BSNL-MTNL – Throwing Good Money After Bad?

Two things have become amply clear in the ongoing telecom debate. One, that running a basic service in India such as telecom in India is not a matter of pure market forces of supply and demand; and two, the Government of India, as a custodian of its citizens wellbeing has got its priorities completely mixed up.

How else do you explain the proposed BSNL-MTNL merger. These are two ailing telecom dinosaurs, fighting extinction for over a decade with a bloated workforce, a telecom infrastructure which is at best rooted in the 1990s and a record of service which sets a record for discovering new depths every year.

According to the Hon Minister of Telecommunications, Ravi Shankar Prasad as reported in the press “They’re a national asset, they operate in strategic regions…, and in case of need like in natural disasters, they’re in forefront of giving free services,” Prasad had said. In reality, they are national liabilities, have little strategic value and given their presence and market share, giving free services with low reliability appears to be their current role.

GoI has proposed a Rs 70,000 cr revival plan, which includes VRS for over 90,000 employees costing about Rs 29,000 cr. Out of this, close to Rs 11,000 cr has been earmarked for improving 4G infrastructure, which is expected to roll out by March 2020.

Compare this to the fact that the private players have already invested around Rs 4 lakh crore in the last few years in 4G and are expected to spend around Rs 60,000 cr in 4G in the current fiscal, after which they will shift their focus to 5G. And GoI wants to invest Rs 11,000 cr in 4G now. In addition, the investment in 5G is expected to be in the range of US$ 30 billion, which is roughly Rs 2 lakh crore in the first two years. And remember, they are expected to play in a market where the likes of Jio have invested over Rs 100,000 cr and are moving into 5G within a few quarters.

BSNL’s revenues have dipped from Rs 31,000 cr in2016-17 to Rs 19,000 cr in FY 19, while its losses have ballooned from Rs 4,800 cr to Rs 14,000 cr in the same years, according to reports in Economic Times. The cumulative losses of BSNL stand over Rs 32,000 cr. MTNL’s case is similar, though lower. In. March 2019, the company reported a revenue of Rs 1987 cr and a net loss of Rs 3,397 crore. The combined entity would thus have a revenue run rate of close to Rs 21,000 cr and an annual loss run rate of close to Rs 17,000 cr. And these are defined as national assets by our Hon minister.

Take a look at Vodafone, one of Europe’s premium TSPs, which has run into rough weather and an existential crisis, playing the same market and even after consolidation with Idea Cellular – Birla’s telecom venture. And the third player is Airtel, one of the savviest when it comes to consumer marketing and who has been truly innovative when it comes to launching new services for both the consumer as well as B2B markets. Both Airtel and Voda are finding it difficult to breathe while Jio is simply investing from its almost bottomless sources of funds.

In such a scenario, how does the GoI expect BSNL-MTNL duo to survive in the market, let alone play? Even if one were to assume that the GoI may give preferential treatment to the duo when it comes to spectrum allocation, it will not be able to give any rebate on spectrum pricing. Sure it can charge the duo and not collect, which only allows the duo to keep the liability on their books and push them further into the red. Beyond this, there is precious little that the GoI can do. Even in rural markets, where the government’s argument was that BSNL would go since the private players would not, the market share has dwindled down to 7% in FY 19 as compared to around 25% just three years ago.

On the other hand, the markets are not as forgiving. The consumer wants the fastest service at the lowest price. While the low prices in India are the reason for the telecom firms to book massive losses, being corporate entities, they can and will rejig their strategies and try and plug the hole. Already, the three big players – Jio, Airtel and Voda have announced that they will be raising tariffs in the near term.

Being a low-priced player does not give one the luxury of shoddy service when alternatives abound. Consequently, if the duo is only going to play the price game, it will be get outgunned by Jio. On the other hand, the duo neither has the technology capability nor has displayed any willingness to provide cutting edge service with the latest technology. Hence, it is almost a foregone conclusion that there will be no new users that will flow into the duo’s fold.

And then there is the cost of merger, which will be underlined by the massive payouts of VRS that will make the red line just a little thicker.

So, why do it at all? Why not just shut down the operation of both BSNL and MTNL and absorb their existing losses of Rs 40,000 cr and call it a day. Expand the VRS into a Compulsory Retirement Scheme (CRS) and let go of all the employees. Subsequently the GoI can run programs to reinduct some of them into other departments or ministries, as the case may be, since there are close to  seven lac vacancies within the governemnt. In any case, it is proven by research and anecdotal evidence that in every VRS, it is only the good and performing employees who ‘voluntarily’ leave. Those who cannot get any other jobs opt to stay and make the entity even worse off.

In addition, GoI can even sell of the assets of the duo to any bidder on a one-time basis – the equipment, the right of way privileges and the existing almost 17 lakh KM of optical fibre, the real estate and the existing subscriber base. That ought to fetch a non-trivial sum (GoI estimates Rs 38,000 cr) which could also offset the cost of CRS. From a purely math perspective, if 90,000 employees who are likely to opt for VRS will cost the government Rs 29,000 cr, the balance 90,000 would cost the same. In that case, all that the government has to do is to spend around Rs 60,000 cr to get rid of the employees and keep the Rs 9,000 cr with itself. In addition, the govt also expects to ‘monetize’ Rs 38,000 crore from the duo from its assets, which becomes additional inflow into the company. Sounds logical?

In such a scenario, the only set of people who are going to be affected are going to the existing employees of the duo, who a one-time settlement with some, however remote, possibility of absorption into some other part of the GoI. It is much easier for the GoI to design some kind of a pension scheme for these employees rather than try and resurrect an already moribund animal(s). Apart from that, a few bureaucrats may get a tad disappointed as two or more lucrative posts become unavailable.

Even politically, with the massive mandate that the current government enjoys in both the houses of parliament, this should be easier to execute than the merger.

It has often been argued that the government in a mixed economic model has no business producing condoms, Bicycles and telecom. With the first two gone, it is better to get rid of the third.

It is good economics but then when has good economics got preference over politics?