The Telecom Crisis: Noises Off

The prospect of possible jail time for Anil Ambani for defaulting on payment to a creditor understandably dominated the business headlines most of Wednesday. Less noticed is another telecom crisis that has thrust itself upon, not the private sector nor the courts but the taxpaying public. Over the past week, MTNL and BSNL have each sent their owner, the Government of India, an SOS seeking a bailout — the second request in six years.

The demands, which festered through most of 2018, are remarkable because they reflect gross mismanagement at taxpayer’s expense — and they now require taxpayer money to bail them out. MTNL’s management has told the Department of Telecom (DoT) that it has borrowed Rs 20,000 crore to clear statutory dues and pay staff salaries, and it wants the government to underwrite this money with a sovereign guarantee and take responsibility for the principal and interest. With losses expanding to Rs 832.26 crore in Q3 of FY19, its net worth has been fully eroded. Had any equivalent private sector company faced the same predicament it would have been up for sale.

To be fair, the government has also asked BSNL, with accumulated losses of Rs 31,287 crore, to explore the option of closure. As with Reliance Communication, Reliance Industries’ Jio has delivered the coup de grace, despite the mandated headstart BSNL was given in the 3G business. But closure is a dramatic step by public sector standards. In 2009, plans for a small dilution in shareholding was scuttled by BSNL’s unions over fears of post-IPO retrenchment (this fear was not unfounded; over 2007-08 central government-owned companies shed some 44,000 jobs). Yet, pay and pension alone have done these former blue chips in. In both, employee costs account for over 90 percent of income — at a time when technology is the sole competitive edge in the business. So, just as union power has prevented the closure of Air India, which should have folded half a decade ago, BSNL can be expected to enter the list of large white elephants on the GOI’s roster.

Both telecom giants have revival plans that centre on voluntary retirement schemes and sale of assets (3G spectrum for MTNL, land banks for both). These are not novel; they have been considered intermittently since at least 2008 without much success. And a bailout is improbable, too, given the government’s fiscal constraints.

Even assuming the government does agree, there will be howls of protest from beleaguered private competitors. In 2013, with reverberations from the 2G spectrum scandal still being felt, the telecom operators’ lobby wrote a protesting letter to the United Progressive Alliance government against a Rs 20,000-crore bailout proposal that DoT had submitted to Cabinet for the two entities. “Consideration of any such proposal is not permissible as it will be in contravention of all tenets of policy, fair competition and level playing field,” the letter pointed out, and the government duly backed out (whether fiscal considerations played a role too is unclear).

At risk are over 200,000 jobs between both these loss-making entities. With unofficial election campaigning already in full swing, and the government battling its own statistics institutions over record high unemployment numbers, the last thing Narendra Modi needs at this time are TV images of telecom employees on dharna for losing their jobs. So it’s a fair bet that the two sick giants will live to battle at least another few months for a decision from the next government.

A band-aid solution is at hand from Air India, which found no buyers when it was put on the auction block last year. This year, there are reports that the government proposes to issue sovereign guaranteed non-convertible debentures worth Rs 29,000 crore to repay working capital loans. This is essentially borrowing more by any other name.

And who will buy this debt? In 2012, a Rs 7,200-crore NCD issue was subscribed by the Life Insurance Corporation and the Employees’ Provident Fund Organisation. The first institution has been the government’s bailout vehicle of choice since the 1980s, and the second has recently mobilized the second to finance the chronically inefficient Food Corporation of India operations. There is nothing to stop both of them stepping up to the plate for two beleaguered telecom giants as well.―Business Standard