An Internet for rural India

Cyber-bureaucracy in India

An intrepid entrepreneur looks to make millions bringing e-governance to India's remote villages.

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BANGALORE (Fortune Small Business) -- It's a sweltering day in May, the hottest time of year in the South Indian town of Sathanur. In the shade of a whitewashed storefront, a rugged, mustached man named Nagabhushana Achalu is filing his first application for a certificate that will help his children go to school. Within minutes the kiosk operator behind the counter has logged on to the state government's intranet and sent Nagabhushana's application to a server in the state capital, 40 miles away.

That may not sound remarkable, but in rural India it's a revolutionary act.

As a member of the Adi Karnataka, one of India's "scheduled castes," formerly called untouchables, Nagabhushana has limited employment options. He earns a meager 5,000 rupees ($100) a year from rice and millet farming. But there is one ray of hope in his life: Private schools in his state, Karnataka, have abolished fees for members of scheduled castes. His two children can go to a good school for free -- so long as their father has the official "caste and income" certificate to prove his poverty.

The process of getting one -- and the bribery involved -- was too costly until the man with the kiosk came along.

India, famous for its bureaucracy, is where entrepreneur Sriram Raghavan intends to prove that the world's billion-plus rural poor can be a lucrative market for online services. Raghavan, 36, once built software for U.S. corporate clients. Now, backed by U.S. venture capital and undeterred by acts of violence against his outlets, he is succeeding where others failed: providing Internet services that villagers actually need and making a profit from their micropayments.

"We're democratizing information services," he says.

Raghavan's company, Comat Technologies, runs 800 kiosks (called Nemmadi, "peace of mind" in Kannada, the state's official language) out of Bangalore, in southeast Karnataka. Though customers like Nagabhushana rarely pay more than 15 rupees (31 cents) at a time for Comat's services, its revenue has grown from less than $1 million to $15 million in the past five years. Raghavan says the company turned a modest profit in 2008.

Similar "telecenters" -- international development-speak for public spaces where people can get online -- exist in poor countries all around the world. What matters is how they are used.

"If a center is there to provide access to e-mail and the Internet, there is no future for it," says Florencio Ceballos, program manager at Telecentre.org, a research group sponsored by Microsoft (MSFT, Fortune 500) and the Canadian and Swiss development agencies. "If the center is able to offer public and private services and sell products -- that's a completely different story."

For Indian small farmers, obtaining vital documents is a laborious and pricey ordeal -- in Nagabhushana's case, merely getting to the nearest government office, a 14-mile bus ride away, costs 30 rupees, or 63 cents. Those who are illiterate must spend around 100 rupees ($2) to hire one of the form-filling brokers who loiter outside government buildings all over India. They might spend an additional 200 rupees greasing the palm of an official to speed up the process, then return to the government office up to three more times before the certificate is ready.

None of that is necessary at the Nemmadi center, a five-rupee (10 cent) bus ride from Nagabhushana's home. The line is short, the operator is helpful, and no bribes are required. Nagabhushana can always check the status of his application with a simple visit or phone call to the Nemmadi. Once the certificate is issued, the operator will be able to access it online and print a copy within minutes -- all for 15 rupees.

Multiply that by 700 million, the size of India's rural population, and you start to see Comat's dizzying opportunity.

For years development pundits pushed Internet connectivity as a cure-all for poverty. But numerous entrepreneurs have learned, to their cost, that what we think of as core Internet services -- e-mail and the Web -- are of little use to illiterate farmers living below the poverty line.

Take Amir Alexander Hasson, a Cambridge, Mass.-based technology entrepreneur. In 2003 his startup, First Mile Solutions, developed technology that allowed hardware attached to a bus to upload data wirelessly from village computers and then connect to the Internet when the bus got to the nearest town. When the bus returned to the village, it connected to the local computer again and dropped off the data, like a virtual post office.

The problem? Not enough demand. "Villagers don't care whether you have a computer with Wi-Fi," says Hasson. "They want to know if this thing can find them a job or help them get fertilizer."

Hasson soon discovered that he couldn't generate enough revenue to cover the cost of the equipment. His new business, United Villages, provides e-commerce services to Indian villagers via cell phones.

The native companies haven't fared much better. At its peak, Indian telecenter pioneer nLogue had 3,500 franchised centers that offered villagers everything from passport photos to health-care services. Today only a few hundred centers remain.

