[afnog] Consortium Structure of East African Submarine Cable System Questioned

Wed Aug 31 19:07:37 EAT 2005

>
>
> Dear all,
>
> Below please find a forward-looking critique on the proposed East  
> African Submarine Cable System (EASSy). It has been developed by  
> Richard Bell, the original author of the Halfway Proposition.
>
> It is worth noting the emphasis on a Public Private Partnership  
> (PPP) approach as the best solution.
>
> Your comments would be welcome and much appreciated.
>
> -----------------------------------
> The current private sector consortium model for the East African  
> Submarine System (EASSy) will not deliver a paradigm shift for the  
> Info Communications Technology (ICT) sectors of the economies that  
> it will serve.  This brief proposes that EASSy should instead be  
> implemented using a Public-sector Private-sector Partnership (PPP)  
> to create a regulated utility that will result in such a  
> transformation.
>
> Global economic growth and prosperity is being driven by a  
> transformational trinity[i] of: technology, liberalization, and  
> globalization[ii].  Africa has to a large extent missed out on this  
> growth, the causes and cures for which were most recently  
> articulated in “Our Common Interest”[iii] and debated at length at  
> the G8 summit in Gleneagles.  It is the most recent of a vast body  
> of literature that clearly documents: the important role of ICT in  
> economic growth and the part that can be played by PPPs in  
> implementing large scale infrastructure projects in Africa.
>
> The growth of the Internet/ICT in Africa has been severely  
> constrained by poor infrastructure and the high costs of  
> international internet connectivity.  The rapid deployment and  
> exponential growth of GSM networks in Africa has demonstrated that  
> using appropriate technology the private sector can build reliable  
> local telecommunications infrastructure to service the needs of  
> society.  As with mobile phones, wireless technologies are rapidly  
> overcoming the problems of poor data infrastructure.  However, the  
> absence of an international fiber optic cable connecting eastern  
> Africa to the rest of the world has been recognized by regional  
> governments, Nepad and donors as a key infrastructure required to  
> overcome the problem of high international Internet connectivity  
> costs (the cable is referred to as EASSy).
>
> The complication is that while the current consortium structure of  
> EASSy will probably succeed in building a commercially viable  
> cable, it will not result in a paradigm shift in the Internet/ICT  
> industry.
> ·       Competing in a global economy requires the cost of internet  
> connectivity to be globally competitive.  Benchmarking the prices  
> of EASSy against satellite pricing is irrelevant if the results do  
> not meet these criteria.  EASSy may well reduce connectivity costs  
> from the current US$ 3,000 per Mb to US$ 2,000 or even US$ 1,000  
> per Mb[iv] but if connectivity costs for operators in Europe and  
> the US are only US$ 10 per Mb[v] then the costs associated with  
> EASSy will not result in a globally competitive ICT industry in  
> East Africa[vi].
>
> ·       A “back of the envelope” calculation serves to illustrate  
> this point.  In the UK, BT Online, VirginNet, and others charge  
> circa US$ 30 per month for a 512Kb ADSL connection.  Their direct  
> cost per customer for upstream connectivity is circa US$ 0.10 per  
> customer (US$ 10 per Mb shared by 100 customers).  At the current US 
> $ 3,000 per Mb (using VSAT) the upstream connectivity costs for say  
> Africa Online to provide an equivalent service in Nairobi would be  
> US$ 30 per customer (US$ 3,000 per Mb shared between 100  
> customers).  With a difference in cost base of 300 times it is no  
> wonder that there has been no dramatic takeoff in ICT in Kenya.   
> The impact of EASSy reducing the cost base from the current US$ 30  
> to say US$ 15 per customer may well represent a 50% reduction in  
> costs for the ISP, but it is still irrelevant when benchmarked  
> against a cost of US$ 0.10 or less paid by ISPs in the rest of the  
> world.  It will not make Kenya or East Africa globally competitive.
>
> ·       The evidence from a similar consortium cable (Sat 3) along  
> the west coast of Africa further supports this position.  Several  
> studies have documented the failure of Sat 3 to significantly drive  
> down international connectivity costs, even in large relatively  
> sophisticated markets such as South Africa.
>
>
> v    It has been argued that pricing issues can be resolved after  
> the cable has been built.  Analysis of the incentive structures  
> that the consortium model creates shows that in fact this would not  
> be feasible regardless of the level of regulatory commitment to  
> doing so.
>
> v    It has also been argued that it is too late to change the  
> current model and that further delays in implementing EASSy should  
> be avoided at all cost.  This is misleading.  Restructuring EASSy  
> could be achieved very quickly and easily.  Today’s consortium  
> members will become the customers of tomorrow’s regulated utility.   
> All the due diligence already done remains valid for the new  
> structure and will not have to be repeated.  The only change is in  
> the ownership structure of the cable itself.  Furthermore research  
> suggests that the regulated utility model would have a lower risk  
> profile than the consortium model and will therefore be easier and  
> cheaper to finance.
