EASSY consortium reaches crunch point for choices about pricing, access and governance – interview with project co-ordinator, John Sihra

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The East African fibre project EASSy is reaching a crunch point for key decisions about pricing, access, equity and governance. Ministers from African Governments will meet in March to signal their approval of work done so far on these issues. The project has been offered a package of World Bank funding in exchange for adopting Open Access principles in contrast to the closed access SAT3 fibre cable (see Telecom News below). However, EASSy appears to have chosen to reject this financing but has accepted the need to respond to the Open Access arguments in some form.

So what is open access? It is not some fixed dogma but starts from the basis of asking the question: how can we get sufficient competition at all levels so that we can ensure low prices whilst at the same time making sure that there are sufficient investors willing to take the risk?

International fibre bandwidth is expensive to build and its life is time-limited, usually to 25 years. Therefore it makes practical commercial sense to organise it in such a way that the maximum use is made of whatever capacity can be provided over as longer period as possible. In order to achieve this, those building the fibre need to adopt two approaches simultaneously:

1. Taking into account the need to operate and maintain the cable, the pricing of the international fibre capacity must be as low as possible in the initial period, with the pay-back being spread over the full 25 year life of the cable.

2. The investors in the cable need to take the view that the existence of the lowest possible commercial international fibre prices will allow them to make their money from their core businesses – fixed or mobile telephony and national infrastructure – or from other businesses building services and applications that make use of their networks. In other words, the cable exists to help everyone make profits at a country level, not to be highly profitable in itself.

Having adopted this approach, those involved need to ensure the following occurs:

Users (like private companies, Governments, or CSOs) can get more or less equal access to the international fibre capacity in their respective countries. Unlike with SAT3, the investors should not be in a position where they are effectively holding a monopoly, or hoarding capacity, or assigning themselves an exceptional price advantage.

Because the underlying assumption is that everyone is using the international fibre to make money through their other activities, it is essential that the basis of the pricing of the capacity is completely transparent. Since no-one is in the business of gaining a commercial advantage in selling the international bandwidth, there is no reason why the financial basis for the capacity offered cannot be open to transparent scrutiny: both investors and users should expect nothing less.

There should be no artificial barriers to investing in the international fibre project and it should be possible for an investor to sell on its share to another investor subject only to an agreed procedure. At present, EASSy is demanding that potential investors have an international gateway licence. As it must know, access to these have been severely limited in many countries to protect the incumbent telco. In two years time, there will be considerably more international licence holders but they will have missed the opportunity to invest in the EASSy project because of this artificial barrier. In South Africa, the Government is talking of issuing international licences to ensure MTN and Vodacom can invest. Will other countries make the same commitment to other potential investors?

EASSy is saying that there has to be a limit to the number of investors. This is not something that would be understood by any sector seeking investment in a company. But this attitude has left a number of potential investors on the sidelines. Although it would probably deny it, EASSy appears to have prioritised getting traditional telco investors, precisely the kind of companies that are unwilling to cede their protected privileges to newcomers. Only 5 of the 27 Consortium members announced at the end of January 2006 were private companies. A number of organisations interested in investing have failed to receive even the good grace of a reply. However recently, it has become a little more responsive to requests, conscious perhaps of the public spotlight on the issue.

In order for landlocked countries or countries without landing stations to get access to the EASSy fibre, there has to be clear agreements in place that allow companies in these countries to connect to the fibre on the same basis as those with coastal landing stations. There cannot be “gatekeepers” in the system who keep prices artificially high as there currently is with SAT3. Furthermore, each country needs at least two competitive providers of both inter-regional and international capacity or the alternative is the rather unpalatable prospect of price control.

There are siren voices that are saying that the EASSy project needs to be built as quickly as possible and that tackling these issues is too time-consuming and complicated. Unfortunately Africa has only once chance to get it right and if it gets it wrong it will live with the consequences for the next 25 years.

Below we talk to John Sihra, Project Co-ordinator, EASSy about how it is seeking to respond to these Open Access issues. Has it done so adequately? You must be the judge…..

Q: How did the Consortium come into being?

The role came into being when the project was first mooted. The original group involved were saying ‘Let’s see if the project is going to be a viable.’ They carried out a preliminary study with a small team and the outcome of the study was positive. At that point an MOU was signed by the small number of existing interested parties and some more who wanted to join.

Q: How is the Consortium currently organised?

There is a Project Management Committee on which sit all of the CEOs of the members of the project. There are three working sub groups:

Technical and Commercial: It looks at all the technical aspects of the project including things like landing stations, the optimum route and the best technologies to use.

Finance and Commercial: Its role is to look at how to fund the project and its governance.

Backhaul: It looks at the terrestrial connectivity and the planning of inland routes.

Construction and maintenance: Once tenders have been agreed, we go into the construction phase. Therefore this working group identifies suppliers and evaluates tenders.

Q: Has the final routing been fixed?

The basic configuration is fixed. We would have liked to have had Eritrea on board but they could not get ready within the timetable. We’re putting a branching unit on the route so that it can join in the future.

We’ve also recently been joined by Mayotte and Comoros. It was their last opportunity to get connected to the rest of the world in this way. Also Mauritius Telecom has joined the project as a member for increased capacity and diversity of supply. We were hoping that the Seychelles would come on board. The work would have cost US$40-50 million but it’s not looking likely that it’ll do so.

Q: What’s happening with the tendering for the construction contract?

We have invited four companies and had responses from all of them.

Q: Are they within your US$200 million project budget expectation?

They are slightly more but we will go into negotiations with one or two of them.

