Don’t bet on BSNL, MTNL’S revival
The four-point turnaround plan for the public sector telcos is a set of necessary steps but is far from sufficient
The government just announced a “revival plan” for the ailing public sector telcos, BSNL and MTNL. The four-point plan comprises: Raising cash through issue of sovereign bonds (~15,000 crore) allocating 4G spectrum (at government cost) to create a new revenue stream; monetising assets (mainly land) to mobilise ~38,000 crore; and reducing employee strength through an attractive voluntary retirement scheme (VRS).
The announcement should be welcomed: The government has finally decided to act.
First, some history. MTNL has been in serious distress for over a decade — grossly overstaffed, dwindling customers and revenues, and no internal resources for investment. In contrast, BSNL was profitable and financially healthy a decade ago. Two events shaped their economic fortunes.
The 3G auction in 2010 irreparably damaged their finances. BSNL and MTNL were compelled to purchase 3G and Broadband Wireless Access (BWA) spectrum. MTNL was already in trouble and its entry into 3G was clearly inadvisable. BSNL at least had a fighting chance with 3G; it had built up surpluses. But the BWA spectrum was simply foisted on them; neither wanted it. BSNL and MTNL were “commanded” by an imperious Ministry of Finance (MOF) to cough up. In short, the MOF raided the companies’ reserves to fill a budgetary hole. Worse yet, it created a permanent recurring liability to service a useless asset (the BWA spectrum). BSNL was stripped of cash it could have used to invest, compelling it to borrow. MTNL was saddled with 3G spectrum it could not possibly utilise optimally.
The second significant event was the entry of the private sector in the telecom sector. In all of a few years, the huge technical staff of the Department of Telecom (DOT) was rendered superfluous. Services hitherto provided departmentally now had new providers. Suddenly, there were qualified telecom engineers with little to do; and, linemen and staff from a different tech era were rendered redundant. The DOT moved the “surplus” staff to BSNL and MTNL. The staff was “absorbed” by the telcos (and guaranteed a government pension). The wage bill of BSNL and MTNL ballooned; no surprise, then, that the wage costto-revenue ratio is 77 per cent for BSNL and 87 per cent for MTNL. Prima facie, the plan appears eminently sensible: Augment revenues, cut costs and sell assets to generate resources for the core business. But don’t bet on it just yet. Here’s why.
The VRS solution has been attempted before, unsuccessfully. MTNL staff (16,000) is predominantly old (and many unskilled in terms of modern needs). Yet, they have held on steadfastly, rebuffing VRS offers. BSNL has 170,000 employees with a more balanced age-profile; but, most have not been willing to leave. The job market is really tight right now. Prospects for telecom engineers and other tech staff are bleak. And, do not underestimate the “social” value of being employed as against being unemployed. So, much depends on the perceived sweetness of the VRS handshake. Lastly, overstaffing is across all age-groups. Can the VRS address this problem?
It is important to get a fix on the magnitude of the financial turnaround required. The combined earnings before interest, taxation, depreciation and amortisation (EBITDA) margin for both companies was (-)20 per cent in 2018-19. The math is simple. A 40 per cent reduction in employees (74,000 employees opting for VRS — a tall order) would yield a 31 per cent reduction in the wage bill-to-revenue ratio. If all that went straight to the bottom line, the EBITDA would rise to 11 per cent, which is not enough. Even with debt at ~45,000 crore, the minimum EBITDA needed to book a profit is 35 per cent. A turnaround, therefore, hinges on large cost savings and a solid revenue boost.
Monetising assets takes time and is not easy in the public sector context. Asset sales, specially land, invariably invite allegations of graft. Decisionmaking in public sector units (PSUS) is tardy, cautious and driven by risk-aversion. This has worsened in a time when the Enforcement Directorate , the Central Bureau of Investigation and other enforcement arms of the government are in full cry. The experience with disinvestment in the past five years is not particularly encouraging. It would be optimistic to believe that resources from assets will become easily available.
Infusing capital through sovereign bonds provides immediate succour. But, like recapitalisation of banks, it is far from sufficient. BSNL’S track record is not inspiring. Its management is not renowned for commercial prowess or success. If management practices and the organisational culture do not change, the bottom line will not either. More on this anon.
Press reports mention that the plan envisages an investment of ~10,000 crore to operationalise 4G services. That is a gross underestimate. It took Jio over five years and a lot of money to deliver quality 4G services. True, BSNL has infrastructure and an extensive network. However, it is both naïve and rash to expect that a new revenue stream will materialise quickly and that too with so small an investment. Resources for the huge investment will not come quickly (the asset sale problem). Finally, in the cutthroat world of telecom, does BSNL, given its management, have a fighting chance to survive the competition?
The plan is a set of necessary steps but is far from sufficient. The VRS “carrot” will need a veiled “stick” for suasion. Without that, VRS will not take off. Faster flow of resources to fund investment will be inescapable; else by the time BSNL gets to 4G, the rest of the sector would have moved on to 5G. And, without management reform all this amounts to nothing. The revival plan, as the phrase goes, is on a wing and a prayer.