EASSy project enters the final lap with critics on all sides

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The EASSy fibre cable project is entering the final lap before construction begins. But as the vital phase that decides key issues like pricing, access and governance  comes to a close, the volume of criticism is rising. The members of the existing private sector consortium that has brought the project to this point are unhappy. The initiative has slipped from their hands and is now in effect being controlled by NEPAD’s e-Africa Commission. Ostensibly frustrated by the pace of negotiations, the Kenyan Government has broken ranks and announced that it will build a Mombasa-Djibouti cable without any Government money, blaming a “South African Club” for obstruction along the way. As it goes down to the wire, all the parties involved are seeking to semaphore their positions in what is undoubtedly a complex negotiation. Russell Southwood tries to sort noise from signal about the current concerns being raised.

On 6-7 April NEPAD’s e-Africa Commission (headed by Dr Henry Chasia) called a 2-day meeting. On the first day it held discussions with EASSy consortium members and other stakeholders. On the second day, Government and regulatory representatives held discussions to decide on a way forward. NEPAD and the EASSy consortium have thus far worked extremely closely together, something acknowledged by both parties. But the consortium did not really expect to find themselves in a position where what they see as their project was in effect taken away from. After the meeting, NEPAD announced that its proposals “would be submitted for approval to a ministerial meeting to be held soon”. 

The parting of the ways has come over proposals developed by NEPAD and the insistence that the cable should be built in such a way that it avoided the high-price inducing monopoly found on the West African SAT3 cable. Parts of the private sector have perhaps only themselves to blame for the level of interest now being taken in the issue by policy-makers and regulators. Telkom South Africa has succeeded in angering the South African Government through its failure to deliver a full copy of its SAT3 agreement.

The negotiations to complete the EASSy cable are enormously complicated and very political in both senses of the word: they involve Government and they are the subject of a number of cross-currents and disagreements. There are three sets of parties involved: the EASSy Consortium members themselves, the DFIs (the World Bank and other similar institutions); and the Governments of the countries affected.

There are the 28 members of the Consortium itself, 16 of whom are owned privately. Public or private, many of the existing investors are incumbent telcos. In 12 out of the 18 countries, there is only a single investor, again in all cases the incumbent telco.

Some of these investors have their own money to invest, whilst others are relying on their Governments to come up with the money through assistance from the World Bank. Therefore whatever this group of financially embarrassed incumbents actually think, they are going along with the proposals from the World Bank. This has effectively divided the Consortium into several different groups from which it is difficult to generate a consensus about the way forward. But even some of those with their own money to invest have moved towards the idea of an SPV:” I’m a big supporter of the SPV within EASSy. Everybody buys at the same price at the landing point. I don’t want the management headache”.

The World Bank has indicated its willingness to put up money for a Special Purpose Vehicle in order to ensure that: prices on the fibre are kept as low as possible, access to capacity is as open as possible and governance is both transparent and commercially effective. It is in a position to underwrite its proposals financially with both soft loans and donor contributions. However because of its position it has stated clearly that it can only do this if the parties involved (particularly the Consortium members) want it to happen. The World Bank is one of several development funding institutions that have taken this position.

And outside of those directly involved is a much larger group: those who want to invest who are unclear whether they will be allowed to; ISPs and other operators who are anxious that things may be “stitched up” in ways that will disadvantage them; and civil society organisations that are worried that “the same old, same old” monopolists will once again make it hard for Africa to take its share of the benefits of the project.

The existence of so many parties has meant a complex and often slightly chaotic negotiation. As one person closely involved in the negotiations told us:”No-one’s in the driving seat. Everybody’s issuing orders from the back seat”.

Trust is something in short supply. Different parties are saying different things and a game of Chinese whispers has ensued. The difficulty is that none of the parties involved have communicated very clearly outside of closed-door meetings. All negotiations have their private and public moments but none of the parties have been very good at the public part. Governments have seen little or no need to communicate widely on the subject. The Consortium members have put little “on the table” in writing for discussion so it is often hard to know what they are proposing on key issues. Furthermore, positions have shifted considerably since the project started.

