Wednesday, February 18, 2009

East Africa: Seacom Sets Broadband Pace

Tami Hultman, 16 February 2009 ALL AFRICA

Seacom, a Mauritius-registered company providing fibre-optic bandwidth to Africa, announced this month that it has laid the first portion of undersea cables on the beds of the Indian Ocean and Red Sea which will link the continent to India and Europe. Brian Herlihy, Seacom’s president, talked to AllAfrica’s Tami Hultman about the race to have the cable operating in Kenya by mid-year.

Where is the work being done at this moment?

There are three cable segments that are currently underway. One is making its way from the edge of South African waters north to Mozambique. One is motoring to the coast of Yemen from the Red Sea coast of Egypt. The third is a ship loaded with Seacom’s deepwater cable that will go from India towards Africa.

When everything is in place, the cables will be joined. Once the final splice happens, there will be six weeks of testing. We’re still on target to be ready for service by the end of June. So we’re quite pleased and excited about that.

I’m not sure that articles and blogs about laying cables and providing bandwidth give a sense of how extraordinarily complex the enterprise is in terms of all the pieces that have to be put together at once – financing, regulatory issues, technical challenges.

I think you’ve hit the nail on the head. The project itself, solely from a dollar perspective and a technological perspective, is not nearly as large as some of the other projects I’ve worked on or that our group has been involved with. But from a complexity perspective, I’d say it’s by far and away the most complex project that we’ve worked on.

You’re trying to offer one, seamless product to end users spanning 11 sovereign nations. To deliver that product requires overcoming issues that are tax related; it has to permit someone to sign one contract where, behind that contract, are the inner workings of agreements that permit that product to go through these 11 different countries. Seacom, as an international entity, has to figure out how to sign contracts at a local level and then deliver that product in and out of all the countries.

We, as a company, either have subsidiaries, which are local entities, or we have local partners in each one of these countries, who are licensed and established to carry communication infrastructure. You’re trying to set that up in a very short period – the construction of the cable is really only 18 to 24 months.

So you’re running around and finding that in Kenya you actually need to go to the tax authorities and get a ruling on how they look at an IRU – in other words, the right of usage on the cable and the ownership of bandwidth on the cable itself. You have situations in Egypt, where I think we were the first cable system ever to do an EIA, an Environmental Impact Assessment.

Sometimes we’ve gone into these countries and said here are the best practices that we want to implement, and on the receiving end, they say: That’s terrific. We want those practices utilized, but we don’t necessarily have the processes or human resources to process your program.

What does the environmental impact study accomplish?

When we finalized and received our complete environmental and social impact assessment in Kenya, we had a very nice ceremony. [Kenyan officials were] incredibly complimentary, not only because we took the care to insure that Seacom was a good neighbor, but also because we set precedent on what best practices should be and gave a template for other cable systems and other marine-associated programs to follow.

I think what people don’t understand is that an environmental assessment is not just a matter of going out and doing studies, writing a report and submitting it. It isn’t that at all. You actually end up changing your program dramatically from where you conceptually started, in order to accommodate the findings and become that good neighbor.

With Seacom, that has included seemingly subtle things, like changing the approach of the cable because the approach route that we’d chosen was also a channel used by fishermen. But, ultimately, changing the route feeds directly into the design of the cable and the manufacturing of the cabling itself.

So unless you’re able to do these things in a very linear process, which is almost impossible over 18 months, you can find yourself subject to delays and higher costs. You realize that the cable should have been manufactured 100 km longer than it was. You can imagine how these “little” things snowball.

You can also imagine that in the first six months of doing any project, people aren’t really interested in it, because they don’t really know how tangible and real it is. So you’re doing this work and undertaking it and not getting the feedback that you expect. All of a sudden, when you actually start going for it, people pop up out of the woodwork and say, “But you didn’t take this into account.”

At that point you really have two options. You could say, “Well, there was an official process and you missed it, sorry.” Or you have a good neighbor policy and say, “Let’s see how we can accommodate you.” Our projects have always followed the path of the latter, but it can have some serious monetary and time impacts on development.

Back to your original question: we’ve had all of these issues and all these stories that we’ve had to manage simultaneously in these countries and keep the cable on a very short timeline for delivery. I think that’s what’s been amazing about this experience so far. We’ve undertaken a challenge and been successful in countries that have very different cultural and business practices and have been able to maintain our stance as a neutral carrier.

Given all that, how have you managed to stay on any pre-projected timeline?

It sounds clich├ęd but it’s really persistence. We’ve just put personnel in each of these countries and sort of ordered people to “stay until you have this right.” I think our experience in building major infrastructure projects let us look at a plane of work and then put in the buffers that our experience has shown us are required. And we’ve had to recognize which are critical-path issues and really attack those.

