Panama Week 2001
"Linking the World through Transportation,
Telecommunications & Friendship"
Washington, D.C.

TELECOMMUNICATIONS LUNCH
Congressman Tom Davis' Speech

Keynote Speech & Recipient of "Friendship Award" 2001
The Honorable Tom Davis
United States Congressman of Virginia

"Good afternoon and thank you for having me here again today.  It was a pleasure to meet with our distinguished guests from Panama this morning  - including Vice President Bazan and Minister Jacome - and introduce them to some of the leading telecomm executives in Northern Virginia - and, in fact, the world.

It is with great pride that I welcome all of you to Northern Virginia.  Forty years ago, if you were sitting right where you are now, you would be in the middle of a farm field.  Since that time, Northern Virginia has grown just a bit.  We have the second largest concentration of high tech companies in the nation, and have emerged as the domestic and international center of the telecommunications industry.  So it is with tremendous enthusiasm that we participate in this unique forum this afternoon.

Let me note how deeply impressed I am with the great strides Panama is making in transforming its own  economy into a vibrant, competitive international telecommunications market.  Our nation's friendship with Panama is long-standing, and we here in Northern Virginia are committed to building a partnership with you that will strengthen our alliance of trade and investment relationships.

Panama has a come a long way from 1903 when it proclaimed its independence from Colombia.  Today, the Panamanian people should be proud of their nation's accomplishments. 

The United States and Panama share a unique history and mutual interests that span almost a century. It is a history that continues to grow today.  

It's been 2 years now since the terms of the Carter-Torrijos Treaty were finalized, with Panama assuming complete responsibility for the Panama Canal. The smooth transition of power and authority of the Canal to the Panamanian government was a truly historic event, one that included the withdrawal of all American military forces in Panama and one that will be remembered as a sterling example of the right and peaceful international transfer of real estate. I am proud of the dignity and grace displayed by both nations throughout this process.

Now we look to the future, to a 21^st century relationship that, hopefully, will focus on increased trade and investment, a relationship that should offer great benefits to Americans and Panamanians alike.

The end of US military presence and control over the Canal has not resulted in a diminished American presence in Panama. Just look at BellSouth, Motorola, ManTech -  to name a few. More than $1 billion in direct US investment in Panama.  More than 19,000 American citizens residing here. The US presence in Panama is alive and well indeed. And after my visit there this past summer, I certainly understand the attraction.

I am a strong believer in free trade and open markets. We simply cannot ignore the fact that we now find ourselves in a global economy. Make no mistake about it: We are in the midst of a revolution.

It's true that there are a lot of similarities between the previous era of globalization and the one we are in now. What is new today is the degree and intensity with which the world is being tied together into a single globalized marketplace. What is also new is the sheer number of people and countries able to partake of this process and be affected by it.

But, as Thomas Friedman notes in his book The Lexus and the Olive Tree, today's era of globalization is not only different in degree; in some way, it is also different in kind. The previous era of globalization was built around falling transportation costs - something I know Panamanians are very familiar with.

Today's era is built around falling telecommunications costs. 
And these technologies are able to weave the world together even tighter. If the first era of globalization shrank the world from a size large to a size medium, this era is shrinking the world from a size medium to a size small.

Let me talk to you briefly about the United States' role in this global telecommunications revolution.

It was 102 years ago that AT&T took over the business and property of the American Bell Telephone Company to become the parent company of the Bell system while continuing its long distance operations.  After nearly 85 years of monopoly control over the voice and data telecommunications market, the dynamics of the communications infrastructure changed dramatically with the breakup of AT&T in 1984.

Since that year, the U.S. telecom market has served as a laboratory for efforts to transform an antiquated, government-sanctioned monopoly utility into a competitive and innovative telecommunications market.

