Mahesh Uppal: Back to the bad old days in telecom

The minister decides the BSNL tender, and almost all TRAI's staff have moved there from BSNL or from the ministry.

Bharat Sanchar Nigam Limited (BSNL), India's government-owned telecom incumbent, has decided to halve its order for 2G and 3G mobile lines. This is in response to the Minister of Communications A Raja's perception that BSNL was overpaying for the equipment. It seems like the bad old days of government meddling in India's telecom sector may be here again.

Shortly after assuming office two months ago, the minister seemed to question the price BSNL was planning to pay the vendors, and according to newspaper reports, was in favour of scrapping the 3G part of the order on grounds that India had not finalised a policy for 3G.

BSNL ordered 23 million against the 45.5 million mobile lines that it seemed to need when it invited the original bids in March 2006. It retained the 3G lines, but the proportion of the order is down to 25 per cent from the original 40. BSNL also wanted the price per line to be roughly 20 per cent lower than the original winning bid by Ericsson. (BSNL's tender terms required that the order be divided between Ericsson and Nokia in the ratio of 60:40 at the former's lower price.)

The two vendors have yet to respond to BSNL's new 'advance purchase order' containing the reduced quantity and price. The question is whether BSNL's review of the tender has given it a better deal. The answers are complex. Several commentators have questioned whether the lost revenues and market share due to BSNL's inability to add subscribers comparable to its competitors will neutralise the savings due to the lower prices "" if vendors accept them.

BSNL has lost considerable market share in recent months. In the GSM market, BSNL was till recently number two to Airtel , but Vodafone Essar has now overtaken it. Idea "" with a much smaller coverage "" added twice as many subscribers as BSNL last month. It is unable to provide connections on demand in many cities.

Lost market share is hard to recoup, especially in telecom. With subscribers usually unwilling to undergo the hassle of a changed phone number, moving to a new operator is rarely welcome. BSNL's task of regaining subscribers will inevitably be especially harder for a 'vanilla' product like voice telephony (or electricity) where competitors will differ little.

To make matters worse, with private players expanding their networks to places where, until recently, only BSNL had a presence, the latter's advantage has reduced further. So, even if BSNL has a cheaper service of superior quality, luring customers back to its network will be a challenge.

Even if the vendors agree to supply at BSNL's price, their order constitutes only about 40 per cent of lines that BSNL had requisitioned. Given the demand for mobiles, remaining quantities therefore will need to be made up and a new tender will be required soon. Experience suggests that new controversies and delays are the norm, not the exception.

The unfortunate part of all this is that unlike its competitors, only BSNL needs to make purchases with tenders. So, it would make more sense for a shrewd management and a supportive government to mitigate this risk by working with larger, not smaller, orders as BSNL has done. Indeed, it is ironic that the talk of a new tender is already gaining ground confirming that capacity will need further augmenting soon.

The reasons for a smaller order seem incomprehensible also since a larger order should undoubtedly improve BSNL chances of getting a better price. Further, BSNL's reducing its 3G lines risks future competitiveness, since its rivals seem ready to launch the services soon after the policy is announced.

A less obvious problem with smaller orders and more frequent tendering is that BSNL could end up with the equipment of several different vendors in its growing network. This will inevitably raise costs of integration of the equipment into BSNL's network as well as of future upgrades. The size and timing of these costs are rarely predictable. To make matters worse for BSNL, almost all its competitors have close associations with specific vendors. They will probably avoid most of these costs.

Given this complexity, for the tender to be reviewed because, as Raja told Business India, "benchmark pricing should be the price at which Motorola supplied similar equipment and services to MTNL," seems bizarre. For a start, BSNL's terrain and market is hardly like India's metros "" Delhi and Mumbai "" that MTNL currently serves.

Raja's motives are difficult to comprehend. In stark contrast to his flamboyant predecessor and now out-of-favour former party colleague, Dayanidhi Maran, he has rarely appeared in industry functions, addressed press conferences, or given many interviews.

Maran has complained to the Prime Minister that Raja's allegation that the latter's stand on the tender had caused BSNL a loss of Rs 10,000 crore was instigated by vested interests. Employee unions, on the other hand, had threatened to strike because they claimed rightly that the delay in procuring equipment was seriously hurting BSNL's competitiveness and growth plans.

The government's role in BSNL affairs could be seen as a matter between a company and its owners. However, there are other worrying signs that the all-important separation between policymaking, regulation and operations may be blurring. For example, before the decision to revise BSNL's 3G order, it was reported that the draft 3G policy was awaiting the minister's approval. Other reports suggest that the government assured the unions that the 3G policy would be kept pending until BSNL is ready.

If any of this is true, it implies a most extraordinary conflict of interest in the government, at a critical juncture in telecom reform. It makes a mockery of the ministry's responsibility to ensure fair competition in the sector. And, coupled with the fact that since Maran's tenure onwards and for the first time since the creation of the Telecom Regulatory Authority of India's (TRAI), almost all senior staff of TRAI have moved there from the ministry or BSNL. It looks very much like the bad old days, when ministers knew best.

The author is a commentator and consultant. He can be reached on Mahesh.uppal@gmail.com