The Law and Practice of Financing an Underwater Sea Cable Project in Africa

It is important to understand the history and technology of Underwater Sea Cables (USCs) so that one can identify risks and drafting considerations in the legal documentation. A USC can be broadly defined as an insulated wire or optical fibre which is laid on the seabed in order to carry data communications from one location to another.[1]

Introduction

The first commercial use of a USC was undertaken on August 28, 1850 when John Watkins Brett and colleagues placed a copper wire, insulated only with gutta percha between Dover in the United Kingdom and Calais in France (Newall, R.S (1882), p.1). Communications were established, however the USC survived only one day as it was cut by chafing on the rocks. The event served to illustrate that a USC would require strong insulation and would possibly need to be armoured in order to protect it from the elements, a fact still relevant for today’s actors when identifying risks in the legal documentation.

The key physical risks for USCs have remained fairly consistent throughout their development, namely:

(i)    the distance from point to point in laying a USC and the hazards that are encountered at Sea; and
(ii)    the technology required to ensure efficient communication.

These physical risks were illustrated as the commercial markets of the United Kingdom and those of the Americas were entering a rapid period of economic growth at the end of the nineteenth Century. It often took weeks or months for a message to be carried by ship from the United Kingdom to the Americas depending on weather conditions.

It was during this period that trans-Atlantic communication developed, culminating in the first successful commercial laying of a USC in 1866 by S.S Great Eastern under the command of Sir James Anderson, laying approximately 4,200 kilometres of telegraphic cable (Black, Robert M (1983)).

The invention of the telephone by Alexander Graham Bell in 1875 was a catalyst for continental communication. Analogue USCs came into use during the 1950s, continuing in development over the next 30-40 years.  

Modern USCs are fibre optic USCs developed during the 1980s onwards. For a number of reasons which shall be seen later during risk analysis, fibre optic USCs transmit better than all other forms of USC, however they have risks attributable to their physical state. Deep sea fibre optic USCs are approximately 17-20 millimetres in diameter, therefore no bigger than the average garden hose (ICPC Ltd/UNEP, (2009)). Although well armoured, particularly close to landing stations, USCs are still very much at risk from the elements.

Approach

This article shall focus on the following:

1. USCs in the context of emerging markets; and
2. The perspective of the lenders seeking to finance the development of a USC.

This article will highlight the primary considerations for lenders and their legal advisers when engaging on a USC project. Being a lender to a USC project provides the widest possible perspective of the risks and conflicting interests of other parties on such transactions.  The aim of this article is to provide a practical review by way of a ‘user guide’ to lenders at each stage of a USC transaction in an emerging market.

It is worth considering what is meant by an ‘emerging market’. There are several possible definitions of emerging markets however for the purposes of this article the term shall mean developing countries with rapid rates of economic growth generally above 6% but which also experience political and institutional challenges.^₂

It is important to understand the market for underwater sea cables and whether there is a viable market in providing finance for such assets, including assessing any preliminary market studies.

The international nature of USC projects means that it is important to be familiar with international regulations and treaties which may affect USCs. This article will seek to explore the key areas of international law and the manner in which they impact the legal documents on such projects.

USC projects follow a unique structure borne out of the fact that they are generally performed as limited recourse project finance._³  It will be useful to review a typical project structure and profile the various parties involved and their competing interests as these factors will inform the negotiating position.

It shall be seen that timing is a key factor in successfully closing a USC project. For this reason, it will be important to understand the steps in the project cycle and to identify opportunities to accelerate the process or matters which may cause unwanted delays.

The Market for Underwater Sea Cables

It is a common misconception that most international communications are routed via satellites. The reality is that over 90% of the World’s telephone, internet and other telecommunications are provided by USCs (ICPC Ltd/UNEP, (2009), p. 3). This statistic illustrates the World’s dependence on USCs and indeed the size of the market for USCs.

Taking the United Kingdom as an example, in 2003 it was the largest European Union and second largest global international telecommunications market (Centre for Protection of National Infrastructure, p. 18). It is the main European landing point for transatlantic, African and Asian submarine cables. 

The United Kingdom example illustrates the position in a developed country carrying extensive volumes of telecommunication traffic. But what about the situation in developing countries in emerging markets? Despite widespread poverty, many of the World’s emerging markets, particularly in Africa have economic growth rates above 7-8%. They are also the least served in terms of telecommunications (Thompson, B (2009), p.1).^₄ In order for private sector development and inward investment to keep pace with this growth rate, telecommunications infrastructure is a crucial component (World Bank (2004), p.3). 

Emerging markets are currently producing some of the latest advances in USC technology. There are clearly also challenges with doing business in emerging markets which are less evident in developed countries. Many of these are physical, such as lack of effective infrastructure or transportation which can affect a USC, or political, such as the lack of a stable government to facilitate the various permits and authorizations required in using land or infrastructure for a USC. 

Regardless of the additional factors to consider when dealing with emerging markets, it is clear that there is a strong and growing market for underwater sea cables. The risks of working in emerging markets are clearly higher than those present in developed markets, however so are the rewards. As the amount of USCs increase in developing countries thereby creating a more competitive marketplace, so too have the prices decreased for the end user. A natural consequence of this is that the sponsors of such projects have a lower rate of return on their investments. The opposite has been the case in emerging markets where the lack of Information and Communication Technology (ICT) infrastructure has meant that having the same level of internet connectivity as in developed countries has meant higher prices for the end user (Adero,B (2010), p.1).

When considering the market for USCs, it is not only important to consider the volume of purchasers of ICT capacity, but also to assess the market for equipment providers and construction contractors – essentially the ‘builders’.

The USC market is unique in having a very limited number of builders. There are several reasons for this including the sophistication of the technology required and the amounts to be invested in laying the cable and deploying a cable ship prior to payment. This is important as the builders that are available have a lot of market capitalisation and therefore stronger negotiating positions on USC projects. It is this negotiating position which is important to be conscious of when proposing issues during the transaction.

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