Friday, September 22, 2006

WiMax - Profit from Poverty Strategy

Proposal for National Poverty Relief and
Microeconomic Development Initiative

WiMax Internet Service Provider Network – Ukraine

Strategy Plan

We stand in the face of a rare opportunity: the advancement of Ukraine as a democratic state.

The opportunity is rare because there are no better or clearer examples of emerging democracy anywhere in the world. There are no more visible demonstrations than the Orange Revolution a year ago. The people of Ukraine made very clear what most of them want. There were and are
more citizens in favor of the revolution than voting and opinion polls indicate, given that it was about cleaning up Ukraine, getting rid of corruption, and improving overall standards of living. Millions of Ukrainians rose up all over Ukraine and demonstrated for weeks to demand those changes and made Ukraine an international leader in democracy.

Ukraine needs help to complete the transition stage from old to new. The hard part is already finished, that having been the mass demonstrations by millions of Ukrainians for weeks. This direction was chosen by Ukrainian citizens of their own free will en masse, who decided to take on the ultimate responsibility to change their own country.

Most importantly, this was all done peacefully for the most part, with both citizen action groups and state officers managing to bring violent provocateurs under control.

This is the time for friends to step in and help, invited. This help is welcomed and appreciated by the vast majority of Ukrainian citizens, regardless of their presumed political orientations. It is also time to highlight, promote and support a rare example of civilized democracy born in the international spotlight at citizen level through peaceful means.

President Yushchenko identified poverty relief as one of his first and most immediate goals. This is no small consideration, given that at least 25% of Ukrainians live in poverty. Relieving poverty is not only a social and humanitarian concern. It is also smart economics and
good public policy.

People suffering poverty require social support from government funds. With at least a quarter of Ukraine's population needing such support, this represents an enormous cost to the national budget. This in turn directly reduces money available to pay state workers' salaries, which in
turn creates a need for workers to take in extra money somehow. This breeds bribery and corruption; corruption has been the primary limiting factor for Ukraine's economic, social, and political development. Thus poverty has a formidable negative impact nationwide. It feeds a vicious negative cycle.

Poverty also places a heavy load on public services, especially medical care and child care. Poverty breeds hopelessness, despair, and anger. Poverty breeds contempt and cynicism, antithetical to a healthy person or nation. Worst of all, poverty leaves people with a sense of
abandonment, a sense that they're not important, they are ignored, and they have been left to suffer and die.

The natural human instinct at that point is self-defense. Harming someone else is less relevant when acting from self-defense posture. Consequently, it comes as no surprise to see higher crime rates in regions of poverty. Terrorist activity usually arises from regions with high
poverty. Desperation breeds attitudes and behavior that wouldn't likelv happen otherwise. Poverty is torturous trap. It proves to be very dangerous for the larger community as well.

The core objective of this project is poverty relief. Methodologies are represented by three main components: national microeconomic development; national child-care reform; national rural
communications initiative. Funding is proposed to be a joint venture of the governments of Ukraine and United States of America.


This proposal began three years ago, with release of a preliminary proposal for microeconomic development in Crimea.1 That proposal was paused at the author's request due to corruption issues within Crimea's government. Since that time, Ukraine has undertaken historical efforts to reduce corruption. Corruption has been the fundamental barrier to economic development in Ukraine.

In Crimea, it was clear that development could not possibly happen in any significant way while the government acted mainly as gatekeepers, holding hostage the welfare of ordinary Ukrainians by resisting development unless government bosses were first paid privately and
directly. Otherwise, those officials had absolutely no interest or intention of helping and improving the lives of ordinary citizens. Traveling from one end of Crimea to the other, the obvious economic potential of Crimea stood in stark contrast to widespread poverty. This was a direct result of corrupt government across the region. With transparent, honest, citizen-focused
government in Crimea, the scope for economic transformation is enormous. Crimea should be one of the most prosperous oblasts in Ukraine rather than one of the poorest. Poverty is a direct result of corrupt government officials in office only for the purpose of enriching themselves and a few allies.

The Crimean Tatar community have been particularly damaged by entrenched corruption. As an additional burden, they are subject to strong negative bias against them by ethnic Russians who now own property wrongfully expropriated from Crimea's Tatars and given to Russians by Stalin sixty years ago.