>
>
> Given this market failure it is upon governments to intervene 
> [vii].  The central proposition of this paper is that a well  
> structured PPP[viii] would be the correct vehicle for such an  
> intervention.  Instead of a private sector driven consortium, the  
> PPP could be implemented as a regulated utility which would allow  
> incentives of all parties to be aligned in a way that maximizes  
> returns to society as a whole[ix].  Arguably this is exactly the  
> sort of growth generating infrastructure project envisioned by the  
> authors of “Our Common Interest” and it would therefore likely  
> attract considerable donor support.
>
> The cost of building and operating the cable for 20 years is circa  
> US$ 250m.  This amount is small compared to the economic benefits  
> that the cable could bring if incentives are correctly aligned.   
> Nepad’s E-Africa Commission could issue a tender soliciting private  
> sector bids to build and operate EASSy.  Since the capacity of  
> traffic that can be transmitted on modern fiber optic cables is  
> virtually unlimited, national governments could set pricing models  
> on the basis of “cost recovery” rather than on the basis of  
> “bandwidth utilization”.  Private sector financial instruments  
> could then be used to “back load”[x] this cost recovery to  
> stimulate market growth early on in the lifecycle of the cable.  A  
> PPP structured as a regulated utility will align the incentives of  
> all parties towards achieving a common goal.
> ·       EASSy Operator incentives.  Cable operator’s incentives are  
> to operate the cable as cheaply and as efficiently as possible to  
> maximize returns on their fixed price “regulated utility” contract.
>
> ·       Telecommunications Operator incentives.  Telecommunication  
> operator’s incentives are no longer to restrict supply to maintain  
> high international prices as is the case with the consortium  
> model.  Instead their incentive is to maximize subscriber numbers  
> and consumption[xi].  Their best way of achieving this is by  
> building local infrastructure and lowering rates to encourage  
> uptake by a larger portion of the consumer pyramid.
>
> ·       Government incentives.  Government’s incentives are to  
> maximize returns to citizens from the existence of the cable rather  
> than to maximize revenues from capacity sold on the cable (as is  
> the case with the consortium model).  Their best way to achieve  
> this is to promote the growth and use of e-governance and e- 
> education with all the associated benefits to citizens.
>
> ·       Citizen incentives.  Once international connectivity  
> becomes a commodity, uptake of ICT’s shifts from being supply  
> driven to being demand driven and all the other benefits then follow.
>
>
> If governments fail to act now East Africa will be capacity  
> constrained for the next 20 years.  Conversely the courage, vision  
> and hard work to restructure EASSy now will create a regulated  
> utility that will lead to a paradigm shift in ICT in East Africa  
> which will in turn become a driver of regional economic growth and  
> prosperity.
>
>
> [i] Professor Andrew Scott, London Business School
> [ii] That being the case solving the problem of high international  
> connectivity costs through regulation is unrealistic.  A return to  
> something like the old ITU settlement system for international  
> telephone calls or a global settlement system based on packets of  
> data transferred (as is being proposed through WSIS) would be a  
> retrogressive step and is unlikely ever to be implemented in a  
> liberalized, globalized economy where the rest of the world is  
> moving in the opposite direction.
> [iii] “Our Common Interest” was the report published by Tony  
> Blair’s “Commission for Africa” and formed the major input to the  
> G8 discussions on Africa held in Gleneagles.
> [iv] Experience on Sat 3 is that consumer elasticity is such that  
> the cable operator is able to maintain pricing virtually the same  
> as or at most marginally below that of satellite.  Financial  
> analysis of the EASSy consortium pricing (at US$ 5m for lifetime  
> use of an STM1, 155Mb) supports the view that the outcome on EASSy  
> will be similar.
> [v] Global transit capacity is available at virtually any major  
> global Internet exchange such as London, New York, or LA for under  
> US$ 10 per Mb.  Further if transit is available at this price then  
> owning and operating a global network must cost less than this price.
> [vi] The Telecommunications Service Providers Association of Kenya,  
> AFRISPA (Africa ISP Association, and, Packet Clearinghouse (a US  
> based NGO which specializes in global connectivity development)  
> have all articulated this view.
> [vii] The EASSy consortium model has been blessed with very good PR  
> for being a “private sector” initiative, but if a market failure  
> exists then the market is unlikely to maximize returns to society.   
> Being a private sector driven project does no in itself confer any  
> economic benefits to the country.
> [viii] Although proponents of the existing consortium are calling  
> it a PPP, it is not.  The goals of the consortium are to create a  
> commercially viable cable, while the goals of government should be  
> to correct the market pricing failure.  These goals are mutually  
> exclusive and create incentives that are misaligned.
> [ix] A maritime fiber optic cable servicing an underdeveloped  
> market is a natural monopoly (marginal costs are virtually zero and  
> always below marginal revenue and average cost) and a competitive  
> pricing outcome is impossible hence the need for a regulated utility.
> [x] Back loading (a reverse of Gordon Brown’s IFF idea) would  
> mitigate the uncertainties related to calculating the latent demand  
> for Internet capacity in a world where capacity is not constrained  
> (as would be the case with the regulated utility model).
> [xi] Once the short-term incentive for generating rent from high  
> international connectivity has been removed, operators are able to  
> focus on their real source of value creation which is the by  
> building and operating local infrastructure.