In this context, it is hard to read what the status of the Kenyan announcement is: a poker player’s gambit or a real proposal? Eme Essien of the IFC (the commercial finance arm of the World Bank) speaking on a panel on the subject at GSM Africa said that the announcement was a “credible threat”. Those close to Government in Kenya say that it is moving quickly to put the proposals together and is keen to see access to the cable transparently available. We had all better hope so for if it goes ahead successfully it controls the way north from countries to the south.

The Governments themselves under NEPAD have formed themselves into a body called Inter-Governmental Working Group that represents the 23 countries covered by EASSy. This grouping came into being at what one can only describe as “five minutes to midnight.” From the April 2006 meeting in Pretoria, it appointed a Sub-Committee to address what it sees as the outstanding issues:

a) Review the viability, functions and scope of a proposed Inter-Governmental Assembly (IGA), whose purpose will be to ensure that NEPAD principles and the policies of the Governments of the region are upheld by the SPV,

b) Define the scope and functions of the SPV,

c) Review recommendations on the policy aspects of the CTO report (see below), taking into account the additional work to be done by the CTO to incorporate the EASSy (undersea) cable,

d) Conclude dialogue with the EASSy parties and DFIs, including the development of a joint project promotion strategy,

e) Raise funding for the interim work leading up to having the SPV Management Team in place,

f) Produce the draft report (on all these issues) for the meeting of Minister, and

g) Take all actions necessary to move the project forward, including the registration process of the SPV.

The Sub-Committee is chaired by former Kenyan MP Shem Ochuodho representing Rwanda and other members include South Africa, Kenya, Botswana and Lesotho. The Sub-Committeee has invited the EASSy Consortium members to a meeting on 26 May. It also hopes to meet the DFIs but no date has yet been set. Its draft report will go to a ministerial meeting  on 6-7 June. This meeting will mirror the first one held in Pretoria: the first day will include stakeholders and the second day will be a closed session.

There is also a informal consultation group created from each of three main groups: Operators: Telkom Kenya, MTN Uganda, UTL and Telkom SA); DFIs (World Bank and African Development Bank); and Government (all the people from the Sub-Committee). In addition, the EASSy consortium members and DFIs have formed a Working Group and already held two meetings, one in Lusaka and the other in Kampala. These meetings have involved looking at different versions of the SPV and seeking to negotiate differences.

Several things have already been approved by the sub-committee:

- It has agreed in principle to engage legal experts (which will happennext week). Member states invited to have their legal people look at legal protocol devised by CTO for fibre connections between states.

- It has agreed in principle to get the services of a technical/business adviser, one person with both skills who has managed cross-border/undersea project and also legal advice.

- Finally it has agreed it is better to build on the momentum that operators and NEPAD have already created.

According to Sub-Committee Chair, Shem Ochuodho, there is a consensus on certain key issues:”One of the things agreed across the board by everyone is Open Access. But it means different things to different people. The operators have accepted the concept but that this project must also make commercial sense. The sooner things are concluded, the better”.

According to Ochudho, the Sub-Committee has worked its way through almost all the items it was set with only two remaining:  One is getting a revised report from the CTO to incorporate the additional work they have been briefed to do. Ochuodho says:”That is not a major piece of work”. The other is fundraising mobilisation. A budget has been put together by the sub-committee and that will go to the larger IGOV meeting.

Despite noisy criticisms from many quarters, Ochuodho is very upbeat:” Concluding the dialogue should take 2-3 meetings. It’s a negotiation effectively. By the end of 2008 the cable should be ready for use”. He is confident that all outstanding issues should be settled by the end of June or July at the latest:”I think the gap between the three different parties, particularly between the private sector and the Governments, is being overplayed”.

There are many outstanding issues that might be important but three are crucial: pricing, access and governance.

The first of these issues – pricing – is intimately related to how the cable is financed. Put simply, the more expensive the cost of the money raised, the higher the price for the end-user. There remains a lack of clarity over whether the Consortium is able to raise the slightly larger budget required to finance the project or not. Publicly, the Consortium maintains it does, perhaps eager not to upset any finance institution it may subsequently approach. Privately, some members are more sanguine and admit that without external funding (such as that from the World Bank) the project will not fly in anyone’s hands.

