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R 141355Z DEC 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 6027
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEHAD/AMEMBASSY ABU DHABI 0125
RUEHDE/AMCONSUL DUBAI 0080
RUEHNE/AMEMBASSY NEW DELHI 0198
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RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS SECTION 01 OF 04 NAIROBI 005265 
 
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 IN AE
SUBJECT: U.S. FIRMS IN THE RACE TO BUILD A FIBER OPTIC CABLE IN EAST 
AFRICA 
 
REF: NAIROBI 2075 
 
NAIROBI 00005265  001.2 OF 004 
 
 
Sensitive-but-unclassified.  This cable contains business 
proprietary information and is not for release outside USG 
channels. 
 
¶1.  (SBU) Summary: Kenya and the rest of the East Coast of Africa 
are on the cusp of achieving interconnection to the worldwide web 
via undersea fiber optic cable.  Two projects are racing to begin 
construction, and the leading contender, Seith East Africa, is 100% 
U.S.-owned.  Moreover, Seith has already negotiated a $330 million 
construction contract for its project with another U.S. firm, Tyco. 
The Government of Kenya, meanwhile, is pushing a less ambitious, 
subsidized cable to spur job creation and development in East 
Africa.  It's possible the two efforts will merge in the coming 
weeks, or that Kenya will drop its plan altogether.  But under any 
likely scenario, the outcome should be a stunning victory for U.S. 
commercial diplomacy in Africa.  End summary. 
 
--------------------------------------------- 
Background: East Coast Struggles to Get Fiber 
--------------------------------------------- 
 
¶2.  (SBU) Econ/C met December 7 with Brian Herlihy, Vice President 
of the Seith Group, a U.S. company focused on power and telecom 
opportunities in the developing world.  He followed up by meeting 
December 14 with Bitange Ndemo, Permanent Secretary in the Kenyan 
Ministry of Information and Communication. 
 
¶3.  (SBU) Seith has in recent months been seriously exploring 
construction of an undersea fiber optic cable along Africa's East 
Coast - the planet's last major landmass without fiber optic 
connectivity to the worldwide web.  As the rest of the globe zooms 
towards an ever-flatter world linked by high speed digital 
technologies, economic development in the eastern half of Africa has 
been hobbled by considerably higher telecom and internet costs.  As 
things stand now, all voice and data transmissions to and from the 
eastern half of Africa ultimately must utilize satellite technology, 
with is both less appropriate and far more expensive than high-speed 
broadband connectivity using undersea fiber optic technology.  The 
digital boom of the past decade in the rest of world was based in 
part on prices for access to undersea fiber optic cables falling 
drastically in the 1990s, a benefit East Africa has not yet been 
able to share. 
 
¶4.  (SBU) East African countries have long recognized the need to 
construct an undersea cable along the East 
Coast, but have thus far been unable to get the job done.  The 
longest-running current effort, the East African Submarine System 
(EASSy), continues to be bogged down in fundamental debates over its 
structure, pricing, and purpose (see reftel for more on the EASSy 
saga).  In response to the failure to get EASSy up and running, 
other governments in the region, led notably by Kenya, have struck 
off in their own direction.  In November, Kenya signed an MOU with 
Etilisat of the United Arab Emirates (UAE) to build The East Africa 
Marine System (TEAMS), which would cover only half of Africa's east 
coast, from Mombasa in Kenya north to Fujaira in the UAE, where it 
would plug into other cable systems and thus to the rest of the 
worldwide web. 
 
----------------------------------- 
The Seith East Africa Cable Project 
----------------------------------- 
 
¶5.  (SBU) Enter the Seith Group, which is 80% owned by the 
Blackstone Group, a New York-based private equity and corporate 
advisory firm.  In early 2006, as it became more clear that internal 
debates within the EASSy consortium might prove fatal, and as a 
fed-up Kenya began organizing the breakaway group of governments and 
companies that plan to construct TEAMS, Seith began discussions with 
Kenya and others in the region on an even more ambitious project 
that would supplant both EASSy and TEAMS.   In his meeting with 
Econ/C on December 7, Seith's Herlihy outlined the current 
parameters of the newly dubbed Seith East Africa (SEA) cable 
project: 
 
-- Total cost: $330 million. 
-- Length: From Durban, South Africa, to the United Arab Emirates 
and Bombay.  Other landing points include Mozambique, Madagascar, 
Tanzania, and Kenya. 
 
