Dear all FYI ----- Original Message ----- From: "Abiodun Jagun" <abi@apc.org> To: <wcurrie@apc.org> Cc: <alice@apc.org> Sent: Friday, May 05, 2006 4:11 PM Subject: Re: Fw: Fw: [Fibre-for-africa] Kenya and its Own Cable..Full Story

Dear Alice and Willie:

I have been trying to follow the discussion on the proposed "Kenya cable" on the fibreforafrica list, whilst at the same time reviewing the detailed feasibility study (DSF) that was submitted by Axion to the EASSy consortium. Bill Woodcock makes an important point about the type of "model" that will be adopted ... from my readings, the decision that is made concerning this will determine the interpretation of "openness" that will be adopted by the new cable.

It is therefore important to re-think fundamental conceptions about the way submarine cable projects are structured or risk making the same "closed" decisions irrespective of who the players are!

I shall try to explain this using EASSy as and the DSF submitted to the consortium as an example. I've come across three different models/structures that have to be decided upon in constructing a submarine cable: [i]ownership structure, [ii] financial structure, and [iii] governance structure. They are of course interrelated and adopting a certain type of ownership structure has an impact on the range of available options for the other types of structure.

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From reading the DSF (dated May 2005) I got the distinct impression that Axion recommended the Consortium model to EASSy. For example the report states:

"The Consortium model is seen as successful as soon (as) it gets to the financial closing of the project. In case system capacity is poorly used or capacity usage principles are incorrectly designed, it only impacts the individual business plan of each Consortium member. The long-term economical viability of projects built under a Consortium umbrella is never at risk." (Axiom, 2005:41)

An alternate model (involving the setting up of a Special Purpose Cable Company - SPCC or Special Purpose Vehicle - SPV) is also recommended where the Consortium members cannot raise the finance required for the project.

The DSF gives a detailed description of what (in its own interpretation) constitutes a Consortium. I have tried to summarise these below:

1. Comprised exclusively of International Telecom Entities (or ITEs) 2. Each member of the consortium commits to [i] an upfront capital cost representing its investment share in the system, and [ii] an operational and maintenance cost share of the system over its life-span. 3. Each member of the consortium carries out a business plan and business model to support its investment decision 4. Each member obtains its own source of finance either from its own management or from the debt market 5. **There is no relevant business plan/model relating to the whole system** 6. Core group of ITEs (also referred to as "MOU parties") together develop the configuration of the cable system, agree on funding rules to cover capital and costs, and also agree on how capacity will be allocated 7. Additional members can join the core group on condition that [i] "it makes sense for the initial core group to include them (e.g. increased business opportunities, limited risk of competition, etc.) and [ii] they as a minimum cover any additional configuration costs that may be incurred" 8. The consortium membership is closed when [i] agreement is reached on the configuration of the cable system, [ii] agreement is reached on the principles guiding the sharing of ownership, and [iii] financing is completed 9. **Investment shares committed by all consortium members is 100% of the capital cost of the system** 10. (As a result of 9) The capacity pricing scheme is NOT derived from the Design (technical) Capacity but from the Notional (expected sales) Capacity - which is computed from traffic forecasts and market share calculations 11. The small print: Encourages people to plan their capacity needs in terms of market shares and NOT traffic forecasts 13. Provides opportunity for ITEs who are not members of the consortium to purchase or lease capacity after its financial closure BUT the consortium then determines the price at which this capacity is sold 14. **The proceeds from these additional sales are distributed among consortium members AFTER the close of finances for the project. Thus cash is not the issue and such sales of capacity are often hampered by members' desire to protect their business plans and returns** 15. Other funding opportunities may arise when traffic requires for the upgrading of the initial system configuration (at marginal cost) - such new opportunities are however limited to consortium members. Pricing of 'new' capacity needs to take into account the initial platform that is now subject to depreciation and the new 'to be lit' part(s)

I emphasised points 5, 9 and 14. Point 5 implies that the "big picture" - that is the global view of the EASSy cable as a whole is secondary to "local" (i.e. National) concerns. Combined with points 9 and 14 it is easy to understand why (as Steve Song indicated in one of his posts on the fiberforafrica list) openness to the Consortium is defined in terms of owning a part of the cable and not in terms of affordable and fair access. What I'm trying to emphasise is that THE CONSORTIUM MODEL REINFORCES MONOPOLISTIC BEHAVIOUR ... because Consortiums close when ITEs have raised the required capital, cash from selling capacity is usually NOT the MAIN objective.

This is why it is important that organisations like KICTANet begin to get involved at the very early stages of the "Kenya cable" to influence the ownership/financial/governance model that is adopted.