We’ve had to make adjustments that have hurt us monetarily but permitted us to keep to our timeline. Those were decisions made by the shareholders because of the importance of delivering the cable on time. I think it’s a huge statement to deliver on time, because you’re sitting in a region that’s had proposed cables for over 15 years with none of them being on time. So if we can be the first, we can establish ourselves as the pre-eminent infrastructure developer. That’s important to us when we speak about what our vision is, as we look at the west coast [of Africa] and other opportunities.

Can you give an example of a compromise that’s had to be made in order to keep the project on track?

We were seeking to approach the landing in South Africa through a specific access way or byway. The area we come into is a national reserve area, but there is a public access route that is currently the host to other conduits. The process – to come to an acceptable agreement with all parties – was going to directly impact our delivery date.

So we approached the head of the national reserve and some of the affected parties and asked them if it would be possible to move the cable down the beach line 500 meters. We proposed a horizontal directional drill, which would drill from below the high water line directly underneath the reserve and come out a kilometer inland, so that it would have no environmental impact and no impact on any other parties.

Ultimately, everybody was incredibly happy with that solution, but it certainly was a much more expensive solution – maybe three times more expensive. The shareholders recognized we were technically not any better off going with this opportunity, but it was one that helped us preserve our timelines and create a much better neighbor relationship.

So in some cases the decision has been to spend more to, literally, to buy time.

It has been that way. It’s not to say that we’re horribly over budget or anything. But it is to say that you make alterations you probably don’t have to if you didn’t care about the timeline.

What’s the total investment?

It’s a U.S. $600 million investment. Financing is 75 percent African equity investment; 25 percent is our group.

Are you pretty much within budget?

We are on budget overall. Obviously, when you do any program like this, you have a pretty stringent oversight from the banks. They watch the budget and then ensure that at all times the project can be fully funded. We’ve been completely compliant with that process the whole time.

You mentioned complexities on tax issues, regulatory issues. How does that work in practice?

If I answer from the view of our products – Seacom is selling units of bandwidth which amount to ownership rights to the cable, or a multi-year lease for a segment of bandwidth. If a customer wants an IRU – usage rights – they can make a case for the absolute logic of it. But as you progress, you may learn that there are no tax regulations on how to account for an IRU. So instead of getting the benefit of an asset for over 20 years on your books, you find that you instead have a huge expense that really is hurting your books. So they’re forced into buying in a leased format, which may not have been economically desirable.

As a company, we have been taking a pro-active stance to go out and seek rulings from the tax authorities on these IRUs and other issues. It’s not a matter of resistance from the tax authority; it’s just like any new situation. When something is new, there needs to be time to explore and understand it. Luckily there are case precedents in United Kingdom law, and a lot of the East African law systems follow loosely the UK systems and can look to those systems for guidance.

But it still takes time, and the question is, can it be done within the time frame of Seacom’s delivery schedule? Then it’s an issue that’s up to the customer. Do they want to take a chance that it will be done, or do they want to go with a lease that was not their first option? It would be a much easier and more seamless process if a lot of these tax and regulatory structures were in place, but you have to live with what it is today.

What about the process of laying the cable? Give us a sense of what it takes to find and commission these cables.

The actual manufacture and laying of the cable is done by a turnkey contractor. You have three majors in the world – Tyco is the contractor for this project. For the most part, they either utilize their own cable-laying ships or outsource, if necessary. With a project like this there is a huge list of permits that need to be acquired, starting with environmental permits and working up to the ministry of defense permits for the Tyco vessels working in specified territorial waters. All these permits are inter-linked to a certain extent.

Ultimately, if permitting is done correctly, the process of laying the cable is not a difficult one, but it’s a very interesting one. You start with a marine survey – a topographic survey of the ocean floor, so you can determine the most benign route to follow. You look at the seismic activity under the water, to avoid the cable being exposed to underwater earthquakes. Then that data feeds into software that spits out a manufacturing specification for the cable itself. The cable is then manufactured completely on land per the specs of the marine route.

Once the cable is manufactured, it’s loaded into large vessels. In our case, we have three cable-laying ships, and the largest will be carrying 6,000 km of cable. So it’s a massive amount. They coil it up on the ship, ready to be laid out 100 percent to specifications.

Hence, when you change a landing, it’s a big deal.

People will say now we know you’re coming, can you move the landing to here? But once the cable ships are at sea, they will either bury the cable [under the sea floor] in the shallower waters or lay the cable right on the ocean floor. Usually you bury the cable at up to 1,000 meters of water depth. At up to [that depth] they will use what’s called a plough but is really a submarine robot that will go onto the ocean floor, make an incision about one-and-a-half metres deep, lay the cable in that incision and bury it. If you can imagine the plough, it looks like a gigantic sled with a cutter in the middle. The entire process is operated from the ship deck itself. The old cables had problems with being eaten by fish and sharks, but they’ve evolved the insulation so that, I guess, it doesn’t look too appetizing anymore.

You mentioned being in the Gulf of Aden. Can you talk a little about that?

