EASSy high-speed telecoms debut in Africa


The Eastern Africa Submarine Cable System (EASSy) is one of Africa's largest telecoms infrastructure projects. It will deliver a 10,500km fibre-optic cable running the length of Africa's Eastern sea-board - from Mtunzini, South Africa in the south to Port Sudan in the north, costing US$248 million.

It will transform telecommunication services in the region. But that transformation entails huge complexity and political sensitivity, a point illustrated by the range of parties involved. Building the cable relies on co-ordinating more than 20 African states, over 30 regional telecoms operators, five development financial institutions (DFIs), NGOs, and technical, financial and legal consultants.

Until now, East Africa has suffered from a lack of high-speed, reliable connectivity; relying on costly satellite connections to provide international bandwidth. In the last few years the mobile telephone boom has brought communications to millions, but there is very little fixed line infrastructure to carry this growing volume of calls and data, either within Africa or between Africa and the rest of the world.

The result is a crisis in connectivity affecting 250 million Africans. Replacing satellite for fibre optic cables will revolutionise the region's information infrastructure and have a huge impact on its ability to communicate with itself and with the rest of the world. There is a wider impact too. Research regularly links investment in telecoms infrastructure to growth in GDP. An improvement in connectivity is a crucial part of East Africa's general economic and social development.

These enormous social, economic and political benefits have made the EASSy project vulnerable to political interference. They also explain the interest and long term commitment of the DFIs, who committed to provide debt and development aid, despite the paralysis in global capital markets.

Getting EASSy off the ground: structure and financing

The financial agreements to secure funding and allow cable building to start occurred at the end of 2007 and start of 2008. But the history of the EASSy project is much lengthier. The November 2002 Summit of the East Africa Business Community resulted in a Business Manifesto including an Action Plan focused on the theme of a digital future for East Africa, enabled by a submarine cable.

The five leading telecoms service providers in the region at the time (Telkom Kenya, Tanzania Telecommunications Company Limited, Uganda Telecom Limited, MTN Uganda, and Zanzibar Telecommunications Limited) took responsibility for launching the project to build that cable. A little over a year later the original participants signed the first Memorandum of Understanding.

From the outset, therefore, a major goal of the EASSy project was to deliver infrastructure that helped achieve public policy objectives. The inter-governmental New Partnership for African Development (NePAD) became involved and attended project meetings throughout 2003. NePAD helped bring in the DFIs by funding a Detailed Feasibility Study, providing critical proof of concept and credibility.

Involving the DFIs was a critical turning point. Although the early vision saw public funds used to build a cable meeting public policy objectives around connectivity, it became clear the EASSy project would need private sector capital and knowledge to succeed. The problem was that traditional project finance or submarine cable project structures did not accommodate competing public (i.e. low cost and open access) and private (i.e profit maximising) objectives. A project structure had to be found that could successfully blend public and private sector requirements.

This led to a hybrid structure, unique in submarine projects. A group of 11 telecoms operators, funded partly by finance from the DFIs, created the West Indian Ocean Cable Company (WIOCC) - a special purpose vehicle sitting within the broader EASSy project consortium (effectively a "consortium within a consortium"). Pro-competitive and open access obligations were embedded in to the DNA of WIOCC and into the governing arrangements for the EASSy consortium. This helped ensure smaller operators could enter the EASSy project through reduced entry investment requirements, keep the goal of a mainly African-owned cable realistic and ensure competitive access from all landing points to capacity on the cable.

As legal counsel to WIOCC, Denton Wilde Sapte helped manage the complexity this hybrid consortium brought. First, we needed to create binding agreements that worked through different levels of network operating agreements. At the EASSy project consortium level, an ownership and operation contract pooled capacity rights in the cable and allocated them among 21 operators. That contract also governed network provisioning, maintenance, and future capacity allocation/expansion. Then, within WIOCC, it was necessary to ensure shareholder and management arrangements, network capacity agreements and co-location agreements, all consistent with but independent of the main EASSy consortium agreement. That consistency was vital to create the certainty required to secure revenue commitments from operators and raise debt.