I am currently reading up on other models as the coverage in the DSF of alternatives to the Consortium model is quite poor. The DSF mentions the following:

Carrier's Carrier Model 1. Submarine telecom cable is fully funded by SPV 2. SPV shareholders not considered as ITEs and as such are not regarded as competitors to ITEs. SPV therefore considered to be 'independent' and 'market-neutral'[2] 3. **Profit from capacity sales is primary objective of the SPV**

Mini-Consortium Model 1. Described as a modern form of the non-profit cable company (NPCC) model 2. Limited number of ITEs come together under a SPV arrangement 3. Members ". address all the capacity market and do not exclude anymore to make (reasonable?) profit out of the sale of capacity." Under NPCC model capacity is sold to all parties (as IRUs - Indefeasible Rights of Use) 4. With NPCC model, the ITEs of the landing countries (referred to as Terminal Parties - TPs) provided financial guarantees to the NPCC shareholders which makes it easier for members of this model to access financial markets 5. (Due to guarantees provided by founding ITEs?) Model is not considered to be 'market-neutral' 6. **Primary objectives of consortium members are (i) early disposal of capacity and (ii) generation of enough proceeds from capacity sales to fulfill SPV financial obligations**

Hybrid Model 1. Equity is provided by ITEs, non ITEs, and/or finance players 2. Clear financial benefits at the start of the project and during the construction of the cable, but this model requires careful balance between constituent parties for the rest of the life of the project/cable. 3. **"The shareholder agreement shall be drafted in a subtle way to ensure that both equity providers will remain tied to each other, i.e. equally interested in marketing the system to other ITEs (potentially competing with the funding ITEs) and boosting the proceeds from any further capacity sales."**

-- Abiodun Jagun APC, Africa ICT Policy Researcher

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Gosh, Alice, this really needs thinking about!

I certainly think it's an interesting development and raises similar questions as the EASSy issue in terms of open access.

If the Kenya cable is simply handed over to Telcom Kenya to exploit the ISps and mobile companies - continuing the practice of fixed line monopolies leveraging the value of international bandwidth - there will be a problem, i.e. that there is little point in having the Kenya cable in terms of really making a difference to the economy. The emphasis has to be on creating an enabling environment for maximising the value of the ICT sector as well as benefiting the economy by radically cutting the cost of bandwidth. It may be worth specifying the price at which it would make a difference as in Richard Bell's paper on the fibre list - US$200-300 per meg per second per month, I think.

So I would think it useful for KICTANet to engage in constructive discussions with the Minister/PS on these issues. I certainly think you should not condemn the government for this initiative - rather try to explore the economic and regulatory issues with them as well as how the EASSy cable would fit in (or not) with this proposal. The question of raising capital from the stock exchange should also be explored - there was talk at the Mombasa EASSy workshop of raising bonds as one form of finance. There is also the issue raised by Abi Jagun, who is now working for APC as Africa ICT Policy Researcher, on the fibreforafrica list about distinguishing between investment and operations with regard to EASSy which could as well apply here. Please discuss this further with her. The question of the landlocked countries should also be raised.

It may also be that this adds to the pressure around EASSy Consortium eAfrica Commission to deliver which may or may not be a bad thing, I'm not sure. I certainly think that competition in cable delivery may be a good thing...

Let's try and have an online chat about it as well as how things are going with you.

Warm regards Willie

...

What are your thoughts on this new development re; EASSy Kenya?

----- Original Message ----- From: "Bill Woodcock" <woody@pch.net> To: "KIPlist" <kiplist-cl@lyris.idrc.ca> Cc: <kictanet@kictanet.or.ke> Sent: Wednesday, May 03, 2006 9:44 PM Subject: Re: Fw: [Fibre-for-africa] Kenya and its Own Cable..Full Story

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i) What happens to the Kenyan (TKL) investment sunk into the EASSy

On Wed, 3 May 2006, John Walubengo wrote: project?

Wasn't the Permanent Secretary's answer that it had been spent on meetings? :-)

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ii) What model (management/ownership) is/will be applied to the new project (if similar to EASSy then we r back to square one)

Yes, that seems like the principal danger here: the possibility that it will be built but monopolized, and you'll just enter a new and different era of stagnation, like many of the west African countries on SAT3... With expensive fiber which hasn't made a difference because it's still monopoly-controlled and priced prohibitively.

I think I and others would be happy to write letters stating that danger, if they'd do any good. That might be naive, I don't know.

-Bill

--- Submitted by: woody@pch.net 2006-05-03 14:54:21 EDT4 (Please reply to original submitter for private communication) --- You are currently subscribed to kiplist-cl as: [alice@apc.org] To unsubscribe, forward this message to leave-kiplist-cl-100946B@lyris.idrc.ca

-- Abiodun Jagun APC, Africa ICT Policy Researcher