VZCZCXRO2233
RR RUEHDU RUEHGI RUEHJO RUEHMR RUEHPA
DE RUEHNR #2075/01 1320607
ZNR UUUUU ZZH
R 120607Z MAY 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 1632
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 0187
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 04 NAIROBI 002075 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE PASS USTR - BILL JACKSON AND JONATHAN MCHALE 
STATE FOR AF/E, AF/EPS AND EB/CIP 
TREASURY FOR LUKAS KOHLER 
 
E.O. 12958:  N/A 
TAGS: ECON ECPS EFIN KE
SUBJECT: KENYA STRUGGLES TO GET WIRED - THE ONGOING SAGA 
OF FIBER OPTIC CONNECTIVITY ON AFRICA'S EAST COAST 
 
Sensitive-but-unclassified.  Not for release outside USG 
channels. 
 
¶1.  (SBU) Summary: Regional efforts to at last bring 
economically vital fiber optic connectivity to Africa's 
East Coast are being stymied by South African efforts to 
impose a monopolistic model on the planned East African 
Submarine System (EASSy), a 5,500 mile undersea cable 
that would link Durban in the south to Djibouti in the 
north.  In response, an increasingly impatient Kenya is 
proposing an alternative "northern loop" linking Kenya, 
and countries in-land, to Djibouti.  Kenya's impatience 
is driven by a desire to jumpstart growth and create jobs 
by stimulating the ICT sector, where success depends 
critically on obtaining international fiber optic 
connectivity.  Kenya's ambitions are being held in check, 
however, by the reluctance of the World Bank, vendors, 
and others to abandon or compete with the EASSy project, 
which has become a symbol of African unity.  Given the 
critical need to connect Africa to the rest of the world 
as soon as possible, the USG should offer support to 
Kenya's efforts to build an undersea cable, even one 
outside the EASSy framework.  End summary. 
 
--------------------------------------------- ---- 
Africa's Urgent Need for Fiber Optic Connectivity 
--------------------------------------------- ---- 
 
¶2.  (SBU) In an increasingly "flat" world linked by high 
speed fiber optic connections criss-crossing the globe, 
the East Coast of Africa stands alone as the only major 
landmass lacking fiber optic connectivity to the rest of 
the world.  All international data and telecom exchanges 
must therefore flow over slower and far more expensive 
satellite links, a situation that has discouraged 
investment and growth, and thereby contributed markedly 
to the continent's continued economic marginalization. 
 
¶3.  (SBU) In an attempt to rectify this situation, 
African telecom operators came together to launch the 
East African Submarine System (EASSy) in 2003.  A 
consortium was formed, presently consisting of 27 
members/investors, to finance and build a 5,500 mile 
undersea fiber optic link stretching from Durban, South 
Africa to Djibouti on the Red Sea at an estimated total 
cost of $200 million.  The EASSy timetable originally 
called for the start of construction in 2006, and for the 
cable to be operational by mid-2007. 
 
--------------------------------------- 
The Bad Guys: South African Monopolists 
--------------------------------------- 
 
¶4.  (SBU) The EASSy project is running well behind 
schedule, however, due to fundamental unresolved 
questions over ownership structure, the role of 
governments in the project, and how non-members of the 
consortium will gain access to the system.  All of these 
questions, in turn, will directly affect the crucial 
determination of bandwidth pricing once the cable is 
completed.  The most important debate pits South African 
interests against Kenya and other consortium members over 
EASSy's business model.  In the simplest terms, South 
African investors want a "closed access" model based on 
the model currently used to run the SAT3 fiber optic 
cable, which runs along Africa's West Coast, and which 
has become a poster child for poor policy implementation. 
SAT3's ownership is dominated by incumbent monopoly 
telecom companies who are allowed under the terms of the 
deal to impose discriminatory and non-transparent pricing 
to extract monopoly rents on traffic flowing in and out 
of their countries over the cable.  Thus, while the cable 
itself is proving lucrative for consortium members, the 
benefits of cheaper, faster global connectivity for the 
broader national economies are not being realized. 
Pricing remains as high or higher than existing satellite 
links, completely negating the development potetial 
inherent in fiber connectivity. 
 