There is one development strategy that is sure to work in Crimea, and that is the strategy outlined in the 2003 proposal. That strategy has been tested and proved in Tomsk, Russia over the past five years. Thousands of people, mostly women with children, have taken loans to create small businesses. 99% of loans were repaid on time and 98% of businesses continue. Microfinance capitalization increased from $6 million to $10 million during the first two years of
operation due to the program's success. The program was self-sustaining after two years. The lives of tens of thousands of people in a city of 700,000 people and an oblast of one million people have been improved economically and socially: more families are able to remain intact and whole due to family income increases.

The Crimea proposal is now recommended to move forward because both Ukraine and Crimea have taken very significant steps in getting rid of corruption. Much of Crimea's Ministry, from the Prime Minister on down, have been removed from office.

Similar housecleaning has been undertaken throughout most of Ukraine. It is now not only appropriate to continue with the Crimea project, it is also appropriate to expand it throughout Ukraine. Expansion consists of national scope rather than one region; and, adding other components. Other components can be added as ideas emerge around the core catalyst project. P-CED Ukraine's take will be 1% of funding. That will be used to support ongoing research and development involving mostly Ukrainian consultants and staffers, tantamount to a poverty-relief/economic development think tank focused on helping the poorest people in Ukraine.
P-CED Ukraine will also coordinate preparations and implementation of the project components,
particularly the more technically difficult communications initiative. If government officials or anyone else in other oblasts have any questions regarding corruption and personal payments, they need only consider the Crimea experience. That entire experience was duly and transparently related to the office of the US Ambassador, US Embassy, Kyiv; and, to the US Senate. For the Ukraine side, it was related to Ukrainian citizens via Kyiv Post (English only); Voice of America-Ukraine (in Ukrainian); and on Internet via web sites such as Maidan.

The message should be clear by now: no corruption will be tolerated in this development project. That anti-corruption policy is now completely congruent with top-level government in Ukraine. More importantly, it is congruent with what the vast majority of Ukrainians want
and need, regardless of their avowed political preferences. It is common ground among almost everyone in Ukraine.

Project Components

National Microeconomic Development

This component is based on microenterprise support. This will require a nation-wide microfinance initiative unlike existing microfinance in Ukraine.

Existing microfinance programs effectively exclude people who need them most, those in poverty. Material collateral is required for virtually all microfinance programs now available in Ukraine. Most microfinance is set up to help people with existing businesses, but not to help people start new businesses. This situation is the exact opposite of what is needed: access to loan funding without regard to material collateral; and, strong emphasis on training and preparing people to create their own business.

Further aggravating the microenterprise environment have been extortionist protection rackets operated by organized crime. The deal is simple: a merchant must pay "protection" money, or else they could find their business damaged one way or another. This amounts to profits stolen at gunpoint, no different in principle than armed robbery. In some cases, criminals have forced so much money from business owners that the business was forced to close. Once the business is closed, there are no other financing possibilities for the owner to try and restart, since most microfinance comes into play only for existing businesses.

The new microfinance program will include a mechanism for reporting this sort of corruption, with reports going to local, regional and national authorities, and to media as necessary, with full
expectation of appropriate action against any and all attempts to extort money, or "protection payments."

Loan funding will be available to anyone who needs it if they are willing to undertake a free training program for business planning and market research to prepare for success. As mentioned above, this approach has been very successful and beneficial as proved by the
Tomsk experiment. This component should be funded in the same amount per capita as in Tomsk oblast, $10 million dollars per one million population. That amounts to $480 million dollars.

National Child-care Reform

This component aims to remove children now in state-care institutions into family-care: return to their own families, foster care, home-country adoption, and small group homes. It follows from research and experience in such programs as TACIS-sponsored Every Child (UK) and USAID-sponsored

Holt International (US.)

According to years of research within Ukraine and the former Soviet bloc by Every Child, 90% of children can be returned to their families, with relatively small financial support to families. The cost of financial support needed is less than half the cost of keeping the children in state children homes. If 90% of children can be removed from state homes back to their own families, at half the cost of keeping them in state homes, it makes absolutely no sense not to return them to their families.

