Why merging MTNL and BSNL is futile

In an attempt to flog a dead horse, the government has announced the merger of loss-making state-owned telecom operators Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL). Apart from the merger, telecom minister Ravi Shankar Prasad announced a host of measures to revive the debt-ridden companies. These include administrative allocation of spectrum for 4G services, debt restructuring by raising of Rs 15,000-crore worth of bonds with sovereign guarantee, reducing employee costs through VRS (voluntary retirement scheme), and asset monetisation plan of around Rs 38,000 crore.

On the face of it, the plan looks kosher, and holds promise to revive the sick public sector telecom units. But the devil is in the details, and with the poor track record of governance and lack of execution capabilities, this plan seems just good on paper. The plan broadly ignores the underlying problems that are plaguing the telcos.

Take 4G services, for instance. More than five years after the rollout of 4G services, the government has finally realised that there's a need of 4G tech for these telcos. In fact, the government itself is now talking about 5G. It's not just late but almost ineffective for BSNL/MTNL to come out with 4G now. Why? Large private telcos have are already providing highly-competitive 4G across the country. It is expected that whenever BSNL/MTNL rolls out 4G, its coverage would not be as wider as private telcos. Then why would someone shift to BSNL/MTNL when private telcos are already offering plans at affordable prices?

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It seems far-fetched to assume that BSNL/MTNL could shift some of its existing customers - about 11.96 crore subs - to 4G. That's because most of their current subs are low-paying 2G/3G customers, and that too in rural areas - especially for BSNL. These subs are generally reluctant to shift from 2G to 4G even if the tech is available. Even the large private telcos like Airtel and Vodafone Idea have struggled to convince their large 2G subs base to make that shift.

The quality of their subs can also be assessed from their usage pattern. For instance, the ARPU (average revenue per user) of BSNL/MTNL subs are just Rs 39 per month (as per TRAI) as compared to Rs 78 per month for private telcos. Though the BSNL was asking for 4G spectrum in 2100 megahertz (MHz) for a long time, DoT took months to finalise the plan. "The telcos have missed the 4G bus," says a telecom analyst.

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In the telecom business, upgrading networks is critical to survival, or otherwise the companies run the risk of becoming obsolete. That's exactly what happened to Reliance Communications that took a late decision to shift from CDMA to GSM, and even after making the shift, it could not invest sufficiently in GSM for years that ultimately resulted in its shutdown.

Giving 4G is one thing but having the supporting infrastructure is equally important. While the plan talks about the raising of sovereign guarantee bonds and monetisation of assets that would help in capex and opex expenses, the details are hazy as of now.

The other big issue that the government plans to tackle is the large workforce. Both MTNL and BSNL are overstaffed. In fact, BSNL's staff cost is over 75 per cent of its total income as compared to 3-5 per cent for the private operators. BSNL particularly started with a plenty of legacy issues. It tried to shed the huge workforce over the years - the initial strength was close to 4 lakh as against 1.76 lakh now - but the efforts have fallen short of what's required. For both BSNL and MTNL, their human resource and physical assets are still mostly concentrated around the landline business where they have been operating for decades.

B.K. Syngal, senior principal at Dua Consulting, says that it's going to be sheer waste of money. The situation has deteriorated so much that it's beyond repair. "Unless the government doesn't improve governance, which means far lower interference of DoT at the micro level and greater powers being given to the current board, any amount of restructuring is not going to help them," says Syngal.

Despite the strategic role that these telcos play, as minister Prasad reiterates, BSNL/MTNL doesn't offer as wider coverage as private telcos today.

While it seems okay to criticise the government for the delay in coming out with a formal revival plan, but it's difficult to blame them for doing what they are trying to do. If the government decides to shut down BSNL and MTNL, which many analysts insist is the only option; it will cost the exchequer about Rs 1.2 lakh crore in VRS and other (winding up) costs. In short, BSNL/MTNL are burdens that the government cannot simply let go.