Telecom PSUs on a Drip

They are like the spoilt kids of a rich father. Born with a lot of promise-the father has huge expectations from them therefore pampers them in all the ways that he can, and supports them and meets all their demands. But while growing up, they never come up to the expectations and suffer both financially as well as personally.

The rich father still does not take notice. Instead of putting things in place by disciplining them and guiding them to new directions, the rich father keeps on overlooking the mistakes they make, year after year. And one fine day, the father realizes what went wrong, realizes the mistakes in his upbringing, but it's too late. No corrective measures are able to help.

This is a more human analogy to what is happening with the Indian PSUs, specifically in the telecom sector. The spoilt kids-BSNL, MTNL, ITI, and CDoT-of the rich father, the Indian government, are facing similar problems. These state-run firms are going through a similar crises.

All these telecom PSUs-BSNL, MTNL, ITI, and CDoT-have so far failed to achieve what they were created for. The very basic objective of being self-sufficient and serve the nation is defeated as these PSUs are neither self sufficient nor are they able to serve the nation the way they were intended to.

Among these PSUs, BSNL, MTNL, and ITI are 'for-profit' firms and CDoT is an R&D arm of the government in the area of telecommunications. But all the three 'for-profit' firms have been in the red for the last several years and one among them-ITI-has been a sick company. BSNL and MTNL are losing revenue, profit, and market share consistently for the last several years. And the MNCs and private telecom players are flourishing at the cost of these PSUs.

BSNL for example, had posted revenues of `24,681 crore in 2002 with a profit of `6,312 crore and after exactly 10 years, its revenue is at `28,000 crore with a loss of over `8,800 crore. MTNL posted a loss of over `4,000 crore on a revenue of `3,595 crore in FY12 from a profit of ` 5,869 crore in 2008.

Similarly ITI's revenue for 2008 was `1,210 crore whereas it has gone down to `917 crore in 2012 showing a loss of `385 crore. And for this financial year, ITI losses on standalone basis widened to `105.2 crore for the three-month period ended June 30, 2012 compared to `88.15 crore posted a year ago for same period.

And all these while the government has never failed to support the PSUs in all the ways it could, financially as well as strategically. As the father asks the siblings to help each other, the PSUs have always been asked to help each other. BSNL and MTNL have been asked by the government to procure equipments from ITI thus helping the telecom gear maker improve its topline.

Besides, the government infuses more cash to the pockets of these PSUs whenever they need. Still, the situation never improved. Taking a very fresh example, on a strategic point of view, the two state-run telcom firms were allocated 3G spectrum in their respective service circles much before the spectrum auction took place.

But even after two years these two telecom firms-BSNL and MTNL-have hardly made any mark in offering 3G services, whereas the private players like Bharti airtel and Vodafone are steadily increasing their 3G customer base. Not to forget, these PSUs including the private players have invested significant amount in getting the scarce 3G spectrum.

The Slow Rise and Big Fall

BSNL, then known as the Department of Telecommunications, had been a near monopoly during the socialist period of the Indian economy. During this period, BSNL was the only telecom service provider in the country. MTNL was present only in Mumbai and New Delhi. During this period, BSNL operated as a typical state-run organization, inefficient, slow, bureaucratic, and heavily unionized.

As a result subscribers had to wait for as long as 5 years to get a telephone connection. The corporation tasted competition for the first time after the liberalization of Indian economy in 1991. Faced with stiff competition from the private telecom service providers, BSNL has subsequently tried to increase efficiencies itself.

DoT veterans, however, put the onus for the sorry state of affairs on the government policies, where in all state-owned service providers were required to function as mediums for achieving egalitarian growth across all segments of the society. The corporation (then DoT), however, failed to achieve this and India languished among the most poorly connected countries in the world.

BSNL was born in 2000 after the corporatization of DoT. The corporatization of BSNL was undertaken by an external international consulting team consisting of a consortium of AF Ferguson & Co, JB Dadachanji, and NM Rothschild, and was probably the most complex corporatization exercise of its kind ever attempted anywhere because of the quantum of assets (said to be worth $50 bn in terms of break-up value) and over half a million directly and indirectly employed staff.

Satish Mehta, who led the team later confessed that one big mistake made by the consortium was to recommend the continuation of the state and circle based geographical units, which may have killed the synergies across regions and may have actually made the organization less efficient than had it been a seamless national organization.

