the coming
months, they could set the stage for stronger sustained economic
growth throughout Kenya and the region for years to come. Among the
highlights:

-- The privatization (and revitalization) of Telkom Kenya, the
country's monopoly fixed line phone company. Likely buyer: A
consortium led by France Telecom. (Paras 3-4).

-- The sale to the public of 25% of Safaricom, the country's (and
the region's) largest and most profitable mobile phone company.
(Paras 5-7).

-- The issuance of Kenya's first 3G mobile license, worth a cool $25
million. (Para 8).

-- Greater competition in the mobile market with the licensing of a
third mobile service provider and a new "fixed wireless" service
using CDMA technology. (Paras 9-11).

-- Significant progress towards achieving the holy grail of fiber
optic connectivity with the rest of the world. One or two submarine
fiber optic cables, one led by Kenya, and one by a U.S. venture
capital firm, should be "lit up" and in business by mid-2009.
(Paras 14-18).

-- Significant progress towards a terrestrial fiber network in Kenya
that will go to the borders of all its neighbors. This, together
with the submarine cables, should provide affordable, high-speed
global connectivity to the entire EAC region. (Paras 19-20).

End summary.

2. (U) This cable is an update on activities and developments in
Kenya's critical ICT sector. It is based on a wide range of sources
and information gathered in recent weeks, including from meetings on
October 18 between Emboffs, a visiting U.S. International Trade
Commission analyst, and several key players in Kenya's ICT sector.

--------------------------------------
The End Game: Privatizing Telkom Kenya
--------------------------------------

3. (SBU) After years of struggle and self-imposed setbacks, Kenya
is finally on the verge of privatizing its lumbering, loss-making
monopoly fixed line phone company, Telkom Kenya. With advice from
the World Bank Group's International Finance Corporation (IFC) and
$80 million from the World Bank itself, Telkom has peacefully shed
over 10,000 jobs in the past 12 months, and is scheduled for a final
tranche of job cuts in November that will bring its payroll to just
over 3,000. The estimated savings from these job cuts will total
over KSh 4 billion (over $60 million) per year, freeing up capital
badly needed to upgrade both Telkom's fixed network, and expand its
more recently established "fixed" mobile network (see para 11
below).

--------------------------------------------- --------
French, Indians, Brits, Libyans in Hunt to Buy Telkom
--------------------------------------------- --------

4. (SBU) Telkom is restructuring its balance sheet to reduce the
KSh 50 billion ($760 million) in debt and tax liabilities it now
carries on its books using the proceeds of the upcoming sale of
Safaricom, the mobile company in which it holds a 60% share (para
5). The company's privatization plan calls for the sale of 51% of
the company to a strategic investor, with the winner to be announced
on November 26. Details at this stage are sketchy, but according to
Telkom CEO Sammy Kirui on October 18, there are six consortia

NAIROBI 00004202 002.2 OF 005


currently bidding for the purchase. These include three Indian-led
groups: Reliance, MTNL, and Bharti. Another group brings together
British Telecom and a Libyan entity we believe is called LAP - the
Libya Africa project. France Telecom and Agility of Kuwait may form
a fifth group, and Telkom South Africa leads a sixth. Bitange
Ndemo, Permanent Secretary in the Ministry of Information and
Communication, told Econ/C October 23 that the France
Telecom/Agility consortia is the most aggressive thus far in bidding
for Telkom.

--------------------------------------------- ------
To Privatize Telkom, You Have to Spin Off Safaricom
--------------------------------------------- ------

5. (SBU) Job cuts aside, the most challenging aspect of the Telkom
Kenya privatization has stemmed from the company's ownership, on
behalf of the GOK, of 60% of Safaricom, Kenya's first and largest
mobile phone service provider (see below). In an anomaly that is
galling to Safaricom's management and foreign owners, Telkom is
already offering its own mobile services in direct competition with
Safaricom and with the country's second mobile provider, Celtel
(more on this below in paras 11-13).