In about ten percent of cases where children can't be returned due to alcoholic or incapable parents (incapable for reasons other than poverty), no parents, or no family, small group homes, foster care, and adoption within Ukraine are next options. Foster care and adoption are relatively rare in Ukraine, although public education programs are underway to promote these options. For the interim, there is great need for small group homes for these children. Small group homes should consist of small enough groups of children to approximate a more intimate, supportive family-type environment. According to Every Child's research, the few small group homes that already exist have about twenty children per home. Having worked in a group home in the US, this author believes that is too many children for one setting. Ten should be the maximum number, with four professional staff per home. That allows a reasonable work load of 3.5 days per week for each pair of staff. Facilities can and should be provided by local governments, making use of some of the hundreds of vacant buildings in most cities in Ukraine.

It is difficult if not impossible to know exactly how many children are currently living in orphanages in Ukraine. Research from Every Child cites the following reasons for this2:

Lack of reliable statistics. Many countries in the region are still in what is euphemistically
described as the 'transition' from semi-totalitarian to democratic rule. Civil society is in an
early stage of development and the state organs remain extremely powerful. There are few checks and balances against the state and no tradition of state-collected statistics being questioned.

Inconsistent data collection. Responsibility for childcare is generally divided between four
or more ministries, each with their own budgets and information systems. Collecting consistent data across the different ministries clearly presents problems. For example, during the course of a situation analysis of childcare in Azerbaijan,

EveryChild was quoted figures for the numbers of children in institutional care in the country that ranged between 8,000 and 120,000.

Problems of definition. For the purposes of this report we define an institution as a large
residential home for long-term childcare. We would expect such a home to house at least 15 children; anything much smaller can be regarded as a substitute family. But the definition used in state-collected data is often uncertain.

Lack of clarity of purpose. Children's institutions that were originally provided for
orphans (or for educational or health reasons) are frequently used to house children for social reasons. For example, in many countries in the region, boarding schools give an education to children who live in remote rural areas that do not have an adequate population to support their own schools. However, children are also frequently placed there because their parents are simply too poor to support them.

Faulty collection of data. Poor data collection can be the result of inadequate mechanisms
or manipulation. For example, a study in Georgia found that some officially-recorded institutions did not exist and others that did were not recognised by the system.

Given those data limitations, as of 2002 Every Child's best estimate was 80,000 children in orphanages3. Going on the assumptions that numbers remain roughly similar and 90% of children can be returned to their families by providing financial support to those families at net cost savings of at least 50% per child versus orphanage care, that works out to a projected cost savings of about 45%. Thus, returning children to their birth homes where the main problem was insufficient money would appear to reduce state-funded support by almost half. Every Child estimates4 a state cost of 600 grivna, or about $115, per child per month. For 80,000 children, total cost is about $9.2 million per year. 45% savings reduces total cost to $5 million per year.

That leaves 10%, perhaps 8,000 children , remaining to be placed in foster care, home-country adoptions, and small group homes. In that attitudes regarding foster care and adoptions within
Ukraine will take time to change and overcome, small group homes appear to the be second immediate alternative to orphanages. These group homes should be family-style settings with a
limited number of children per home. Allowing ten children per home, 800 such homes are needed. This results in an increase in staff compared to orphanages; in an orphanage, a staff of four people might manage a hundred or more children, whereas in family-style group homes a staff of four is needed per home, or 3200 total staff. Allowing a decent living wage of $300 per month on average per staffer across 25 oblasts brings staff costs to $11.5 million. About $4 million of that amount is covered by cost reductions above, leaving a total cost increase of about $6.5 million per year for greatly improved lives of almost all children now in orphanages.

National Rural Communications Initiative

This component aims to provide low-cost broadband Internet service in Ukraine. Even in the few areas where it is available, broadband is expensive by international standards.

This component will also function as a revenue engine that ensures the overall project has a cash surplus and is self-sustaining. Specific attention will be given to the transitional costs of the child-care initiative.

Ukraine's state-owned Ukrtelecom is preparing for a $700 million investment into expanded communications services throughout Ukraine, using UMTS 3G technology. While it appears that wireless coverage will increase and will include somewhat faster Internet connections to more people, the infrastructure is more expensive and user costs will therefore have to be higher than with P-CED Ukraine's recommended technology. Russian investors on the other hand have a similar project underway in Russia with $600 million investment, using technology and system design almost identical to P-CED U's design for Ukraine. (P-CED's founder preached and predicted this technology while in Russia during 1999-2000.) P-CED U's design will cost a small fraction, about 15%, to create infrastructure throughout Ukraine as compared with what Ukrtelecom is preparing to spend. That allows for service for an average of 5000 customers per oblast at an average subscription cost of $25 per month for broadband Internet with unlimited usage, no traffic charges. That reflects the norm in most of Europe. Projected average net profit per year per oblast is approximately $1 million, or $25 million nationwide for the initial 125,000 customers. This money will support the child-care reform component. Monies not needed for the child-care component go to microenterprise funding. Thus, providing Ukraine infrastructure for low-cost, high-speed Internet broadband - a critical need in its own right - will serve to support child-care reform, and to further increase funding for microenterprise.