"With telecenters a single service does not earn sufficient revenue, but multiple services can become too complicated for a single kiosk operator to manage," says Ashok Jhunjhunwala, a technology professor and founder of nLogue.

When Raghavan co-founded Comat in 1996, selling to the rural poor was far from his mind. The company started out as an international software outsourcing firm specializing in network support. In the 1990s Raghavan set up a branch of the company in Dallas that brought in $3.5 million a year at its peak. (He later sold the Indian outsourcing business to Atlanta-based Software Paradigms International.)

Then came a 1999 contract from the Karnataka state government in South India. The project, called Bhoomi ("land" in Hindi), was to computerize the state's land-record system. Previously, records had been held by village accountants, who often took bribes to make favorable adjustments to farm boundaries. Bhoomi was designed to create a digital trail of any alterations, making fraud easier to spot.

Comat employees spent four years digitizing more than 20 million paper land records in some 20,000 villages. By 2004 the state's land records were online and accessible in 177 local government offices. But the project wasn't particularly profitable for Comat, and getting paid by the state took as long as 12 months.

So in 2006 Raghavan made Karnataka an offer it couldn't refuse. Through a public-private partnership Comat would open hundreds of centers in the state's rural areas and digitize other records -- everything from birth certificates to pension documents -- at no charge. Comat would pay the government a share of the 15-rupee fee it charged citizens for each certificate: nine rupees for land records already digitized, one rupee for certificates that it was in the process of putting online.

The government didn't need much convincing. By 2008 Comat had rolled out 800 centers, positioned so that most rural Karnatakans wouldn't have to travel more than seven miles to reach one. Each center was equipped with a computer, printer, backup power and satellite hookup. Together they now process more than 50,000 government transactions a day.

This has provided relief for officials as well as citizens. The annual school admission season used to be a nightmare for Ravi Tirlapur, head of a government office in southern Karnataka. Thousands of applications for different kinds of certificates would pour in, forcing Tirlapur to spend long nights signing every one.

"I used to get a pain in my hand," he says. These days he simply inserts a card into a reader to place a bar code on each document.

Comat's welcome has not been universal. Since 2007 there have been several small-scale attacks on the Nemmadis. Computers and printers have been stolen. Kiosk operators have been harassed. A mysterious fire destroyed one center; an unidentified assailant smashed a truck into another. Raghavan suspects that the culprits were the information brokers who profited from the old system. "It's part of the game," he says with a shrug.

Raghavan is working hard to expand his product line. "You need to offer a range of different services to be viable," says Basheerhamad Shadrach, Asian program manager of Telecentre.org.

Here Raghavan is following the lead of one of India's biggest rural-business success stories, Drishtee. Since 2000 Drishtee has set up more than 4,000 franchises across 12 states, providing health care and microfinance services -- but not in Karnataka. Raghavan is betting that Comat's unique e-government service has won him enough consumer loyalty that Drishtee will find it impossible to compete in that state.

For the past year Comat has been offering vocational training such as English lessons and IT classes, which together generate a third of the company's revenues. This year Comat signed a deal with India's Life Insurance Corp. to become its agent, collecting premiums and settling claims. Raghavan is also looking to bring mobile ATMs to Karnatakan villages and set up bank accounts for state pension payouts, so the money can be deposited automatically.

Unlike nLogue and Drishtee, whose franchisees used microloans to finance their equipment purchases, Raghavan chose to keep tight control of his network. He decided that Comat should own and operate everything. It was an expensive venture, costing 200,000 rupees ($4,220) per center plus 170 back offices, for a total of $5 million. The company is drawing on $20 million in venture funding to finance its growth, including a $12 million investment round last October from two U.S. sources, Unitus Equity Partners and eBay (EBAY, Fortune 500) founder Pierre Omidyar's philanthropic fund.

Comat can expand only so far in Karnataka, a state with 52 million residents. Some observers doubt there's enough political will elsewhere in India.

"The Karnataka government's approach to citizen-centric services was remarkable," says Telecentre.org's Shadrach. "You wouldn't find the same level of support from others states" -- not to mention elsewhere in the developing world.

Raghavan says that he's in talks with local governments that might be persuaded to emulate Karnataka's system. "Poorer states are more interested in subsidizing rice or sugar," he admits, "but it's a matter of time before they come around. We're making government better."