Tami Hultman
16 February 2009
(Page 2 of 3)
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.
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Very interesting article, Thank you. notebook memory
We're very excited about Africa's cellular revolution as well!
Nathan Eagle's txteagle program is one initiative that we, here at ALTA, are very excited to see growing!
http://www.altalang.com/beyond-words/2009/02/18/beyond-txt-crowdsourcing-wi th-txteagle/
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