NAIROBI 00005265  002.2 OF 004 
 
 
-- Construction: Seith has successfully concluded the terms of a 
construction contract with U.S.-based Tyco Telecommunications. 
-- Operator: Seith's strength is in developing and operating power 
systems.  Thus, it will contract out the operation of the cable to 
VSNL of India.  VSNL recently bought Teleglobe of Canada and owns 
26% of Neotel, South Africa's second national operator.  Its largest 
shareholder is the Tata Group, one of India's largest outsourcing 
companies. 
-- Capacity: 1.2 terrabits total, of which 40 gigabits will be lit 
up initially. 
-- Licensing: SEA's operating license in South Africa will piggyback 
on Neotel's.  Seith has hired a Washington law firm that is ready to 
begin securing the necessary operating licenses and landing rights 
in the seven countries in which will SEA will connect.  Seith does 
not anticipate major delays in this regard. 
-- Backhaul: In an unusual move, SEA will also construct the 
backhaul fiber networks from the coastal landing points to the major 
metropolitan centers.  Thus, in Kenya, it will build backhaul from 
Mombasa to Nairobi.  Seith realized that many nations were not 
prepared to take the cable from a landing point on a beach all the 
way into major city centers and therefore has included the 
construction of metropolitan interconnection centers as part of its 
project. 
 
------------------------------------------ 
Timing: Will Early Bird Will Get the Worm? 
------------------------------------------- 
 
¶6.  (SBU) Herlihy said Seith plans to get Board approval shortly to 
invest an initial $7 million for the marine survey required for the 
cable.  This will begin in January, 2007 and by March Tyco will 
begin constructing the fiber optic cable.  Herlihy said the northern 
leg of the cable, from the UAE to Mombasa, will be completed by 
mid-2008; the southern leg from South Africa to Mombasa, will be 
completed by the third quarter of 2008.  If SEA follows this 
timetable, it will be finished before TEAMS, which is running into 
delays, according to Herlihy.  This, he believes will render TEAMS 
redundant, leading Kenya and the UAE to cancel the project. The SEA 
project holds the advantage over other proposed efforts, including 
TEAMS, that its funding will come from a single, private source and 
will not need to attract investors before launching. 
 
¶7.  (SBU) TEAMS, according to Herlihy, was economically flawed from 
the start because it did not include connection to South Africa, a 
market he said is "ready to burst" from an ICT perspective.  The 
South African market, said Herlihy, is really the key to the 
economics of the SEA project because it will generate much of the 
initial volume and therefore revenues. 
 
--------------------------------------------- -- 
Open Access and Low Prices - Unbeatable if True 
--------------------------------------------- -- 
 
¶8.  (SBU) Pricing for access to the cables, however, will hold the 
key to the relative fates of the SEA and TEAMS cable projects.  The 
Government of Kenya (GOK) under the determined Minister of 
Information and Communications, Mutahi Kagwe, has until now rejected 
Seith's overtures in part due to fears that Seith's project, being 
on commercial terms, would not offer prices low enough to spur the 
desired development gains in Kenya and the region and would be held 
up by delays in South Africa.  Herlihy, however, argued that the 
pricing planned for the SEA project is more than sufficiently low to 
generate economic benefits from the start.  End-user costs, he 
claimed, will go down from the current $7,500 per month per megabyte 
in Kenya using satellite technology to around a tenth this amount. 
 
¶9.  (SBU) Seith will use a "one price fits all" structure in which 
any/all buyers can purchase "indefeasible rights of use," (IRUs) to 
connect to the cable.  IRUs provide a specified quantity of 
bandwidth over a period of 20 years for a set price paid up-front. 
Seith's "pricing vision" calls for declining prices for IRUs over 
first five years of the project as a way to catalyze demand and 
encourage large capacity purchases, for which it will provide 
transparent volume discounts.  Because any company can purchase 
IRUs, the model for the SEA cable is "true" open access and very 
transparent, according to Herlihy, thus ensuring competition and low 
prices to end-users. 
 
------------------------------------ 
Kenya Not Ready to Abandon TEAMS Yet 
 
NAIROBI 00005265  003.2 OF 004 
 
 
------------------------------------ 
 
¶10. (SBU) Speaking with Econ/C December 14, Permanent Secretary of 
Information and Communication Bitange Ndemo acknowledged that Seith 
had lowered its projected pricing over the course of recent weeks. 
But he is unsure SEA's pricing will be low enough to lead the GOK to 
abandon TEAMS.  The latter, Ndemo explained, still has the strong 
support of his boss, Minister Kagwe.  Kagwe is strongly in favor of 
subsidized pricing and cares little about maximizing traffic volume 
and revenues.  Kagwe wants the cable as a magnet for investment in 
call centers and other ICT services as a way to generate growth, 
jobs, and development in Kenya and in the region.  Kagwe, Ndemo 
explains, wants pricing as low as India's, which is currently about 
half what SEA would offer.  Ndemo admitted "we still need to sort 
out some of the math," but he claimed that Seith's pricing was not a 
tenth the price of satellite links, but would generate prices just 
under two times cheaper than satellite. 
 
