On October 23, the government seemed to have finally cleared the air on its plans for public sector white elephants MTNL and BSNL. It would not disinvest from the state-run telcos-rather, it would put in money to 'revive' them.
The Cabinet Committee on Economic Affairs approved a Rs 70,000 crore package to revive MTNL and BSNL, with the two companies being merged and a voluntary retirement scheme being initiated to retrench employees.
To put this bailout into perspective, that amount is greater than the allocation to Health in the Union budget. The government rescue plan has identified the sale of assets as one of the avenues to raise funds, as well as issuing sovereign bonds. However, there has been a growing chorus from market analysts and policy wonks for the government to disinvest from the state-run telcos. For its part, the government has argued that state-run telcos provide services to far-flung areas of the country, which is a fair point. Private enterprise, driven by profit, will likely not invest in setting up infrastructure in areas it does not find lucrative. Announcing the government's decision, Union Telecom and IT Minister Ravi Shankar Prasad called BSNL and MTNL "strategic assets" that formed the backbone of critical communications infrastructure.
However, that's only part of the story. While it is true that BSNL and MTNL needed to be rescued, the rescue strategy is equally important. State-run companies like Air India, with enviable infrastructure, have been run into the ground not by a lack of funds but by the culture that PSUs-and BSNL and MTNL in specific-have come to represent. BSNL and MTNL have operated in a vacuum, with a complete disregard for competition. They have steadily bled customers to the private sector. The companies are more or less redundant in the lives of average taxpayers who will foot the bill for their revival.
According to TRAI, as of May 2019, BSNL had a market share of 9.98 per cent, which, combined with MTNL, goes up to 10.28 per cent. In contrast, Vodafone's market share is at 33.36 per cent, while Airtel is at 27.58 per cent. BSNL's fall from Navratna firm to sick PSU has been steep. Brokerage firm Kotak Institutional Equities estimates BSNL's accumulated losses to be over Rs 90,000 crore.
The two companies together employ a total of around 200,000 people, a number that the government is hoping to trim through a voluntary retirement scheme (VRS) for employees over the age of 50. According to reports, BSNL could offer a VRS to about 80,000 people. (In comparison, Bharti Airtel employs about 17,000 people and Vodafone employs about 12,500 people).
The fact that the government has decided to spend so much of tax payers' money on a service that the average Indian does not necessarily use merits a debate. It calls for the government to offer more detail than what has been put out so far.
Here's what we know about the Rs 70,000 crore revival package: Real estate assets worth Rs 37,500 crore will be monetised, with the funds being used to clear debts, upgrade networks and offer VRS to bring down the employee count by 50 per cent. The plan also includes the allotment of 4G spectrum to the two companies, with the cost borne by the government. The idea is to make the companies more competitive, even as the other players get ready to compete in the 5G market. The plan also includes a phased merger of MTNL, which operates in Mumbai and Delhi, and BSNL, which operates in the rest of the country. That said, the possibility of such a merger was vehemently denied by the government as recently as last year, with such a plan being fraught with impediments, requiring the government to think through every last detail. For instance, in the past, the leadership of BSNL has highlighted the different pay scales at the two companies as one of the impediments. Another is that MTNL is a widely-owned listed entity.
The government might also be being over-optimistic in its hope that 4G spectrum will make the companies competitive, because the real issue that needs to be addressed is whether BSNL will be equipped to function competitively. As a long-time telecom analyst, who asked to remain anonymous, points out, 4G spectrum alone does not guarantee customers. Customers respond to easy access and responsiveness. Typically, PSUs in consumer-facing businesses struggle (barring banks, where customers largely go because of other incentives such as financial security and no minimum deposit limits). This is because customers are demanding, and this requires a company's processes to be geared to respond to customers with immediacy. If anything, BSNL and MTNL's poor customer service is one of the biggest reasons for subscribers choosing to take their business elsewhere.
The question that the government needs to answer is if BSNL can indeed be evolved into a company capable of competing in a cutthroat telecom market? It needs to present, and then execute, a credible plan to make this happen. For instance, for a PSU to become competitive, it needs a degree of autonomy. However, for far too long, the government has treated state-run telcos as personal fiefdoms. They have been harangued into investing in outdated technology and sold poor quality spectrum at high prices. Factors like these have contributed to the steady decline of both companies. Governance reform at telcos is as crucial an aspect of the rescue plan as is the money associated with it. Changing the work culture and infusing these companies' processes with transparency and accountability will require a lot of determination to see through what could be difficult decisions.
Some of the details that remain unclear include what kind of real estate assets would be offloaded, how this is to be achieved, and how integral that real estate turns out to be when it comes to the running of the business. For instance, a major roadblock to such a plan could be the fact that BSNL doesn't (directly) own much of its own real estate-it is owned by the Department of Telecom. A committee was set up nearly 15 years ago to facilitate the change of ownership, but the status quo remains.
The government could also have tried other avenues-for instance, it could have explored the option of offloading some of its stake in the telcos, holding on to 51 per cent while giving up management control to generate real interest in the turnaround of state-run telcos. This strategy has worked for the government in the past-in 2001, it sold its majority stake in the Bharat Aluminium Company Limited to private sector player Sterlite Industries Limited. The company turned from a loss making enterprise into a profitable one.
While the government has its intent in saving the state-run telcos right, it is choosing not to learn from its mistakes in the past and realise its shortcomings in managing consumer-facing businesses. It needs to learn to let go, to deliver on its promise of minimum government and maximum governance. At this point, the rescue plan runs the very real risk of becoming another wasteful exercise, at a time when the economy is in the midst of a slowdown.
