BSNL-MTNL merger: Revival out of coverage area?

To be fair, the government did incorporate BSNL in 2000 to supply services in India, except for Delhi and Mumbai, which have been served by MTNL since 1986.

BSNL-MTNL merger: Revival out of coverage area?
The natural monopoly character of telecommunications has been decidedly undermined by wireless technology.

By Rajat Kathuria
& Chavi Asrani

The early logic of public provision of telecommunications services in India was justified on grounds of market failure, and employment creation. Market failure meant the private sector would either not be interested in providing the service, especially in far flung rural areas, or monopoly conduct would flourish unchecked in areas it did serve. The widespread distrust of the market and private enterprise obliged the government to supply telecommunications services. And, in the absence of a meaningful social security architecture, the department of telecommunications (DoT), along with other public sector enterprises, became employers not only of “last resort” but also of “first choice”. The security of a government job, and its associated benefits are enticing even today, even though the economy is vastly different, and private enterprise is truly established.

The natural monopoly character of telecommunications has been decidedly undermined by wireless technology. Accordingly, ownership is no longer the best way to achieve multiple government objectives, if ever it was. There is ample evidence from India, and the world, that suggests government ownership dulls incentives, and therefore, development and distributional objectives is better achieved through independent regulation, and the law of contract.

The arrival of independent regulation in 1997 in the form of the Telecom Regulatory Authority of India (Trai), and private sector participation meant the government could easily vacate this space without hurting its development objectives. To be fair, the government did incorporate BSNL in 2000 to supply services in India, except for Delhi and Mumbai, which have been served by MTNL since 1986.

The change formally created a PSU in telecom, but functioning, process, and culture was largely inherited from the parent department. Often, the argument is made that between a private and public sector monopoly, the former would be abusive and extractive while the latter benign. And, thus, if ever the sector inched towards monopolisation, either by design (read cartelisation), or market circumstance (read aggressive and disruptive competition), the public sector would provide the much-needed countervailing power. One cannot imagine either BSNL or MTNL succumbing to becoming part of a private sector led cartel, just as one cannot visualise the nature of the competitive threat they would present in case private sector ran amok.

The beginning did, however, inspire confidence. In the three years following BSNL’s incorporation, it became the country’s leading telecom operator, commanding a market share of about 85% in provisioning of fixed-line services, over 17% in mobile services, and 25% in internet services. But, over time, its fundamental weaknesses—overstaffing, lack of market responses, and cumbersome procedures—have rendered it an also-ran. The market share of BSNL has dwindled to about 10% while MTNL has a market share of about 7% in two of India’s most lucrative circles. If preservation of competition is the objective, it is a task best performed by the sector- and economy-wide competition regulator, and not by artificially supporting a public sector entity. It seems to be a rather extravagant route to maintaining competition.

Another argument made in support of the public sector is service provisioning in remote areas. To BSNL’s credit, it did serve areas which private sector did not. But, BSNL’s rural market share has dwindled from over 25% in 2008 to less than 8% in 2019, while the rural market has been growing. A robust telecom PSU, another argument suggests, could be of strategic value, especially in periods of calamities. Once again, it seems a rather expensive route to maintaining strategic services when the same could be provided by private players under threat of regulatory injunctions.

How does the public sector survive with market disruptions and technology shocks becoming the norm rather than the exception in telecom? Public sector is, at best, geared for stasis, and the telecom sector is anything but that. Adding to the technology disruptions are policy flip-flops that went from being pro public sector to either neutral or even hostile. Private entrants had long argued for a level playing field with the public sector while the latter complained they could not compete with one hand tied behind their back. Both were right from their standpoints, but asymmetric policy in favour of the public sector was hard to maintain. Thus, the public sector was persuaded to pay licence fee, and for spectrum, just like others did, some of which they did not want. In 2016, the entry of Reliance Jio coincided with intense tariff competition, and subsequently, a sharp fall in interconnection user charges (IUC) that affected the entire telecom industry. Public sector operators, already bleeding, were hit badly.

Worried about the future of the public sector entities, the government has crafted a revival plan, including a merger of BSNL and MTNL. In management jargon, the merger could potentially unlock synergies, but unfortunately, there appear none on the telecom horizon. The return on capital employed for the two PSUs has been consistently negative, and manpower costs account for 60% and 80% of their revenues, respectively, compared to about 5% for the private operators. The other components of the rescue package include raising sovereign bonds, monetising land assets, and a voluntary retirement scheme for employees. The government has also promised allocation of 4G spectrum at 2016 prices.

None of these inspire confidence, given protracted government procedures. For example, asset sales will be subject to cumbersome tenders, allegations of favouritism, and plain rent-seeking—aspects that are partly responsible for the bleak situation in the first place. Moreover, customer interface is not a public sector forte, so 4G spectrum is likely to be a drain rather than a revenue spinner.

At the beginning of this piece, we advanced two reasons for direct public sector service provision by government—market failure, and employment. The market failure justification doesn’t exist anymore, suggesting exit for BSNL and MTNL. The medium to long term costs of continuing in operation are likely to be higher than those of shutting down. Since employment creation is no longer a public sector imperative, shutting down may make economic sense, but it is hardly a feasible political option. One cannot lay off 200,000 employees with a stroke of the pen, even if continuing operations is a more expensive form of social protection. It has to be carefully planned.

The silver lining is that the merged telecom entity would have a pan India presence, and would become a listed enterprise. This may eventually assist in disinvesting, or better, privatising the merged operator. Thus “revival to sell” should be the mantra rather than “revival to operate”. The latter is a tall order, and, unencumbered, the merged entity could well turn out to be profitable in private hands. But, it will be a painstaking process. After all, as a great poet said aah ko chahiye ik umr asar hote tak!

Kathuria is Director and Chief Executive, & Asrani is Consultant, ICRIER. Views are personal.

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