Two major events represent those efforts.
The 1984 antitrust settlement -- in which the Reagan Justice Department required that AT&T separate its long distance business from its 22 local telephone companies -- first brought competition to the long distance market.  Those 22 entities were consolidated into 7 Regional Bell Operating Companies (RBOCs), and AT&T was allowed to retain its long distance market as well as its equipment manufacturing company.  A critical part of the settlement was the prohibition preventing the RBOCs from providing long distance service -- a service over which the RBOCS retained a key control component: access service.  [Access service is the provisioning by the local exchange carrier to the interexchange carrier (IXCs-long distance companies) with access to the local exchange.]

As long distance companies multiplied and technology improved, competitive access carriers began competing heavily with the Incumbent Local Exchange Carriers (ILECs) in the provision of special access services between ILEC and IXC offices for business customers.  As these competitive access carriers diversified into data services, Internet access services, and local and long distance telephone services, you saw the emergence of the Competitive Local Exchange Carrier (CLEC).

While a few states were taking the lead in establishing pro-competitive policies for local telecommunications services, the overall state regulatory regime was much more restrictive on the ability of CLECS to compete directly with the ILECs.  Most states protected ILECs from competition such that most CLECS restricted their offerings to interstate services only.    

The lack of competition in the local telecom markets led to the creation of the second landmark event to shape the current U.S. telecom environment:  the Telecommunications Act of 1996.  Its objective was and still is to encourage the proliferation of competition in the local telecom market by eliminating state barriers to CLEC entry, by providing 3 methods-- interconnection, unbundled network elements, and resale-by which CLECs can gain entry into the local market, and by establishing a "carrot-stick" checklist which permits an RBOC to enter the long-distance market in states where it has proven to regulators that it has sufficiently opened its local loop to competitors.

The '96 Act also coincided with the dramatic rise in the growth of the Internet, a consequence of the development of the first graphical user interface, Mosaic, in 1993, which greatly improved consumers' ability to navigate the World Wide Web. 

The years following the Act's passage were marked by both obstacles and achievements for consumers.  Litigation ensued as a result of its implementation by the FCC and State commissions, and to date, there are only 7 states in which the RBOCs have proven sufficient market-opening compliance to be allowed into the long-distance market.

The combined promises of the Act-to offer the path of deregulation in exchange for local competition-appeared to offer limitless opportunities to nascent technologies and new business ideas five years ago.  It inspired an avalanche of venture capital funding for new and existing CLECs eager to compete.  As a direct result of the market-opening provisions of the '96 Act, CLECs invested over $50 billion in new telecom networks.  In turn, the telecom industry created thousands of high-skilled, high-paying jobs nationwide and fueled related industries.  These synergies played a large role in fueling the United States' economic expansion for the latter half of the 1990s.  

But now the U.S. is facing a critical economic juncture.  
A once-booming market has turned into a rapid downturn over the past year-a-half as start-up companies have failed to produce the consumer market and revenue stream needed to survive.  In that time, the CLEC industry has been hit hard by plunging stock prices and evaporating capital resources.

With nearly every technology sector linked to telecommunications services, the weakening of competitive carriers is having a domino effect, pushing the current fragility of the telecom market into a wider swath of the U.S. economy.  Computer equipment makers, networking equipment manufacturers, Web hosting hardware producers, and fiber optics manufacturers, among many others, are all linked to telecom.  It also directly impacts stalwart financial institutions that have invested heavily in telecom companies but are now vulnerable due to the high industry debt load they are servicing.

Since last year, there have been nearly 2 dozen telecom bankruptcies; 14 have been CLECs.  Thousands of jobs have been lost and recruitment virtually halted.  In addition there have been numerous IPO withdrawals or postponements as a result of the market's downturn.

The U.S. Commerce Department reported last year that communications equipment spending reached $124 billion, or 12% of all business spending on equipment and software.  It also accounted for one-quarter of the rise in U.S. business spending.

But by the end of 2000, financial analysts were projecting that capital expenditures by U.S. businesses would range from flat to down by 5% in 2001.  The new projections show spending dropping between 10-15% this year and staying flat next year.  Layoffs and stock market losses could also slow consumer spending.