This enterprise model, where a company does business to make profit for the specific objective of using profits for social benefit, is becoming increasingly common in Europe, in Great Britain for example. This model should not be confused with a non-profit or not-for-profit company. P-CED's model is specifically for-profit. The only thing different from conventional capitalist enterprises is the usage of profits for poverty relief and direct social benefit. Bottom line is measured in financial and social terms.

P-CED's founder proposed this sort of model ten years ago - specifically proposing the emerging information technology and Internet sector for profits - in a white paper to the US White House in 1996. Those concepts became in "idea virus." In 1998, programs began to appear in leading US business schools along the same theme, under the general heading of "social enterprise." Those business schools include Stanford, Yale, Harvard, and Duke universities, with similar programs appearing in Oxford University and London School of Economics. In 2002, social enterprise was adopted as official government policy in Great Britain. Bottom-line measurement in terms of both financial profit and social benefit is now commonly referred to as "blended value" or "double bottom line." The enterprise model is "profit for poverty."

Moreover, the preeminent capitalist in the world has recently undertaken the profit-for-poverty model proposed ten years ago. Bill Gates and his wife Melinda have invested the bulk of their fortune, $39 billion, into poverty relief and social benefit through the Gates Foundation. Philanthropy, of course, is nothing new. The problem is that there aren't nearly enough funds available from philanthropy to stem the tide of poverty. The new trend is to create poverty-relief/social support organizations that in effect grow their own money with seed capital from governments and philanthropies.

The model proposed in the 1996 paper specifically predicted and included wireless Internet infrastructure as the wave of the future, with potential profits in a new, emerging, undeveloped sector available to use for poverty relief. It has taken a decade for the technology to develop and become available on the market, and about that long for the enterprise model to begin to gain widespread acceptance. During this year, 2006, the first wide-scale nationwide roll-outs of wireless technology are entering the market. The Russian project is the largest and most ambitious to date.

Broadband Internet service is also a political imperative. As Ukraine moves toward closer integration with the European Union and the West, it is important to understand that most if not all EU states now have a policy of broadband Internet access to 100% of their citizens. This
demonstrates the recognition of the linkage between economic development and broadband Internet access. "Access" means that broadband Internet service is available to 100% of the population at a user cost they can afford.

Cost of this component is approximately $100 million, with a projected net return of 25% per year to be applied to social benefit in each of 25 oblasts. Operations will be based in urban areas, with transmission and outreach to rural areas throughout each oblast.

Information delivery via broadband Internet access cannot be left to the market alone. During the past decade, information access has become so vital to developed economies as to be considered equivalent to basic human rights such as food, shelter, and any hope of economic well-being - for individual citizens as well as communities and nations. Hence the EU push for 100% access to broadband Internet. With information now having become an essential commodity for economic development, it makes no more sense to leave delivery in the hands of conventional market economics than it does to deal with food the same way. It cannot be "You'll get it when profits make it most sensible to deliver it to you." That, however, is precisely what is happening in Ukraine and much of eastern Europe. People have to have their needs met first, after which they can go about making better lives for themselves and their families. Information access has become a basic need, and is of course an essential aspect of any democracy where citizens need access to information, ideas, and cheap communications in order for democracy to develop and flourish.

If left only to conventional market forces, it will likely be at least another decade before affordable broadband access even begins to become available to most Ukrainians. Considering the exorbitant cost in Ukraine for standard telephone service and prevailing Internet access via high-cost low-speed dial-up service, there is no reason to believe that Ukrtelecom is looking to do anything more than maximize profits without regard to broad social and economic benefit. That is perfectly normal capitalism. Privatizing Ukrtelecom will do little more than shift profits from one small group to another, although public auction similar to Kryvorozhstal steel company should put a few billion dollars more into Ukraine's national budget. That money then ends up with the same question as money from the Kryvorozhstal sale, which is: how to use the money for greatest long-term, sustainable social and economic benefit for Ukrainian citizens? President Yushchenko is specifically looking for answers to that question, with this proposal being one of his answers. And among the things that must be done is implementation of nationwide access to broadband Internet service, same as is being done across the European Union and is beginning even in Russia. This is particularly advantageous when it can be done at a time when an emerging sector is largely undeveloped, profit potentials are highest, and profits can be directed to wide-scale poverty relief by innovative organizations.