----------------------------------
Why the Safaricom IPO is Important
----------------------------------

6. (SBU) To resolve this glaring conflict of interest, the GOK is
moving to unbundle the two companies through what will be the
largest (by far) initial public offering (IPO) in the history of the
Nairobi Stock Exchange (NSE). The GOK plan calls for Telkom's 60%
ownership in Safaricom to be transferred to the Ministry of Finance
in the coming days so that the privatization can proceed. Then,
either late this year or early next, 25% of Safaricom's shares will
be sold to the public on the NSE. The GOK will retain the balance
of shares, but will place a portion of these in a special purpose
vehicle designed to allow Safaricom's 40% owner, Vodaphone Kenya
(which is a subsidiary of Vodaphone UK), to buy additional shares in
the future and ultimately achieve 51% or more ownership of Safaricom
-- should it so choose. Recent press reports, however, indicate
Vodaphone may forgo a majority stake in Safaricom if the GOK cedes
its right as the current majority shareholder to appoint the
company's CEO.

7. (SBU) Meanwhile, the IPO, if successful, will represent a triple
play for Kenya. Ministry PermSec Ndemo believes the IPO will raise
around $2 billion. This will provide direct one-time support of $530
million to plug the GOK's budget deficit. It will also allow the
GOK to pay down Telkom Kenya's debt and tax liabilities and pay for
a new mobile license (see para 13), all in preparation for its
privatization. In addition to unlocking the Telkom privatization in
this way, the Safaricom IPO is also important because it is likely
to play a major role in the ongoing cultural shift in Kenya away
from traditional assets like land and cattle to more modern
financial instruments like stocks and bonds.

--------------------------
Mobile Market Also on Fire
--------------------------

8. (SBU) As in many other African markets, the growth of mobile
telephony in Kenya continues to astound. In 2000, industry pundits
estimated that the country would have 400,000 users within five
years, but Kenya now has 8.1 million after seven. Safaricom CEO
Michael Joseph, whose company's pre-tax profits in 2006 equaled 1.6%
of Kenyan GDP, said on October 18 that Safaricom is enjoying 50%
revenue growth per year. The Safaricom and Celtel networks
currently cover 30% of Kenya's land area and 75-80% of the
population. With a penetration rate of only 25%, however, the
market looks set to continue its rapid growth over the next 5-10
years. A telling example: Safaricom on October 18 paid $25 million
to the industry regulator, the Communications Commission of Kenya
(CCK), for a Third Generation, or 3G, mobile license. CEO Michael
Joseph said the company needs 3G spectrum to keep up with demand for
high-speed data services from corporates, and because Kenya is
running out of room on the 2G radio spectrum.

--------------------------------------
Econet Finally Gets 3rd Mobile License
--------------------------------------


NAIROBI 00004202 003.2 OF 005


9. (SBU) But the current mobile market, dominated by Safaricom and
Celtel, has come to resemble just that - a duopoly, resulting in a
less-than-fully competitive market. It was thus good news in August
when Econet Wireless, a South Africa-based mobile phone operator,
was finally allowed to exercise its rights under a much-coveted
third mobile license, which it had won in a tender three years
earlier in September 2004. It had been blocked from rolling out its
network by then-Minister of Information and Communications (and
current Foreign Minister) Raphael Tuju. Tuju attempted to revoke
the license, citing unexplained irregularities in the tender
process. Econet fought Tuju and the Communications Commission of
Kenya (CCK) in court, and won, but was still prevented by the CCK
from rolling out its network because it had not paid fully for the
license fee after a falling out with its local partner.

10. (SBU) In July, Econet, the Ministry, and CCK reached two
interlocking agreements in which Econet agreed to drop several
pending lawsuits against Tuju and the GOK in exchange for the
Ministry declaring Econet's license to be "in good standing." CCK
in turn agreed to provide Econet with the network codes and
frequencies required for roll-out as soon as Econet satisfied the
requirement for 30% local Kenyan ownership, and paid the $12 million
it still owed on the license fee. CCK Director-General John Waweru
confirmed on October 18 that Econet has met these requirements. As
such, Econet expects to begin service roll-out by March 2008 after
an initial investment in infrastructure totaling $100 million.