So what is being proposed by NEPAD? According to Dr Henry Chasia, speaking at a recent Knowledge for African Development Event, a Special Purpose Vehicle will be set up that raises 70% of the required budget through debt and 30% from equity. The World Bank’s presentation to the April meeting showed it covering 50% of the required budget for the project. The aim is that all purchasing capacity will receive it at the same price. It envisages a much wider group of shareholders for the equity, paying equal amounts each: 60 companies, with a rough spread of three companies per country. Shareholders’ ROI will be regulated.

Whilst the spread of shareholders is to be welcomed, the high level of debt may actually lead to higher rather than lower prices. Raising debt equity is an expensive process and the final cost of the money involved will inevitably be in the higher ranges of percentages above LIBOR. Although final pricing offers have not been fixed, the range that seems to be under discussion is $1500-1700, which is higher than the prices given earlier by a Consortium member. Issues remain as to what the final cost of the capacity will be as the final destinations are either Sudan or Djibouti, not in a competitive market in Europe.

The second area of concern is the selection of people to become shareholders of the Consortium. John Paul Bagiire, General Manager – Strategy, MTN Uganda said on a panel at GSM East Africa that the NEPAD proposals were taking Africa back in time to a point where Government decided everything. He said the private sector was unhappy with the idea of Government selecting who would be involved.

Shem Ochuodho, Chair of the IGOV Sub-Committee maintains that all existing Consortium members will be involved and that Government will only check the credentials of new Consortium members. According to Dr Henry Chasia, e-Africa Commission, governments are going to “authenticate” companies and Ministries will be asked to recognize that companies applying are legal entities.

In similar circumstances, the existing EASSy consortium went from admitting new members by a vote of all members to allowing people to join if they met a set of criteria (unpublished). Rather than hand back to Governments what are in effect regulatory functions, IGOV should examine how it can step back from these processes and where possible leave them in the hands of existing regulatory bodies after initial decisions are made. Criteria for entry should be made publicly available.

The requirement for an international licence continues to make a mockery of these processes. Take the case of Rwanda itself.  When it was the Government incumbent, Rwandatel signed the MOU because the Government said it needed to get involved. Government made a member commitment of US$10 million. When the company was privatised, the Government wanted to take back the MOU status and give the responsibility to its ICT development agency, RITA. But as Garry Clark, COO of Terracom, Rwandatel’s new owner told us:”It’s not got an international licence, hence I remain the MOU party. We have to agree with Government what we are both going to do. After the discussions with the World Bank, we’re asking is being an MOU partner really worth it now?”

Meanwhile Kenya is going through a process that will result in two more international licenes (for its mobile operators) and in current circumstances, it is hard to see how they might become investors if they wanted to do so. Vodacom has no international licence in South Africa so is making its investment via its Mozambique company where it does. What is needed is a greater degree of consistency and transparency that will allow the maximum number of investors to become involved if they have money to invest. For as a Consortium member told us:” The International gateway licence was just a filter to make sure the MOU group wasn’t too big”.

On governance, matters are far less clear. The SPV will have a Board but as yet it is not clear who will be on that Board or how it will operate. Since all shareholders are equal on the basis of the devised SPV, it is unclear who would therefore be elected to the Board. The suspicion remains in the private sector that Government will get involved and what might be a commercially-run organisation will turn into an Air-Afrique-style disaster.

It is perhaps worth remembering what everyone involved should be doing. Government (and bodies it appoints like regulators) have the task of creating a policy for the public interest and a competitive market that will attract investors and create low prices for users. They should not be tempted to run or play a part in running the cable once it is complete.

The private sector needs to get a reasonable rate of return on funds it deploys (discuss). Operators in the Consortium need to know that the managing agent of the Consortium is acting in their best interest and is relieving them of the burden of having to manage the cable. They need capacity at a price that: will enable them to bring new services to Africa, expand their customer base and help that make good profits at a national and regional level. Users want the lowest possible price that can be achieved without the cable becoming a financial white elephant. Therefore everyone needs to get this deal done…..