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Government dials wrong number in bailing out PSU telecom giants

It’s time for the government to cut its losses

July 04, 2019 / 09:39 AM IST
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Shishir Asthana

The tried, tested and failed strategy of bailing out sick public sector companies is likely to be used by the government once again. This time, the patients are the PSU telecom twins – BSNL and MTNL-- and the bill is going to be much higher than any seen till date.

Reports say the government is considering a Rs 74,000-crore bailout plan for the two telecom companies. Ironically most of the funds will not be going to build the company but to its employees.

A handsome exit package is likely to be announced to the two heavily overstaffed telecom giants. The report says that an additional 5 percent compensation (ex-gratia) is expected to be made to make the VRS (voluntary retirement scheme) attractive. The VRS will cost the exchequer a mind-boggling Rs 40,000 core. The residual funds will be used for buying 4G spectrum (Rs 20,000 crore) and other capital expenditure (Rs 13,000 crore).

Though it may look odd, the government as a promoter had no choice but to entice the employees to leave. Here are some numbers that highlight the mess in PSU telecom companies:

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In the case of MTNL, consolidated employee cost as a percentage of turnover is 111 percent. In other words, the company does not even generate enough revenue to pay its employee salaries. In the case of BSNL, the employees account for 65 percent of the revenue on a consolidated level. As compared to these two PSUs, a loss-making private sector company – Vodafone Idea-- has an employee bill which is only 5.5 percent of its revenue. Despite it, the company is in losses.

Given this information, will MTNL and BSNL ever be able to recover the money government is pumping in? Both these PSUs do not even have the latest technology, they are currently operating on 3G technology while the industry is now getting ready to launch 5G technology.

Even from the funds that the government will be pumping in, around Rs 33,000 crore will be spent on making them 4G compliant. It would take years, if ever, for the two PSU companies to come anywhere close to the private sector ones.

So why is the government interested in bailing out these companies when the chance of recovery is low. Simply because the cost of closing the company is higher. The cost of closing the two companies is likely to be Rs 1.2 lakh crore.

The government is not willing to take the entire cost upfront. But given the level of competition in the telecom sector the incremental Rs 50,000 crore needed to shut these companies will in any case have to be pumped into these companies in a few years and by then the cost of shutting them would go up.

Reducing its employee cost will help a larger portion of revenue to percolate down to meet the operating expense, but the high level of competition and low prices will prevent the companies from being profitable anytime soon, thus requiring more money from the government.

Earlier it was Air India that needed budgetary support almost every year but now the telecom duo will need periodic nursing, all at the cost of taxpayers. A lot of good money is going down the drain, money that could have helped revive the economy.

The government hopes that the two companies will grow stronger later on and someday in future it will be able to monetize its investment. That’s the stuff fantasies are made of.
Shishir Asthana
first published: Jul 4, 2019 09:21 am

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