Vinod Vaish, the then chairman of the Telecom Commission made a very bold decision to promote younger talent from within the organization to take up a leadership role and promoted the older leaders to a role in licensing rather than in managing the operations of BSNL. The efficiency of the company has since improved, however, the performance level is nowhere near the private players.

What's Wrong with Them?

The biggest problem with these PSUs, especially BSNL, is they remain heavily unionized and are comparatively slow in decision making and its implementation, which largely acts at the instances of unions without bothering about outcome.

Management has been reactive to the schemes of private telecom players. Though it offers services at lowest tariffs, the private players continue to notch up better numbers in all areas, year after year.

BSNL provides fixedline, mobile, broadband and internet services in 20 circles other than Delhi and Mumbai, which is covered by MTNL. BSNL and MTNL are both in the red with the former registering a net loss of `8,851 crore during 2011-12. MTNL registered losses of `4,018 crore in 2011-12 on revenues of `3,400 crore.

“The problems with MTNL and BSNL aggravated after 3G auctions in 2010, as they had to pay `28,000 crore as spectrum charges to the government for 3G airwaves and Broadband Wireless Access,” says a DoT official on the condition of anonymity.

The other reason why these companies are not being able to compete against the private telecom firms is an issue of legacy as they earlier provided only landline services and that had led to a lot of staff on their rolls.

And it's not just the revenue or profit of the company going down, its cash reserves are also on a consistent decline. BSNL's cash reserves have dwindled to `2,500 crore in 2010-11 from a hefty `30,000 crore two years back. “As per the audited books of account, cash reserve of BSNL has gone down from `30,343 crore as on March 31, 2010 to `2,500 crore on March 31, 2011,” the telecom minister, Kapil Sibal had told Lok Sabha in a written reply few months back.

What it means is the firm's cash reserve would go dry in the 2012-13 fiscal period unless it makes some drastic improvement in its business, the chances of which look bleak at this scenario, considering the way the state-run firm still functions.

Procurement and the revised wage bill also made it dip into reserves. Depleting cash reserves also mean that its revenue from other income has also gone down by 80%. “The company is in a critical condition. As and when its cash reserves run dry the government would have to provide a bailout package by injecting at least `600 crore on a monthly basis to keep it afloat,” the DoT official said.

Talking about BSNL, industry experts including its ex-employees said that if the company runs like this, it would be hard to imagine its existence by 2020. “You need food to survive and you need to feed around 3 lakh people,” explains a senior BSNL official who used to look after its finance department and is an industry veteran. “Neither they are earning enough nor do they have a cash reserve now. It would be difficult to visualize this company in 2020,” the ex-BSNL employee laments.

“The PSU telecom operators-BSNL and MTNL-have significantly higher cost base as compared to private telecom operators,” says India ratings, a Fitch Group company explaining why the company is not doing well. “This is mainly on account of high personnel expenses and other operational expenditures.”

BSNL employs around 3 lakh and MTNL has around 60,000 employees. The staff cost at these companies eats into over 50% of revenues. Compare this with any private operator operational in similar number of circles. Bharti airtel, for instance, has an employee strength of around 25,000 to run its business in 22 circles and just over 3,000 for Delhi and Mumbai. Same is the case with any other private operators in India.

BSNL has been losing market share and at present its share stands at less than 10%. It also has a huge salary bill which eats into 42% of its revenue. Every year, the salary bill rises by close to 10% and this year it is expected to pay `20,000 crore as wages. On the other hand, the private operators pay just about 5-6% of their revenue as salary. MTNL spends around 50% of its revenue on salary bills.

The other major factor of their consistent decline in profit is the way these telecom PSUs perform. Typical to any PSU including the telecom ones, they are losing out to private fims because of stiff competition from the latter ones. The state run firms have never improved upon their business processes nor on their network expansions, both in terms of quality as well as quanity.

“Stiff competition from private operators and decreasing average revenue per user accounted for decline in revenues, while increased expenditure resulted from large legacy workforce whose wages accounted for 50% of the revenue,” Sibal had told Parliament in a written reply.

“Declining subscriber base due to stiff competition in the mobile sector-BSNL has been unable to compete on its brand image, reach and services to match that of competition,” says Girish Trivedi of Monk Consulting, a firm that tracks and analyzes the telecom industry to its minute details.

