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Achieving global connectivity.

Modern telecommunications is a prerequisite for - not a natural consequence of - a developing country's economic success in today's emerging global economy. Study after study drives home the point that an adequate telecommunications system is essential to the integration of a country's political, cultural, and social fabric - and is critical to its economic advancement.

Telecommunications has become the "missing link" for the developing nations, observed Jonathan Parapak, the secretary general for Posts and Telecommunications of the Republic of Indonesia. "When some of us speak about telecommunications development," he said, "we are enchanted by their fantastic possibilities, both from the technological viewpoint and the networking of services. However, we must never lose sight of the fact that globalization also includes Africa, Asia, and Latin America. As long as the developing world is left behind in telecommunications, there cannot be true global connectivity."

In a recent paper, Walther Richter of the Geneva-based International Telecommunications Union (ITU) compared the effect of telecommunications on the economy of a developing country to that of fertilizer on agriculture. He commented: "You can grow produce without fertilizer, just as you can run an economy without telecommunications, but each is considerably less efficient without these basic inputs."

And, Peter F. Drucker, writing in the April 9, 1992 issue of The Wall Street Journal, summed up today's situation this way: The biggest demand pool in the world is for telephone service in Third World countries, including the former Soviet bloc. There is no greater impediment to economic development than poor telephone service, and no greater spur than good telephone service."

Simply stated, the ability to compete in a 24-hour-a-day global economy increasingly depends on a nation's ability to manage the rapid transfer of information. For developing countries to expand socially, culturally, and economically, telecommunications is as important a part of the infrastructure as electric power, modern roads, water, and sewer systems.

It seems logical, then, that all developing countries would be placing major emphasis on achieving a modern, flexible telecommunications infrastructure. Unfortunately, this is not always true. In Latin America, Asia, and Africa, for example, the absence of reliable, efficient telecommunications service remains a major stumbling block to the healthy development of many countries.

Roadblocks to Advancement

Studies by the World Bank, the ITU, and others point to an enormous scarcity of even the most basic telecommunications services throughout the developing world.

Richter points out that the Tokyo area alone has more telephones than all of Africa with its population of 500 million. In some developing countries, there is less than one phone per 100 people - and most of these phones are concentrated in the country's capital. In addition, where networks are established, maintenance and overload are so bad that only a small percentage - as low as 30% - of the calls is completed. In fact, these studies estimate that half the world's population has absolutely no access to telephone service whatsoever.

So, why isn't every developing country rushing to join the telecommunications revolution or, at least, building a basic infrastructure? Money, it turns out, isn't the problem. Banks are willing to lend, and the use of private capital through various privatization arrangements provides more than adequate financing. Instead, according to ITU and other studies, the biggest hindrance to telecommunications development in the developing countries has been the attitude of their governments.

Under communism, for example, telephone systems were deliberately kept primitive to maintain control of the population. As telecommunications services improved in the Soviet Union, albeit marginally, this level of control became more difficult - giving some credence to the quip that it was the fax machine that toppled the Berlin Wall.

In other developing countries, centralized political and communications control is maintained in the capital city while rural areas are isolated. This is sometimes a matter of control. More often, however, it's simply a matter of neglect by the central government, which believes that providing telephone service to its entire population is a low priority at best. For example, developing countries spend less than 1% of their investment on telecommunications versus more than 2% for the industrialized countries.

These attitudes can be turned around only when the leaders of developing countries understand the quantitative and qualitative benefits of creating a modern telecommunications infrastructure.

Reasonably well-managed telecommunications operations, for instance, can generate large financial surpluses. One World Bank study of a dozen developing-country telecommunications investment programs reported a more than 13% average annual rate of return on overall net plant in service.

Indisputable Benefits

Such studies demonstrate that the benefits to the developing country from establishing an adequate telecommunications infrastructure are substantial and pervasive. For example:

* Communication improves between various sectors of the economy, boosting productivity and providing better management in both public and private sectors.

* Substantial cost savings are realized for expansion by the country's internal businesses and across all business activities such as purchasing, selling, inventory control, managerial and labor costs.

* As economic development takes place, telecommunications becomes the most cost effective means of communication for increasing numbers of people, replacing the post office and personal travel.

* Less energy input is required for communication, making transportation more efficient and cutting down on pollution and other transportation-related problems.

* As telephones are installed in increasingly remote and undeveloped areas, the user benefit per call increases proportionally. Once minimal commercial relations have been established between remote regions or centers, the economic value of the calls to the users skyrockets - more than offsetting the costs of installation and maintenance.

* Other, less quantifiable benefits include the attraction of new industries to more rural areas, helping to slow unwanted rural-to-urban migration and bringing a feeling of security and less isolation to individuals and companies in outlying areas. Health services and education can be improved and national unity increased. Government programs can be more effectively administered.

* Finally, a modern telecommunications system is essential for attracting companies and capital from the industrialized nations, since companies must be able to communicate efficiently within the country and with headquarters and operations abroad to run their businesses.

