The telecom sector has seen massive changes in the past three years. There has been major consolidation and just three private service providers have been left in the game as effective players. But there is also the proverbial elephant in the room: the two large government-owned telecom service providers, Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL).
Both PSUs have suffered huge losses for years. Both are over-staffed, cumbersome organisations that find it hard to stay competitive. However, they have substantial assets in the form of large networks and significant user bases.
BSNL, in particular, has a huge optic fibre network, a national footprint, and a large wireless and wireline subscriber base as well. MTNL has a foothold in the country’s two largest metro areas. Also, taken together, the two PSUs control substantial market share in the wired broadband segment.
The net losses of BSNL in 2017-18 (the last available balance sheet) amounted to Rs 79.9 billion on revenues of Rs 226.7 billion. The year before (2016-17), it had net losses of Rs 47.9 billion on revenues of Rs 284 billion. Losses climbed while income from operations declined 20 per cent. By March 2018, BSNL had 183,000 employees.
That trend of rising losses coupled with falling revenues is believed to have continued and indeed, accelerated, in 2018-19. A parliamentary statement from the minister estimated that BSNL would have incurred losses of Rs 142 billion in 2018-19, with revenues falling to Rs 193 billion. The direct employee strength is said to have declined to about 165,000.
MTNL, which only services Mumbai and Delhi, had net losses of Rs 29.7 billion on consolidated revenues of Rs 32 billion in 2017-18. In 2016-17, it had losses of Rs 29.4 billion on revenues of Rs 36.5 billion. In March 2018, MTNL had a roster of 22,000 direct employees, with about the same number deployed on a more temporary basis.
Both companies have had issues with paying salaries and expenses, leading to agitations by employees. It is estimated that nearly 70 per cent of BSNL’s revenues are committed to meeting the salary and expenses of its workforce. Neither PSU has been able to launch commercial 4G services due to the financial crunch. This has impacted their subscriber base. High-end subscribers have ported out, although BSNL continues to garner 2G/3G subscribers from the rural hinterland, where it is often available as the only service provider.
It is difficult to compare MTNL like-for-like since its operations are geographically limited, even if the losses seem abnormally high. It is, however, possible to compare the metrics of BSNL with private operator Bharti Airtel, which also has a national footprint.
Bharti Airtel currently has about 14,800 employees across its India operations. It registered stand-alone India revenues of Rs 498 billion and losses of Rs 18 billion during 2018-19. The comparison indicates that, while the environment is difficult for players in the telecom sector, it is possible to generate far higher revenues with less than one-tenth of the staffing strength of the two PSUs.
Given the magnitude of mounting losses, policymakers have to do something about these two government-owned firms. The actions taken, whatever that may be, will change the dynamics of the telecom industry.
There are some options. One is a “revival package” to try and turn these businesses around. Another is a strategic sale of stake to a single entity, with the government retaining control. A third possibility is the sale of majority stake to some entity. A fourth option is an initial public offering (IPO) for unlisted BSNL, and further stake divestment via a follow-on public offer (FPO) by MTNL, which is already a listed company. A fifth option would be something like a sale or lease of the assets of these companies, to pare debt and turn these companies into shell entities. The proceeds from such sales could be used to pay salaries and pensions.
At this point, there is no certainty about which course of action will be followed. The IPO/FPO option would be hard to accomplish, given the weak financials and poor track record of the companies. There may be no takers for public issues.
Any entity buying a strategic stake would want to downsize the employee roster radically in both businesses. This is even more imperative for an entity that considers buying a majority stake. How can the government ensure this, given that both companies have strong unions that have already demonstrated their unwillingness to go along with any such proposal? Can it arrange a voluntary retirement scheme (VRS) that would be acceptable to the unions? That may be prohibitively expensive too.
Earlier this year, the Department of Telecommunications set up a high-level panel to look into the revival of MTNL and BSNL. According to the revival proposal mooted by the panel, a revival of the PSUs would cost Rs 740 billion. It includes a Rs 290 billion payout for VRS, a sum of Rs 200 billion to pay for 4G spectrum, and Rs 130 billion to fund capex for 4G services. The proposal estimated that, with such a revival package, BSNL could become profitable by 2023-24. However, there are unconfirmed reports that this revival proposal has been rejected by the finance ministry.
BSNL has a huge net fixed asset base, which it valued at Rs 425 billion in 2017-18. This includes tangible assets (land, buildings, cables, apparatus, plants, etc., as well as capital work in progress) and intangible assets. It has a national fibre network of 750,000 route-km of optic fibre cable (OFC), which, according to industry estimates, could be valued at Rs 500 billion, well above the estimates on its balance sheet.
BSNL’s network dwarfs the OFC networks of the other players. Reliance Jio has 325,000 route-km of OFC, including 178,000 km acquired from Reliance Communications. Bharti Airtel has 250,000 route-km and Vodafone Idea has 160,000 route-km.
BSNL could try to reduce expenses and raise cash by hiving off its network, selling it off, and then leasing back what capacity it needs. This is a standard strategy that has been adopted by other telecom players. In fact, the airline industry uses a similar financial strategy with its fleet. A sale brings in a lump-sum amount and lease-back costs less than borrowing a similar sum.
BSNL also holds considerable real estate assets, which it could monetise in various ways. It claims that it holds 3.28 million square metres of land and it could spare up to 3.2 million square metres. The estimated fair value, according to an internal estimate, is Rs 202 billion. Lease or sale of some of these assets would be possible.
BSNL has one key advantage over private operators – its debt stands at Rs 130 billion whereas the three private operators have a debt of well over Rs 1 trillion each on their books. So if it deleveraged by selling off some assets, it could well go debt-free. That could also help towards capex and VRS funding. MTNL lacks the same scale. But similar deleveraging efforts could be instituted in MTNL.
However, there would be major social implications involved in shutting down the PSUs; BSNL, in particular. Given that BSNL effectively has monopoly status in many places, where no other operator has a significant network, subscribers cannot port out. If BSNL is shut down, policymakers would have to ensure that the network remains functional in such areas so that subscribers are not impacted. This adds to the complexity of the possible solutions.
Given the financial stress in the sector, it would also be difficult to find a buyer for the OFC network, even if it was put on the block. There may be overseas entities interested in buying into this, but none of the current service providers appears to have the capacity to put Rs 500 billion equivalent on the table. Even Jio, which is in the best financial shape, is in the process of deleveraging.
This helps define the problem. There are two loss-making, government-owned entities, which have significant assets and subscriber bases. Both are monstrously over-staffed. Going by industry norms, they would need to shed 90 per cent or even more of their current workforce to “right-size”. They have active and powerful unions that would object strenuously to any such initiative.
It would cost an enormous amount to revive either company. The government does not possess those resources in an economy that is undergoing a slowdown, given that the fiscal deficit is already high. The telecom sector is financially stressed to the point where it is hard to see any of the current private operators being capable of taking over and investing the kind of resources necessary to turn these businesses into profitable companies.
BSNL also has social obligations in that it is, in effect, the only service provider in many places, where telecom penetration is low and ARPUs are very low. Any solution would have to ensure that the networks remain operational in those parts, at least until other operators find it worth their while to enter those regions.
Many solutions and “packages” have been mooted because this is an intractable problem. It is unclear what the government will opt to do. It cannot afford to wait too long since the losses will continue to mount. s