September - 2001 - issue > Sam Pitroda Column

The digital divide issue has been debated for nearly two and a half decades. But in the nineties – the high growth period for telecom — the investment community began to see it as a savior. People became convinced that telecom was indeed important and was directly connected to development. So developing countries needed to build telecom infrastructure to expedite the process of development.

Consequently, the G8 set up a special committee with Japan taking the lead, publishing a report with recommendations. Similarly the UN Secretary General, for the first time in the history of UN, decided to set up a separate panel on ICT — Information and Communications Technology. This panel comprised top board members from Cisco, Hewlett Packard, Nokia and Alcatel as well as members from developing countries like Jai Naidoo, former communications minister of South Africa, and myself. The panel, which has been meeting for almost a year now, set up a plan to use the UN’s moral authority to help convince leaders in developing countries that telecom is critical to education and health and so must get higher international priority and more investments. The panel would ask countries to liberalize and deregulate telecom and invite private investments from global investors to build infrastructure.

Ripple Effect

While all of this was going on, and great momentum was being built, the tech bubble burst. Valuations in the telecom industry tanked and hit these programs very hard. One by one, all of the major telecom operators, partly because of their huge bids for 3G licenses, and partly because of consolidation — for instance, MCI and WorldCom — decided to delay their programs to install more capacity. This started a ripple effect in the industry.

As operators were hit, so were manufacturers. The latter started seeing orders either delayed or cancelled. All of a sudden the industry was faced with dramatic revenue drops and 300,000 laid off telecom professionals.

In this restructuring process many of the manufacturing companies began closing their operations in emerging markets — for example, Lucent closed its operations in Egypt and is selling parts of it. The company is also trying to close operations in India. As a result of this, many talented people in the industry got completely wiped out. This has led to a dichotomy in the industry: on the one hand there is excess capacity in plants and no orders; on the other hand in India and around the world, there are billions of people who have never used a phone.

Funding Dries Up

Currently, emerging markets are not getting the type of funding they had expected, especially from vendors. Traditionally, if you do a $1 billion project, you will find $300 to $400 million in equity and the remaining comes from vendor financing. Investor appetite for equity in emerging markets has vanished – telecom is being seen as a bad investment and everyone is trying to recoup from previous financial commitments. Vendor financing has completely dried up because struggling companies have no capacity to fund projects in emerging markets.

Thus, it’s a Catch 22 situation. The G8 task force and the UN task force created huge hype and expectations that something would be done to bridge the digital divide globally. Even the Bill Gates Foundation got involved and set up a conference in Seattle in which I participated. Everyone thought that private organizations like the Ford and Rockefeller Foundations would chip in and provide funding. That a collective force — UN, G8 and non-profit organizations — would combat the digital divide. Not much has really happened because the dot-com crash and telecom downturn have combined to completely change the scenario.

A real example is of a telecom company in Africa who has been building a massive telecom network. They were hoping to go public so they could raise money and expedite the process, but because of the market they haven’t. They tried selling the network to big players, but found no takers. They have tried to come up with money to run their operations, but cannot find financing. This in turn is forcing them to wind things down. So it is a very brutal scene out there in emerging markets.

India Perspective

Things have slowed down in India too. The ripple effect has come from several different directions. Many MNCs are pulling out directly and indirectly. No one has come forward with big bucks. The VSNL case is an example. Manufacturers are pulling out with a sour taste in their mouths regarding Indian delays, policies and regulatory processes.

But Indian players like Bharti and Reliance have become strong in the process. Like in western countries, consolidation will lead to two or three major players emerging in India as well. VSNL, with its strong operating base, can now negotiate a better pricing package with manufacturers — such as Motorola.

However, India cannot shield itself from the ups and downs in the U.S. economy. The U.S. economy affects everybody. The world is going through a restructuring of financial systems and institutions. So once you have global standards and global accounting methods, you will have to accept the fact that everyone needs to follow those to have a fair comparison. Japan is finding this out the hard way in its banking sector.

China, though, is going forward more strongly. China Mobile currently has nearly 100 million mobile phones and by 2005 the number will be 250 million. The Chinese economy is, to a certain extent, closed and they are not tied to international plays. There will be some impact in China, but less compared with other countries.

The other exception is very strong players in developing countries earning lots of cash from other businesses and willing to put their money into telecom because they will be able to buy cheaper. So, if you have the money, this is the time to buy telecom property.

A Global Leader is Required

This has been a big shock to all those who have been working on reducing the digital gap. At this time, no one has really come up with a bold vision and initiative — not even the World Bank or IMF, who are capable to some extent. This is the time to show global leadership. Someone has to say, “Why can’t we come up with a long-term financing package for the developing world such that we can preserve the jobs in the developed world?”

Someone should think of diverting telecom equipment to the emerging markets and devise a long-term payout plan to build much needed basic infrastructure. This will keep not only the industry going, but will use the capacity that is already built. There is no sense in keeping equipment idle in plants and not produce anything just because the markets in advanced countries have dried up. Developed nations can afford to slow this process and wait for two to three years because they already have enough capacity in place. But what is the point of totally killing basic infrastructure projects in emerging markets?

One or two companies like Cisco and Lucent cannot come up with a bold vision. They attend G8 summits, but do not go there to serve the needs of developing nations. They look out for their own products, their own portfolio and their own agenda. Nothing can be done until there is a very strong global leader willing to stick his or her neck out and say, “Lets look at global restructuring and not just Japanese restructuring, American restructuring, Lucent or Cisco restructuring.”

Sam Pitroda is chairman and CEO of WorldTel. He has been a founder of several companies in Europe and North America and the first chairman of India’s Telecom Commission. To exchange ideas with him, write to pitroda@corp.siliconindia.com.

This article is based on a telephone conversation with Mr. Pitroda.