Building the Infrastructure

Developing countries seeking to modernize their telecommunications infrastructures traditionally consider one of two fundamental policy options:

* Declare an open-entry policy, which allows multiple suppliers to pursue attractive telecommunications markets.

* Designate a "private" telecommunications supplier who has defined obligations for expanding and improving services in a specific time period.

The first option may appear attractive to major business customers, especially multinationals, by ensuring that an array of telecommunications services is available quickly. However, competing suppliers naturally target only the most profitable markets, draining revenue from the existing public network. With this option, a generally available public network will probably never be developed.

In regard to the first option, the financial equation doesn't work if the government decides to introduce competition into the profitable segments of the telecommunications sector while, at the same time, requiring the public network to be the "supplier of last resort."

With the second option - which most commonly requires some form of privatization - there is more certainty that a generally available public network will be developed. However, the "designated provider" may be more methodical in developing specialized business services.

A developing nation can strike a balance between these two options that ultimately will achieve open-market competition while ensuring the modernization of the public network for the use of the majority of its citizens.

The country still would designate a "private operator" for its public telephone system. However, it would assure its private operator that, in return for making a substantial investment in upgrading the country's telecommunications infrastructure, the private firm would enjoy "exclusive" or competition-free operation.

This "exclusive" status would cover a specific period - usually 10 to 12 years. During this period, rates would be appropriately "rebalanced." That is, local rates would be increased to better reflect the cost of providing local services, while international rates would be reduced, diminishing the cross subsidies between services. Funds for new investment would come from internally generated cash and from the ability of a designated private operator to raise new capital in the financial markets. After this time, the private firm would be expected to operate in a competitive environment.

In this way, the developing country recognizes the long-term commitment and large investment required to develop, expand, and improve the quality of its telecommunications infrastructure. As a result, the price of access lines is adjusted, a world-class telecommunications system is installed, the private telecommunications company can make a reasonable return on its investment, and the country's economy is allowed to develop.

A Win for Everybody

This approach to privatization lets everyone win: the controlling investor group, the government, employees, customers, suppliers, new investors in the company and, most important, the economy of the country that privatizes.

GTE and other international telecommunications companies are well aware of the advantages of investment in developing countries. GTE, for example, has the technical and managerial ability, as well as the solid financial foundation, to modernize a country's telecommunications network over time. The quid pro quo for GTE and its shareholders is that the company earns more than its risk-adjusted cost of capital over the life of the project.

This is very close to what is occurring in Venezuela, where a consortium led by GTE has purchased a 40% share of the Venezuelan telephone company, CANTV, and is modernizing that country's telephone system. By the year 2000, we believe that CANTV will have become the best telecommunications company in Latin America.

CANTV will spend more than $5 billion over the next eight years on phone-system improvements. In 1992, the company began adding a substantial number of digital-microwave and fiber-optic systems for long-distance calls and providing more than 200,000 new digital lines. Future improvements will include installation of testing devices that can identify service problems even before customers notice them. In addition, thousands of out-of-service public telephones are being repaired.

Bruce Haddad, the new president of CANTV, has commented that "CANTV is going to significantly help the development of Venezuela and its people and, in addition, will be an excellent financial investment for GTE." Other consortium members include T.I. Telefonica Internacional de Espana, La Electricidad de Caracas, Consorcio Inversionista Mercantil Cima (CIMA), and AT&T International.

In a similar privatization process, a consortium that includes Southwestern Bell purchased shares of Telefonos de Mexico (Telmex) and is involved in modernizing that country's telephone system. More than 40% of the infrastructure is located in Mexico City, with the current system having only five to six lines per 100 people (compared with 53 lines per 100 U.S. citizens).

Several billion dollars will be pumped into the Telmex system over the next 10 years. With the installation of state-of-the-art equipment and by implementing a broad range of network and service enhancements, Telmex will become one of the most modern telephone companies in the world.

Future Development

For developed nations, there is no doubt that the ability to compete in a 24-hour-a-day global economy requires the rapid transfer of information - both voice and data - across sophisticated telecommunications systems. As more and more developing countries realize the importance of sophisticated telecommunications as a requirement for economic development, they will begin to invest in the upgrading and expansion of their telecommunications infrastructures.

Every country, every region, has its own problems and opportunities and its own timetable for establishing a reliable, modern telecommunications infrastructure. Some parts of the developing world will see quantum improvements in the next few years; others will take longer to approach even a minimum infrastructure.

The former will include those countries that effectively privatize their state-owned telephone companies as an integral part of their economic development. And, as they do, their economic and social development will begin to pick up speed. Each country, its citizens, and the surrounding regions will realize proportionally more and more benefits.

This positive domino effect eventually will result in a truly global telecommunications network, with no "missing links" among the developing countries.
COPYRIGHT 1993 Directors and Boards
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Lee, Charles R.
Publication:Directors & Boards
Date:Jan 1, 1993
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