--------------------------------------------- ---- 
The Good Guys Want "Open Access" and Lower Prices 
--------------------------------------------- ---- 
 
 
NAIROBI 00002075  002 OF 004 
 
 
¶5.  (SBU) On the other side of this divide are the World 
Bank, Kenya, and reportedly other consortium members. 
The World Bank, which is committed to helping bring fiber 
connectivity to Africa through its Regional 
Communications Infrastructure Program, has offered to 
finance a significant portion of the total cost of EASSy 
on highly concessional terms.  But it is wisely insisting 
that the project learn the lessons of the SAT3 fiasco by 
adopting "Open Access" principles.  These call for equal 
and open access to fiber capacity, and transparent, non- 
discriminatory, and competitive pricing for bandwidth. 
Only in this way, believes the World Bank and others, can 
EASSy "help everyone to make money at the country level, 
and not be highly profitable in itself."  The World Bank 
believes successful implementation of EASSy along Open 
Access principles will lower bandwidth prices for end 
users by a factor of 10 in countries not just in those 
coastal nations with a direct connection, but also those 
in-land, which would link up to the undersea cable via 
inter-connected domestic "backhaul" fiber networks. 
 
------------------------------------------- 
Kenya Plots a Course to an ICT-Based Future 
------------------------------------------- 
 
¶6.  (SBU) Into this fray has stepped Kenya, impatient 
with both the slow pace and monopolistic direction of the 
EASSy project.  Under dynamic new leadership at the 
Ministry of Information and Communication, the country 
recently adopted a new information and communication 
technologies (ICT) strategy.  Spearheaded by Minister 
Mutahi Kagwe and endorsed publicly by President Mwai 
Kibaki in February, the strategy calls for the long- 
overdue (and politically painful) privatization of 
Kenya's monopoly landline provider, Telkom Kenya. 
Looking ahead, it calls for the issuance of new 
international gateway licenses for mobile operators, the 
issuance of additional national licenses, the 
establishment of broadband wireless services, the 
expansion through the private sector of domestic fiber 
optic networks, and eventually a unified licensing 
regime.  Longer term, the strategy plans to "re-skill" 
Kenyans through "Centers of Excellence" with the aim of 
making Kenya a regional ICT hub, to include a thriving 
call center and outsourcing services sector. 
 
¶7.  (SBU) Already, according to Bitange Ndemo, Permanent 
Secretary at the Ministry, big Indian firms are looking 
 
SIPDIS 
to outsource lower value-added call center functions to 
Kenya given the latter's apparent comparative advantage 
in the form of a well-educated workforce with strong 
English language skills.  Under Kagwe and Ndemo's 
strategy, a rejuvenated ICT sector can and should be the 
catalyst in achieving the elusive holy grails of job 
creation, faster economic growth, and poverty reduction 
in Kenya.  And all of this would be driven by technology 
in the hands of private sector forces. 
 
--------------------------------------------- ------- 
Impatient with EASSy, Kenya Threatens to Go it Alone 
--------------------------------------------- ------- 
 
¶8.  (SBU) The success of this audaciously ambitious 
strategy hinges on a number of policy outcomes in Kenya, 
but also crucially on the availability as soon as 
possible of reasonably-priced international fiber optic 
connectivity. Kagwe and Ndemo have therefore made 
connecting Kenya to an undersea cable their highest 
priority since coming to office late in 2005.  In a late- 
February video conference with the World Bank in 
Washington witnessed by Econ/C and EB/CIP's visiting 
Director of IT Policy for Africa, Kagwe made it clear 
that while Kenya wished to support and continue to 
participate in EASSy, it would also not hesitate to look 
at other options if the disagreements surrounding the 
structure and orientation of EASSy were not resolved 
soon. 
 
