Challenges of change

Substantial investments in infrastructure enabled VSNL to handle the explosion in international telecom traffic in the 1990s, but the Government's liberalisation programme poses new questions.

VIDESH SANCHAR NIGAM LTD (VSNL), a Navaratna public sector company, is India's "gateway to the world". It is the sole provider of public international telecommunication services and links the country's telecommunications system to 236 countries around the world. In the last few years, VSNL made substantial investments and increased its telecom capacity; this enabled the company to handle the explosion in telecom traffic to and from India. Its performance in the future, however, will be determined by the manner in which it copes, or is allowed to cope, with the policies of liberalisation in the Indian telecom sector.

Although VSNL came into existence only in 1986, its history goes back to 1947 when the Overseas Communications Service (OCS) was established in the Department of Telecommunications (DoT). Between 1870 and 1947, private companies provided external communications services to and from India. The nationalisation of the Indian Radio and Cable Communication Company in 1947 led to the birth of the OCS.

VSNL offers a variety of services - telephony, telex, telegraph, Internet access, packet switched data transmission, video conferencing, television relay and other value-added services. However, more than 95 per cent of VSNL's revenue comes from telephony services.

In 1996-97, the company generated revenues totalling Rs.4,996 crores and made a net profit of Rs.505 crores. In the six months ending September 30, 1997, it made a net profit of Rs.415 crores, up from Rs.269 crores in the corresponding period of 1996.

VSNL has four gateways - in Delhi, Mumbai, Chennai and Calcutta, the main centres that handle telecom traffic to and from India. It derives the capability to function as the Indian junction for international telecom traffic from terrestrial and submarine cables that run across the Arabian Sea and the Bay of Bengal and earth stations that receive telecom signals from satellites. VSNL's membership in international consortia such as the International Telecommunications Satellite Organisation (INTELSAT) and the International Maritime Satellite Organisation (INMARSAT) gives it access to international telecommunications circuits. A network of satellite earth stations across the country enables it to provide telephony services to Indian subscribers using the DoT's telecom network.

VSNL operates three submarine cables: one links Chennai and Penang (Malaysia); the second links Mumbai and Fujairah (in the United Arab Emirates); the third is SEA-ME-WE-2, a multinational and multipoint fibre optic digital cable system running from France to Singapore. The company invested Rs.250 crores in the SEA-ME-WE-2 project, which was commisioned in 1994. VSNL has also invested Rs.125 crores in the recently-commissioned Fibre Optic Link Around the Globe (FLAG) submarine cable project, which connects several countries from the United Kingdom to Japan. Two fibre optic cables, each with a capacity of 5 giga bytes per second (gbps), run along the route. VSNL is to invest $52 million in the SEA-ME-WE-3 fibre optic cable project, which will connect 12 countries from the United Kingdom to Singapore when it is completed in 1998-99. In India, the cable system will land at Mumbai and Kochi. The project will use wave division multiplexing technology and the two cables will have a capacity of 10 gbps each.

VSNL is establishing six more gateways - at Jalandhar, Kanpur, Gandhinagar, Hyderabad, Bangalore and Kochi - at a cost of about Rs.250 crores. The company has invested Rs.50 crores in order to operate the Indian gateway of the Iridium Mobile Satellite Project. VSNL has won the contract to operate the Satellite Access Node (SAN) of the ICO's mobile phone project, which is expected to be launched in 2000 (ICO is an affiliate of INMARSAT's global personal mobile communications services). VSNL, which is the second biggest shareholder in the project, has exclusive rights to market digital voice, data, fax and a range of messaging services in India and has non-exclusive marketing rights in some South Asian and Central Asian countries.

The control room at the Bose Earth Station at Halisahar near Calcutta. VSNL's network of satellite earth stations enables it to provide basic and value-added telecom services to Indian subscribers.

VSNL invested Rs.1,536 crores in projects during the Eighth Plan, which ended in March 1997. Of this, Rs.500 crores was invested in 1996-97. Consequent on these investments, VSNL's international circuits capacity increased from 3,331 circuits in 1992 to 14,535 circuits in October 1997 (see chart). The international norm for the ratio of domestic lines to international lines is about 400:1. In India, the ratio has dropped from about 2500:1 in 1991 to about 700:1.

According to VSNL Chairman B.K. Syngal, VSNL aims to increase its international circuits capacity and stay close to the international norm. Syngal has said that the "aggressive" expansion of the DoT's domestic network in recent years requires a rapid expansion of VSNL's capacity. (The DoT added 2.5 million lines in 1996-97, increasing the number of telephone connections to 14.5 million, registering a growth rate of 21 per cent over the number of connections in 1995-96.) According to Syngal, VSNL also plans to increase its capacity to about 35,000 circuits in the next few years. Under the terms of a Memorandum of Understanding signed with the DoT recently, VSNL plans to invest Rs.5,200 crores in various projects in the next five years. There are plans to establish a regional hub, provide direct-to-home services for Internet, data and entertainment, install optic fibre cables and implement other modernisation projects.

Operating on its own telecom switching and transmission equipment and working in tandem with the DoT in India and telecom carriers abroad, VSNL acts as the Indian junction for international telecom traffic routed to and from India. The Tariff Accounting Rate (TAR) determines the manner in which the company shares revenue with foreign carriers.

VSNL has a licence from the DoT to provide international telecommunications services till March 31, 1999 and a written assurance from the DoT that its monopoly status will remain unchallenged until 2004. However, following the World Trade Organisation (WTO) agreement in February 1997 on telecom services, there is pressure to allow private companies to operate long-distance services in India and operate international traffic to and from India. How the VSNL negotiates these challenges will determine its performance in the future. During the WTO negotiations, the Indian Government made a "commitment" to review the question of opening domestic long-distance telecom services to private and foreign companies. It also made a similar "commitment" to throw open international telecom services in India to such companies by the year 2004.