Without those revenue commitments from operators and debt raised from DFIs, the EASSy project could not move. Raising debt at the WIOCC level relied on the "bankability" of what the wider EASSy project was doing. With the DFIs waiting in the wings, the structure needed to satisfy their concerns as well as those of the WIOCC consortium. And, as important, the turnkey contractor (Alcatel-Lucent Submarine Networks) needed to understand that their payment obligations from a large, fluid consortium were secure.

Having got over these hurdles, financial close occurred in the first half of 2008. WIOCC secured loans of US$70.7 million from the DFIs to go with the WIOCC members' equity contributions of US$20 million. The rest of the US$248 million EASSy project cost is funded by the other consortium members.

Facing the challenges

The most obvious difficulty with a project of EASSy's size is managing the expectations and demands of parties in different locations. Those parties operate not only under different legal systems, but are also subject to varying political pressures and business standards. The investor group had diverse experiences of large infrastructure projects, and were influenced by different public policy and commercial goals.

That meant for the EASSy project to go anywhere it needed a flexible approach from all sides. We found that, risk allocation and binding contracts were important, but real-world relationships and collaborative behaviour mattered just as much. Good personal and political relationships, and an openness to negotiate and take account of the idiosyncrasies of a unique deal, were essential to get a cable laying ship into the Indian Ocean.

It was also important for the parties to have an awareness of the logistics of approval and signature of large numbers of contracts for their counterparties. If one party could not "sell" a position internally, the whole project would suffer.

The difference between black letter law and the position on the ground was clearest when looking at telecoms regulatory legislation in the countries where the EASSy cable makes land-fall. The structure of the EASSy project consortium, and the unique nature of the project itself in the region, meant that applying existing legislation often involved putting a square peg in a round hole. Either the telecoms regulatory regime did not anticipate an international cable project at all or, if it did, it had never been used - in all cases regulators had no experience of a submarine cable.

Ensuring the legal ownership of the cable trunk and each branch - and associated capacity and usage rights - were compliant with at least 10 different telecoms regulatory regimes created significant work. The participants quickly came to realise the value of principle-based regulation drafted broadly enough to cope with new ways of working as opposed to regulation focused on controlling particular technologies.

Having a wide geographic spread of interested parties brought with it its own learning, not least the value of high-speed communications EASSy will deliver to East Africa. The most intense period of activity on the project came in the first half of 2008, with the full time project team based in 11 countries on three continents, and the wider team including companies in another nine countries. This group negotiated and agreed over 120 contracts - ranging from loan agreements and related security documents to shareholder documents, project consortium amendments, network build agreements and capacity purchase agreements - almost entirely remotely. This was achieved with only one two-day face-to-face all-party meeting - an illustration of the huge value fast, effective communications technology can bring to international business.

An irony not lost on participants was that the most difficult parts of the negotiating process involved communicating with countries that stand to benefit most from the EASSy project.

What the EASSy project means to the market

The most significant benefit the EASSy cable will bring to the East African telecoms market is more bandwidth, faster connectivity, and lower prices than the current satellite-dominated set-up. This will have several benefits.

First, it will help reduce the volume of payments leaving Africa to international infrastructure providers, with the attendant economic improvements that can bring. One of those improvements is likely to be increasing operator profitability. And if operators can increase profitability the prospects for privatisation or re-financing of state-owned operators improves.

Second, the hybrid structure of the EASSy project has hard-wired progressive development objectives. A significant portion of the cable's capacity must be provided on terms that ensure open access, non-discrimination and cost based pricing. These arrangements address one of the main criticisms that emerged during negotiation - that EASSy would replace the dominance enjoyed by satellite operators with cartel-like structures that have beset other African submarine cable projects.

As the EASSy project moves through construction to reality, solutions to the matrix of practical, legal and political challenges that characterised the first years of its inception will face further stress-tests. With telecoms sector growth in East Africa continuing apace, the EASSy project is well placed to pass those tests, and become a vital piece of the infrastructure jigsaw needed to meet increasing demands for bandwidth.

Rod Kirwan is a partner and Ed Hayes an associate in the Technology, Media and Telecoms department of Denton Wilde Sapte.