¶9.  (SBU) Since then, with none of these disagreements 
any closer to resolution, Ndemo has begun talking to 
consortium members separately, and also to potential 
investors, about shelving EASSy for now and building a 
separate "northern loop" which would connect by sea 
 
NAIROBI 00002075  003 OF 004 
 
 
Djibouti to Kenya's port of Mombasa.  He has also spoken 
with Indian firms about building an undersea cable 
linking the subcontinent to Mombasa, but it is not clear 
where these talks stand.  In any event, in conversations 
with Econ/C and EB/CIP, Ndemo has expressed confidence 
that there are enough EASSy members who side with Kenya's 
position on open access to raise the necessary money to 
launch a new northern cable project and move quickly to 
construction and roll-out. 
 
--------------------------------------- 
Political Correctness a Stumbling Block 
--------------------------------------- 
 
¶10.  (SBU) The hitch, as always, is political.  Ndemo 
realizes that going against the grain on EASSy is 
politically incorrect in that it appears to undermine a 
symbol of African unity.  The EASSy consortium consists 
almost completely of African telecom firms, and enjoys 
the strong political backing of the pan-African New 
Economic Partnership for African Development, or NEPAD, 
headquartered in South Africa.  Even the World Bank, 
according to Ndemo, seems leery of offering support to a 
Kenya-led northern loop project because of fears it would 
offend NEPAD and undermine an ostensibly African 
initiative.  Privately, Ndemo is disdainful of NEPAD's 
meddlesome involvement in EASSy, and also of the idea of 
using EASSy as a symbol of "black empowerment."  In his 
view, the cable should be as open to multinational 
operators and investors as to African ones. The bottom 
line for him is harnessing as much competition as 
possible in order to ensure the maximum use of fiber 
capacity at the lowest possible cost. 
 
------------------------- 
The U.S. Commercial Angle 
------------------------- 
 
¶11.  (SBU) The story would not be complete without an 
American angle, and in this case, it is through U.S. firm 
Tyco, one of only a handful of companies worldwide 
capable of laying an undersea cable of EASSy's magnitude. 
In fact, Tyco and French firm Alcatel are alone in the 
running for the tender phase of EASSy, now underway and 
reported to be close to decision.  Tyco therefore appears 
reluctant to be seen as aggressively courting Kenya out 
of fear that it will offend the EASSy consortium and 
thereby jeopardize its bid. Ndemo told Econ/C May 10, 
however, that Alcatel is playing both sides of the fence, 
staying in regular contact with him and monitoring the 
seriousness of Kenya's intention to lead a separate 
effort to build a northern loop. 
 
------- 
Comment 
------- 
 
¶12. (SBU) Our view, admittedly a parochial one from our 
narrow perch in Nairobi, is that both the USG and the 
World Bank should look seriously and offer whatever 
support possible to Kenya's bid to develop an alternative 
to EASSy.  In time, there is probably room in the market 
for two cables; indeed a northern loop and some version 
of EASSy could be complementary in meeting Africa's 
growing demand for telecom, internet, and related 
services.  Moreover, supporting Kenya's efforts to build 
a northern loop might be just the dose of real-world 
competition EASSy needs to get its act together, move to 
an Open Access model, and begin to roll out. 
 
¶13. (SBU) Fiber optic connectivity may sound too 
technical for some, but the economic future of Kenya and 
her neighbors depend on it.  If it doesn't get it soon, 
Kenya's new ICT strategy may be dead on arrival.  It is 
an ambitious strategy indeed.  But it differs from other 
grandiose Kenyan government strategies of the past in 
that there is actually leadership in place working 
feverishly and against great odds to make it a reality. 
That leadership will not be in place forever, so time is 
of the essence.  Success, we believe, would be worth far 
more than all the donor assistance given to Kenya each 
year in terms of spurring growth, reducing poverty, and 
facilitating the necessary longer-term shift to a 
 
NAIROBI 00002075  004 OF 004 
 
 
globally competitive, urban, services-based economy in 
East Africa's pillar country. 
BELLAMY