Target funding includes the US Millennium Challenge Account administered by Millennium Challenge Corporation (MCC.) MCC's mission objective is poverty relief through growth and economic development. Ukraine can probably afford to take on this project with cash from the Kryvorozhstal privatization. In that this project is entirely self-sustaining within two years after initial cash input and pays for itself in four years, it makes sense for Ukraine to take it on
unilaterally. This is, however, proposed as a joint Ukraine/US project. The US has as much to learn and gain from this project as does Ukraine.

Let's be honest regarding poverty relief and MCC objectives: the US is also looking for solutions for poverty relief, and we certainly do not have an abundance of answers given at least 37 million American citizens living in poverty by official measures. Based on extensive research by P-CED, it is the opinion of this author that the real poverty level in the US is well in excess of 50 million, people, about one in six.

The so-called "War on Poverty" in the US began as a component in President Lyndon Johnson's "Great Society" program, around 1965. That program followed in the tradition of Franklin Roosevelt's New Deal about three decades earlier. Since the advent of War on Poverty in the US, poverty in the US gone up and down as various administrations interpreted "War on Poverty" differently Some attacked the conditions of poverty and sought to relieve those conditions. Others essentially attacked US citizens living in poverty, goading them to somehow get out of it even with no real means of escape. The result has been extremes in management philosophy averaging out to small progress in relieving poverty in the US after hundreds of billions of dollars input - a dismal return on investment. It should be understood that Millennium Challenge Corporation's philosophy of poverty relief through growth is an ongoing experiment in the US over three decades, but which has not taken root primarily due to political conflict and disagreement. Moreover, the US experiment shows that national economic growth does not necessarily relieve poverty. Poverty rates have risen in most of past thirty years in the US even as the national economy has steadily grown. There is no compelling evidence that national economic growth relieves poverty over time for individual citizens, while there is compelling evidence that it doesn't. So poverty relief via growth is not an issue of straightforward economic growth. Rather, this is an issue of targeted, strategic growth aimed directly at millions of specific human beings living in poverty.

Ukraine is technically a threshold country with MCC in 2006, that status having been approved by MCC's board of directors near the end of 2005. Considering that Ukraine holds unique opportunity for the US in a joint development project, directors of MCC would do well to consider exercising their authority to make an exception for Ukraine to become fully included this year, bypassing the interim threshold status. The main factor keeping Ukraine in threshold status was a slightly below median score on the corruption measure. Implementation of this project will decrease corruption more than enough to satisfy that measure.

This is as much to the advantage of the US as Ukraine. Joint cooperation on poverty relief and peaceful, home-grown democratic development is precisely the message that the US needs to send to the rest of the world. There is no better or more obvious example to be set than Ukraine.


It is clear that the US and Ukraine are both struggling to find answers and solutions for poverty relief and elimination. Either side has far more than enough money in existing national budget accounts to fulfill this project. At the same time, both sides stand to benefit greatly via joint cooperation. Both sides need each other. There is no better location on earth than Ukraine for this initiative. Lessons learned can be quickly replicated within Ukraine and the US as well as
adapted to other countries.

If the US adventure in Iraq is really and truly about establishing democracy, it is very safe to say that we're going to have to find cheaper and less destructive ways of going about it. The cost of 30 hours of warfare by the US in Iraq covers the cost of four years (35,064 hours) for this project.

Which method makes more sense?


1 Proposal for Economic Development of the Crimean Tatar Community in

People-Centered Economic Development, 2003.

2 Family Matters - Report on Central and Eastern European Orphanages.,
2005, page 14.

3 Ibid, page 17
4 Ibid, page 34



A Guide to Social Enterprise.
Social Enterprise Coalition, UK, 2004.

Family Matters - Report on Central and
Eastern European Orphanages
, November 2005.

IT Access for Everyone - Global Benchmarking
. World Economic Forum, January

Wikipedia Encyclopedia,