The Cabinet Committee on Economic Affairs approved a Rs 70,000 crore package to revive MTNL and BSNL, with the two companies being merged and a voluntary retirement scheme being initiated to retrench employees.
To put this bailout into perspective, that amount is greater than the allocation to Health in the Union budget. The government rescue plan has identified the sale of assets as one of the avenues to raise funds, as well as issuing sovereign bonds. However, there has been a growing chorus from market analysts and policy wonks for the government to disinvest from the state-run telcos. For its part, the government has argued that state-run telcos provide services to far-flung areas of the country, which is a fair point. Private enterprise, driven by profit, will likely not invest in setting up infrastructure in areas it does not find lucrative. Announcing the government's decision, Union Telecom and IT Minister Ravi Shankar Prasad called BSNL and MTNL "strategic assets" that formed the backbone of critical communications infrastructure.
However, that's only part of the story. While it is true that BSNL and MTNL needed to be rescued, the rescue strategy is equally important. State-run companies like Air India, with enviable infrastructure, have been run into the ground not by a lack of funds but by the culture that PSUs-and BSNL and MTNL in specific-have come to represent. BSNL and MTNL have operated in a vacuum, with a complete disregard for competition. They have steadily bled customers to the private sector. The companies are more or less redundant in the lives of average taxpayers who will foot the bill for their revival.
According to TRAI, as of May 2019, BSNL had a market share of 9.98 per cent, which, combined with MTNL, goes up to 10.28 per cent. In contrast, Vodafone's market share is at 33.36 per cent, while Airtel is at 27.58 per cent. BSNL's fall from Navratna firm to sick PSU has been steep. Brokerage firm Kotak Institutional Equities estimates BSNL's accumulated losses to be over Rs 90,000 crore.
The two companies together employ a total of around 200,000 people, a number that the government is hoping to trim through a voluntary retirement scheme (VRS) for employees over the age of 50. According to reports, BSNL could offer a VRS to about 80,000 people. (In comparison, Bharti Airtel employs about 17,000 people and Vodafone employs about 12,500 people).
The fact that the government has decided to spend so much of tax payers' money on a service that the average Indian does not necessarily use merits a debate. It calls for the government to offer more detail than what has been put out so far.
Here's what we know about the Rs 70,000 crore revival package: Real estate assets worth Rs 37,500 crore will be monetised, with the funds being used to clear debts, upgrade networks and offer VRS to bring down the employee count by 50 per cent. The plan also includes the allotment of 4G spectrum to the two companies, with the cost borne by the government. The idea is to make the companies more competitive, even as the other players get ready to compete in the 5G market. The plan also includes a phased merger of MTNL, which operates in Mumbai and Delhi, and BSNL, which operates in the rest of the country. That said, the possibility of such a merger was vehemently denied by the government as recently as last year, with such a plan being fraught with impediments, requiring the government to think through every last detail. For instance, in the past, the leadership of BSNL has highlighted the different pay scales at the two companies as one of the impediments. Another is that MTNL is a widely-owned listed entity.
The government might also be being over-optimistic in its hope that 4G spectrum will make the companies competitive, because the real issue that needs to be addressed is whether BSNL will be equipped to function competitively. As a long-time telecom analyst, who asked to remain anonymous, points out, 4G spectrum alone does not guarantee customers. Customers respond to easy access and responsiveness. Typically, PSUs in consumer-facing businesses struggle (barring banks, where customers largely go because of other incentives such as financial security and no minimum deposit limits). This is because customers are demanding, and this requires a company's processes to be geared to respond to customers with immediacy. If anything, BSNL and MTNL's poor customer service is one of the biggest reasons for subscribers choosing to take their business elsewhere.
The question that the government needs to answer is if BSNL can indeed be evolved into a company capable of competing in a cutthroat telecom market? It needs to present, and then execute, a credible plan to make this happen. For instance, for a PSU to become competitive, it needs a degree of autonomy. However, for far too long, the government has treated state-run telcos as personal fiefdoms. They have been harangued into investing in outdated technology and sold poor quality spectrum at high prices. Factors like these have contributed to the steady decline of both companies. Governance reform at telcos is as crucial an aspect of the rescue plan as is the money associated with it. Changing the work culture and infusing these companies' processes with transparency and accountability will require a lot of determination to see through what could be difficult decisions.
Some of the details that remain unclear include what kind of real estate assets would be offloaded, how this is to be achieved, and how integral that real estate turns out to be when it comes to the running of the business. For instance, a major roadblock to such a plan could be the fact that BSNL doesn't (directly) own much of its own real estate-it is owned by the Department of Telecom. A committee was set up nearly 15 years ago to facilitate the change of ownership, but the status quo remains.
The government could also have tried other avenues-for instance, it could have explored the option of offloading some of its stake in the telcos, holding on to 51 per cent while giving up management control to generate real interest in the turnaround of state-run telcos. This strategy has worked for the government in the past-in 2001, it sold its majority stake in the Bharat Aluminium Company Limited to private sector player Sterlite Industries Limited. The company turned from a loss making enterprise into a profitable one.
While the government has its intent in saving the state-run telcos right, it is choosing not to learn from its mistakes in the past and realise its shortcomings in managing consumer-facing businesses. It needs to learn to let go, to deliver on its promise of minimum government and maximum governance. At this point, the rescue plan runs the very real risk of becoming another wasteful exercise, at a time when the economy is in the midst of a slowdown.