Q: How is the financing looking?

It’s looking good. We had a data-gathering meeting in Cape Town late last year and the commitments exceeded our expectations. We believe that we will be able to raise the necessary funding by ourselves.

Q: Are their members of the Consortium who will require World Bank funding in order to come up with their financial contribution?

Some have been approached by the World Bank, including Zambia, Malawi and Burundi as a result of lobbying by NEPAD. Most of the members are funding the equity themselves.

Q: How does somebody get selected to become a member of the Consortium?

It’s open to any service provider with an international gateway licence. For example Satcom in Tanzania and KDN in Kenya.

Q: But isn’t the requirement for an international gateway licence a barrier. The Kenyan regulator may announce a series of international gateway licences after the financing round closes in April. In two years time, there will be a considerably larger number of international gateway licences. Aren’t these companies going to be excluded?

It doesn’t exclude anybody. The MOU stage is open. Up until the time it closes, anyone is free to join the project. Anybody who has a need to join is welcome. But we cannot keep extending the MOU parties as it would be extremely difficult to manage. We already have a total of 33 companies. We only need one person to disagree and there’s nothing we can do about it.

Q: So how is the decision-making structured?

The Construction and Maintenance agreement allows for some decisions to be taken by a smaller group. There are several levels of voting, including majority decisions.

Q: So there are several different tiers of voting?

I wouldn’t say tiers of voting. Larger investors have more say in the running of the company. If you put in more, you get more say. Some decisions can be made with 40% of the members and some with 60%. It would need 60% to approve an upgrade.

Q: So going back to access to capacity, what happens to the potential investor who is unfortunate enough not to have acquired an international gateway licence?

It will be able to acquire capacity at cost plus 25% for the next 5-6 years. That’s currently part of the Construction and Maintenance agreement that is at the drafting stage. Huge capacity has been set aside for this purpose and therefore we can accommodate anybody.

Q: So what will for example one mbps per month cost?

I’d like to hold off on that.

Q: I’ve been told just over US$1000 per mbps per month?

I don’t know where you got that from.

Q: A member of the Consortium.

The price set will be for the life of the cable. The cost plus premium is marginal. 25% on US$1000 (for whatever capacity) is not much. On average, everyone will come out OK. You will be able to buy from the initial investors at cost plus a margin.

We want (our members) to make money out of the services provided. It will kickstart a lot of economies. At present there are projections for 30-40 mb going by satellite. (Paying for that) is a terrific cost to the continent (in foreign exchange). We want to double that capacity and keep the foreign exchange in the continent.

We will set a time, probably 5-6 years, where anyone can buy capacity at cost plus. But we need US$200 million (to finance the project) and we have to get the initial parties to invest. They have to protect their risk. IRUs will be available after 5-6 years. Will it be market-driven? We will have to decide then but the first priority now is to get the project off the ground.

Q: So what governance structure will the Consortium have?

At the moment we are talking about a co-ownership structure. Consortium or SPV (Special Purpose Vehicle) are both nasty words. It doesn’t matter what you call it as long as it is commercially oriented. We’re still financing the Commercial and Maintenance agreement…But you’ll have a Board of Directors and a management team.

Q: Who appoints the management team?

The co-owners.

I understand that there will be a Ministers meeting in March to sign off on the governance principles and an underlying structure that will reflect those principles.

We’ve recently had a meeting with NEPAD. It has developed five Open Access principles.

Q: Can you take me through those and how you’re responding to them?

- It should be a Special Purpose Vehicle. Nobody should push anything down anyone’s throat. It will be a commercially oriented structure based on co-ownership.

- Open Access. Anyone who has a licence can join until the offer closes and then they are entitled to buy capacity at a reasonable cost.

- Backhaul capacity and landlocked countries: Kenya, Rwanda, Uganda, Burundi and Tanzania have signed a separate MOU to implement a ring. Each will put in two pairs on existing cable at cost as their equity contribution to the ring. Therefore the cost for using the ring is minimal. The Burundi section is missing but there is backing for an SPV to fill the gap.

- Regulators need to create conducive environments to create cross-haul links between countries. For example, UTL will be able to route traffic direct to the international cable in and out but it will need a separate licence for cross-border traffic.

Q: I make that four principles.

Well there’s five principles in there. We’re trying to do the right thing here. NEPAD has always been our friend. It’s always had observer status. We need to take cognisance of the views of African governments. We’re listening but we want to make sure the project’s commercial.

The World Bank has said we will fund it. If we can get the project fully subscribed by its members, why should we use that money? Why are we being pushed to take a loan?

Q: What about the backhaul routes?

As part of the Backhaul working group, there are three sub-groups: Northern, Eastern and Central and Southern. It’s a novel idea. Each of these sub-groups do not impinge on people’s resources. If you contribute 2 pairs, that will be your equity in the project.

Q: Will you be able to buy capacity from an international member like BT if you’re based in say Kenya?

No, you can’t do that for a period of time. We need to protect local industry. What BT can do is provide the international leg, London – Mombasa before handing over to a local entity. BT has no licence to operate in local jurisdictions. After 5-6 years, it will open up, something like that.

Q: So in some countries you’ll only have the choice of one carrier?

If you acquire an international licence, there is nothing to stop you acquiring capacity. You buy capacity from the central pool at a fixed price. The pool is kept aside for occasional use (like broadcasting) or can be sold.

Q: Who decides who the capacity is sold to?

The management.

Q: Will members of the Consortium have a veto on who the capacity is sold to?

There will be no veto by a single carrier.