One of the complexities of being in this region is the pirate activity in the Gulf of Aden and off the coast of Somalia. Seacom, as you can imagine, has huge exposure; the cable ship is motoring at a speed that is slower than normal ships. My understanding is that both within the ship itself there is armed security, and there is also an [armed] frigate that follows the ship. Because the submarine fiber optic ship works at such slow speeds, the practice of self-protection is more common in the submarine industry than elsewhere, and it is commonly accepted.

How do you make your money on this in the end?

Here’s an analogy. Look at building a high-rise condo, and in that high-rise, which is the equivalent of the cable here, you have the ability to sell multiple units. Each one of those units is the procurement of bandwidth by our customer. In the early years, as we sell these units, we don’t sell 100 percent of them. We might sell 20 percent of them. As we sell these units, we’re recovering our costs. We pass the break-even line, perhaps in five years. Once we’ve hit that, we still have quite a few units left to sell, and those units move us into the profitable category. You can do a combination of selling and leasing, as you would do with condo apartments.

And what always happens in telecom is that prices go down as volumes go up. Over time, our customers they may be spending the same amount of dollars, but they’re always securing more capacity, because the unit pricing is coming down.

Our unit price from day one is maybe 90 to 95 percent cheaper than the equivalent unit price of satellite. Going forward, it will continue to lower as the volumes go up.

Some people are saying that the price of broadband won’t come down as dramatically as people hope. It will depend on many factors. There are three parts to getting the service to the end user. One is the last-miles solution, and that can be DSL, 3G, wireless WIMAX. Second is the national network – different backbones that can be microwave, fiber optics or even satellite regional transmission. The final element is international bandwidth, which can be submarine fiber optic cables or satellite transmission. Seacom is focused on the last one and will bring that price down by 90 to 95 percent.

That leaves the other two components, which also need to come down in price. In many countries, the national backbone and the last mile connectivity aren’t as robust or adequate as the end user would like them to be. When Seacom brings down the international bandwidth cost substantially, it economically justifies further investment into these other two components, national and last mile. So you start to see Seacom as a catalyst for these other investments.

That’s not just something you’re expecting? You’re already seeing it?

You’re already seeing it in anticipation of Seacom’s arrival. There are three national networks now bring built up in Kenya. In South Africa there must be four different national networks being developed. We’re seeing people explore business cases in Mozambique and Tanzania. The government of Rwanda has rolled out huge fibre networks throughout the country.

All of these investments would never have made sense for delivering pure satellite connectivity. Now, with submarine cables, they make economic sense. It’s not just a price issue. It’s about the quality of the product being delivered to the end user.

Your company talks about social benefits.

The major one, I think, is education. Education is so important for economic development in Africa. I was recently at the MIT media lab [in Massachusetts in the U.S.] where there is a push to change fundamentally the way that we educate children through visual education. The concept of creating a completely three-dimensional textbook is completely within technical reach. I think visual learning helps so much when you’re in Africa, because of the diversity of languages.

The other thing that has excited me is you always think about these cables as a way to bring content to Africa, so that Africans will have the same access to information as the rest of the world. But the world needs more access to African content, and the idea of adding a billion people worth of content to the worldwide web is incredibly exciting.

At a groundbreaking ceremony in Mozambique, Graca Machel came. One of our shareholders gave a speech, and he spoke about natives and immigrants. He said everyone over the age of 30 is an immigrant to this technology age. The natives are younger people. They can pick up technology and use it like an additional gene that they have.

When you consider that 50 percent of Africa’s population is under the age of 25, it really makes you smile. These are the people who will exploit this technology and be limitless with what they can do.

Lack of reliable power is a tremendous constraint on development of all kinds. Have you had discussions about how energy issues might affect your supply and demand?

Is Seacom itself in jeopardy because of the energy crisis? It’s an incredibly low energy requirement to run fiber optics. I think we’re powered by 12.5 volts from each end of the cable. We’re quite fortunate that energy itself is not a problem for Seacom.

Having said that, our end users are primarily computer based and the ability to access the worldwide web or data applications via the computer are constrained by energy. Absolutely.

We have been involved in the energy discussions. The planning for energy growth in Africa has been insufficient and it will be a limiting factor for economic growth. It’s probably a big statement to make, but I’ve had experience in the power industry and have seen that power projects usually lag demand, as opposed to preceding and predicting demand.

In Africa, I’m seeing demand grow now at exponential rates. But people not having the foresight to create a supply that will meet that demand is, I think, an indictment of how the international finance system has worked, because [large, multinational institutions] have a hard time seeing the necessity in Africa to meet backlog demand. But also there is an issue with the countries themselves; there hasn’t been the foresight and planning.

South Africa has been the perfect example of that. They’re getting a little respite right now because the mining industry has cut back on production, but commodity demand will be a long-term boom. It’s just going to be a bit cyclical. We’re very involved, because I do wear multiple hats and have had exposure to the energy industry. I think the high cost of energy and inadequate supply will continue to be a hurdle within Africa.