--------------------------------------------- ------- 
TEAMS Wants Deal with Tyco Too; French Playing Dirty 
--------------------------------------------- ------- 
 
¶11.  (SBU) As a result, Kagwe and Ndemo are moving full steam ahead 
to begin construction of TEAMS on a timetable nearly identical to 
the plan for SEA.  Like Herlihy and Seith, both are strongly in 
favor of using Tyco to lay the cable.  Ndemo said he is regular 
contact with Tyco and would be asking Tyco officials to visit Kenya 
the week of December 18 to negotiate the final terms of a 
construction contract, and then sign it.  Ndemo said Tyco was at a 
competitive disadvantage because its chief rival, Alcatel of France, 
has moles in the GOK who, to Ndemo's fury, had leaked the details of 
Tyco's bid to Alcatel.  Ndemo, in turn, informed Tyco about the 
incident.  Tyco's ace card, however, is that Alcatel is politically 
unacceptable to Kagwe and Ndemo because it had earlier won the 
contract to construct EASSy. If it switches over to TEAMS now, Kenya 
will be accused of purposely torpedoing EASSy, a political storm 
Kagwe wants to avoid.  Ndemo noted that Alcatel won the EASSy tender 
earlier this year using similarly dirty tricks against Tyco. 
 
------------------------ 
Can TEAMS and SEA Merge? 
------------------------ 
 
¶12.  (SBU) Ndemo understands the advantages offered by the SEA 
project over TEAMS, and his bottom line is that he doesn't want to 
have to invest the $64 million required of the GOK for TEAMS if an 
adequate alternative is being built by the private sector.  He is 
working to convince Kagwe to negotiate a compromise with Seith under 
which the two projects would merge into one, with Kenya providing 
30% of the equity.  The key to bringing all the parties together, he 
said, is Tyco, which has a hand in both projects. He is urging Tyco 
executives to stop in Dubai enroute to Kenya over the coming weekend 
to begin to broker such a compromise with Etilisat officials. 
 
-------------------------------- 
Paradox: GOK Also Supporting SEA 
-------------------------------- 
 
¶13.  (SBU) Ndemo, meanwhile, contends the SEA cable will be built no 
matter what.  He agrees with Herlihy's analysis that the cable is 
made economically viable by the expected boom in internet traffic 
from South Africa, and that traffic from Kenya alone is not the 
dealmaker or a deal breaker for Seith.  Moreover, he is not standing 
in the way.  The previous day, he issued a letter to Seith granting 
SEA landing rights in Mombasa, and the GOK has also pledged to 
provide land to the company in a Nairobi-area media park for Seith's 
cable management center.  He expects the company will have no 
problems obtaining a Data Center Network Operators license in Kenya, 
allowing it to establish a national data network and international 
gateway. 
 
---------------------------------------- 
Managing the Optics of Foreign Ownership 
---------------------------------------- 
 
¶14. (SBU) Ndemo's support for SEA, despite the complications 
surrounding TEAMS, dovetails with Herlihy's confidence that the SEA 
project will win the hearts and minds of East African companies and 
governments.  Aside from some tax issues related to SEA's backhaul 
investments, he foresees no major regulatory hurdles.  He is 
 
NAIROBI 00005265  004.2 OF 004 
 
 
concerned, however, about the optics of foreign ownership of such a 
large and important piece of infrastructure.  Seith is starting to 
plan the public relations elements of the project, which it hopes to 
roll out in early 2007.  Econ/C noted the USG will be as supportive 
as possible in dispelling misinformation and promoting the project, 
and he urged Herlihy to keep both Washington and Embassy Nairobi in 
the loop as rollout approaches.  Comment: We note that Seith does 
not even have a public website.  As such, we worry that SEA will be 
cast by its commercial opponents in Africa as a sinister ploy by a 
mysterious foreign firm to monopolize vital African infrastructure. 
Seith will thus need to market itself and the project carefully and 
aggressively as the project moves forward.  End comment. 
 
------- 
Comment 
------- 
 
¶15. (SBU) The SEA cable project is not out of the woods by any means 
yet.  But Seith is confident it will be the first in the water, and 
thus quickly make all other competing projects redundant.  And even 
if Kenya builds TEAMS, the news is still good.  If and when SEA (or 
both cables) is built, the results will be stunning in two respects. 
 First, the East Coast of Africa will finally be wired for the 
internet age - with huge development gains if the pricing is low 
enough.  Second, the project would be one of the biggest wins for 
American commercial diplomacy in Africa in years, with Seith the 
financier and owner, and Tyco the builder.  Tyco, in fact, could 
theoretically end up with two major construction contracts by next 
week worth nearly half a billion dollars.  At a time when the French 
are still playing dirty and Chinese infrastructure providers appear 
invincible across the continent, an American owned and built fiber 
optic cable would be a sweet victory indeed for the American private 
sector.  We plan to support it wholeheartedly. 
Ranneberger