EASSY members agree to hybrid SPV and KDN still going ahead

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The trio of parties involved in getting the EASSy project of the ground – African Governments, external funders (DFIs in the jargon) and last but not least the EASSy consortium members have agreed that the project will go forward using a Hybrid Special Purpose Vehicle (SPV). An exhausting 3-day all-stakeholder meeting in Nairobi produced the breakthrough but many of the difficult details have yet to be sorted out. But KDN’s Kai Wulff is going ahead with a rival project and looks like a man with more than one option should he choose to change his mind. Russell Southwood tries to make sense of the latest twists and turns in this East African fibre saga.

The Nairobi meeting was the first time that all of the parties had sat down together to discuss substantive issues and although the going proved to be hard, when the Chair asked if anyone was against the hybrid SPV, answer came there none.

The hybrid SPV model is being backed by the DFIs that include: the World Bank, the European Investment Bank, the Development Bank of South Africa, the African Development Bank, the Agence Française de Développement (and its private sector finance arm PROPARCO) and KfW Entwicklungsbank (German Development Bank).

So what is the hybrid SPV? In essence there will be two sets of companies:

1. the EASSy SPV that will receive support from the World Bank that will in turn support what we might call the Higher SPV (H-SPV) 2. The Higher SPV that will receive investment from all those organisations investing directly and that will not be subject to the Open Access requirements placed upon the EASSy SPV.

Since part of the EASSy SPV’s purpose is to offer the lowest possible prices, its decision on pricing will set the benchmark against which those not in the EASSy SPV will have to set their prices as setting a higher price will not be an option.

The EASSy SPV will be open to all of the existing EASSy consortium signatories plus all of those parties that got left out in the formation of the original project. It should therefore include entities like UbuntuNet, the university bandwidth consortium. Everyone is still insisting that international licences will be required to participate and this may yet create a hurdle for some parties.

The consensus on the hybrid SPV structure seems to have made everyone’s position much more fluid and according to Laurent Besancon, Senior Regulatory Specialist, Global ICT Department, World Bank who has been closely involved with the negotiations from the DFI side:”Quite a large number of companies will join the EASSy SPV and the more that join, the lower the financing costs will be and therefore the lower the final price of the bandwidth.”

It has to be said that it is currently quite hard to see the incentive to remain outside of the EASSy SPV unless you are an organisation “forward-buying” extremely large amounts of bandwidth or that you imagine your presence on the Board of the H-SPV will grant you some form of control not otherwise available through the EASSy SPV.

Because it has taken a long time to reach agreement on the hybrid SPV, none of the tricky details about corporate governance and pricing have yet been resolved. Obviously the EASSy SPV and the direct investors into the H-SPV will nominate representatives to the Board of the H-SPV but how this will be achieved and what level of representation is assured for each group has not yet been settled.

The discussion to settle this issue will be tricky as the EASSy SPV needs to ensure that Open Access principles and low pricing are achieved and the private sector members will want to ensure that the entity is run commercially. And it would not be beyond the bounds of imagination that one or two of the direct investors outside of the EASSy SPV will try and undermine in subtle ways the consensus achieved on a “low price, high volume” approach. For example, will those with landing stations get a special position at the table as in the current EASSy structure? At present there are apparently 4-5 landing station parties in the EASSy SPV so the issue may not be clear cut.

The EASSy SPV’s Open Access position is underwritten by the DFIs but what if one or more of them was to decide that their work was done after five years and to sell out to another external investor? None of the details of the financing package are clear and yet it will be the balance between grants, soft loan funding and commercial funding that will ultimately settle the outcome of the final price of the bandwidth. The DFI package is worth US$170 million. The last budget announced by NEPAD was US$280 million and this included $10 million working capital and $30-40 million to build or upgrade existing landing stations.

The DFIs say they are working hard to clarify the funding package issues and to produce the funding to pay for the expertise to get the “i”s dotted and the “t”s crossed.

There is still no clarity on pricing. The principle is that the bandwidth will be as cheap as possible and that there will be a “step-down” after the initial five-year period. It appears from what is known that the bandwidth will be in the range that has already been quoted by various people associated with the EASSy consortium (see previous News Updates).

A Task Force has been set up representing the three main parties involved and it will be this group that will have to try and overcome “the devil in the details”.

A certain frisson was caused last week by the news that several countries (including Burundi had signed the CNMA but we are assured that this was simply to allow the release of monies to get the equipment acquisition moving for the capital project ahead. According to the World Bank’s Besancon:”We’ve had reassurances that the CNMA will be amended to reflect the Task Force and EASSy SPV input. The signing of the CNMA helps keep the momentum moving forward from Nairobi.”

Meanwhile KDN’s CEO Kai Wulff is still sounding bullish about its project to sign with Flag to connect Mombasa to a Yemen branch of the Falcon cable:”We are definitely going ahead. There are enough people willing to listen to a better and cheaper proposal. But whatever happens I will simply go with whatever is the cheapest option and I’m not going to be delayed by anything.” The company is believed to have a “let-out” clause on the Flag deal and could make the move back to EASSy if the price is right.

Wulff stressed that whilst he would compete in all other arenas in the field of international bandwidth he was simply trying to make the cheapest bandwidth available to everybody:”KDN’s motivation is that we’re looking for the best and cheapest option that will help the development of the ICT sector in the region and through that the development of the whole region.”

Regional press reports say that the company is in negotiations with Safaricom, Telkom and Celtel Kenya and ISPs.