The Hindu Business Line : Up against odds

MAY has certainly been a bad month for Bharat Sanchar Nigam Ltd (BSNL). First it was forced to roll back the hike in landline to cellular rates, which is expected to set it back by around Rs 3,500 crore this fiscal. Now comes the news that the Union Cabinet has rejected the compensation package that it was seeking to stay afloat and sustain its rural unremunerative operations. The way things are going, despite breaking new ground in cellular services, the company, which was corporatised in October 2001, is now in danger of being plunged in the red this fiscal. Unless, of course the Government changes its mind and grants it a few financial concessions.

It may be recalled that the Department of Telecommunications (DoT) had, close to six months ago, cleared a financial package of measures that include the full reimbursement of its licence fees and spectrum charges till the year 2006-07. The package is estimated to total Rs 23,000 crore during the five-year period.

At the time of its corporatisation on October 1, 2001 when the DoT decided not to involve itself directly in providing telecom services, BSNL had been promised fiscal incentives only till the end of fiscal 2002-03, after which it was expected to stand on its own two feet and fight for its survival, as the market demands. The logic being that this would spur the company to become a full-fledged corporate entity.

As per the initial financial package granted to the company, it was reimbursed the licence fees (varying from 12 per cent, 10 per cent and 8 per cent of its adjusted gross revenues for the year depending on the various circles of operation) and spectrum charges till March 2003. It was also granted a moratorium on repayment of principal and payment of interest upto March 2004 on the Government loan of Rs 7,500 crore.

BSNL was further exempted from payment of dividend due on equity at the rate of 50 per cent and 25 per cent for the years 2002-03 and 2003-04, respectively. It was given a concessional central sales tax on all procurements and given a plan assistance of Rs 720 crore for its village public telephone programme.

However, by the time fiscal year 2002-03 was drawing to a close, the company started sweating. Competition in basic, national long distance and cellular services, which it offers, was squeezing the huge margins that it had maintained till then. Moreover, with the drastic fall in tariffs, the company realised that it would be unsustainable to operate in the rural areas without adequate help from the Government.

It sought a relief package, which found favour with the Telecom Commission and the Communications Minister, but was shot down by the Finance Ministry since it involved a significant outgo from the Consolidated Fund.

As per the package, apart from being fully reimbursed the licence fees and spectrum charges till the end of the Tenth Plan period, the amount of Rs 2,300 crore that has been budgeted for the year 2002-03 was also to be suitably adjusted to the actual licence fees and spectrum charges. The relief was to be provided as an annual grant and utilised by the company exclusively for its rural operations.

The package also included waiver of spectrum charges in rural areas, and a moratorium on repayment of principal and interest on Government loan to BSNL to continue till 2006-07. It further provided that the equity included in the capital structure of BSNL should be subjected to a dividend of not more than 10 per cent till 2006-07.

The compensation of Rs 720 crore for investment by BSNL in village public telephones was to be treated as a loan in perpetuity. That apart, BSNL sought exemption from payment of space segment charges to the Department of Space. In regard to the burden of pension of retired DoT employees, it had sought that it should be met out of the dividend payment by MTNL and BSNL deposited in the Consolidated Fund.

Despite Arun Shourie's valiant attempts to make the Finance Minister, Jaswant Singh, see the logic of granting BSNL these concessions, he failed. The Union Cabinet, which took up the issue, refused to pass it saying that a level playing field had to be provided to all operators, and no partiality could be shown towards BSNL.

The Cabinet decision may seem justified, since it raised the matter about a level playing field for all operators in the telecom sector. But then, is BSNL on a level playing field with the other operators? Maybe not. The rollback of landline to cellular tariffs and free calls happened just a couple of months ago after a hungama was raised in Parliament. Realising that there may be a backlash in the assembly elections that are due in many States soon, the company was forced to hurt itself in the leg.

The estimates suggest that BSNL will suffer a revenue loss of Rs 3,476 crore on account of the rollback. While the loss on account of change in landline-to-cellular tariffs will be Rs 2,600 crore, the hike in number of free calls will impact it by Rs 876 crore. As rightly pointed out by Shourie at that time, the company, which had a surplus of Rs 6,500 crore in 2001-02, has seen a massive decline in this to Rs 2,500 crore during fiscal 2002-03 on account of the falling tariffs on STD calls. The higher call charges was expected to, therefore, help it continue to retain surplus. Now, however, it will have to look at other ways to make up for the shortfall.

The Minister had noted that there are three consequences of the decision. First, expansion of infrastructure by BSNL will be grossly affected. While private operators are free to concentrate on the lucrative areas, BSNL does not have this liberty. Second, the company's effort to improve its network by replacing outdated technology will suffer. Finally, the expansion of network in rural areas will be slowed down, as BSNL will not have the surplus to do so any further. It has to look at ways of raising its own money for rural telephony which will be difficult.

The company is forced to go to the unremunerative rural areas without being compensated. The rest of the competition is concentrating only on the urban lucrative sectors, while it is forced to perform its `social obligation'. The dice is loaded heavily against the PSU telecom behemoth.

grambabu@thehindu.co.in

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