Bailout Blues

The government is considering a Rs 74,000 crore package for revival of sick state-run BSNL and MTNL. A Group of Ministers (GoM), headed by Home Minister Amit Shah, is reportedly deliberating on ways to monetise assets. The bailout package, say reports, will involve an over Rs 40,000 crore early retirement package, Rs 20,000 crore for 4G spectrum and over Rs 13,000 crore for network rollout. BSNL, which is far bigger of the two, will get a lion's share of these funds. But the question is - can BSNL be revived in a market that is changing technologies faster than ever and where its far efficient private sector rivals such as Airtel and Vodafone Idea too are hanging by a thin thread and struggling to survive the Jio onslaught?

The success of the plan, say experts, will depend on the extent to which the government understands the problems of BSNL, which is going through the worst period in its 19-year-old history. In February, it got a lot of flak after failing to pay monthly salaries. Though it has been paying salaries on time since then, the time bomb is ticking fast. Its monthly wage bill is over Rs 1,230 crore, and salaries are rising at about 8 per cent annually. With revenues falling year after year, it will soon run out of money to pay its employees. BSNL's revenues are expected to fall 23 per cent in 2018/19 to Rs 19,308 crore while losses are expected to swell 78 per cent to Rs 14,202 crore. It will have to get used to taxpayer-funded bailouts, it seems.

The biggest problem with BSNL is its bloated workforce, about 1.63 lakh, which it inherited mostly from the Department of Telecom Services and Department of Telecom Operations through which the central government used to offer telecom services in the domestic market. Private sector rivals like Vodafone Idea and Bharti Airtel are much leaner with 9,883 and 8,453 permanent employees, respectively, as on March 2018.

BSNL's staff cost is over 75 per cent of its total income as compared to 3-5 per cent for the private players. Ironically, with just one-third of BSNL's employee cost (Rs 331 crore per month in 2017/18), Airtel pays its CEO Gopal Vittal 113 times more (Rs 16.97 crore) than what BSNL pays its head (Rs 80,000-1.25 lakh a month). As early as February, the BSNL board had approved a VRS for over 54,000 employees and proposed reduction in the retirement age to 58 but faced stiff resistance from the finance ministry.

The other big issue with the ailing telco is lack of 4G wireless services - except in three telecom circles - which makes it dependent on the low-paying 2G/3G customers, and that too in rural areas, where the number of low-spending prepaid customers is higher. Typically, the average revenue per user (ARPU) of 4G customers is higher than that of 2G/3G subscribers. For instance, Jio, which is a 4G-only operator, has ARPU of Rs 126 as compared to BSNL's Rs 41. Low ARPUs can seriously hit revenues and profitability - just like what happened to Airtel and Vodafone Idea after Jio's disruptive entry. BSNL hasn't done enough to arrest the fall in ARPU, which stood at Rs 52 in March 2018. It has been asking for 4G spectrum in the 2100 megahertz (MHz) band. The decision has been pending with the department of telecommunications (DoT) for several months now.

To add to the problems, BSNL, like other telcos, has been hit by Jio's onslaught. It has added the lowest number of subscribers among all telcos in the past three years. For example, it added just 2.2 crore subscribers between September 2016 and April 2019 as against Jio's 31.48 crore and Airtel's 6.19 crore (most of it inorganic). BSNL's visitor location register, a metric to count active subscribers on a network, is the lowest (57.86 per cent) among national operators. This shows a higher number of irregular users.

What is particularly distressing is that all this has happened despite BSNL having one of the best infrastructure, large footprint and wide bouquet of services. For instance, its optical fiber network of 7.5 lakh route km is the longest among all telcos. In comparison, Airtel has 2.5 lakh route km and Vodafone Idea has 1.6 lakh km. It has spectrum in premium 900 MHz, 1800 MHz and 2100 MHz bands with a consolidated holding of 421 MHz across the country. Yet, the company's market share in broadband is just 4 per cent, far less than segment leader Jio's 55 per cent.

"The decline in revenues is a clear indicator that BSNL hasn't been able to monetise its infrastructure efficiently," says B.K. Syngal, Senior Principal at Dua Consulting, adding that interference by the DoT at the micro level, and bad governance, have affected the company in a big way. "In a market where telcos are snowed under huge debt, BSNL has managed to keep its debt low at about Rs 14,000 crore. The issue with BSNL is service standards and inability to retain customers. On technology and connectivity, they are reasonably satisfactory," says a telecom analyst.

