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Follow UsNEW DELHI: India plans to turn its creaky telecom department into a company next month, but the road from state-owned monopoly to modern telecom firm looks long and winding. A major hurdle could be its nearly 400,000 employees who are opposed to the change and have gone on strike several times this month in protest.
Incorporation is mostly a precursor to privatisation, but the government so far has been coy about a possible share sale. "This is a prelude to divestment, not a privatisation," independent telecom consultant Mahesh Uppal said. Analysts have no doubt the market would welcome a share sale, as telecom is one of the few profitable government businesses.
Two other state-owned phone firms, carved out of state departments in 1986, are already stock market favourites. Mahanagar Telephone Nigam Limited (MTNL), in which the state retained 56 per cent, provides fixed line phone services in Delhi and Mumbai. Videsh Sanchar Nigam Limited, 53 per cent state-owned, is the monopoly provider of overseas voice services and India's main Internet service provider.
But, turning the entire state Department of Telecom Services (DTS) into a private company is a far more daunting task. The first step will be taken on October 1, when DTS is converted into Bharat Sanchar Nigam Limited (BSNL), which will be a limited company 100 per cent owned by the government.
Until a year ago, a single Department of Telecommunications (DoT) was both the policy-maker and a service provider. Fledgling private firms in India's telecoms industry often blamed it on interpreting laws to suit its own needs. Last year, the government split the monolith department. DoT retained the policy and licensing functions, while the new DTS focused on local and long-distance fixed line telephony.
Cultural transformation
Overnight, BSNL will become India's largest company in terms of assets, estimated at Rs 630 billion ($13.58 billion), and inherit a nation-wide land-line telephone network. DTS' revenues grew at a compound annual growth rate of 22.8 per cent between 1994-95 and 1998-99. Its sales in 1998-99 (April-March) was Rs 176.38 billion.
Total revenues of India's telecom services sector is estimated at about Rs 270 billion ($5.85 billion). But, challenges faced by the new company are as big as the opportunities. The most difficult will be to usher in a cultural transformation in an organisation used to decades of government monopoly.
DTS has come a long way since the mid-1980s when consumers waited up to six years for a phone connection and spent half a day in queues to pay their bills. Incorporation will be a first step on a new path that looks equally long.
"The key for DTS will be to turn itself into a good marketing organisation, offering quality service to compete with private companies," said Anil Joseph at consulting firm Frost & Sullivan.
Massive overstaffing is another challenge. With 363,000 workers, DTS is among India's largest employers, after Indian Railways, whose 1.5 million staff earned it a place in the Guinness Book of Records as the world's biggest employer. Analysts say DTS is at least three times overstaffed for its 24-million line phone network, but its unions are well-organised, which could be the main stumbling block towards privatisation.
For two days last week telecom unions, worried about job security and pensions after incorporation, disrupted the domestic long-distance network throwing trade and business out of gear. More than 5,000 engineers of the telecom department staged a one-day "mass casual leave" on Friday to protest the impending loss of their status as government employees.
Competition is another headache. Already in some Indian provinces, private companies are sniping at DTS' heels, targeting its lucrative corporate customers. While these make up just five per cent in number, they contribute some 50 percent of sales.
These new competitors are building high-capacity broadband networks to accommodate data and applications traffic aimed at corporate clients in the new economy. DTS will have to follow suit, but upgrading its network will be costly.
Large investments needed
On the money front, incorporation will be a boon. Experts say DTS, with its equity of Rs 50 billion ($1.09 billion), will be able to borrow huge amounts for an investment-hungry sector. Indeed, fund raising has been the key inspiration to allowing private firms into India's telecoms sector.
Analysts estimate India needs some $80 billion between now and 2010 to increase its telephone density from three per hundred people to the current world average of 15. But, inviting private investments, begun in 1995, has been beset with litigation and progressed in fits and starts.
In 1995, the government decided that each of the 20 telecom circles or zones and the four metro districts that India is split into would have two fixed-line operators, one of which would be the state-run phone department. But, the competitive bidding route used to choose private firms led to unrealistic pledges of license fee payments and no takers for some of the less lucrative circles.
Only six zones now have private companies signed on to provide fixed-line services of which three have begun operations. The bidding and rollout of mobile phone services in the telecom circles was more successful. Two private firms were to provide mobile phone services in each circle with DoT having the option of being the third. Fourteen companies now offer cellular services, with the total number of subscribers reaching 2.3 million.
Prospects of profits for telecom firms improved in 1999 when the government migrated to a revenue share arrangement with them to substitute the license fee system. But the industry complained it was a hurdle to profitability. In return they accepted to take on multiple players in each circle, a plan yet to be implemented. The most significant competition for BSNL could come in about 15 months when private firms commission networks to carry domestic long-distance phone traffic. The segment was opened to private competition in August and revenues from it make up a significant portion of DTS' revenues.
(C) Reuters Limited 2000.