Dealing with a double whammy

Updated: May 13 2006, 05:30am hrs
In 1997 when the state-owned Mahanagar Telephone Nigam Ltd (MTNL), which operates in New Delhi and Mumbai, was granted a licence by the government to foray into mobile phone services, its private cellular rivals had opposed it bitterly.

Fledgling cellular players feared unfair competition and lower tariffs. Today, those worries seem to have been unfounded. MTNL cellular subscriber base of 2.02 million is a mere 2.8% of the Indian mobile services market share as against Bharti Airtels 28.7% share with a subscriber base of 20.68 million.

The comparison does not end here. For fiscal 2005-06, while Bhartis net profit soared by 51%, MTNLs plummeted by 38%. And now comes the most contrasting numberBharti has a total employee strength of 10,000 while MTNLs stand at 50,000! Things are only a shade better for big brother Bharat Sanchar Nigam Ltd (BSNL), that runs the largest fixed-line phone network in the country. Though a late starter, it has managed to become the second largest GSM-based cellular service operator with a total subscriber base of 17.59 million and a near-quarter share of the market. The good news, though, perhaps ends here. BSNLs net profit in 2005-06 has dropped by a fifth.

The writing on the wall is clear: Telecom PSUs that enjoyed the benefit of monopoly pricing until a decade ago will continue to yield market share if they do not rationalise their costs primarily on account of staff salaries. And, the bad news: that legacy is not going to be easy to shed. BSNLs total staff is around 357,000 translating into about 150 phone lines (including mobile phones) per employee. Though the metric is better than comparable statistics for African countries, BSNLs number puts it in the company of countries like Peru, Guyana and Jamaica that too have a 150:1 lines to employee ratio.

According to 2004 data from the International Telecommunications Union (see graph), each telecom employee in China managed 445 lines, a figure set to increase with the booming telecom market in that country. The Asian average of 269 would put BSNL to shame too.

The picture is bleaker for MTNL, which has a total subscriber base of 5.92 million. The lines to employee ratio for the company is about 118. MTNL has offered voluntary retirement schemes (VRS) to its employees twice. Officials said that earlier this year, about 2,000 employees opted for VRS in the first round to be followed by 602 employees in the following round. Around 1,300 employees are expected to opt for VRS in June. It is of course much less than what need to be shed but officials are helpless.

Our staff costs for 2005-06 came down by Rs 99 crore. With our VRS programme, we may be able to bring it down further. However, being a PSU, it is difficult for us to set a target, says RSP Sinha, chairman and MD, MTNL. BSNL, was carved out from the department of telecommunications (DoT) in 2000, has not come out with any VRS so far. Employee absorption from DoT to BSNL is still not complete and unless this is done no VRS can be offered. Bringing down staff strength for both telecom PSUs will be difficult, says B Srinivas Rao, telecom analyst at Enam Securities. Yet, BSNL will need to address a bigger problem staring it in its face: shrinking profits in a regulator mandated pricing regime.

The company is fighting hard to retain subsidies it gets from the government and other private operators as access deficit charge (ADC) on the ground of providing services in rural areas at rates below cost of service. BSNL has challenged the newly-reduced ADC, effective March 1, by the Telecom Regulatory Authority of India (TRAI) before the Telecom Disputes Settlement and Appellate Tribunal.

BSNL has also opposed a decision of the regulator to abolish ADC from 2008-09. ADC inflows accounted for Rs 4,200 crore in 2005-06 and are expected to be down to Rs 3,335 crore this year. BSNL is also fighting the governments decision not to reimburse its license fees, down from the current regime of a partial refund. BSNL received Rs 25,00 crore as license fee refunds last fiscal, a source to dry completely this year. BSNL says that absence of such subsidies will make its rural area services unfeasible.

Says BSNL chairman and MD AK Sinha: Weve written to the government seeking full reimbursement of licence fee. The current spat it is locked with MTNL over payment of inflated carriage charges also reflects BSNLs worry over a dwindling gravy train. Carriage charges, until last year, used to be distance based with a peak charge of Rs 1.10 per minute. From March 2006, however, TRAI revised these with a ceiling of 65 paise per minute. Now MTNL has threatened that either BSNL reduces its carriage cost further or it will invite bids from other private operators.

But if BSNL shrinks carriage costs for MTNL, it will have to do the same for other private sector companies using its national long distance network for carrying long distance calls. Naturally, the PSU is going through one of its toughest times.

So is everything lost for the telecom PSUs facing increasing competition from its private rivals Not really, feel analysts, who point towards the growth in BSNLs subscriber base.

PSUs suffer from structural disadvantages. However, despite that, they have been holding on to competition and doing reasonably well, says Enams Rao. Barely a year after it launched its services, BSNL quickly rose to number two position in cellular services in 2003 and has maintained that spot since.

MTNL, on the other hand, will have to go beyond paring its bloated staff. Analysts predict it will have to fix the bigger problem of its licensed areas of operationrestricted to the Delhi and Mumbai metropoliseswhereas most of its competitors have pan India footprints. Its overseas forays, like in Nepal, have not contributed much.

The solution, experts think, may be to merge BSNL and MTNL getting better economies of scale, opportunities to cross-sell telecom services and financial leverage available to large corporates. Until that happens, the two PSUs may find the going tougher.