Cross-connections

Telecom Minister A Raja appears to have got everyone on the back foot, including his interlocutors in the Prime Minister's Office, by comparing the bid that MTNL got for its cellular network ($69 per line) with the one that BSNL has got ($108 per line). The large difference, he has argued, is evidence that the BSNL bid is excessive, and that the company would have got a better deal if it had not disqualified Motorola on technical grounds. The difference, according to his numbers, works out to around Rs 9,500 crore. This may seem rather obvious, but it is probably not a valid comparison since the two tenders were quite different""for instance, MTNL's tender had a much smaller proportion of 3G lines. You could argue, and Mr Raja has done so, that the BSNL contract asked for specifications way beyond what was required and that the 3G share is too high, especially since the 3G policy has still not been announced. That's a call the BSNL board took, perhaps keeping in mind the policy promises that Mr Raja's predecessor was making, and perhaps also keeping in mind that 3G networks can be used, indeed are used, to provide 2G services the world over. In any case, Mr Raja himself probably recognises there is a difference between the two contracts and that is why, soon after he took over, he said that the prices quoted by the lowest bidder had to be reduced to below $100. Assuming prices come down to $99, that's a saving of Rs 1,650 crore, much less than what is being talked of now, but a sizeable sum nevertheless.

Apart from asking BSNL's board to explain the difference between MTNL's price and the bid it has approved, Mr Raja has asked the company to explain why Motorola was disqualified; the reason, it is known, was that its 3G partner, Lucent, was no longer doing any R&D in the 3G GSM space. Though Motorola had argued that this would not compromise the tender since Lucent was in any case committed to servicing its existing customer base, BSNL decided that this was sufficient grounds for disqualification. This may well have been a quirky response, but it is not certain that including one more company in the bidding would have made a significant difference to the prices quoted. One can make a case for tenders that offer less discretion to company officials, and that is what the government has agreed to in the case of large infrastructure projects where weights given to various bids have been the subject of intense controversy, but the question is whether there is enough reason now to start ab initio and re-tender.

One issue to keep in mind is the opportunity cost of delay, which can then be weighed against the possible benefits of negotiating a price downward. Compare the original cut of Rs 1,650 crore that Mr Raja wanted with the loss that BSNL faces when it doesn't have capacity""while BSNL provided around a fifth of all new connections in the first quarter of last year, this is now down to 3-4 per cent. Given the average of Rs 320 per month that BSNL earns from each customer, it can wipe out this amount pretty quickly""that is, delays in awarding the contract are likely to be more expensive. If you take into account the loss in valuation that BSNL will suffer, the equation tilts even more""if capacity constraints result in BSNL acquiring 6 million fewer subscribers over a year, based on the current valuations of around $600 per subscriber in the industry, its market valuation declines by Rs 14,400 crore. In other words, however imperfect the tendering process may have been, in commercial terms the case for not going ahead is quite weak.