As you would expect, there are numerous theories as to the catalyst for these changes, not only in the U.S. but in Europe as well.  Fatally-flawed business plans, the irrational debt juggling that many new and existing telecom companies gambled with, and the high return-on-investment expectations that failed to materialize when revenue growth hovered below capital spending as competition increased. . .all form a patchwork of explanations for the current state of the U.S. telecom market. 

Of course the question is where do we go from here and what can we expect to see in the short-term? 
Certainly, much of the telecommunications decline can be attributed to the simple realignment and filtering process of the capital markets.  Bad ideas that don't produce profits will be quashed eventually.

But there are telecom companies, including a few competitive carriers, that are continuing to sustain their operations and/or attract capital.  Although I wouldn't presume to second-guess the judgments of Alan Greenspan, the Chairman of the Federal Reserve Board which sets U.S. monetary policy, it is prudent that decision-makers continue to allow the market to filter winners and losers with little, if any, regulatory or statutory interference.

I am not certain that we have yet seen the financial shockwaves from the last year finish their outward flow from the U.S. and European economies to the rest of the world.  Certainly, the instability of the last few weeks have not helped.  WorldCom just reported a 60% drop in their third quarter profits, citing increased economic pressures.  A couple of telecom companies were downgraded yesterday by brokerage firms, including Brocade Communications and Juniper Networks.  And European markets were lower.  But Japan's Nikkei did rise nearly three-quarters of a percent.

However, I am optimistic that as technology and telecom companies reemerge, you will see a more robust market that will build on rather than reinvent the last 5 years in economic growth.

The outlook in Panama also seems to involve more promise than gloom. 
Panama appears poised to replicate its role as an international crossroads for shipping, this time in the communications arena. The expansion of the Canal over the next decade could well create another revolution in world shipping, with Panama once again serving as the hub for what some refer to as ERTW (equatorial-round-the-world) services. This is a familiar role for Panama; I think of the Panama railroad for the 49ers, the use of the Canal for U.S. international expansion, and many other examples...

Now, Panama could and should see itself becoming an international crossroads in telecommunications. Telecomm companies like Global Crossing are rooting their systems through the Isthmus, for example. Just as it has been and will continue to be a hub for international shipping, Panama could find many of the world's telecomm wires passing through it.

It is my hope that the U.S. can partner with Panama in this endeavor. Two developments since last year are encouraging. An amendment to our Bilateral Investment Treaty, which ensures quick and effective settlements of investment disputes, went into effect earlier this summer. And last year's agreement that OPIC - the Overseas Private Investment Corporation - signed with Panama has led to $56 million in new U.S. investment. This should be just the start.

As you know, the entire region is currently engaged in crafting the Free Trade Area of the Americas. We are drawing on the positive experiences of NAFTA, which has benefited the US, Mexico and Canada in untold ways. Better jobs, and more of them.

I am delighted that Panama has declared itself a full partner in the development of this pact, having agreed to serve as the temporary headquarters for the FTAA Secretariat. FTAA has the potential to change countless lives for the better. Picture it: Men and women conducting their business in free markets, pursuing their economic destinies, going as far as their dreams, talents and perseverance will take them. In the U.S. we call this the American Dream, but today it's being played out around the world, including Panama.

Of course obstacles remain, some of which have been made clear to me by American businesses eager to make investments in Panama. The Moscoso Administration has made great strides in combating money laundering and taking other steps to improve business confidence. But businesses have a right to expect even greater transparency and predictability in their dealings with government, and I am hopeful the Panamanian government will continue to work to remove remaining risks to investment. I know that changing ingrained attitudes and practices is not the easiest thing to do, but the stakes are too high for any other course of action.

Again, thanks very much for the opportunity to be with you today and share some thoughts. I hope that today we have planted the seeds for mutually beneficial investment opportunities between our two nations, and I thank Vice President Bazan, Minister Jacome and the entire Panamanian delegation for visiting Virginia's 11^th Congressional district.  There is much we can accomplish together.