The ongoing war of words between the Kenya government and Internet service providers over prices is the result of a canny scheme to rope the latter into paying for idle capacity that was procured at exorbitant costs.

The EastAfrican has established that the providers are swamped with excess capacity after signing 25-year contracts for the biggest bandwidth tiers of 155mbps — which, according to those in the know, is unlikely to be used within the contract period.

Indeed, all that the providers are likely to sell is about 30mbps, but someone has to pay for the surplus — inevitably, this will be the consumer.

That is the simple reason why Internet costs are unlikely to come down soon, with providers preferring to supply additional bandwidth instead of reduced costs, as a strategy to recoup the costs of having bought more capacity than the market required.

The threats coming from the government to step in and control prices, particularly from Bitange Ndemo, the Permanent Secretary in the Ministry of Information and Communications, are a pointer to the increasing likelihood that consumers are getting a raw deal.

Last week, Mr Ndemo accused shareholders of The East Africa Marine Cable System (Teams) of colluding to fix Internet connectivity prices.

At issue is the massive investment put in by the providers to secure the capacity, which has already been paid for.

And with only six months to go till the arrival of the East African Submarine Cable System (Eassy) cable, the providers risk losing billions unless they can dispose of the costly capacity before June 2010, which is highly unlikely.

The existing cables, both Seacom and Teams, came on board when it became apparent that the multi-state Eassy fibre-optic cable was taking too long following initial disagreements over ownership, funding and distribution.

At the moment, neither of them is directly connected to Europe, with Seacom going to India, while Teams is connected through Fujaira in the United Arab Emirates.

Onward connectivity pricing from Fujairah to Europe is costly because of cross-connect fees — connecting from one cable system to another — and the recurring costs of leasing bandwidth to destinations in Europe and Asia. 

Seacom was laid at a cost of $750 million and Teams at $180 million, while estimates are that by the time Eassy goes live, it will have consumed $265 million.

The cost of laying the cable determines the purchase price. While Seacom is well entrenched, Teams is facing teething problems over ownership and finance.

Some of its shareholders have gone to court to challenge their being thrown out for not being able to pay up, with their shares being distributed among the larger shareholders.

The Kenya government is breathing fire because Teams was built with public funds, but sold later at cost, in the expectation that the buyers would sell capacity at cheaper rates. This has not happened.

Considering the set-up cost, the debt-equity ratio is high, estimated at more than half, and whether or not the costly capacity is sold, the loans have to be repaid.

Insiders told The EastAfrican that once the Eassy cable goes live, several things will change, including the pricing of bandwidth, which will be uniform and graduated, meaning a provider will purchase only what they require and increase as they grow.

Contracts on the Eassy cable will be short-term, starting from three months for the least capacity of 2mbps.

While Seacom and Teams operate purely on commercial lines, Eassy is a World Bank-funded project premised on the need to open up access to as many people as possible. It will be distributed on an open access basis, which is not available at the moment.

In an ideal environment, cables should be owned by international networks, not individual commercial entities.

What is happening in East Africa is that except for Safaricom, which is owned by Vodafone UK, the others are small and lack the kind of expertise and resources required to supply the service at affordable prices.

Internet penetration has largely been restricted to urban areas serving an elite group.

Providers have said that they will first have to recoup their investment before lowering the internet connectivity prices but the government says they should be selling Internet connections at about $200 per megabyte whereas the companies have held the price at about $4,000 — the price of satellite connectivity.

When we were initially setting up Teams, the issue of recouping investments after it had gone live did not feature,” Mr Ndemo said.

In Teams, the government has a 20 per cent stake, Safaricom 22.5 per cent and Telkom Kenya Limited 22.5 per cent. Essar Telecom Kenya, Kenya Data Networks, Wananchi Telecoms, Access Kenya and Jamii Telecommunications Ltd own the rest of the shares.

Operators have been accused of creating a cartel to fleece consumers but they say they need to recoup their investment comes first.

They add that meaningful price reductions will take up to three years.

When the undersea fibre-optic cable landed at the Kenya coast two months ago, there were high expectations that it would lead to efficient and cost-effective Internet connectivity.

Consumers were made to believe that the undersea cable would be the surest answer to impediments linked to terrestrial connectivity.

Safaricom chief executive officer Michael Joseph has been quoted by the media as saying that one of the unspoken reasons why connectivity will not come cheap is the desire to recoup investment by keeping the prices high.

He has also indicated that consumers may have to wait until 2011 to experience the full cost-saving benefits of the international fibre optic cables that arrived in the country a few months ago.

The government’s threat to cap Internet prices could spark a confrontation with industry players in coming weeks.

Fibre-optic connectivity was expected to decrease the cost of communication by at least 10 times, as fibre offers a cheaper vehicle than satellites, which currently supply most of the region’s communication links.

None of the companies that dispense Internet services directly to consumers have committed to the kind of price cuts consumers have been anticipating, with some like AccessKenya and UUNET offering double capacity rather than lowering their costs.

Kenya Data Networks implemented a 90 per cent reduction in prices, but most of its clients are other ISPs, and so the trickle-down effect is yet to reach the grassroots.

But firms say they face stiff financial penalties if they break long-term contracts with their satellite providers — an argument that Mr Ndemo dismisses.

“This is being mischievous. Some are now enjoying prices around $600, but that price needs to be much lower in order for mwananchi to enjoy the benefits. We had hoped competition would bring prices down. If we feel Kenyans are not enjoying lower prices, we may be forced to step in,” He said.

Users cannot immediately exit these contracts without paying high penalties, so most will be retained until their expiry.

Industry sources say some players are already paying just $100 per megabyte, but are reluctant to pass on those benefits to consumers until they have full connectivity to more than one fibre-optic cable.

At present both Teams and Seacom rely on one SE-ME-WE 4 cable and the Mombasa landing points, requiring that providers retain some satellite capacity, and incur the attendant costs.