--------------------------------------------- -------
More Competition: Telkom Kenya Enters Mobile Fray...
--------------------------------------------- -------

11. (SBU) As noted above, Telkom Kenya, although ostensibly a fixed
line service provider, is also in practice the other new player in
Kenya's mobile market. In September, it officially rolled out a
"fixed wireless" service following a year-long trial period. The
service, which is based on Code Division Multiple Access (CDMA)
technology, came to Telkom as a gift from the Chinese government in
the form of a KSh20 million ($300,000) concessional credit to Kenya
in 2006, ostensibly to fund a CDMA network that would reach
under-served rural areas with nominally fixed services. In
September 2006, Telkom and Chinese firm Huawei signed a contract to
construct a CDMA 2000 access network and microwave backbone, and to
provide thousands of free CDMA handsets (which Kenyan middlemen
promptly bought up, marked up, and sold). Since last year when the
trial began, Telkom has aggressively rolled out the service in urban
areas, competing head-to-head with Safaricom and Celtel. It already
claims 150,000 subscribers, and predicts it will have a million
customers by the end of the year. Indeed, having failed through the
years to expand its legacy fixed line network, Telkom is banking on
"Telkom Wireless" to make it commercially relevant after its
privatization.

------------------
...But Is It Fair?
------------------

12. (SBU) Safaricom and Celtel point out that Telkom Wireless
amounts to a gift from the GOK to Telkom to make the latter more
attractive to a prospective buyer - and at their expense in terms of
competitive fairness. They argue that the CDMA network was
originally cast as a GOK development project to provide fixed
services to remote rural communities, but has now morphed into a
full-scale commercial mobile service. Further, they rightly point
out that Telkom Kenya is not properly licensed for mobile services,
did not pay for a mobile license, and gets an additional edge over
Safaricom and Celtel by not having to pay the 10% excise duty on
mobile airtime that they do.

--------------------------------------------
Telkom to Get Mobile License for $55 Million
--------------------------------------------

13. (SBU) In response to these criticisms, the CCK on September 28
published a notice of its intention to issue a mobile license to
Telkom Kenya. In separate meetings on October 18, CCK Director
General John Waweru and Telkom Kenya CEO Sammy Kirui both insisted
that Telkom Kenya would pay for the license at a price of $55
million, equivalent to the price paid by Safaricom in 2000. Despite
this pledge, industry players remain suspicious of GOK and CCK
intentions, believing the latter will continue to tilt the
competitive playing field in favor of Telkom Kenya. These fears are

NAIROBI 00004202 004.2 OF 005


fueled by persistent rumors that two major GOK-initiated
infrastructure projects, an undersea fiber optic cable and a new
terrestrial fiber network (paras 14-18 below), will be handed over
to Telkom Kenya for management once they are completed. This would
give Telkom effective control over vital infrastructure that all
companies, including its rivals, will need to survive and grow.

-------------------------------
The Desperate Need for Fiber...
-------------------------------

14. (SBU) As noted reftels, Africa's East Coast is the last
remaining major landmass in the world without fiber optic
connectivity to the rest of the world. As such, all data and voice
traffic in and out of the region must utilize satellite technology,
which is both expensive and inappropriate for certain types of ICT
applications. The growth of the ICT sector in Kenya, and with it
the entire economy, has lagged as a result. Kenya's fledgling call
center industry, for example, is currently paying $3,000 per
megabyte per month vs. the global norm of $300-600 in competing
markets such as India's. Moreover, satellite bandwidth is
increasingly scarce at any price. According to Safaricom CEO
Michael Joseph on October 18, Kenya will run out of satellite
capacity in July 2008, forcing companies to pay higher costs for
increasingly lower quality satellite bandwidth. Safaricom - indeed
the entire region - is desperate for affordable fiber connectivity.

-------------------
...Under the Sea...
-------------------

15. (SBU) A number of projects are underway to deal with this
critical infrastructure bottleneck. Reftels report extensively on
three different competing initiatives to construct a submarine fiber
optic cable for the East Coast of Africa. Of the three, the two
front runners continue to be the Kenya-UAE TEAMS project, which will
connect Mombasa with Fujaira in the UAE, and the larger SEACOM
project, which will run along the entire coastline from South Africa
to the Red Sea. It is led by a subsidiary of American venture
equity giant, the Blackstone Group.

16. (SBU) On October 11, TEAMS took a step closer to fruition when
the GOK announced that French firm Alcatel had won the $82 million
contract for system construction. In winning the tender, Alcatel
edged out U.S. firm Tyco, which was unable to match its rival on
either price or completion date, despite aggressive advocacy by the
U.S. Mission in Kenya with both the company and the Ministry f
Information and Communications. Alcatel has promised to complete
the TEAMS cable by June 2009, but many suspect this date will slip.
The CEOs of both Safaricom and Telkom Kenya complained on October 18
that the financing for the project has not yet been secured. They
and other operators in Kenya and the region are being invited to
make $5 million equity commitments to TEAMS by the end of November,
but have yet to see a business plan for the project.

