[Kictanet] Fw: Fw: Fw: [Fibre-for-africa] Kenya and its Own Cable..Full Story

alice at apc.org alice at apc.org
Fri May 5 20:23:28 EAT 2006

Dear all


----- Original Message ----- 
From: "Abiodun Jagun" <abi at apc.org>
To: <wcurrie at apc.org>
Cc: <alice at 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.
>>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
>> 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 at pch.net>
>>> To: "KIPlist" <kiplist-cl at lyris.idrc.ca>
>>> Cc: <kictanet at kictanet.or.ke>
>>> Sent: Wednesday, May 03, 2006 9:44 PM
>>> Subject: Re: Fw: [Fibre-for-africa] Kenya and its Own Cable..Full Story
>>>>      On Wed, 3 May 2006, John Walubengo wrote:
>>>>    > i) What happens to the Kenyan (TKL) investment sunk into  the
>>>> EASSy
>>>> project?
>>>> Wasn't the Permanent Secretary's answer that it had been spent on
>>>> meetings?  :-)
>>>>    > 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 at 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 at apc.org]
>>>> To unsubscribe, forward this message to
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> -- 
> Abiodun Jagun
> APC, Africa ICT Policy Researcher

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