Sunil Jain: How to kill a PSU

RATIONAL EXPECTATIONS

Finance Minister P Chidambaram appears to have ruled out the privatisation of PSUs, but it is worth considering what this policy is costing the PSUs. Two good examples of just how this cost is are ONGC and BSNL. The government's behaviour in both cases has been contrasting, but the net impact is the same""the PSUs are being bled slowly.

The ONGC story is well-known. Following his frequent run-ins with the minister and the controversial Jatar-Rao report on the Mumbai High fire, which damned him (ironically, the government has kept the report under wraps though after it was pointed out it was full of holes), Subir Raha was refused an extension last May, and the senior-most director RS Sharma was asked to assume acting charge. In August, Sharma went through the Public Enterprise Selection Board (PESB) process, and was selected as the number one candidate. This was cleared by both the petroleum minister and the home minister, but four to five months later the Prime Minister decides that Sharma isn't good enough. And a new interview is now to be held, by another committee. The idea of having an independent PESB instead of each minister constituting his/her own search committee was to avoid favouritism as far as possible.

Even if the interview is held immediately, that means it will be at least a year of the country's top oil major remaining headless. The loss of momentum is obvious at a time when ONGC was embarking on very major expansion projects. Meanwhile, the government has already whittled down several of ONGC's projects, aimed at making it an integrated-oil major over the next decade. This includes a new refinery-cum-petrochemical complex at Mangalore at a cost of Rs 30,000 crore, the Rajasthan refinery, and another refinery and petrochemical SEZ in Kakinada. Whether this is gross incompetence or a conspiracy is something for the reader to decide but it is interesting that while a host of oil firms including ONGC have had run-ins with the Director General of Hydrocarbons, the ministry intervened only in favour of the private firms!

In the case of BSNL, however, the government has not played spoiler. The problem has to do with it being a PSU, and the cost it has to pay for this. When BSNL launched its cellular services in October 2002, few thought it would become one of the biggest mobile phone service companies in the country, matching market leader Bharti every step of the way when it comes to acquisition of new subscribers. Being a PSU, however, BSNL has to follow time-consuming and archaic tender procedures""while a Bharti or a Hutch can order equipment within a couple of months after private discussions with vendors, BSNL has to go through an elaborate public tender.

So, almost two years ago, the PSU began inviting vendors to discuss/plan for a next generation (3G) network. An eminent panel of experts was even constituted to vet its Request for Proposal, and this was then reviewed by BSNL's board, which has nominees of the government on it. A year ago, the $5 bn tender was floated, and a committee with independent members was set up to evaluate the bids. This in turn set up five sub-committees to examine different sections of the tender (to reduce the chance of bias) ... the committee's recommendation then went back to the board for approval.

Last year, in October, the board rejected two bidders on technical grounds, and opened the bids of the others. A rejected bidder went to court, and the case has been there for more than four months, after 12-13 adjournments. The way things are it could well go on for another year or more.

Before we come to who's to blame and possible solutions, what will this cost BSNL? BSNL is woefully short of capacity and its ability to attract new customers is now determined by whether it can give small "expansion orders" to vendors on the basis of existing contracts""while this helps somewhat, it is nowhere near enough. In 2005, BSNL was able to get around 30 per cent of all new GSM cellular subscribers in the country and 22-23 per cent for all mobiles including the CDMA ones. This has fallen steadily and, last month, BSNL got just 16 per cent of the new GSM subscribers""it was 12 per cent for all mobiles.

If you assume BSNL's new network is delayed by a year and it is able to stumble along with "expansion orders", this means the PSU will "lose" at least 6 million potential subscribers to competitors like Bharti and Reliance, assuming conservatively that the industry adds just 5 million subscribers each month. Based on the valuations Vodafone paid Hutch, this means BSNL stands to lose over $3 bn in terms of capital values. At an Average Revenue Per User of Rs 300 or so per month, a year's delay also means BSNL loses a whopping Rs 2,190 crore of top line revenue.

On the face of it, there is little the government could have done to prevent this. But an active government would be trying to persuade the courts to hear the matter at the earliest, and that the tender be awarded subject to the court case""both these things happened in the case of the Delhi and Mumbai airports since the government had made them a prestige issue. And there is the larger issue of whether PSUs should be going through such elaborate tendering procedures when no private company follows the same procedures. In today's ultra-competitive world, it does seem an invitation to disaster.

suniljain@business-standard.com