17. (SBU) SEACOM, meanwhile, also appears on track for completion
by mid-2009, despite a great deal of uncertainty generated in
September when South African Communications Minister Ivy
Matsepe-Casaburri and other telecom officials stated publicly that
the country would not allow non-South African-owned cables to land
there. While these threats appear to have died down, the South
African Government is the driving force behind a grandiose, almost
utopian plan under the New Partnership for Africa's Development
(NEPAD) to develop a continental terrestrial broadband network
linked to several new submarine cables, all of which would be
licensed by NEPAD (vs. national governments) and supervised by a new
supranational regulator. The plan is outlined in the "Policy and
Regulatory Framework Protocol for NEPAD ICT Broadband Infrastructure
Network," completed in Kigali in August 2006. But only a handful of
African countries have signed it. Kenya has not, and CCK
Director-General Waweru said on October 18 that Kenya fundamentally
disagrees with the approach being taken by the NEPAD protocol.

18. (SBU) In any event, in the teeth of these developments, SEACOM
is proceeding with system construction, having already secured
financing for the $300 million project and locked in a construction
contract with U.S. fiber maker Tyco. In South Africa, it is
partnered with Neotel, through whose license it will land near
Durban. In Kenya, SEACOM is on the verge of having its landing
rights in Mombasa approved by CCK.


NAIROBI 00004202 005.2 OF 005


--------------
...and on Land
--------------

19. (SBU) On land, at least two privately operated fiber networks
already link a handful of major cities in Kenya. Electricity
distributor Kenya Power and Lighting is also laying fiber optic
cable on its poles and plans to offer bandwidth services.
Additionally, Telkom Kenya completed a 310 mile fiber cable linking
Mombasa to Nairobi in July 2006, and the company is just now
completing the project's second phase - a cable linking Nairobi to
the Ugandan border at Malaba. To complement this, the GOK in
February announced an ambitious plan to build a $50 million 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. In June, the GOK awarded the tender to construct FONN 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.

-------------------------
The Regional Implications
-------------------------

20. (SBU) Telkom Kenya's and private sector fiber already connects
Nairobi to the Ugandan border. On top of this, the terrestrial FONN
project will extend to Busia, also on the Ugandan border; Moyale on
the Ethiopian border; Lokichogio near the border with Southern
Sudan; and Namanga and Mabayani on the Tanzanian border. To further
regionalize the effort, Kenya has offered equity ownership in TEAMS
to telecom operators in the four other EAC countries, as noted in
para 16 above. However, PermSec Ndemo told Econ/C October 23 that
operators and governments in the four other EAC countries are
"dragging their feet," and have been unwilling to commit to TEAMS
for fear of irritating the South African government, which continues
to push the grandiose NEPAD network initiative. Ndemo, a former
U.S.-based business executive, sees the NEPAD plan as hopelessly
unrealistic and many years away from realization. He said EAC
country operators have until the end of November to commit to TEAMS.
If they don't, they'll have to buy capacity from TEAMS at higher
rates than they'd enjoy as owners. His view: NEPAD is a pipedream,
TEAMS is coming soon, and EAC operators should get on board now
before the train leaves the station.

--------------------------
Comment: Kenya in the Lead
--------------------------

21. (SBU) In any event, once both FONN is complete and either TEAMS
and/or SEACOM land in Mombasa, a regional fiber network will be in
place. Thereafter, and assuming a reasonable regulatory
environment, the entire EAC region should benefit from affordable
high-speed connectivity with itself, and with the rest of the world.
As such, the importance of current ICT activities, policies, and
trends in Kenya cannot be overstated. Whether its neighbors agree
or not, Kenya in our view rightly sees itself as a leader in this
regard. While its own regulatory environment still needs
improvement, its policymakers have taken a great deal of political
and economic risk over the past two years to get Kenya and the rest
of region connected as quickly as possible to the rest of an
increasingly "flat" and competitive global economy.
Slutz

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