“Since 2007, the private operators have added nearly 600 mn, while BSNL and MTNL have added only 70 odd mn,” he adds. It clearly shows that these state-run firms are moving slower than a snail.

Providing quality customer service is another major area where they PSUs lose out to private players. Lower Quality of Service according to benchmark reports from Trai also clearly indicates the impact on their performance. “Stagnant skill set of employees and slow reaction to market demands are few other factors affecting their business,” adds Trivedi.

For example, BSNL had recently offered to surrender its BWA spectrum to the government after its plans to roll out WiMax based services using these airwaves through a franchisee model flopped.

“Over last few years, private players have invested heavily to improve their network infrastructure and service quality. But PSU operators were not able to match the industry standards and eventually lost out to the competitors,” says India Ratings.

The Uncertainties: BSNL-MTNL Merger Plans

Not that the government did not come up with a rescue plan. In 2010, the PM appointed a committee headed by Sam Pitroda to come up with a 15-point turnaround plan for the company. However the recommendations were blocked by former telecom minister A Raja and not a single recommendation has been put in place so far, even after two years.

Then there were talks around the merger of the two telcos. In February 2011, the DoT said it wanted to revive a proposal for the merger of state owned operators, BSNL and MTNL. In its draft plan, the department while showing concern over the deteriorating performance of BSNL and MTNL said that BSNL and MTNL should be merged as they have complimentary operations and can combine their strengths for synergies.

DoT said the government should set up a multi-stakeholder committee to develop a restructuring plan for both firms. The committee should have members from public enterprises, the DoT, the department of IT, and ministry of finance. However the BSNL's staff unions are opposing this merger tooth and nail realizing that MTNL is in dire straits and needs help of its big brother, BSNL, to alleviate itself from getting into red balance sheet.

MTNL in spite of having its operations in two big metro cities, viz, New Delhi and Mumbai is realizing a cascading fall in revenue and profits for the past 10 successive years. To ensure that a repeat of the failed Air India-Indian Airlines merger does not happen, the DoT has asked BSNL and MTNL to prepare a work plan for their merger within three months. When asked, MTNL's CMD AK Garg denied getting such a letter from the DoT, but added that he is in absolute favor of this merger. “It's a great opportunity, and the merger, if it happens, would perfectly fit into our synergy,” he says.

“The merger of the two companies makes a lot of sense but it comes with a lot of complications, which includes one company being a public limited firm and the other not, and it will be best to ask both to suggest ways for it. We have asked both the companies to submit a report suggesting ways to merge the two companies in 3 months,” said a senior DoT official.

But industry experts are apprehensive about the merger. The merger of Air India and Indian Airlines is considered a failed case, and one reason for this failure was the lack of prior consultations with the employees of both airlines. This fuels the apprehension among the employees of both the PSUs.

And it's not just BSNL or MTNL that the government has been extending its generous support to, the other state-run firm ITI has also been getting tremendous support. In 2004-05 the government had crafted a special revival package for the sick company. It had sanctioned a revival package of `1,024.77 crore during the year 2004-05 to support VRS expenditure, equity infusion, induction of new technology products. Among others, the revival plan included reservation of 30% of orders by BSNL and MTNL towards ITI, advance payment of 75% of the purchase order value against the reserved quota orders; and assistance by way of government guarantee to raise loan/bonds from market.

This year also, the department of telecommunications has prepared a revival plan of `4,156.79 crore for ITI, which is yet to be approved by Board for Reconstruction of Public Sector Enterprise and Cabinet.

Future

Though these telcos are losing everything they have and seems to be on drip, they still can take some immediate measures that can make them see the lights of 2020-steps, that do not need government intervention and would not command the blockages of their employee unions. A right approach in addressing the immediate issues can bring back the ailing firms to stability, if not completely save it.

• Maximize Customer Satisfaction: Improvement in its approach towards customers. Drastic need to change the mindset within the organization to become customer friendly and improve customer relationships
• Strict Financial Measures: Linking each action to financial outcome (except for some highly evolved social cause like reaching to a part of country where no private operator will go)
• Urgent employee development
• Revive marketing efforts
• Cut down losses
• A Clear Focus: where it will play its social role of PSU and where it will play role of a commercial enterprise