The Parliamentary committee on petitions yesterday tabled its report in the Lok Sabha, recommending a merger of BSNL and MTNL, while also adding that mere financial support from the government won’t work, saying that the “aspect of providing financial support to these entities by the Government has proved to be an apparatus for ‘survival’ and not ‘revival’.”

One reasoning from the committee which we couldn’t quite understand: “with the two entities competing against each other as well as the private sector players – their value attrition would only accelerate.” This doesn’t make sense because MTNL operates only in Delhi and Mumbai, while BSNL operates in all other circles. Thus the two do not compete with other. Still, that doesn’t mean that the merger isn’t a bad idea: it should lead to a reduction in management overheads.

This recommendation of a merger is based on information provided by BSNL and MTNL for the period up to 2015. That means, given the shake-up in the telecom sector because of Reliance Jio, the numbers are likely to be much worse. Too little too late?

The report cites the following reasons for the recommendations:

1. Decline in marketshare:
– BSNL’s wireline marketshare declined to 59.31% from 65.54% between December 2013 and 2015.
– BSNL’s Wireless marketshare declined to 7.96% by December 2015. For the same period, MTNL’s wireless marketshare declined to 0.36% from 0.58%.
– BSNL’s wireline broadband services marketshare declined to 15.67% in December 2015 from 29.96% in December 2013. For the same period, MTNL’s broadband marketshare declined to 1.25% from 3.19%.

“The Committee are, therefore, of the considered view that if the current trend of incessant shrinking of market share of BSNL and MTNL continues, both these entities would soon become commercially non-viable and a burden on the exchequer.

2. Poor management: The committee says “the advantages, these Public Sector Undertakings had in the past, viz., extensive infrastructure in remote areas, their Pan India reach, Huge optical fibre infrastructure, strategic alliances with IT and Hardware Companies, etc., have now been dissipated due to inherent deficiencies of the Management, viz., failure to improve the working culture, inability to optimize the network capabilities, assets being unproductive, poor service image of the Companies, their inability to retain customers, poor marketing, etc.”

According to a representation to the committee, “MTNL is not able to upgrade its GSM and landline network for the last 3-4 years due to constraint of funds. In the wireless segment due to limited no. of BTS / Node B sites both for 2G / 3G the coverage and quality issues are encountered by the customers.”

Also, “BSNL has not been able to invest in expansion of its network over the period 2008-2012.”

3. Financial Distress: Both MTNL and BSNL are loss-making (apart from the profit of Rs 7825 crore that MTNL reported in FY14, as a “result of Government support in the form of a write-back of provisions for pension liabilities and spectrum amortization costs.”

BSNL Financials:

MTNL Financials:

Government measures to revive the companies have not been towards improving the business, but dealing with its liabilities: “treatment of pensionary liabilities of Government employees absorbed in MTNL and who opted for combined service pension on parity with similar employees in BSNL, waiver of Government loan to BSNL involving an amount of Rs.1411 crore, financial support of Rs. 6724.51 crore to BSNL and Rs.4533.97 crore to MTNL on surrender of Broadband Wireless Access (BWA) spectrum and financial support of Rs.492 crore to MTNL towards payment of Minimum Alternate Tax (MAT). ”

For BSNL, “Huge legacy workforce whose salary and wages is around 50% of the revenue (This has worsened the position due to implementation of Sixth Pay Commission/ 2nd Pay Revision Commission (PRC) / Wage Revision Commission Recommendations).”

The committee points out that the fact that competition from private operators which are flourishing in the country is no excuse for “the existing pitiable condition of these commercial entities (MTNL and BSNL). It does acknowledge that there has been a reduction in tariffs due to increased competition, “significant spectrum related payouts, high burden on account of employees’ remuneration and poor service quality which resulted in a steep decline in subscriber numbers.”

The DoT, in its submission to the committee, had acknowledged that “These PSUs have not been able to invest adequately in the expansion/modernization of their network due to financial losses leading to network coverage issues. BSNL has not been able to invest in expansion of its network over the period 2008-2012.”

Recommendations

1. A multi pronged strategy: “onetime infusion of funds with stringent firewalls of accountability, technological advancement and network improvement, launching of innovative schemes for enhancement of customer satisfaction, improvement in the work culture of these entities, exploring synergies between BSNL and MTNL”

2. Management change: “The Committee also recommend that the option of handing over the Management of BSNL and MTNL to those professionals – who have a proven track record of facing a stiff competitive environment coupled with efficient management of finances, equipment, manpower and modern marketing strategies could also be weighed by the Ministry of Communications (Department of Telecommunications).

3. Tracking QoS and subscriber growth as metrics: “the Committee are of considered view that ‘increase in the subscriber numbers’ and ‘improvement in the service quality parameters’ are the determining factors for taking out MTNL and BSNL from
the vicious circle of continuous and mounting financial distress. Once the confidence of subscribers is regained by these Entities, the Committee have no doubt that they would be able to exhibit the early signs of revival.

Note that the report does mention several initiatives being taken by MTNL and BSNL for enhancing their services, but these do not mention a specific timeline.

4. Merge: “their merger would give both the entities a chance for competition, against the emerging consolidated private sector players. The Committee also have no inhibition to assert that the synergies and advantages inherent in an integrated national telecom infrastructure would pave the way for lower cost of investment and greater combined ability to face competition. Besides, the merger would also ensure not only better quality of services to the subscribers but also a whole range of telecom and other related services that MTNL and BSNL have presently been offering separately.”

They’ve recommended a setting up of an expert committee for the merger

MediaNama’s Take

By the time the expert committee gets done, it will probably be too late for BSNL and MTNL, given that the market is changing rapidly, and government committees (such as this one) take far too much time to finalise recommendations. Secondly, the merger won’t be easy: MTNL is listed, while BSNL isn’t, and any exit would either involve listing BSNL for discovery of its share price, and then proportionately merging the two entities. Alternatively, it would require a cash-infusion into MTNL for a buy-back and delisting, before the government merges the two. Note that MTNL was listed on NYSE, but now trades on the Over-the-counter market.

MTNL and BSNL would probably be better off as infrastructure providers, providing wholesale services to MVNOs and other ISPs (i.e. unbundling of the last mile), without a consumer-facing unit. Most important, though, would be for it to reduce their employee expenditure and management overheads. It also makes sense for the government to separate its Internet and telecom infrastructure services, including those in Railwire, into a single Internet and Mobile Infrastructure service provider. Given how the government won’t function, that won’t happen, so don’t hold your breath.

Download the report here.