One reflection of poor governance is the fact that BSNL frequently struggles to fill up even top director-level roles, showing its inability to attract talent. Out of the six whole-time directors (including the chairman and managing director), just one is full-time (Vivek Banzal), one post is vacant (HRD), and the remaining four directors are holding the charge as an additional responsibility until full-time directors are appointed. It has not had a full-time finance director for the last couple of years, and since March, there have been two appointments already. For a loss-making PSU, it's strange that the job of finance director is being treated as non-essential.

The Fall of BSNL

BSNL was the fourth operator to enter the wireless market. Private operators denied it roaming services. BSNL imposed a similar ban. Later, when private operators were struggling with network expansion in rural areas - and since BSNL was established in smaller towns - it continued with its stubbornness and didn't let the private players use its tower infrastructure. It realised its mistake after almost 10 years of denying customers roaming services on its network.

But the real downfall started more than a decade ago - in 2008 - when it floated a tender for 93 million cellular lines. The Rs 50,000 crore tender was one of the world's biggest telecom contracts that time. It caught everyone's attention, including that of private rivals, and got stuck in a bunch of controversies. Telecom equipment vendor Nokia-Siemens, for instance, accused BSNL of favouring select vendors and filed a case in the Delhi High Court against its disqualification on technical grounds. Eventually, the court cases, and probe by vigilance authorities, led to the cancellation of the mega tender. "They could have been market leaders if they had rolled out 93 million lines," says Syngal. From 2009/10 onwards, the telco has been posting losses every year.

Besides, BSNL had started with a lot of legacy issues. Its physical and human resource assets were mostly concentrated around the landline business where it had been operating for decades. It tried to shed the huge workforce over the years - the initial strength was close to 4,00,000 - but the efforts have fallen short of what's required.

Several attempts have been made to revive the PSU. Under the UPA government, the then telecom minister, Kapil Sibal, sought a bailout for BSNL even as the government set up a GoM to look into the funding of the PSU. In the first term of the Narendra Modi government, the market dynamics completely changed in favour of the newcomer, Jio, which offers dirt-cheap tariffs and continues to put the viability of other telcos under doubt.

From a peak cash position of Rs 37,200 crore in 2007/08 to sitting on accumulated losses of Rs 90,000 crore, BSNL is being increasingly seen as an entity that survives mostly on government dole. Syngal says PSUs like BSNL have been systematically destroyed by constant interference of the Sanchar Bhawan (DoT). BSNL didn't reply to Business Today's request for comments on the article.

What's Next?

The situation has reached a point where the government doesn't really know how to fix the problem and BSNL may become a worse case than national carrier Air India. In the telecom business, upgrading networks is critical to survival, and without sufficient funds, the PSU may start losing customers at an even higher pace.

Telecom Minister Ravi Shankar Prasad has been supportive of the idea of revival but it seems that even he's in a dilemma. If the government decides to shut down BSNL and MTNL, it will cost the exchequer about Rs 1.2 lakh crore (as money for VRS and other costs).

Disinvestment seems unlikely given the state of the telecom sector. Also, unions have opposed several stake sale proposals in the past. A bailout package costs much less but there's no guarantee it will fly, especially with the approach that the company plans to take, say experts. For instance, the 4G market, where BSNL intends to enter, has already been captured by private telcos with large network coverage. As per mobile analytics firm OpenSignal, Jio has 97.5 per cent 4G/LTE coverage. BSNL, if it rolls out 4G, will remain an also-ran.

However, there is a catch with 4G services. Harsh Walia, Partner at law firm Khaitan & Co, says while 4G has a notional benefit of garnering customers, BSNL doesn't really need 4G at the moment. "Telcos claim they have reached so many villages but it's like electricity. Most villages in India have an electricity pole but not every house is lit. The next round of growth will come from rural where telecom penetration is still low. Rural focus is the way to go," he says.

"Forget about the new initiatives, BSNL might be walking on thin ice as areas in which it has expertise are losing ground. Its strong wireline business is witnessing a rapid shift as consumers move to mobile phones for all purposes," says a telecom consultant.

Over the years, tens of committees and reports and hundreds of consultants have flagged the crisis. The problem remains unfixed though. Despite being well aware of the mess, the government seems to have no meaningful way to improve the situation. All it seems to be doing is throwing good money after bad and waiting for the impossible to happen.

@manukaushik