> ---------------------------------------------
>
> Richard Bell (Kenyan Citizen)
>
> After an early career in the Royal Marine Commandos, Richard  
> founded Swift Global (Kenya) one of Kenya’s first ISPs in 1995 and  
> Swift Global (Uganda) in 1996.  He went on to co-found Kenya Data  
> Networks (a telecommunications infrastructure operator) with the  
> Sameer Group in 2003 before exiting all of his investments and  
> returning to London for a year of further studies at the London  
> Business School in 2004.  In 2005 he was appointed non-executive  
> director of African Lakes Plc and he is currently a partner of East  
> Africa Capital Partners which is raising a US$ 30m venture capital  
> fund for investment in East Africa’s technology, media and  
> telecommunications sector.  He holds a BSc (Hons) from The  
> University of St Andrews and an MSc (Sloan Fellow) from the London  
> Business School.
>
> He was founding chairman of the Telecommunications Service  
> Providers Association of Kenya, founding chairman of the Kenya  
> Internet Exchange Point, and, founding chairman of the Kenya  
> Network Information Center (Kenya’s country code Top Level Domain  
> name registry .ke).  He was the original author of “The Halfway  
> Proposition” and has lectured extensively on matters of ICT and  
> Internet development both in East Africa and Internationally.
>
>
>
>
> On 29 Aug 2005, at 21:57, Brian Longwe wrote:
>
>>
>> On 28 Aug 2005, at 17:08, Thierry Amoussougbo wrote:
>>> How do you see African countries tackling the challenges of  
>>> existing infrastructure impediments to ICT investment and  
>>> development, including Transport links, Workforce capacity and  
>>> skills, Electricity Supply, Communication networks, Financial  
>>> constraints and market?
>>
>> Infrastructure in general is a problem many African countries need  
>> to generally solve in order to rise up and be counted, espcially  
>> in this digital (or is it now optical) era.
>>
>> Since this seems to now be an area that many countries are taking  
>> seriously, there are many ongoing projects across major sectors  
>> such as road transport, electricity supply, rail transport, water  
>> distribution etc...
>>
>> One element that all of these have in common is that they all  
>> require (and utilise) right of way (or wayleave). Unfortunately  
>> due to the lack of coordination amongst and between the  
>> implementors of these projects there is a distressing amount of  
>> money being wasted on repetitive digging of trenches - many times  
>> on the same pathways/routes.
>>
>> There is therefore need for a strategic coordination - preferably  
>> from the local government authorities who issues wayleave/rights  
>> to require for example, anyone putting up a road to also lay a  
>> certain amount of communications conduit alongside, anyone putting  
>> up a railway or pipeline to lay a certain amount of comms conduit  
>> alongside etc...
>>
>> These conduit facilities could then facilitate the rapid rollout  
>> of much needed optical fibre across entire regions.
>>
>> The commercial details could obviously need to be worked out so  
>> that there's a win-win, but that shouldn't be too difficult....
>>
>>> What specific elements does a policy environment need ?
>>>
>>
>> Cognizance of the critical importance of high capacity optical  
>> networks and ways of incentivising the same
>>
>>> Where do such policies exist?
>>>
>>
>> unfortunately mostly in the western countries (with the  
>> Metropolitan Area Networks - MANs e.g. Norway)
>>
>>> What are best practices examples?
>>
>> Interestingly enough a v. good example of private enterprise  
>> installing infrastructure is Kenya Data Networks (http:// 
>> www.kdn.co.ke) a recently licensed data operator. Who has rolled  
>> out optical fibre backbone across majority of Nairobi CBD and has  
>> plans to go as far as Ethiopia, Uganda, Tanzania and Rwanda by end  
>> of next year.
>>
>> Currently over 50 office buildings in Nairobi are on the fibre -  
>> enabling ISPs, Telcos and other providers to reach massive  
>> clientele with only one link on the fibre.
>>
>> Bandwidth prices have dropped tremendously and now 10MBps backbone  
>> link to all the connected buildings only costs US$600/month.
>>
>> This will probably go down with competition.....
>>
>> My batteries dying, more tomorrow (i forgot my laptop charger in  
>> the office ;-)
>>
>>
>> Brian
>>
>> --
>> Brian Longwe                           Tel: +254 20 316171
>> Chief Executive Officer            Cell:+254 722 518744
>> InHand Limited                         Fax: +254 20 350157
>> Sharp Centre, Wambui Rd     PO Box 43042-00100
>> Muthaiga, Nairobi                    http://www.inhand.co.ke
>> KENYA                                       Putting the world in  
>> your hand
>>
>>
>>
>>
>>
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>
> --
> Brian Longwe                           Tel: +254 20 316171
> Chief Executive Officer            Cell:+254 722 518744
> InHand Limited                         Fax: +254 20 350157
> Sharp Centre, Wambui Rd     PO Box 43042-00100
> Muthaiga, Nairobi                    http://www.inhand.co.ke
> KENYA                                       Putting the world in  
> your hand
>
>
>
>
>

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