THE threat to VSNL has emanated mainly from the WTO's international regime on telecom services and from the Indian Government's liberalisation programme, which is aimed at the privatisation of VSNL and the corporatisation of the DoT. VSNL is under pressure to cut its tariffs and it faces the prospect of losing its status as the sole service provider.

It is difficult for VSNL immediately to reduce its tariffs to bring them close to the tariffs of foreign carriers because it has incurred heavy capital costs in infrastructure projects in the last few years. Its ability to offer rate cuts and participate aggressively in tariff negotiations with established carriers such as AT&T, MCI and Sprint may thus be impaired. The settlement rates between VSNL and foreign carriers were based on bilateral negotiations. However, in recent times the United States Federal Communications Commission (FCC) has taken a more active interest in the settlement rate. According to media reports in early December, AT&T, MCI and Sprint were "instructed" by the FCC to pressure VSNL to reduce the "basic cost" of a U.S-to-India call from 79 cents to 23 cents. A recent agreement between VSNL and the U.S. companies resulted in the reduction of the TAR from $1.58 to $1.45 per minute for a call from the U.S. to India. The rate is shared equally by VSNL and the foreign carriers.

The international carriers are eager to acquire a share of the growing traffic to and from India (see chart). In recent years, Indian traffic has grown at nearly 25 per cent per annum, more than double the rate of growth of global telecom traffic. The traffic rose from 487 million telephone paid minutes in 1992-93 to 1,385 million telephone paid minutes in 1996-97 (traffic volumes grew further by 24 per cent in the first half of 1997-98). However, because of the lower rates offered by operators abroad, the number of call minutes to India was nearly two-and-a-half times the number of international call minutes from India. This situation was facilitated also by the call-back facility made available by many foreign carriers, including unlicensed agencies. The incoming-outgoing call ratio, according to industry analysts, is expected to increase until 2000 and then taper off. VSNL has said that call-backs are advantageous to it because it enables it to utilise the more profitable incoming line capacity, on which margins are higher. However, as a result, the DoT loses revenue from potential outgoing calls, on which the DoT's margins are higher. Not surprisingly, the Ministry of Communications declared call-backs illegal in 1995.

VSNL has an interconnect agreement on revenue-sharing with the DoT. The earlier agreement of 1994 provided a fixed gross profit margin of Rs.10 per minute for VSNL. However, key assumptions which formed the basis of the agreement - the rupee-dollar exchange rate, the incoming-outgoing call ratio and VSNL's average settlement rate with foreign carriers - went haywire. VSNL and the foreign carriers made gains at the expense of the DoT. However, the rate cuts offered by foreign carriers resulted in revenue losses for VSNL.

A new agreement was worked out between the DoT and VSNL in April 1997. It stipulates that VSNL will get a fixed revenue of Rs.10 per minute in 1997-98 and 1998-99. Between 1999-2000 and 2001-2002, the TAR between VSNL and the DoT will be related to VSNL's rates with foreign carriers. However, the uncertain factor in this is the settlement rate between VSNL and the foreign carriers. The entire arrangement may be thrown out of gear if VSNL is forced to cut rates to compete with the foreign carriers.

New projects undertaken during the Eighth Plan period enabled VSNL to strengthen itself before the impending entry of foreign companies into the field. Syngal has argued that VSNL needs to be ready with capacity before private telecom service providers enter the scene. He has pushed VSNL to develop the company as the key operator of a regional hub in South Asia.

Last year, VSNL chose British Telecom (BT) as its partner for its Rs.1,600-crore Jalmala project to develop the South Asian regional hub. The ambitious project will have 23 landing projects, connecting dense traffic points. However, this ran into trouble; opposition came mainly from the DoT, which felt that VSNL should have adopted a more transparent tendering process. Analysts believe that the DoT's apprehensions are genuine: they note that the project has a potential annual revenue-earning capacity of Rs.200 crores from domestic long-distance traffic, which is the DoT's principal area of operation. The controversy forced VSNL to invite tenders to identify partners for the consortium which will handle traffic to South Asia and lease capacity to VSNL.

VSNL's critics say that the consortium-managed project will allow "back door" entry by some companies before the opening up of the long-distance telecom network. They argue that the winning consortium will have a headstart over other companies when domestic long-distance services are thrown open to the private sector. They claim that the consortium, with its depreciated value of assets, will be able to offer lower tariffs than its competitors.

The Government's new Internet policy is a threat to VSNL's status as the sole Internet service provider. The company has indicated that it wants to form a subsidiary to operate in this segment, just as telecom companies all over the world have done to protect their long-term interests. This is particularly relevant, given the threat posed by Internet telephony which, according to international telecom analysts, is likely to dent the profits of telecom giants such as AT&T (The Website of Phillips Tarifica, a U.K-based telecom consultant, provides a report, The Net Effect: The Impact of the Internet on World Telecommunications). VSNL is also interested in working with the DoT to develop an Internet backbone.

VSNL's Navaratna status has raised hopes that it will enjoy greater operational flexibility while facing up to competition. However, instead of offering it financial support, the Government has chosen to divest its holding in the profitable company. After two rounds of divestment since 1992 - including a $526-million Global Depository Receipts issue in 1996-97 - the Government's holdings in VSNL have come down to 65 per cent. Syngal has argued that Indian companies need to be strengthened financially before the sectors they operate in are thrown open to private participation. He has also argued, in the context of the opening up of the Internet to private service providers, that "monopoly should not be broken just for the sake of breaking monopolies."