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Economic Bytes: Merging BSNL & MTNL

Will merging BSNL and MTNL pull the two companies out of their problems? – (Merging BSNL & MTNL)

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In News: (Merging BSNL & MTNL)

  • The Union Cabinet has announced a massive revival package of nearly Rs 70,000 crore for the ailing telecom PSUs BSNL and MTNL.
  • The two companies – which together hold about 14% market share in the mobile business will also be merged.
  • The merger will await sorting out of some operational and regulatory issues since MTNL is a listed company. Till the time the process is completed, MTNL will work as a subsidiary of BSNL.

Merging BSNL & MTNL

Why the merger?

  • The revival package for the two PSUs comes at a time when the telecom sector is facing financial stress due to stiff competition and reduction in tariffs.
  • The competition in the mobile segment and absence of 4G services (except in a few circles for BSNL) in the data-centric telecom market has progressively eroded the competitive strength of BSNL and MTNL.
  • As landline numbers started shrinking, their operations were also pulled down due to a mix of negative factors such as poor management, government meddling and very poor customer service.

Huge Manpower costs

  • Manpower has been a major drain on the revenues of the two companies with an official report in June pegging the staff cost as a percentage of revenues at 77% for BSNL, and 87% for MTNL (based on 2018-19 financial numbers).
  • While human resource comprises 5% of cost for other telecom operators, for BSNL and MTNL the number is over 70%.

Fiscal position of the two companies

  • In the last four years, MTNL and BSNL revenues have fallen by 30% and 40% respectively.
  • In the last financial year (2018-19), the two companies reported annual losses of Rs 14,000 crore and Rs 3,388 crore respectively, while their cumulative losses are much higher. These losses are essentially a burden on taxpayers.

Why not sell them?

  • The government does not want to sell the two companies as it looks at them as strategic assets of India.
  • They are most cooperative when there is a natural calamity, the entire Army network is managed by them and even for banks most of the network is managed by BSNL.
  • The idea is to make these companies competitive and bring in professionalism, instead of just divesting, closing or hiving them off to a third party.

Components of the revival proposal:

  1. Allotment of 4G Spectrum:
    • The Cabinet proposal clears the way for the administrative allotment of spectrum for 4G services to BSNL and MTNL.
    • This spectrum will be funded by the Centre by the way of capital infusion in these PSUs at a value of Rs 20,140 crore, alongside the GST impact of Rs 3,674 crore.
    • By using this spectrum allotment, BSNL and MTNL will be able to deliver 4G services, compete in the market and provide high speed data using their vast network including in rural areas.
  2. Debt restructuring and Long term bonds:
    • BSNL and MTNL have been cleared to raise long-term bonds (that is, sell bonds and get money in return) of Rs 15,000 crore, for which sovereign guarantee will be provided by the Centre.
    • The PSUs will restructure their existing debt, and also partly meet their capacity expansion obligations. The debt of the two firms stands at about Rs 40,000 crore.
  3. Voluntary Retirement Scheme:
    • A voluntary retirement scheme, will be offered to the employees, who are aged above 50 years. Around half of the employees fall in this above age bracket.
    • The outlay will cost around Rs 30,000 crore, which will be borne by the government. The ex-gratia component of VRS will require Rs. 17,169 crore, while Rs 12,768 crore will be used to meet cost related to pension and gratuity.
  4. Monetization of Assets:
    • The government has also decided to raise funds by monetizing the existing assets of BSNL and MTNL.
    • The proposed asset monetization plan is expected to generate an additional revenue stream of around Rs 38,000 crore by this route.
    • This will help in servicing of bonds, network upgradation, expansion and meeting the operational fund requirements.

Will the package be able to revive the companies?

  • Bulk of the private players — such as Tata Teleservices, RCom, Aircel, Telenor, and Videocon — have shut shop in recent years. In essence, there are now just three companies — all private — that survive.
  • The crunch is so severe that even much-experienced operators such as Airtel and Vodafone-Idea are struggling to salvage business as they run into losses and their debts have risen into lakhs of crores.
  • However, debt is one area where BSNL and MTNL are relatively better off. The duo has a total debt of around Rs 40,000 crore, which is the lowest for any telecom company in India.
  • The government expects that with these measures, BSNL and MTNL are expected to turn EBITDA (Earnings before interest, tax, depreciation and amortization) positive in the next two years.
  • Whether the merged entity will be able to better take on the reduced and weaker competition, or whether it will struggle to take off will depend largely on how it is managed hereon.

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